Imprivata's (IMPR) CEO Omar Hussain on Q4 2015 Results - Earnings Call Transcript

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Imprivata (NYSE:IMPR) Q4 2015 Earnings Conference Call February 16, 2016 5:30 PM ET

Executives

Jeff Bray - Director of IR

Omar Hussain - President and CEO

Jeff Kalowski - CFO

Analysts

Jamie Stockton - Wells Fargo

Sean Wieland - Piper Jaffray

Saket Kalia - Barclays

Gur Talpaz - Stifel

Sterling Auty - JPMorgan

Mike Ott - Oppenheimer

Steven Wardell - Leerink Partners

Jeff Garro - William Blair

Operator

Greetings and welcome to the Imprivata Fourth Quarter 2015 Results Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded.

I would now turn the conference over to Mr. Jeff Bray, Director of Investor Relations. Thank you. Mr. Bray, you may now begin.

Jeff Bray

Good afternoon and thank you for joining today’s call to discuss our results for the fourth quarter. I am Jeff Bray, Imprivata’s Director of Investor Relations. And with me on today’s call are Omar Hussain, Imprivata’s President and Chief Executive Officer; and Jeff Kalowski, Imprivata’s Chief Financial Officer.

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 future events and the future financial performance of the company. We caution you to consider the important risk factors that could cause actual results to differ materially from those in the forward-looking statements. These risk factors are set out in our press release issued after the market close today and are more fully detailed in Imprivata's Annual Report on Form 10-K filed with the SEC on March 11, 2015, as well as other documents that may be filed by Imprivata from time-to-time with the SEC.

During the call today, we will present both GAAP and non-GAAP financial measures. Non-GAAP measures exclude share-based compensation expenses, stock offering costs and the amortization of purchased intangible assets and any acquisition-related items. These non-GAAP measures are not intended to be considered in isolation from, a substitute for, or superior to our GAAP results and we encourage you to consider all measures when analyzing the company’s performance.

A reconciliation of non-GAAP financial measures discussed on this earnings call can be found in the company’s earnings release, which was furnished to the SEC today and posted on the Investors section of imprivata.com. Finally, please note that any forward-looking statements that we make today are based on assumptions that we believe to be reasonable as of this date and we undertake no obligation to update these statements as a result of new information or future events.

With that, I’d like to turn the call over to Omar Hussain. Omar?

Omar Hussain

Thank you, Jeff. Fourth quarter 2015 revenues were $34.2 million, representing 18% growth and $119.1 million for the full year, representing 23% year-over-year growth. Our EBITDA loss in the quarter was $1.3 million and we generated $1.5 million in cash from operations. Bookings in the quarter grew 32%, driven by growth in Imprivata OneSign and increased bookings in our new products.

We added over 300 healthcare customers during the year, a new record for Imprivata, and we now serve over 1500 healthcare customers globally. We continue to maintain over 97% retention rate of our healthcare customers. Add-on business continued to grow and was 43% of revenues last year, which included cross selling of our new products. The addition of new customers to our existing base coupled with high retention rates should drive growth through both upsell and cross-sell opportunities across our expanding product portfolio.

A recent CIO survey by JPMorgan showed that physician and clinician access are a spending priority for hospitals in the post meaningful use era. Other surveys indicate that hospitals are continuing to grow their investments in security. These tailwinds are driving demand for OneSign and our other products. Earlier this month, Imprivata OneSign was named best-in-class in single sign-on, providing one more proof point of Imprivata’s continued leadership in the market for authentication and access management and healthcare.

Let me highlight some of our new Imprivata OneSign customer wins during Q4. We are proud to announce that we won a deal with OSF Healthcare of Peoria, Illinois. OSF has nine hospitals, 52 clinics, and two colleges of nursing, all running Epic and is quickly expanding to host Epic for non-owned facilities and affiliates. Imprivata was not only able to demonstrate improved clinician productivity in OSF’s hospitals, but also at the Epic hosted affiliates. We continue to see a large opportunity within our existing customer base.

In Q4, we had a nice add-on order from New York City Health and Hospitals, as they added to the existing Imprivata OneSign footprint in preparation for the Epic rollout across their 11 hospitals this year. In Q4, we also saw a record number of competitive displacements as customers moving to virtual desktop infrastructure and/or changing EMRs, turned to Imprivata OneSign to streamline access and improve clinician productivity. For example, last quarter, Denver Health chose to switch to Imprivata based on our significant experience and unique product capabilities in authenticating Epic workflows at over 200 Epic hospitals worldwide.

