Vocera Communications (VCRA) Management Presents at Baird 2016 Healthcare Conference Call (Transcript)

| About: Vocera Communications (VCRA)

Vocera Communications, Inc. (NYSE:VCRA)

Baird 2016 Healthcare Conference

September 07, 2016 10:50 AM ET

Executives

Justin Spencer - CFO

Analysts

Matthew Gilmor - Baird

Matthew Gilmor

Hey good morning everyone my name is Matthew Gilmor and I cover Healthcare and Technology stocks for Baird. We're very excited to have Vocera here again at the conference this year, representing the company is Justin Spencer the CFO, also Sue Dooley is in the back if you have any questions or follow up afterwards. We're going to do sort of a modified fireside chat. So Justin's going to run through a couple of slides just to lay some groundwork so we all have a basic understanding of the company and then we'll go into Q&A. If you have questions please raise your hand, we'll be delighted to take them. You can also use the iPad. I think its sessionsfour@baird.com and we'll be sure to get them addressed. Without further ado, I'll turn it over to Justin.

Justin Spencer

Alright, thanks Matt, good morning everybody. Great to be with you, let me just jump in, as Matt mentioned I'll just share a few slides and definitely want to gets to the Q&A portion of the session, we're -- we think we're really at an intriguing and very interesting point in the company’s life. We're seeing communication really be elevated inside of healthcare, particularly hospitals as a very strategic need and we've been investing very heavily in our overall communication platform which is primarily a software platform that delivers hands free voice and data communication inside and outside of hospitals to a variety of workers and we're seeing a lot of traction with this platform and our real emphasis on software growth has been a key enabler of this and I'll talk about kind of where our you know software business is expected to go over the next few years.

We also have a variety of use cases now where we support our solution and have demonstrated really tangible returns from the investments that our customers have made in a variety of environments whether it's the emergency room, the operating room, or other parts of the hospital. If you follow the company at all, you'll also recognize that we had several large platform wins of late and we’re selling more at the higher levels in the organization. Larger systems are buying our platform because of the enterprise grade service that we provide and the security that it offers.

And we're also at an interesting point from a financial standpoint where we turned EBITDA positive and have a lot of operating leverage in our business that I'll describe in just a moment. From a market standpoint I mentioned earlier that communication is really risen in terms of its strategic importance inside of hospitals and these are just a few data points that kind of illustrate how important communication has become. I'll just say that communication or lack of or poor communication creates a lot of problems and challenges inside of hospitals and so our goal is to really help our customers, hospitals and the clinicians that work inside of the hospitals and other hospital workers communicate more efficiently which drives their patient satisfaction and it also minimizes risk of life, risk of error and a variety of other types of benefits.

In terms of how we think about our growth, we think about our growth in four main categories, the first driver of growth comes from our existing customers, we've been overall as we look at our overall install base of roughly 900 hospitals in the United States and there's a couple of hundred outside the United States, our focus is really to expand our solution inside of those hospitals, we estimate that on average we're 30% to 40% penetrated even in our install base. In a 12 month horizon as a significant portion of our revenue comes from existing customers and so as we expand our solutions in new departments inside of a hospital or even additional hospitals as part of the same system, we have roughly half of our sales force that is dedicated to up selling into our installed base.

Roughly 20% of our revenue comes from ongoing supply, that’s about $75,000 to $85,000 a day. Replenishment supplies once our badges, our batteries and accessories reached there at the end of their useful like the customers from there are going to buy more and that today represents about 20% of our revenue and we have a very attractive gross margin on that business.

Software is the key driver for us, if you look at our business, that’s one of the key indicators that how successful we are at selling our overall platform. Our goal is to have software represent in a few years roughly 25% of our revenue up from 15% in 2015. We’ve expanded our software platform to include not just the voice technology, but now also secure messaging. You learn management capability and strategic integrations and work flow and also solution that are focused on improving the patient experience inside the hospital.

