Vocera Communications Inc. (NYSE:VCRA)
Q2 2016 Earnings Conference Call
July 28, 2016 17:00 ET
Sue Dooley - Director, IR
Brent Lang - CEO
Justin Spencer - CFO
Mohan Naidu - Oppenheimer
Nicholas Jansen - Raymond James
Nina Deka - Piper Jaffray
Matt Hewitt - Craig-Hallum Capital Group
Rob Munnings - William Blair
David Larsen - Leerink
Jamie Stockton - Wells Fargo
Good day, ladies and gentlemen, and welcome to the Vocera Communications Second Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Later, we will conduct a question-and-answer and instructions will be given at that time. As a reminder today's conference is being recorded.
I'd now like to introduce your host for today's conference, Ms. Sue Dooley. Ma'am please go ahead.
Hello everyone. Welcome to Vocera's second quarter fiscal 2016 earnings conference call. I'm Sue Dooley, Director of Investor Relations. Joining me today are Vocera's CEO Brent Lang and Justin Spencer, our CFO.
We've distributed a press release detailing Vocera's quarterly results earlier this afternoon. It's posted on our Web site at investors.vocera.com and also available for normal new sources. This conference call is being webcast live on the IR page of our Web site where a replay will be archived. Before we begin our prepared remarks, I'd like to take this opportunity to remind you that during the course of this call, we will make forward-looking statements regarding projected operating results and anticipated market opportunities.
This forward-looking information is subject to risks and uncertainties described in Vocera's filings with the SEC and actual results or events may differ materially. Except as required by law, we undertake no obligation to update or revise these forward-looking statements. On this call, we will refer to those GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP financial measures is provided in our posted earnings release.
With that, let me turn the call over to Brent.
Thanks Sue. Good afternoon everyone. Thanks for joining us on today's call. The second quarter of 2016 was another strong quarter for our business. The demand for our products is expanding.
Our platform offering is resonating with customers who are looking for solutions to address communication and collaboration challenges and improved patient safety and staff experience. We're executing well as a company and our sales, customer deployments and product development efforts are on track for continued success.
We continue to see solid year-over-year bookings growth in our business, validating the powerful differentiation of our communications platform. Our bookings growth came from a great quarter for expansions and upgrades from our existing customers, as well as some new customer wins that have the potential to expand over time.
Second quarter revenue was $31.2 million, up 22% over the same period last year. As we have discussed in the past, our large backlog position only -- not only fortified our confident in our revenue expectations, but also created an opportunity to grow at a higher rate.
In Q2, our large backlog position helped us achieve higher revenue growth. As customers requested, we implement our solutions earlier than initially thought. Our revenue growth in Q2 demonstrated the power of our backlog and our strong sales execution maintain a healthy backlog and deferred revenue position, which remained essentially flat sequentially and it substantially higher than Q2 of last year.
As a result of our revenue growth and efficient cost management during the quarter adjusted EBITDA was also better than expected, demonstrating the leverage in our operating model. We expect to be EBITDA positive for the full year, which is an important milestone for the company as we pursue profitable growth.
The highlight of Q2 was the ongoing success of the deployments at our large enterprise customers. We are live at the Francisco Lions Olympia field's facility and across the entire main medical center at the University of North Carolina. The focus we are placing on these large accounts is paying off.
Our second quarter results reflect what we are seeing in the market. Culminations are increasingly focused on communication and collaboration solutions as a key IT priority, in order to increase efficiency and prepare for a successful migration to new healthcare delivery models. This quarter, we published new case study showing how Vocera customers are doing just this.
Let me share a couple great examples. Halifax Health, a 678-bed community health system in East Central Florida selected the Vocera Solution in order to increase communications efficiency between clinicians and provide a better experience for patients. It used to take 30 to 45 minutes for a nurse to get a response from a physician, but now the nurse can reach the physician directly and expect a response almost instantaneously.
Halifax also integrated the Vocera platform with several clinical systems, including the hospital's electronic health records and patient flow systems. Integration with MEDITECH enables discharge notifications to be sent automatically to the right care team members on their smartphone or handsfree Vocera badge as soon as the physician's orders are entered into the EHR, accelerating the entire patient discharge process.