In 2015, we added two new products to our platform and began to build cross selling momentum. In its first year, Imprivata Confirm ID ended with 60 total customers, 38 of which are also Imprivata OneSign customers. We had several notable wins this quarter and I would like to highlight one. Rush University Medical Centre, a 676 bed hospital in Chicago just a few months after investing in Imprivata OneSign, Rush came back and added Imprivata Confirm ID to help allow them to e-prescribe controlled substances.

Imprivata Cortext also had a strong 2015. As a reminder, earlier this month, we were proud to highlight that Imprivata Cortext won best-in-class as a category leader in secure messaging. Imprivata Cortext ended the year with 247 customers, up from 90 last year and 91 of those customers are also using Imprivata OneSign. We believe the shift away from pagers in hospitals is accelerating and more CIOs are concerned about protected health information being exchanged between providers through unsecured communications.

In fact, the Boston Globe recently wrote an article about the shift and highlighted one of our Q4 wins, Steward Health Care System. Steward is one of the largest system in Massachusetts and had 2000 pagers in service before they invested in Imprivata Cortext to streamline and secure communications for 15,000 users throughout their system. As more hospitals decide to follow Steward’s lead, Imprivata Cortext is well-positioned to continue to take market share.

Now, I would like to move on to Imprivata PatientSecure. We continue to see market interest in pipeline growth for our Imprivata PatientSecure product, and our reseller partners are also showing increased engagement. For example, Cerner will display Imprivata PatientSecure as part of their patient experience at HIMSS this year. As we often see with new products, the pace of the ramp in sales is difficult to predict and sales cycles have proven longer than we expected. Given the slower ramp in bookings to date, we have been conservative in modelling Imprivata’s PatientSecure contribution to revenues in 2016.

In spite of the slow ramp, in no way does this diminish our long-term belief in Imprivata PatientSecure’s potential, and we continue to believe there is significant market opportunity for this product. With these product additions to our platform, our sales force now has more opportunities to sell into our existing customer base. In 2016, all of our sales reps in North America will be responsible for selling all of our products. We have also added product sales specialists to help simplify our go-to-market model. As a result, we believe we will see ongoing improvements in sales productivity and increased cross-selling.

Before I turn the call over to Jeff to discuss financials, I want to discuss some exciting innovations that we will be rolling out at HIMSS. Our customers are looking for a single platform for authentication across their enterprise. In response, we are expanding Imprivata Confirm ID to become a comprehensive identity and strong authentication platform for healthcare. At HIMSS, we will announce Imprivata Confirm ID for remote access and Imprivata Confirm ID for medical devices.

Imprivata Confirm ID for remote access will provide a quick, simple, and secure method to access network and applications from a remote location using our own token service. Newer medical devices require clinicians to enter usernames and passwords when accessing the device. This is becoming challenging and time consuming for clinicians. Imprivata Confirm ID for medical devices will eliminate the use of usernames and passwords for clinicians and replace it with tap and go functionality. Our initial foray into this new segment will be with device manufacturer, Capsule. We will demo these new products at HIMSS and expect to officially launch them into the market during Q2.

Now to cover the financials for Q4 and 2015, I would like to turn the call over to our CFO, Jeff Kalowski. Jeff?

Jeff Kalowski

Thanks, Omar. 2015 achieved record revenues of $119.1 million and grew at 22.8% from the prior year. While the growth rate declined from 2014 as we experienced headwinds in our small hospital and non-healthcare segment during the second half of 2015, we did experience significant customer growth, as we added over 300 new healthcare customers to our installed base.

Taking a closer look at the fourth quarter, our total revenue increased 17.9% to $34.2 million, compared to the fourth quarter of 2014. Product revenues of $19.9 million in the quarter increased 20.5% compared to last year and was driven by strong add-on sales to our installed base from both our Imprivata OneSign product line as well as sales of our new products. I want to point out that while product revenue growth was down from Q4, 2014, our overall product bookings grew in excess of 30% during the quarter.

Our new products in the aggregate, namely Imprivata Cortext, Imprivata Confirm ID and PatientSecure exceeded 10% of the overall quarterly product bookings. These new product bookings may vary on a quarterly basis. However, we estimate that they will become a larger component of total product bookings for the year. Total product bookings include both subscription-based products as well as certain bundled perpetual license transactions that will be recognized over a 12-month period.

