Good afternoon, ladies and gentlemen and welcome to the Vocera Communications Conference Call. My name is April and I will be your conference coordinator for today. At this time all participants are in a listen only mode. After the speakers' presentation there will be a question-and-answer session. [Operator Instructions] I would now like to turn the presentation over to your host for today’s call, Sue Dooley of Vocera Investor Relations. Please proceed.

Thank you. Hello, everyone. Welcome to Vocera’s conference call to discuss our third quarter fiscal 2019 earnings. Joining me today are Vocera’s CEO, Brent Lang; and Justin Spencer, our CFO. Earlier this afternoon, we distributed a press release detailing our quarterly results. The release is posted on our website at investors.vocera.com and is also available from normal news sources. This conference call is being webcast live on the Investor Relations page of our website where a replay will be archived. Before we begin our prepared remarks, I would 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 both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP financial measures is provided in our posted earnings release. With that, I would like to turn the call over to Brent.

Thanks, Sue. Good afternoon, everyone. Thank you for joining us. The third quarter of 2019 was another solid quarter for Vocera with record revenue of $51 million and good profitability. As we entered Q4, we are excited by our large deal pipeline, our sizable market opportunity and our expanding product set, which has never been better. The highlights for the third quarter showcase our market appeal and highly differentiated offerings. Our success winning large deals continued with eight deals over $1 million made up of both expansions and new hospital wins. This included four large deals in our federal business, and we're on pace for another record year in the sense. Overall device shipments were at a record -- were at record levels, and we are encouraged by how the Smartbadge is building momentum. Our investments in international are driving results with substantial year-over-year bookings growth, including two international deals over $1 million. Finally, in Q3, our pace of innovation continued, including the launch of our next generation smartphone app, the Vocera Vina. Let me tell you a little bit more about some of these exciting developments. From a bookings perspective, we believe customers across our target markets are embracing our unified platform and the power of our clinical integration, intelligent workflow engine and best-in-class voice, messaging and alerting solutions. We achieved our largest ever number of million dollar win this quarter demonstrating the value of our technology with both new and existing customers. In the US commercial health care market, the highlight was a $2.2 million win at the University of Texas Southwest. UT Southwest bought our full solution, and will leverage Smartbadges for communication, as well as for receiving nurse call and patient monitoring alerts. At Fairview Health, we sold a large $1.1 million engage cross sell, building…

Thanks, Brent. Hello, everyone. We had a solid third quarter for both revenue and profitability, reflecting the continued momentum and pattern we typically see in the second half of the year. Total revenue in Q3 grew 6% to $50.8 million with balanced growth across both our products and services segments. Our device revenue of $19 million increased 12% from prior year, a record for Vocera and was fueled by shipments of both the Badge and Smartbadge. As expected Smartbadge shipments increased from last quarter, and we continue to be encouraged by the pipeline for this device. We anticipate that the Smartbadge mix will continue to increase over the next several quarters, as customers see how this new device demonstrates the full power of our software platform. Meanwhile, the Vocera Badge continues to have strong appeal in the month. Sales of this device were robust in Q3 driven by our Federal business Nordstrom and other key customers. Software revenue was $9.5 million compared to $10.3 million in the same period last year. As we look forward over the next few quarters, we believe our software business will return to robust growth. There is high software content in several of the large deals we booked in Q3 that we expect to ship in the coming months. And the newer products that Brent mentioned earlier, including the Smartbadge and our new Vina mobile app should drive higher software sales, a key driver of our long term operating model. Our software maintenance and support revenue, which provides a solid economic foundation for our business grew 9% in Q3 compared to the same period last year. Our revenue pattern for software maintenance and support revenue is predictable because it is recurring and is recognized over an extended period of time. Also fueling this with our…

Thanks Justin. With Q3 behind us, we are focused on execution and closing out a strong year. As we think about next year, while our growth may remain moderate in the near term, we are confident we are taking the right steps to secure long term growth. We will continue to invest in international work to ensure a smooth Smartbadge transition and continue to enhance our sales process in order to harvest or large deal pipeline and bring in new customer wins and expansions. It's still early days in the evolution of hospital communications away from pagers, loud speakers and wireless phones. Our differentiated technology and our large Greenfield opportunity inspire us to pursue the goals we set out to achieve. Namely to transform healthcare and make a lasting difference for patients and caregivers. This thesis remains unchanged and we remain confident about the Future. With that, we're ready to conclude our formal remarks. Thank you for listening today. Operator, we are ready to open the line for questions. Thank you very much.