Since implementing this integration Halifax Health has reported an 8% decrease in the time it takes to discharge a patient on the oncology unit. In addition to accelerating its discharge process, Halifax has fast tracked care team responses, improved patient experience and is aiming to reduce overhead paging hospital wide by 90% in the next year.
In another case study focused on patient experience, Guadalupe Regional Medical Center chose Vocera Rounds, our cloud-based Mobile Rounding Solution, to standardize and improve its previously manual paper-based and labor intensive rounding practices. After implementing our mobile solution, this 125-bed facility was able to enhance care team processes and the hospital experienced a 12% increase in HCAP scores for pain management across multiple units within the facility.
These new case studies have been published on our Web site, plus feel free to ask us and we'll be glad to send them to you. Our industry is receiving increased attention from leading research firms and Vocera is a highlight of this work. This month Gartner published a new reference tool vital for healthcare provider CIOs to use when assessing the value of new technologies.
Gartner identifies technologies that can deliver transformational value to healthcare providers over the next decade and specifically highlights Vocera as a leader across multiple solutions area.
Now, let me give you an update on our growth drivers in the quarter. In Q2, bookings growth within our existing customer base was particular strong for both expansions and supplies and our overall bookings growth demonstrates good balance and strong execution across the various growth drivers in our business.
Our Fed team had a very strong Q2 bookings quarter and we believe this success underscores our position as the market leader in both the VA and DoD. We are especially pleased to book our first clinical work flowage and deployment within the VA system as a sacrament to VA, which includes both nurse call and physiologic monitoring integrations.
This deal is strategically important because it gets us in the door with the Vision 21 region for the first time ever. Our business with the VA is healthy and growing. The FIPS certification on the B3000n received in April through several VA badge refreshes including Chillicothe, Saginaw, West Palms, Dayton and Miami. We also received $1 million expansion order from Madigan Army Hospital, to roll out the Vocera Solution to the outpatient clinics associated with the hospital.
This occurred just six months after closing a $1.3 million in patient deal there last December. Unhealed of this success we are heading into the key Q3 fed buying season with positive momentum. During the quarter other commercial highlights included a sizable expansion order at the University of Arkansas Medical Center, which signed a new equipment lease and is also expanding the use of our solution to the College of Nursing.
Q2 also produced large expansion and badge replacement orders at the University of Alabama at Birmingham and at two Cleveland clinic facilities. We continue to benefit from a growing base of customers utilizing our software maintenance and support services as well as a very healthy renewal rate, which continues to be well above 95%.
Our international business also had some valid wins in Q2. First in Dubai, Al Jalila Children's Hospital chose Vocera to be its clinical communications provider. Jalila Children's is a new state-of-the-art 200-bed hospital in Dubai operated by the Jalila foundation, a non-profit charitable organization promoting medical education and research in the United Arab Emirates.
This smart hospital is set to open this quarter and will be an exemplary model for future expansion within the Dubai healthcare city and other Jalila foundation hospitals in the region. We also booked some significant international expansions in the quarter, including a large strategic deal at South Eastern Trust in the U.K.
This booking includes an expansion license for our communications platform, 500 new badges and the addition of our collaborations suite and nurse call integration. With the opening of this new hospital, they will be our biggest customer in Northern Ireland and become a flagship account, highlighting the use of our platform across multiple types of devices.
In Canada, despite deep budget cuts in the health system, we were able to demonstrate significant value to our customers that resulted in a large order from the Interior Health Authority, where we continue to displace in building wireless phones and from Alberta Health where we continue to expand use of our solution.
I'm pleased with the -- with our execution and progress on our strategic priorities so far this year. Our investment to expand our communications platform by adding even more scalability and new functionality is paying off. In Q2, we continued our cadence of rapid product development and released meaningful product enhancements designed to support our largest deployments.
We launched the next major version of our communications platform software, increasing scalability, improving speech recognition and delivering additional enhancements for our customers. As you know, our software platform is central to our solution and we are excited with the markets responses, we continue our successful transition to an enterprise software platform company.