In that regard as we’ve expanded our software platform, we’re also able to now address a broader set of users, historically our voice technology has been primarily focused on badges although we do have other in hospital doctors and other hospital workers that use our badge with the primary user bases in the nurses. Now with the broader platform that we have, the ability to support multiple devices such as Apple or Android based smart phones even the Apple Watch. And we can now address a much larger population of users, healthcare workers that in our customers base. The last growth driver for us is international. So international represents about 10% of our revenue, which is growing at a faster rate generally in our domestic business and we -- our goal is to have our international business get to the 20% to 25% of our total revenue over the next few years.

We’re not in every market, we’re in the Canada, the UK, Middle East and in Asia -- the Asia-PAC region, we’re in Australia, New Zeeland, Singapore and Malaysia. Those are our target markets and collectively we think those market are about the same size in aggregate as the U.S. market. We tend to go through market there in those countries, primarily through channels, through resellers. And we’ve invested in that area over the last few years and we’re starting to see the returns. These are general markets that have general English speaking health care systems that are modernized. In the case of the Middle East they’re building a lot of hospital, there is a massive amount of infrastructure and investment going into healthcare there. So although it’s still a relatively small portion of our revenue and lumpy, we see a lot of opportunities for growth in international.

I mentioned our platform and if you kind a start from the bottom up on the chart. Historically, three, four years ago, we were very focused on voice hands free, speech recognition voice technology and we’ve broadened our platform through a combination of organic development as well as acquisition to essentially broaden the offering. We also can integrate with over 70 different clinical systems which no one else in the market can replicate, this is a true differentiator for us. We have also expanded our social [ph], one of the devices that is unique to Vocera and we’re associated with is the badge, it’s an iconic devices, it’s a great device. It has a very powerful presence in hospitals among the users that use it. But we now support a variety of end points.

So the value proposition that we have with our software as we can go in and a customer can choose the device that they want to use for the type of employee or worker that they have in the hospital, so whether it's hands free voice on the badge or a smartphone which is either a hospital provided smartphone or a device that the worker or the nurse, the doctor bring themselves, we can support any -- pretty much any device that they want to use in their environment.

And we've also as I mentioned earlier expanded from just using our solution in the hospital to outside the hospital setting and that's a key emphasis for us going forward. These are examples of devices that we support today. The Vocera Badge is in the left-hand side and the Apple iPhone, the Apple Watch that app is running on the iPhone, actually all three of the devices to the right, there is the Vocera collaborations suite, that’s our integration secure messing and voice technology for a mobile phone. The device to the right is the Zebra M340 smartphone, it's a healthcare device that's built specifically for healthcare. You can see at the very top the flat is that's a barcode scanner, it's a fairly ruggedized device, it's actually quite popular in healthcare today and we're actually reselling that and few of the large wins what we've announced of late have included sales of this product. So we're really kind of round out the overall end-to-end offering that we have.

I mentioned integration, so this is a key differentiator for Vocera, we support 70 unique clinical integrations, like we integrate with all of the major electronic health record companies the Nurse Call Solutions, a variety of patients monitoring solutions. So we typically with most deployments we'll do one or more integrations, we charge for those as well. It’s another revenue generating source for us. But also once we've integrated with an EHR system or Nurse Call systems, it makes our solution very-very sticky the barriers -- the competitive barriers [ph], the barriers to the switch go way-way up when a customer has integrated our solution with another core system of theirs.

Evidence that this is working or these are few of the larger deals that we have announced of late, these are seven of them that are all multimillion dollar transaction, multimillion hospital deals, Franciscan Alliance for example is a $9.4 million win, in Q4 across 14 hospitals, we're in a process of rolling them out. Several of these were actually in process as we speak and a couple of more we will start in the next few quarters. They tend to have large implementation of horizons so the time to revenue is a little bit longer because of the complexity and size of the implementations, but so far they're going well. In aggregate we stated publically that roughly 9% of our revenue in 2016 is expected to come from these seven implementations which leave a lot of additional contract value that’s yet to be realized in 2017 and beyond.