In addition, certain customers have a preference to license Imprivata Confirm ID on a perpetual basis and in response, we added a perpetual license alternative in Q4. We expect a combination of both subscription and perpetual deals in 2016.

Maintenance and service revenue of $14.3 million increased 14.6% year-over-year, primarily due to the growth in our software revenues, resulting in higher maintenance revenues as well as higher services. Services revenues did not grow as quickly in Q4 due to lower service bookings in Q3 as there is generally a one quarter lag in the revenue recognition of service bookings. We experienced strong Q4 total bookings of $43.3 million.

Our total backlog, including deferred revenue from our balance sheet increased to $51.8 million at year-end 2015, a $9.1 million increase from $42.7 million as of September 30, 2015. We anticipate recognizing revenue of approximately $45.6 million from the backlog over the course of 2016, $30.5 million of which is maintenance revenue.

Overall gross margin of 69.6% in the fourth quarter set the high point for 2015 but was down from 72% in Q4 2014. This decrease was almost entirely due to a product mix change between software device revenues from Q4 of the prior year. Product gross margin rebounded from the prior quarter and improved to 75.3% in Q4, which was also the high point for the year. For all of 2015, the average product margin was 74% as compared to 76.4% for 2014. As our revenue from subscription base software products increases along with PatientSecure sales, we expect to see product margins gradually improve in 2016.

As I've mentioned in the past, our product gross margin will fluctuate on a quarterly basis as customers buying patterns shift between software licenses and authentication devices but on an annual basis it should normalize in the mid-70% range. Maintenance and services gross margins were relatively flat throughout the year and improved in Q4 to 61.6%, also the high point for the year but down from 62.1% in Q4 of 2014. For all of 2015, maintenance and service margins improved slightly to 60.9% as compared to 60.6% in 2014, driven by a higher mix of higher-margin maintenance revenues. For professional services, we are currently fully staffed and expect maintenance and service gross margins to gradually improve through 2016.

Taking a look at our operating expenses, R&D in the fourth quarter of $8.4 million increased 29% year-over-year and in line with our plan. As a percentage of revenue, R&D represented 25% in the quarter compared to 23% a year ago. R&D expenses in the fourth quarter include the operating expenses related to the HT acquisition plus the additional investments made hiring engineers for the PatientSecure product line. Sales and marketing expenses of $14.4 million in the fourth quarter increased 18% from the fourth quarter of 2014 and represented 42% of total revenues in both 2015 and 2014.

G&A expenses in Q4 of $4.7 million increased 31% year-over-year and represent 14% of total revenue as compared to 12% in the prior year. G&A expenses exclusive of stock compensation should be close to flat in 2016. All of the items I just discussed led to a GAAP operating loss of $3.7 million in the quarter. And in terms of adjusted EBITDA, we generated a loss of $1.3 million in the quarter. As compared to Q3 2015, we saw significant operating leverage as our adjusted EBITDA loss improved from $4.3 million to $1.3 million on a revenue increase of $5 million.

Looking at the balance sheet, our cash balance at December 31 was $51.7 million, a decrease of just $213,000 from the prior quarter. Our total debt obligations are less than $1 million and are principally related to capital lease obligations. In Q4, cash flow from operations was a positive $1.5 million. One thing I want to address is our accounts receivable balance at the end of the quarter. Our DSOs calculated on revenues increased to 93 days. However, a significant part of our receivables’ increase was due to subscriptions and maintenance renewals that we booked towards the end of the quarter. So on a billings basis, our DSO was 72 days. These calculations exclude unbilled and pre-acquisition receivables related to the HT acquisition. I would also point out that our receivables aging improved from Q3 to Q4. Before I turn the call back over to Omar, I want to provide our initial 2016 financial outlook.

For the full year 2016, we expect revenue to be between $136 million and $140 million and adjusted EBITDA to be in the range of a loss of $11.6 million to $10.3 million, which would represent an adjusted EBITDA margin of minus 9% to minus 7%. We're not going to give explicit bookings guidance but we do expect that for the full year, our bookings growth should exceed our revenue growth and we are forecasting to be EBITDA positive in Q4. As Omar mentioned, we are forecasting a slower ramp in Imprivata PatientSecure sales and we model that into our guidance.