Collaborations suite, which enables customers to access our voice and messaging software platform from iOS and Android devices is becoming a standard parts of many of our deals. And we added a number of new customers this quarter. We also added new clinical integrations to our portfolio, which now includes over 75 integrations with third-party systems.
By enabling bi-directional work flow capabilities with a number of clinical systems including Hill-Rom and Critical Alert Systems. These additions to our platform underscore our commitment to creating a seamless communication system that not only connects all personnel within a health system, but also links them to the relevant data within the clinical systems they use.
These integrations create meaningful competitive advantage for us. During the quarter, we also obtained two important security certifications that helped provide our customers the assurance that the Vocera platform is secure and will protect patient data. In addition to the FIPS certification I mentioned earlier, we also successfully completed and passed a SOC 2 Audit for our cloud platform.
These certifications provided by the U.S. DoD and a nationally recognized auditor provide objective third-party evidence of our solution's security, scalability and performance. These certifications underscore how our product stands out within our industry.
As I mentioned in my opening, we achieved important implementation milestones with some of our large enterprise customers including UNC, Parkview and Franciscan. The focus we're applying to these large deployments is resulting in happy customers, who are seeing great value in our solutions.
Overall, I am pleased with our progress in Q2 and how it sets us up with the remainder of 2016. Strong momentum in our business is continuing with solid bookings, successful large scale deployments, high customer loyalty and improving profitability. We are executing well and making good progress towards our long-term operating model. I am confident in our ability to continue to drive double-digit revenue growth in the business while delivering increasing profitability over time.
Now, let me give our CFO, Justin Spencer, a chance to provide some financial highlights from Q2 and guidance for the rest of year. Justin?
Thanks Brent. Hello everyone. We are very pleased with our financial results this quarter highlighted by 22% revenue growth, positive adjusted EBITDA and non-GAAP earnings. We also maintained a strong backlog in deferred revenue position, which should fuel continued revenue growth in the second half and beyond. Total revenue in Q2 increased to $31.2 million with double-digit growth in both our products and services segments. Our large deployment continued to progress very well and in some cases have moved along faster than we anticipated.
For example, we have already begun the deployment at Parkview. In addition, some of our previously announced large customers are already buying more from us. Such as the University of North Carolina, which bought 900 more badges to support higher demand at its main campus location. Product revenue in the quarter increased 33% to $17.7 million, reflecting the increasing value of our software platform and our mobile device strategies.
Software revenue increased over 50% from last year and represented roughly 18% of our total revenue. The software growth was largely driven by our new customer deployments and the broadened capability of our software platform. For the first half, software is up 27% over last year and this continues to be an area of emphasis for us. Our device revenue grew 25% to $12 million. This includes our first significant revenue from the resale of Zebra MC40 smartphones, which we bundle with our Vocera Collaboration Suite software in order to drive our software sales.
Badge and accessory shipments continue to be robust, reflecting the enduring benefit of hands-free, speech-recognition based communication. Our software platform is resonating in the market, where users are able to select the mobile device that works best for their needs and leverage the features and functionality our software delivers. Services revenue in the quarter was $13.5 million up 11% from last year.
Our software maintenance and support revenue grew 12% as a result of an expanded customer base and a renewal rate which continues to be well above 95%. Software maintenance and support revenue is all recurring and was approximately 34% of our total revenue. The growth of our customer base and the high maintenance renewal rates also resulted in deferred revenue of $40.8 million, up 20% over Q2 last year. Professional services revenue were $2.9 million up 7% from last year.
A lower growth rate of professional services revenue relative to our software revenue growth rate is due primarily to timing differences between project milestones achieved and revenue recognition for our large deployments. These are going very well and we are right on schedule with our delivery milestones.
Overall, we continue to have good revenue visibility with our combined backlog and deferred revenue balance up substantially versus last year and at a record level for Q2.
Non-GAAP gross margin was 62.5%, reflecting the timing of professional services revenue recognition associated with our large deployments and the strength of our bundled communication software and MC40 smartphone solution. We are right on track with our gross margin expectations for 2016 and as we build scale and drive more software revenue we see a path even higher gross margin longer term.