I mentioned earlier that we have really refined and enhanced particularly for our sales force armed them with better analytics as to how our solution is -- the returned that our customers are getting from our solutions, and these are just some examples, some synopses of different accounts where we’ve measured demonstrable improvement in their -- in a key metric that is important to them. Whether it's a patient engagement score, like an HCAP Score or turning around an operating room faster which enabled them to get in more surgery per day, to lowering admittance rate from the emergency room or just admitting times from the emergency room to the acute care hospital. All of those are clear benefits that they've been able to derive from the use of our solutions.

From a financial standpoint we've been growing nicely, we grew in the first half 17%, in Q2 of '16 we grew 22% and along with that has come an improvement in our overall profitability. We have a lot of the operating leverage in our model -- in our business model. We believe that roughly 40% of every incremental revenue dollar can drop to the EBITDA line because of some of the fixed costs that we have in our business as well as the high margin structure that we have.

And so as we think about that operating leverage, what we started to talk about more in the last six months is really a target model, now we haven't really framed it in the context of, hey we’re going to get to this revenue number in three years or five years, we've actually just kind of bound it to a particular revenue cycle. In this case it’s a $200 million target model and in that scenario we see our software business growing from 15% last year, it's going to be 16% to 17% of our revenue this year and growing to be roughly 25% in this target model, and with that comes margin expansion from roughly 63% today to 68%.

And then we get a lot of scale and efficiency from growing our topline, our operating expenses we don't feel have to grow nearly as quickly as our topline will. And so the percent of revenue in terms of R&D, sales and marketing and G&A comes down over time and what the net result of that is, is the $200 million we believe we have a business that can generate 20% EBITDA margin. And out to the right we just kind of illustrated what the CAGR is, the three year CAGR would be 24% gross grade [ph] and the five CAGR on revenue would be a 14% and that's where the business is today, we believe it's growing in that kind of range.

So lots of capacity for incremental profit generation and if you run valuation metrics on these numbers it's quite attractive. So I think that's it, I'll open it up for questions.

Question-and-Answer Session

Q - Matthew Gilmor

Well Justin thanks for laying the groundwork for it and it was really very helpful and if there are questions please don't hesitate to raise your hand or turn that question of the iPad and we’ll get those addressed. I thought it might be helpful just to round things out, to have a little bit of a history here and I think in some ways that help us understand why you've been returning to growth though. I know you all came public at a time when hospitals were having to spend just a ton of money on [indiscernible] and the electronic health record, but could you talk about some of those historical balances and then where we are in sort of the budgeting cycle for hospital?

Justin Spencer

Sure, we went public in early 2012 and leading up to that point we were growing at 25% or 35% per year. And we could go into a hospital and really demonstrate our product and it's very compelling. But in late 2013 couple of things happened, first there was a health care [indiscernible] which cut Medicare reimbursement rates by 2% across the board and all of you know that Medicare is a major source of revenue generation for a lot of the hospitals and incidentally that sent the hospital spending environment into basically a freeze and I’ll come back and talk about kind of what we've done internally, but that frankly kind of caught us off guard a bit. We weren't -- we didn't arm Vocera, the company did not arm Vocera’s sales people with the tools to selling in more challenging spending environment. And I'll talk about what we did there.

But second market force that occurred after that was Obamacare. And we mentioned that one of the key pieces of the regulation that was part of Obamacare was that hospitals were required to deploy an electronic health records as part of the meaningful use of regulation. And so coupled with the hospitals -- difficult hospital spending and now hospitals were really focused on deploying the electronic health record, which is a massive undertaking by many hospitals and consumes not just dollars, but also important resources. And to deploy our solution it does require cooperation and collaboration with the IT organization and proper sponsorship and what not to get properly [indiscernible].

So we also found that the pool of resources that would be available to deploy our solutions was challenging as well. So overtime thing -- early late ‘13, that was the situation and our results were impacted by that. But then kind of in the middle of 2014 things started to settle. Hospitals kind a got -- although they’re spending was clearly down from where it had been, it become more subtle and slowly but surely things started to kind of unfreeze or open up. But then the critical juncture for us was from a market stand point was they got through the deployment of the electronic health records and by and large hospitals executives were pretty disappointed with the productivity gain from having now an electronic health record and they realized that communication was an important glue or fabric that needed to be in place to really enable these electronic health records to -- the productivity to improve from that.