We also expect small hospital spending to be soft for most of this year and non-healthcare sales to decrease from the prior year. In terms of earnings per share, we expect the GAAP loss to be between $0.86 and $0.81. The non-GAAP loss per share which adjusts for stock-based compensation, amortization of purchased intangible assets, and the contingent liability revaluation is anticipated to be between $0.63 and $0.58. Our annual EPS estimates are based on estimated weighted average share count of 25.2 million.

Before I get into the first quarter guidance, let me spend a moment discussing our expense plan for 2016. Our operating expense growth in 2016 will be less than experienced in 2015 and also less than our expected revenue growth. The first half of the year includes major marketing events like our worldwide sales conference and HIMSS which are held in Q1 along with various user conferences and seminars to be held in the second quarter. In 2015, HIMSS was held in Q2 as compared to Q1 this year, so these expenses will shift into Q1 2016.

Additionally, Q1 2016 has the full effect of the PatientSecure expenses resulting from the HT acquisition in Q2 2015. These expenses will significantly impact our first quarter's operating expense levels and due to the seasonality of our quarterly revenues, most of our 2016 adjusted EBITDA loss is generated in Q1. As I mentioned, our forecast for EBITDA profitability is unchanged and we are estimating to be EBITDA positive in Q4 2016.

Now for the first quarter of 2016, we expect revenue to be between $28.5 million and $30 million and adjusted EBITDA to be between a loss of $7.9 million and $7 million. In terms of earnings per share, we expect the GAAP loss to be between $0.41 and $0.37 and non-GAAP loss to be between $0.36 and $0.32. Our first quarter EPS estimates are based on an estimated weighted average share count of 25.1 million shares. As we have mentioned before, the sale of our subscription-based software products such as Imprivata Confirm ID and Imprivata Cortext, it's sold together with our Imprivata OneSign perpetual license requires us to defer the Imprivata

OneSign license revenue and recognize both the license and related service revenues over the subscription period. The deferred revenues included in our backlog and will be recognized over the next year. We're seeing increased demand for our subscription products and I want to point out that as we cross sell our subscription based products, we expect this may happen more frequently. That said bookings are unaffected. In the event these deferrals are significant to our quarterly results, we will provide more details on the magnitude of the deferral.

With that, I'd like to turn the call back over to Omar for his closing comments. Omar?

Omar Hussain

Thanks Jeff. As we conclude, I would like to leave our shareholders with some thoughts on our business. By broadening Imprivata's Confirm ID Authentication platform from EPCS to now address remote access and medical devices; we continue to expand our addressable market in healthcare security. Imprivata is a strategic partner to over 1,500 healthcare customers and we believe that we have a large Greenfield and competitive replacement opportunity. Our relentless focus on customer service means that we really lose a customer. These forces combined to generate a substantial cross selling opportunity which should lead to sustainable long-term growth for Imprivata. Before opening the call for questions, I would like to welcome our new customers and thank our existing customers for their continued loyalty and support. I would also like to thank our employees for their dedication and commitment to innovation and customer success.

Now I'd like to turn the call over for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Jamie Stockton of Wells Fargo. Please go ahead.

Jamie Stockton

I guess maybe the first one Jeff, could you talk about what you have built into 2016 guidance from PatientSecure, I know you said that you guys were being conservative. If you could just run it through the numbers, within 2015, what have you guys anticipated in 2016 just so we can kind of back into what organic growth is implied at?

Jeff Kalowski

Yeah, Jamie, we’re not going to disclose specific components of the plan for PatientSecure. They fell short on bookings in 2015, and we've modeled substantial increase from 2015 given this shortfall, but we don't want to give specific numbers. It will be more back ended because as Omar said in his comments the ramp is taking a bit longer, so I would say it’s going to be more back-end loaded in the second half of the year.

Jamie Stockton

I guess maybe my next question is on the booking strength in the fourth quarter. You guys mentioned that the kind of newer solutions; Cortext, Confirm ID, PatientSecure were around 10% of bookings. When we think about the contribution that those made in the fourth quarter given the comment that you just made, is it mostly Cortext and Confirm ID that made the incremental contribution that really -- in the fourth quarter and not really PatientSecure?

Jeff Kalowski

Yeah, it was mostly largely our subscription-based products. And they were over 10% with PatientSecure but to a lesser extent it was PatientSecure.