Non-GAAP operating expenses were $18.9 million, up 2% from last year. Demonstrating the operating leverage we have in our business as revenue grows. In 2016, we continue to expect operating expenses to grow roughly 4% to 6%, significantly less than our expected rate of revenue growth. Our strong revenue performance and operating leverage in Q2 also contributed to increased profitability and we generated $1 million of adjusted EBITDA during the quarter.
We also delivered positive non-GAAP earnings per share continuing our commitment to expand profitability and deliver on our long-term operating model. Finally, our balance sheet continues to be very strong. We generated positive operating cash flow in Q2 and expect to be cash flow positive for the full year.
Now let me turn to guidance. The first half performance exceeded our expectations and we carry a lot of momentum into the second half of 2016 as a result of strong bookings performance and backlog levels. As a result, we are raising our guidance for 2016.
Revenue is now expected to be in the range of $116 million to $121 million and adjusted EBITDA is expected to be $2 million to $4.5 million. For the third quarter, we expect the revenue to be between $29.5 million and $31.5 million and adjusted EBITDA to be between $0 million and $1.7 million.
In summary, we are very pleased with the financial results in the second quarter and our overall business momentum. We continue to stay focused on the success of our large deployments and the benefit of our solution.
I'll now turn it back to Brent.
In addition to our great operating results, I'm pleased to announce that Alexa King has joined our Board of Directors. Alexa is Executive Vice President and General Counsel at FireEye, the leading security platform that provides real-time threat protection to enterprises and governments worldwide against cyber attacks. Her experience in Corporate Governance and Cyber Security will make her a great addition to our Board. Before FireEye, Alexa was General Counsel at Aruba Networks. As she joins our Board, Alexa succeeds Brian Ascher, a partner at Venrock who was an early Venture Capital Investor in Vocera. I want to thank Brian for his 14 years of service to the company and the tremendous support, insight and guidance that he has provided over the years to help the company succeed.
I'm also pleased to announce that our new General Counsel, Doug Carlen began working at Vocera earlier this month. Doug has extensive legal experience with both public and private technology companies. Most recently, he was the VP of Legal Affairs at Liquid Robotics. Earlier in his career he was General Counsel at Covad Communications. We're excited to have Doug's knowledge and experience as part of our team.
In conclusion, I am proud of our team's execution and positive Q2 performance. Our strong revenue growth and profitability are the result of several years of hard work by the Vocera team to innovate and expand our product lines, enhance our sales execution and deliver exceptional service and customer experience in order to delight and empower our mobile workers with our intelligent communication and collaboration solutions. I am very proud of the results our employees have delivered for our customers and our shareholders, as well as the impact we are having on our community.
Thank you for listening today. Operator, we are ready to open it up for questions.
[Operator Instructions] Our first question comes from the line of Mohan Naidu of Oppenheimer. Your line is now open.
Thanks for taking my questions. Brent, maybe on the implementations you talked a little bit about some being ahead of the schedule, do you expect to see some of these implementations, which you thought you would go into 2017 to pull into 2016? And how much of that is the driver to the increased guidance versus new deal flow that -- that came in ahead of schedule?
Mohan, this is Justin, I'll take a stab at that. We had originally estimated that are the large deals would -- at the beginning of the year would represent about 6% of our total revenue for the year and that's now expected to be closer to 9%. Now we did also book in Q1, which is part of that number, the Parkview transaction and that was a meaningful portion of our revenue in the second quarter. So that's one of the drivers as a new deal that we've had in 2016 that we're actually able to book and also ship here in 2016.
So, we still expect to carry quite a bit of contract value or backlog from these large deals into 2017, but certainly as we look at within our revenue forecast and in the updated guidance, one of the drivers of that is that these implementations are going very well and in some cases going a bit faster than we originally anticipated.
That is great. Maybe question around the budget priorities that you are seeing at the hospitals, given the deal flow it doesn't feel like you are seeing any pressure there, but I just want to ask you, if that ease hurdle at all for you guys when you go talk to the clients about any of these deals?