Meanwhile -- so that was the market forces and meanwhile we invested -- took that opportunity to really invest more in our sales force. We realized that our sales team did not have the tools necessary to really sale in a more challenging environment. So we invested in ROI case studies, a lot of the ROI methods that I shared earlier came from this work, case studies, references and augmenting salesforce.com which is our sales force tool that we use for sales enablement. We refined our lead generation capability and so, we really hunkered down and invested broadly in sales enablement.

And so when the market conditions turned back in started in mid-2014 and really by 2015 things were starting to move again. We had really up leveled our sales force, we had much better tools, they were much better equipped, trained, more efficient, they could target there accounts a lot better and on top of that communication really rose to a higher level in the organization, a more strategic level. And so now we’re seeing ourselves having better sales success at the higher level of the organization, selling more of these system level sales and we think that’s going to continue.

Matthew Gilmor

Can you talk about the destination [ph] of clinical integration, it took me a little while to appreciate how different that is compared to some of the companies that you would traditionally call your commentators but given that it’s so different, I mean it’s really hard to say that they are true competitors. So does that sort of meaning exactly, what information is integrated into communication module?

Justin Spencer

Yes this is a critical part of our differentiation and our story which really there is not another competitor out there that can match our capability. We have there 70 different systems, clinical systems that we can support -- that we can integrate with. Most often our customers loss is integrate with the Nurse Called system, it’s either a [indiscernible] system or a portion of their electronic health record system. And Cerner, Apex, Allscripts are amongst the HR top ones that we integrate with.

I will give you one example, so the hospital near [indiscernible] in the Bay Area was really struggling with the time it takes for patients to get admitted from the emergency room into when they have to actually be admitted to the hospital. This is Santa Clara Valley Medical Center. And the wait times were just grievous by their own admission, and one of things that they found was that the beds in hospitals were not getting turned over at a very fast rate, so we implemented a two-way integration with their electronic health record system whereby a notification could be sent to a -- they call in an environmental service workers, they’re house keepers. The house keepers that’s nearest to that particular bed that needs to be cleaned, and then it will actually be spent to their Vocera Badge via a voice prompt.

The house keeper can acknowledge the receipt of that and basically can input a command that says I’m working on it, that then gets updated in the electronic health record as being a room that's being worked on. And then when that room is complete, the house keeper can then update it via voice prompt and that update goes right back into their health [ph] record and changes the bed status to available or ready. And as a result of that very simpler close loop integration that we did, Santa Clara Valley Medical Center was able to really cut their admittance times in half by 50%.

A huge, huge improvement and we do these all the time. They’re often customer requested and like I mentioned earlier once we have integrated with one of these systems that cost of switching or the barriers however you want to define it goes way-way up and it make for solution much-much more sticky.

Matthew Gilmor

And what is the -- to kind of close the point on that, what is the [indiscernible] traditional competitor, what are they're offering versus this clinical integration?

Justin Spencer

Well, it's much more limited. There are some integrations that our customer support, but not nearly the depth and the breadth that we have. And certainly when we introduced the badge along with the smartphone capability to deliver that notification if that's what it is, an alarm or an alert to a badge or to a smartphone only Vocera has that kind of capabilities.

Matthew Gilmor

And maybe we should start on some of implementation recently and I think that's been an areas where that’s actually driven some upsides to some of the near-term financials, so what's been driving the faster integration, is that a pull from the customer that they see the value and they want it to be sped up or is that something where your teams are just better at implementing the systems today versus couple of years ago?

Justin Spencer

So the implementation, at the beginning of the year we had six very large transactions and implementations that we expected to get started on. We thought it would represent about 6% of our revenue and after our Q2 call in July, we updated that guidance. But also included one additional account which is Park View [ph] that closed in Q1 and it was really Park View that called us up in Q2 and said, hey we're ready to go getting and they asked us to ship their product and begin the implementation sooner than they had expected.