Jamie Stockton

And then maybe my last question. There is obviously a lot of interest from hospitals and security and you guys have been -- I think a very visible vendor when it comes to Single Sign-On and some of the technologies that have been built on top of that. Can you talk about -- maybe Omar this is a question for you, can you talk about anything that you're doing to try to broaden your offering around addressing some of the security needs of hospitals. I know that you mentioned that you're trying to take Confirm ID into other settings including remote access to solutions, anything like that that would kind of address the broader IT security needs of a hospital?

Omar Hussain

So Jamie, we are expanding product portfolio, Confirm ID as you know leveraged the strong authentication platform that we had with OneSign that front ended SSO. We introduced that to do EPCS and it turns out that it is the perfect platform for providing two-factor authentication for a variety of access points. At HIMSS, we will be showing remote access, we will be generating our own token technology, so it will be tightly integrated. Our partnership with Capsule is introducing us now into med devices where we're replacing username and passwords; and through the course of the year, you will see more and more front-end access points where usernames and passwords have traditionally existed in healthcare be replaced by convenient strong authentication in two-factor. And we are always looking [indiscernible] platform. One of the things that has been the hallmark of our success is that customers come to us and ask for a slew of things that they feel are critical and that's how we sort of prioritize our roadmap and product development. But the first step clearly is Confirm ID more than EPCS. It will become the strong authentication platform in a hospital as an access point for remote access, med devices, EPCS, and other critical clinical workflows.

Jamie Stockton

All right, thank you.

Operator

Thank you. The next question is from Sean Wieland of Piper Jaffray. Please go ahead.

Sean Wieland

Thanks. I want to pick up on where Jamie left off on PatientSecure. Can you just give us an idea – can you characterize this? Is it a product issue? Was it a demand issue? What are some of the issues that are causing the shortfall in your expectations?

Omar Hussain

Right now it’s not a product issue or demand issue, Sean. It’s just a new product execution, sales execution issue. We acquired the company, it had its own sales force. They had a very different approach of how they went about selling it. We had some slowdown in how we engage with our partners, clearly mea culpa we made some mistakes expecting things to go a little smoother and faster, but we are retooling it.

One of the things we're doing, for example, is we've changed out the PatientSecure sales reps, we brought in our top guys to become the overlays and the experts. We are opening up PatientSecure to all our sales reps, so they all have been extensively taught on the product in January at the sale kick off. They will be carrying it in their bag and getting quota credit. We hadn’t given them quota credit when we launched a cash bonus, but it wasn’t in their bag. It didn’t get them towards the objective.

We've also started engaging with partners that this has fallen off the sort of radar. We just sort of expect it to continue, but we've learned that you’ve got to keep new focus on it. We had a great event at the Cerner Conference, and at HIMSS Cerner is showcasing the product as part of their whole patient experience side. So it is a longer sales cycle. It is a different sale. Our guys have to learn how to sell this to the revenue guys, not just IT guys. But on the flip side, the good news is the pipeline is building. As we run marketing campaigns, we have more and more people interested in the product. We are doing more demos and evals, and we expect that it will take a little bit of time, but towards the second half of the year, we will start to see results out of the market.

Sean Wieland

Can you tell us how many customers formerly known as HT Systems had at the end of the year?

Jeff Kalowski

Sean, we didn’t add many customers this year since the acquisition, so we acquired almost about 60 customers, so it hasn’t changed that much since the acquisition.

Sean Wieland

And you haven't lost any?

Jeff Kalowski

I am not aware of any that lost, no.

Sean Wieland

Okay. And then one more I'll squeeze in on the guidance on ’16. Jeff, do you have an assumed magnitude of the revenue deferrals? Is any of that baked into your guidance? I know you said you will disclose it when you have it, but I just wanted to know if you have anything earmarked in ’16.

Jeff Kalowski

Yeah. We had – we did bake in some factors for that. We did see the number of deferrals going up. We had some in Q4, so because we're selling more of the subscription products, we are seeing more cross-selling. So we did bake in a factor for that and if it's off significantly, we will of course disclose the magnitude.

Sean Wieland

Okay, thanks a lot.

Operator

Thank you. The next question is from Saket Kalia of Barclays. Please go ahead.

Saket Kalia

Hey, guys, thanks for taking my questions here. Omar, maybe just to start with you, can you just talk about the competitive wins this quarter. I think you said this was a record for that metric [indiscernible] provided, but qualitatively what do you think that maybe changed a little bit in '15 and then if you look at the other side of coin in terms of the whitespace in the market have you seen any change competitively there as well on and specific on OneSign?