Yes. I think budget priorities inside the hospital is always an area of focus for us. I would say that it's gotten better over the last couple of years, certainly as the focus on the electronic health record is diminished. And [indiscernible] and some of the other spending priorities have diminished, that there is an increasing focus on communication collaboration. But in any environment, in a hospital, the budget constraints are going to be tight.
And it really falls onto the role of our sales and services team to make sure that we're doing a good job of articulating the powerful ROI of our solution, the ability to improve operating efficiencies and improve patient safety and staff experience. And that's part of the selling exercise. But the budgeting process is certainly something we have to take into consideration and we're always very mindful of it during the sales process.
That's great. Thank you for all the color. Thank you very much.
Thank you, Mohan.
Our next question comes from the line of Nicholas Jansen with Raymond James. You're line is now open.
Hi, guys. Congrats on a great quarter. Just wanted to get a little bit more detail on the strong software sales in the quarter, certainly with the nice bounce back relative to what you saw in the first quarter. So, just any of your thoughts on kind of that momentum heading into the back half of the year?
Yes. Hi, Nick. The software growth has really been driven by or was driven by the success with large customer deployments. And typically when we sell a new customer, when a new customer buys our solution, there's a higher software content that's associated with that. So, a major driver of that software growth is really these new customer, some of which are large. But we also have even smaller customers that had -- we've had a lot of new customer success in terms of acquiring new customers over the last several quarters. And so we're seeing that really translate at these deployments proceed and begin.
So, the -- I would also say we did have -- we did benefit in the quarter from a couple of pieces of revenue recognition that were previously deferred. So, that's why I quoted the first half software growth number. In Q2, our software revenue grew 50%. That's not quite what we expect in terms of growth rate going forward. But certainly, we expect our software growth to continue at double digits. And longer term we see that our business, over the next few years, we'll hopefully get to a place where we're generating 20% to 25% of our overall revenue that's coming from software.
Great. Thanks for that color. And then secondly, I just wanted to kind of get your thoughts on how the enterprise pipeline kind of looks like. I know Parkview, I think probably came in, a bit sooner than what you expected. And certainly that's contributing to the better than expected revenue growth guidance this year. But just your broader thoughts on, kind of some of the larger sales funnel as we think about momentum heading into 2017? Thank you.
Yes. Hi, Nick. So I think the sales force continues to be focused on trying to sell higher and higher into the organizations. As I mentioned in the last call, there it seems to be more of a strategic focus on communication collaboration solutions as they move from a department-level decision making to a facility level, or in some cases a system-wide level decision-making process. So that's good for our business and we're working with the sales force to make sure that they're selling in the right levels of these organizations. We feel good about the pipeline moving forward. But as we've said in the past, these deals tend to be a little bit lumpy from a bookings perspective.
And you don't want to set the expectation that there going to be an even flow. We're going to have quarters when they're higher and quarters when they're lower. From a bookings perspective, if they translate into revenue it tends to smooth things out. It gives us better visibility, because we've got the deployment schedules in hand. I'm particularly excited as we head into Q3 about the federal government business.
As I mentioned in the prepared remarks, Q3 is the strongest quarter for the VA and DoD typically. And based on the momentum we're seeing in that part of our business, we're hopeful that we can close some larger deals there. So, I think it all set into our confidence as we raise guidance for the remainder of this year.
Congrats again. Thanks.
Thank you, Nick.
Our next question comes from the line of Nina Deka with Piper Jaffray. Your line is now open.
Hey guys, congrats on the great quarter.
I was wondering, could you describe where you stand with the core business in terms of upgrade opportunity and even expansion within your existing accounts?
Yes. There's still a tremendous upgrade opportunity within the installed base. It's interesting. Over the last couple of calls, we've focused pretty heavily on some of these large enterprise deals that have been somewhat -- a new element of our business. But if you look at the business overall, the vast majority of our revenue is still being generated from our ongoing relationships with existing customers, whether that's in the form of maintenance renewals, supplies and expansions. And Q2 was really a reflection of that, where we saw particularly strong bookings, growth and expansions and supplies and obviously had the continued high maintenance renewal rate.