So there is now seven large deals, the logos where -- all seven of those logos were on that side that I showed, and collectively, we expect those seven to represent about 9% of our total revenue in 2016. Now in aggregate so really the thing that's changed Matt is, it's not so much a pull in from ’17 it's more the Park View transaction accelerated into Q2. We saw roughly $2 million of extra revenue from Park View in Q2, which is why our revenue was so strong in that quarter. But there is roughly $23 million, $24 million of contract value that is represented by those seven large deals and the majority of that will actually be realized in 2017. But there is still lot of revenue upside. We haven't done anything to change the trajectory of our growth in 2017 with these implementations.

Matthew Gilmor

What's been -- as you think of it, you had some really large and high profile deals as you announced in the last probably 12 months. You mentioned Park View, I think there has been [indiscernible], UNC and [indiscernible] as well. What's been the common denominator amongst those deals, why is the deal size so much bigger today?

Justin Spencer

Well, first what we're seeing is more centralized buying decision at the sea level, we think which is a carryover from the electronic, the infrastructure that electronic health record -- the hospitals had in deploying the electronic health record. There is a kind of more, kind of centralized buying pattern now that exists. Secondly, our platform is an enterprise grade platform and so you know hospitals can implement our solutions and know that it's scalable and secure. You know those are probably the two biggest things. The investment that we made in our platform has been very-very strategic for us over the last two years.

Matthew Gilmor

And what about trends within -- you do have a non-healthcare segment, could you maybe talk about that a little. What trends are you seeing there and then also you mentioned internationally you hoped to get at, I think, it's 25% of revenue. Where are we today in sort of the buying behavior internationally?

Justin Spencer

Yes, so with the non-healthcare business it's roughly 5% of our revenue today, we have three sales reps that are focused on that portion of the business. They sell the exact same products basically that we sell, so we don’t do any customized development for that business. So for us it’s really all upside in terms of going after that. We've had a lot of success, all three of those sales reps went to our President's club last year which means that they exceeded their quota by a significant margin, had a great year.

We continue to add new high end hoteling properties, a nuclear power plant was one of the two segments that are most prevalent for us in that business. There may be additional opportunity there down the road, we just don't know, but we're kind of keeping our options open and with the success that we're having in that business it's just providing a nice lift for us.

And then the international question was the other one. So today international represents about 10% of our total revenue. I mentioned earlier the markets that we’re in, we don’t really feel the need to expand to additional markets at this point, because we're just so under penetrated in the markets that we're going after, it tends to be a little bit lumpy, but the growth rate if you look at it over a 12 month horizon is robust and we’ve added a few reps to the international business over the last couple of years, we'll probably add a few more, but our primary way of reaching those markets is through resellers. We got to have the right reseller and we feel like we've actually made a couple of changes in the Middle East in the last 12 months and feel like we have the right partners now in those countries, so we're really bullish there in the international market.

You know the market size if you look at just the number of hospitals or hospital beds depending on which way you look at it, those markets in aggregate are almost the same size as the U.S. So lots of opportunity on competitive dynamics are little bit differently, we see AFCOM [ph] in the international market particularly in Europe and then Middle East a bit more less [indiscernible], but really optimistic about that.

Matthew Gilmor

Let me ask one additional question with the time remaining, which is your now EBITDA or breakeven, it’s got a sense of major achievement, it’s got to bring a big smile to the CFO’s face. You know presumably that frees some cash flow for growth investment. So what are the CapEx priorities or the investment priority right now?

Justin Spencer

We’re not a capital intensive business, so our rough CapEx requirements in each year $1 million to $3 million mostly corporate type stuff. So we do have some excess cash on the balance sheet. I estimate that we probably need 50 million to 60 million for OpEx and just proper working of the balance sheet. We have been acquisitive in the past, and I think you’ll find us -- that for us to continue to be focused on M&A. There are lots of interesting technologies out there we’re very interested in. There is a lot of venture investment going into healthcare as you know. So we’ll --that will be an area of focus for us, we will continue to pursue the powder and that we’ve acquired technologies and even in some cases, small customer bases and that’ll continue to be a focus for us.

Matthew Gilmor

I think we’re just about out time, so please join me and thanking Justin and Vocera.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!