Omar Hussain

So on our core - on OneSign in the whitespace, our win rate is clearly as high as it was. We haven’t - we don't lose many deals and we are generally the vendor of choice. What is interesting, not just in Q4, but I think for the whole year is this was a record year for competitive displacements is that as some of the hospitals that had systems, EMR systems that are kind of being phase out and they are going to be either Epic where we are sort of one of the largest partners and vendors with great market share and recognition or to Cerner or to Meditech. As they move the EMR vendor platform, we find ourselves being brought in. And I think I mentioned this on previous calls, we continue to see virtual desktop infrastructure as another other major driver. So when they do one of those two infrastructure upgrades, either changing an EMR or add-on virtual desktop, we are front and center in that process and we're seeing more and more of it right now.

Saket Kalia

Got it. And then Jeff to you, just on the financial front, can you just maybe talk about sort of how you think about sort of sales and marking investment here ’16? The EBITDA guidance is a little bit of improvement from '15, but can you just talk some of the investment parties in sales and marketing specifically?

Jeff Kalowski

Yeah, So as far as quota-carrying reps, last year we had about 55 and we did not invest much more than that. It is about the same number this year. So we did consolidate some of the non-healthcare sales force and added some. So it was net-net wash. So most of the investment was really on the sales and marketing side on run rate going into next year, but with respect to direct quota-carrying sales reps, we didn’t add that much.

Saket Kalia

Got it. Right. That’s it from me. Thanks very much guys.

Operator

Thank you. The next question is from Gur Talpaz of Stifel. Please go ahead.

Gur Talpaz

Sure. Thanks for taking my question. I am not sure if you saw, but there is a report last year that came out that basically pointed out there is malware on every single medical device inside of a hospital environment. Can you to talk about whether you see that as a driver if you will for the pending launch of Confirm ID for medical devices and alternately what’s pushing you in that direction?

Omar Hussain

Yeah, I think in general, Gur, that healthcare is being attacked on all different fronts and medical records are still a prime target for hackers and having one of our consumers was mentioning that they have these new medical devices - I won’t to mention the vendor, but it was so complicated to just put a username and password on the front end, that they decided not to have it at all. And so in order to improve the efficiency, there is both back end attacks that are happening with malware and stuff and there are front end attacks. And Imprivata's authentication platform we just think is in a prime position to replace usernames and passwords with better two-factor authentication and access. But today our priority is the front end, that’s our strength and we will be looking at the solution from that perspective.

Gur Talpaz

That makes sense. And then it looks like Cortext had I think a pretty good year, looks like you picked some momentum there. Can you talk about what you are seeing in that side of the market? It’s a fairly competitive space, but it looks like you’ve kind of found a niche in that market. Looks like you’ve kind of picked some strength there.

Omar Hussain

Good question. I think there are three factors. Number one is, it takes a while for product to mature and we have a great product as evidenced by our win as best-in-class for the year in our messaging. The second factor is that the market is heating up and it’s not just a question of people dabbling and buying 200 seats or 100 seats. People in healthcare systems are now looking at long-term investments. And my theory is there are 40 vendors today. It'll be down to three or four and in another three years most of those startups will be dead or gone. And with 1,500 customers or over a 1,000 in the US alone, I think a lot of our customers trust us a vendor of choice. And we're seeing them come back to us and saying it's not just about having a product, it’s about having service, it's about having quality and it's about being there for them over the long haul. And I think we will win our fair share.

Gur Talpaz

Got it. And then maybe just one for Jeff. Jeff, if I look at your guidance, can you maybe give us some other qualitative or quantitative granularity with regard to how you are thinking about the separation between new customer growth versus upsell as you kind of think about growth in 2016?

Jeff Kalowski

Well, our add-on revenues continue to grow year-over-year and we expect that to continue. It was 43% of the revenues were add-on revenues this year. So as long as we continue to add customers in the over 200 range, we expect that they will buy more after the initial sale and we will get more add-on revenue, but we don’t - look, when budget we look at our install base and we look at and see, who is going to buy more. So we have some good visibility into that in our modeling.

Omar Hussain

Gur, I’d like to add something that we added more than 300 new customers last year. It is unimaginable that we will continue on that here. I mean, that’s a lot of customers to add. I'm not sure – and I think that these customers are buying from us and have a potential to buy many things from us over time, but I think as the market matures, you will see that while we add new customers, our new customers may buy smaller deals from us or may buy a product with a smaller deal entry point and then they keep adding on other components.