On average, we still anticipate that our customers are only around 30% penetrated and so we have the sales force continuing to call on the installed base, looking for those expansion opportunities. The B3000n badge, which is our latest generation badge, has also created upgrade opportunities where customers are looking to update to the newer version of the hardware that drives a degree of the supplies order and also some of the expansion business there. So, it remains a mix, the big win, the big new wins tend to take the highlights, the headlines if you will. But there's a very healthy portion of our business which is being driven out of the installed base.
Great, thanks. And then also, can you provide some additional insight on where we might expect to achieve -- where you might expect to achieve some operating leverage, like professional services or [indiscernible]?
Yes. I think -- we have a business model that is really ranted to be able to deliver, fairly high incremental EBITDA and profit margins on changes in revenue. And I think we've been demonstrating that over the last few quarters. We generated $1 million of adjusted EBITDA that's quarter and we raised our EBITDA guidance for the full year. In this quarter 2% increases in operating expense. What we see going forward is, as we continue with these large deployments, our gross margin is going to be right in line with 2015.
And then, as our software mix continues to represent a larger portion of our overall revenue in future years, we see the opportunity for margin expansion. But, in terms of leverage, as the business grows, we don't see the need to add significant amount of resources or investment to our operating expense in order to drive a higher profitability. And we estimate that our operating leverage is between 35% and 40% incremental EBITDA margins on every incremental dollar. That's the kind of business model that we have and that we're trying to direct towards.
Great. Thanks so much.
Our next question comes from the line of Matt Hewitt with Craig-Hallum Capital Group. Your line is now open.
Congratulations gentlemen on the great quarter. Thanks for taking the questions.
Sure. Hi, Matt.
Hi. Couple for me, first, when you look at the pipeline as it sits today, is it possible to break that out as far as new wins versus what you're expecting from expansions and reorders? And maybe how has that changed over the past year? I know obviously every quarter there's a significant amount that's coming in from expansions and reorders. But, has that pipeline changed as you started to get better traction with new customers?
Yes. We certainly look at it across those different dimensions. We actually track metrics in terms of multiples of the forecast numbers in each of those quadrants as it relates to pipeline. One of the things that gets a little complicated is the timeline in the pipeline varies depending on the type of order. And what I mean by that is that, often times the supplies order may go from a pipeline to a booking to revenue within a very short period of time, versus a new construction at a new hospital facility or even if it's not a new construction is selling in the new hospital facility may be in the pipeline for a much longer period of time.
So it's hard to do it apples-to-apples comparison there. But what I would tell you is that based on some of the marketing regeneration and demand generation on the front end. And an increased focus on the sales organizations, we are seeing an increase in overall pipeline, particularly weighted towards the newer customer facilities. We have not given specific numeric metrics around that, but I would tell you that directionally it's certainly increasing faster within the new customer area.
Okay, great. Maybe one more. Given that maybe a little bit faster implementation cycle, at least at one or two of these facilities and you did raise your gross margin guidance. But is there -- as we look at 2017, and I know haven't provided guidance for that. But, how does that, how does pulling forward or you're conducting some of those implementations a little bit faster -- how does that impact the future periods? I mean when you had talked about these new wins, it was 12 to 18 months typically for these larger facilities. If you pull those a little bit forward, I would think that you would have a benefit this year and then wait and see for next year? I just need a little bit of color there. Thank you.
Yes. I guess, I'll start and Justin can jump in here as well. I think that the key point here is that we felt like we had strong enough bookings performance from the sales organization this quarter that if you look at the backlog and deferred revenue that we have exiting Q2, it's still very, very healthy, substantially higher than it was a year ago, and essentially flat quarter-to-quarter.
So, yes, we had some earlier deployments with some of these large deployments, but we're still sitting in a very healthy position from a backlog and deferred revenue perspective as we head into the remainder of the year. And combine that with continuing to see a strong pipeline is what gives us confidence here. And remember, we're not talking about a huge swing.