Gur Talpaz

That's helpful. Thank you.

Omar Hussain

We saw that with Confirm ID. People who bought 200 seats came back and bought 1,000 seats later in the year.

Gur Talpaz

Perfect. Thanks for the color. Thanks.

Operator

Thank you. The next question is from Sterling Auty of JPMorgan. Please go ahead.

Sterling Auty

Thanks, guys. One question, one follow-up. I apologize if you said it in your prepared remarks and I missed it, but when you look at the guidance, what have you kind of assumed in terms of a non-healthcare contribution within that guidance?

Jeff Kalowski

We have assumed that that – our largest hit to our -- impact to our growth next year is really coming from the non-healthcare and a lack of growth in the smaller hospitals. So that is the most significant impact to the growth rate. And then we’ve been very conservative with our PatientSecure ramp, and that’s sort of affecting our growth rate. And non-healthcare will be down, sorry.

Omar Hussain

Non-healthcare will be down from last year.

Jeff Kalowski

Sorry, I missed that part.

Sterling Auty

Perfect, that's exactly what I was looking for. So you’re – especially, because it sounds like you're taking some of the go-to-market resources and reallocating them to where you’ve got the strength in healthcare, so I would imagine, that would contribute to down year-over-year.

Jeff Kalowski

Yes.

Sterling Auty

Okay. And then follow-up, in terms of PatientSecure, when – taking separate, so not the pipeline that was already there when you made the acquisition. In terms of the conversations that your sales reps are having with potential customers now, do you feel like they have gotten to that pain threshold, where they understand that the benefits of having the platform are truly enough to – or that the pain of not having the platform is enough that they need to do something or are we just still too early in kind of the educational process about what PatientSecure can actually do?

Omar Hussain

Well, we’re learning how to really transition the pipeline into bookings. Our sales guys were not used to talking to the revenue folks at a hospital. And now they have gone through the training, what happened with PatientSecure and this is sort of the mea culpa. We bought a company and our first thing was to put the product on hold till we fix up some of the technology things and made it more robust and improvised it, right. And then we have their sales rep who had a very different approach of having conversations, and so some of our partnership relationships fell short, a lot of the work that they were doing was already through partnerships and we didn’t introduce it to our sales force as a bag-carrying [ph] item, it was like, you get a bonus for it. Now that we’ve realized from some of the marketing and the interest, there is a lot of interest, but they were ill-prepared and so now, we have introduced the product to all our sales reps, it’s in their quota, we spent expensive time talking to them about it, the pipeline has been growing, they actually are having better conversations, the deals do take longer, because sometimes these hospitals may not have that prioritized in their purchases today, but it’s growing very rapidly. I mean, if you listen to what’s happening in healthcare, patient identity is one of the top topics. CIO Healthcare Forum has identified patient identity as a key component of interoperability of patient information. So it’s bubbling up at a very fast rate sort of in the mindset of CIOs, and Chief Medical Officers and CEOs of hospitals. And our team is now learning now, they are starting to articulate the story, better quantify the pipeline and move deals forward. And we are very bullish that we will see some good traction out of this towards the end of the year.

Sterling Auty

Great. Thank you.

Operator

Thank you. The next question is from Mohan Naidu of Oppenheimer. Please go ahead.

Mike Ott

Actually, this is Mike Ott on for Mohan. Thanks for taking my questions. Back in 3Q, one of the headwinds you guys cited were some hospitals. Are some of those headwinds subsiding today especially around ICD-10 and M&A in small hospital space?

Omar Hussain

We’re not seeing – so, one of the factors we feel in the small hospital is not – we’re not seeing growth there. Those headwinds are affecting in the short-term our growth next year definitely. The M&A and the uncertainty around -- the ICD-10 is no longer an issue, we don't see it, it hasn’t cropped up, but we are not expecting growth in the small healthcare market. It’s not affecting, longer term, it won’t affect us, because it's not that the market size is slowing, it’s just not becoming part of the bigger purchases. I mean, I think I talked about OSF who bought not just for the hospitals, but also for all the clinic and smaller hospitals in their environment. So we will get the deals, but we will just get it through the bigger acute-care hospitals as they consolidate those users.

Mike Ott

Okay, makes sense. Thanks. And then how are international deals, where are you guys seeing strength? And if you can remind us roughly what percent of your revs come from outside the US and how those might change in the next few years?