As Justin mentioned earlier, at the beginning of the year, we thought these large deals would represent about 6% of revenue. It's now up to about 9% of revenue for the year, but that includes the Parkview deal which was a new booking that occurred in Q1 that was not part of the initial calculation.
So, it's not like we're seeing a massive shift from one year to another year. And I don't think it has a meaningful or dramatic impact on how we're looking at 2017. If anything, if we're able to be as successful as we appear to be so far with these large deployments, they end up acting as great reference sites for us and proof points for the capability and scalability of the platform, which I think ultimately leads towards stronger bookings performance in the future.
And I would just add that, the drivers of the guidance raise are -- as Brent mentioned, are really two-fold. One is the timing of the larger deployments. We're doing a little bit better there. But also, we're just doing better in terms of our installed base in our expansions business. And we had an exceptionally strong quarter here in Q2. And the timing of -- the conversion and timing of revenue is usually shorter for existing customers.
So, as we continue to gain traction with our supplies business and our broader expansion business. We feel a lot of pipeline and opportunity here in the near-term, which was another important driver behind 2016. And that, that sets us up to add to our backlog position and continue our momentum in 2017.
All right, great. Thank you.
Our next question comes from Rob Munnings with William Blair. Your line is now open.
Hey guys, congrats on the quarter. So, I just wanted to touch on M&A here for a second. Two parts here, I was just kind of wondering whether you guys think the pricing in the private markets has become a bit more rational. And also, now that you guys are looking at EBITDA profitability, would you consider doing a deal that dilutes you in the near-term or are you committed to maintaining these profitability levels? Thanks.
So, in terms private company evaluations, I think what we're starting to see, there's still a lot of money flowing into the private companies, particularly in digital health remains a pretty hard area. So, I wouldn't say that we've seen any dramatic drop off in evaluations amongst the private companies. Maybe a little bit of softening there and more organizations looking to exit more proactively, as opposed to maybe having to go in and do a proactive move on our part. So there's more willing buyers. The valuations from what we've seen have remained pretty healthy.
In terms of our outlook on it from an M&A perspective, we're first and foremost focused on whether it makes strategic sense for the business. How does it tie into our platform? How does it tie into our vision for delivering intelligent communication collaboration and capabilities for our customers? And how is it going to help us drive long-term revenue growth for the business? The inflection point around EBITDA for me anyway represents more of a discipline than anything and focus on, maintaining the right level of cost containments and maintaining an operating model where we have leverage in the business. But if we can acquire something that provides additional growth opportunities for us, that actually just accelerates that leverage within the business model.
Okay, great. Thanks guys. That's all from me.
Our next question comes from David Larsen with Leerink. Your line is now open.
Hey, congratulations on a good quarter. Can you talk a bit about what is sort of causing your customers to want to deploy the solutions, I guess in a more rapid manner, what's driving sort of that heightened sense of demand, please? Thanks.
Yes. Hey David, I think I would point to two factors. One, the original schedules and timelines were just naturally conservative, because in some cases the hospitals were nervous about the level of complexity or the amount of work that needed to be done. And so, what we put into our original forecast and plans was a relative conservative timeline and approach.
The second thing though is that what's happening is once these users start using the product, they are really happy with the impact that it's having on their day-to-day operations. And it's creating a groundswell of excitement and interest across the health system as the clinicians talk to each other. And so that is leading towards a demand within the organization to -- hey, we want it now, we want it next, we want it sooner.
And fortunately, we've been able to respond by, obviously, from a product perspective, we can scale up relatively quickly. From a professional services perspective we have added some resources to be able to be more responsive to drive these deployments. So, I think it was kind of a combination of conservative initial outlook, and then, strong customer response; strong customer demand would be the positive impact that the products are having on the customer.
Okay. And then, are the MIPS and MACRA in alternative payment model, regs having any impact on your business, as far as you can tell?
Only in the sense that I think organizations are continuing to look at how to drive operational efficiency. I guess my view on all the various alternative payment models is that they all sort of point to a couple of key factors. They need to drive down their cost structure. They need to increase operational efficiency. They need to improve patient satisfaction. And frankly, there is a major issue associated with staff burnout and staff satisfaction. And so I think some of these organizations are really looking for ways to try to improve staff satisfaction as well.