Omar Hussain

We're still on track. We see roughly, I think it was 19%, 20% above our –

Jeff Kalowski

22% this year was international, about the same as last year.

Omar Hussain

All right. We are seeing a lot of interest coming out of the Middle East lately, and in Australia. We had -- we followed into Australia late in 2013. We are starting to see some good momentum build there this year, and we expect it to continue in Asia-Pac in ‘16. One of the bright spots that we are seeing in the international markets is the Middle East. In fact, we have a team down at a big conference right now with a lot of discussions going on. They are investing in brand new hospitals, and interestingly enough, the two more important products that they're looking at are OneSign and PatientSecure. So this is going to be an interesting market opportunity for us.

Mike Ott

Great. Thanks guys.

Operator

Thank you. The next question is from Steven Wardell of Leerink Partners. Please go ahead.

Steven Wardell

Hey, guys. You mentioned that the non-healthcare sector is in decline. Can you talk about what's driving that? Is that a competitor in that sector or decline of demand or is that a decline of sales priority in that sector?

Omar Hussain

Well, it starts with sales priority. Our focus has been in healthcare and when we were still selling one product, OneSign as a Single Sign-On product, it was easy to maintain a little bit of focus on the non-healthcare piece. Now that we have multiple products, the company doesn't have -- we can't afford to invest the dollars in marketing and creating a position. I mean, we go to HIMSS, we don’t go to RSA. RSA is the most security conference for non-healthcare and we don’t go there, we go to HIMSS instead, and we spend more and more at HIMSS. So I think that it was an inevitable thing. We always felt that that would happen.

Also, in non-healthcare, the product is sort of commoditized. They're just buying Single Sign-On. In Healthcare, there are buying productivity, workflow automation and authentication platform, so it's a completely different priority and a completely different value proposition, and in the end, we are a healthcare IT security company, so at some point, you have to buy [indiscernible].

Steven Wardell

Thanks. And then there is a bear thesis around the hospital sector in general right now that says that their profitability will be pressured in 2016, and that could lead to leaner health IT budgets. Are you seeing that or do you think that -- do you think that you’re -- the conversations with CIOs that you're having are being impacted by that?

Omar Hussain

I'll say two things. The bulk of our -- we don't -- a lot of our business is not the for-profit hospitals, the bulk of our business is the non-profit hospitals. And we haven't seen them being impacted on the for-profit side. Secondly, I'll say is that in the post of meaningful use era, the most important thing is security. You can't invest billions of dollars in automating information and then not protect it. So whether you are a for-profit hospital or whether you are a non-profit hospital, the increased amount of attacks that are happening in healthcare, protecting patient information is becoming the topic du jour. Recently, there have been articles about how patients are afraid of privacy issues. So until those issues are solved, you won't go to Phase 2 of healthcare technology. So I think we're in a very strong position for at least the foreseeable future to address a series of problems that affect the market.

Steven Wardell

Great. Thanks.

Operator

Thank you. The next question is from Jeff Garro of William Blair. Please go ahead.

Jeff Garro

Good afternoon guys. Thanks for taking the question. I wanted to dig into the guidance a little bit, and maybe just thinking about backlog growth that is exceeding revenue growth. And also some more of the your revenue coming from subscription, and with issues you've dealt with customer implementation schedules in the year and kind of hammering those out, if you have any comments on how you might see greater visibility into your revenue guidance in 2016 than in prior years, that would be great.

Jeff Kalowski

Yes, Jeff, the backlog growth was driven a lot by obviously by the subscription based booking. So you’re going to see it in the bookings growth, but you won’t see it in the revenue growth, so that’s going to be ahead of the revenue, and that’s modeled into our guidance. But more of our revenue, a bigger component is going to be from subscription and recurring revenue, so we have more visibility in addition to add-on revenues from customers through our traditional perpetual business.

Jeff Garro

Great. That’s very helpful. And one more for me, I wonder how we should continue to think about channel partners contributing to your business. You’ve mentioned that there might be a little bit of a refocus there, but if we look back on 2015, if you could think about how much channel partners have contributed to revenue or bookings throughout the year and just whether you expect that to increase or decline directionally next year will be helpful?

Jeff Kalowski

Jeff, it’s traditional around 60-40 split, we don’t see that changing. We see that staying same next year.

Jeff Garro

Great. Thanks for taking the questions.

Operator

Thank you. Ladies and gentlemen, that concludes the question-and-answer session. And with that, this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation. And have a wonderful day.

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