And all of those factors point towards a solution like Vocera to be able to help out with that. And so the ins and outs of which payment model and that's evolving -- don't have as much impact on it, as the overall trends towards those higher level factors.
Okay. And just one last question. Cerner obviously, has a relationship with the Department of Defense. Could you talk about your ability to sell into that health system, Cerner centers got the Millennium Platform contract? Thanks.
Yes. As I mentioned in my prepared remarks, we're feeling really good about our fed business, both from the DoD and the VA side of things. That's part of the Cerner award, our understanding was that DoD was very clear that, inoperability was of utmost importance. And so, we're hopeful that will continue to be the philosophy and the mindset within the organization. And we feel like, we have some very strong champions within the DoD that are helping us navigate that process and we continue to establish incredibly strong proof points from some of the case studies and ROI work that's been done within the organization and that news is travelling across the departments and it's helping us to drive additional sales. So that, the Cerner implementation doesn't seem to be having any impact on our ability to be successful there.
Great. Thank you.
[Operator Instructions] Our next question comes from the line of Jamie Stockton with Wells Fargo. Your line is now open.
Yes. Good evening. Thanks for taking my questions. I guess maybe the first one, Justin, if I heard you correctly, you said that this was the first quarter that you were starting to really see some reselling of the Zebra devices, which I am assuming was a decent part of the lift in device revenue, sequentially. Can you give us anymore color on how much flow through there, or how sustainable or stable you feel like that will be? Just so we do a reasonable job of modeling device revenue going forward.
Sure. So the MC40 revenue, specific revenue was just over $1 million and which means that the badge and the accessory business was also strong and that was driven by the really strong expansions business bookings that we had in the quarter. Several of our large or a few of our large customers have purchased the Zebra MC40 from us, bundled with our collaboration suite software. So, our strategy is to -- we don't sell the Zebra MC40 smartphones, kind of standalone and device, it's just devices, we actually only sell them when bundled with our collaboration suite software.
So that's the strategy that we're pursuing. Many of our customers are looking at a variety of devices as they can -- if they consider the unique needs of their clinicians and users in the hospital. And so, we're really starting to see the thesis that we laid out a few quarters -- several quarters ago, about users wanting a variety of devices in a hospital network. And so, we're seeing more and more mixed usage models and more and more of our deals are contemplating the smartphone with -- in this case of Zebra MC40 with our badges. So that's good. And from a margin standpoint, because we bundled the Zebra MC40 smartphone with our software, we actually increased the margin dollars and we're fairly neutral in terms of the percentage.
Okay. That's great. And then maybe, Brent, just a quick one on the international. I don't know if the commentary was more robust this quarter than it has been in previous quarters, but I do know that there is expectation internally, I think at Vocera, that you're going to see that business really become a larger percentage of revenue over time. Can you give us any indication, whether that's actually showing up in the results yet, or is that more of a -- still kind of 2017, 2018 phenomenon.
Yes. I think we are starting to see it shows in the results. We had strong revenue growth on a quarter-over-quarter basis versus 2015, coming from internationals it was up about 30%. It still represents a lower percentage of the overall mix than I would like, it's still in the 10% or less of our total business. And I still think it needs to be in the 20% to 25%. So, we're pushing the team hard, we -- it's been kind of lumpy, we had more success in some regions than we did in others. I was particularly pleased with the results out of EMEA this quarter, where some of the deals that we had been watching, particularly in the Middle East, started to come through and we saw some good wins from a booking standpoint there.
The international markets, there's obviously lots of dynamics going on there. And so, having a variety of different international markets to spread out the performance is helpful for us. We still feel like there's plenty of room for growth there and want to continue to drive it as a major growth driver for the business.
Okay. That's great. Thank you.
I'm showing no further questions in queue at this time. I'd like to turn the call back to Mr. Lang for closing remarks.
Okay. Well, thank you everyone for taking the time. We really appreciate. I know it's a super busy day and we appreciate you taking the time to dial in and happy to follow up with you in the future. Have a great day.
Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Everyone, have a great day.
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