[Operator instructions] And your first question comes from line of a Ryan Daniels from William Blair.

Yes, thanks for taking the questions, guys. Obviously, the key focus will be on Q4 sales and the flat year-over-year growth versus the expectation for stronger performance. I'm curious if you can go into a bit more detail on the impact of each of the three things you outline. Meaning, how much of this do you believe is due to an extended sale cycle? How much due to some the International noise and weakness? And then how much on existing clients taking longer to assess and install or purchase the new badge? If you can break that down that would be helpful.

Sure, Ryan, thanks for the question. I appreciate it. I think that's certainly the most important one is this transition we're seeing in the market between departmental level buying and enterprise level buying. We're seeing a larger increasing number of bigger deals and fewer and fewer decisions that are being driven at departmental level. This is having a positive impact in terms of average deal size, but in many cases is adding complexity as these deals need to go through additional approval cycles and building consensus across the organization. International, the second one that you referenced and I also referenced in my remarks is more a function of bringing consistency. We feel like we actually had a really strong Q3 and we're looking forward to some of the deals for the remainder of this year and into next year. But if you look at it on a year-to-date basis, it's certainly below where we had wanted it to be. I think in that case, it's more question of us continuing to do the work, that we've already begun to do more sales enablement, more marketing support, some leadership changes that we've made internationally to have an opportunity to get their teams in place. The pipeline is there internationally, and the -- our competitive differentiation, and our offering seems to be resonating really well. So it's really more a matter of bringing more consistency to that part of the business. And in the case of Smartbadge, I think this is actually a net-net positive for us over the longer term, what we realized is that what we did off with the introduction of the Smartbadge was truly an industry changing activity and while there remains a lot of excitement around it we're recognizing that customers are having to rethink their strategy around clinical integration, around messaging, around software platform and even the infrastructure around silly things like their chargers, batteries, training, some of the infrastructure. So particularly within the install base, I think that that is a bigger impact. So if I was going to rank order them, I probably would say the transition in the deal sizes is overriding the biggest element of it; Smartbadge would be second; and I think international would be third. But we view all them as sort of temporary issues that over the longer term, we feel like either the market will self-correct or we will be able to execute and fix on our own. And actually lead towards more bullishness in the business on a longer term basis.

Okay, that makes sense. I'll hop back in the queue. Thanks.

Your next question comes from the line of Vikram Kesavabhotla from Guggenheim Securities.

Hey, thanks for taking the question. I just want to talk about that longer sales cycle in a little more detail. And as we've seen these deals transition to the larger sizes, is it mostly the administrative process. The approval process that's causing them to take longer or is there anything to call out with respect to budget pressure or the competitive landscape that is causing these deals to take longer to close?

Yes, good question. I would characterize it primarily on the administrative side. And if I break down the sales process and just sort of to have there's a portion on the front end, which is the evaluation of the product, getting to what we think of as vendor of choice, and the reason that that's extended in the sales process is because the number of interested parties and decision makers that want to have a say in that decision increases a lot when you go to these house wide deals. So each department had the CMIO, the CMO, the CNO, the CIO, all these people want to be involved in that decision making and evaluation process. And so it's more of a calendaring and administrative issue just to get demos completed for those folks. We're not seeing any kind of competitive impact on that, it's really just a matter of building consensus amongst the organizations. The second half is sort of post vendor of choice selection to purchase order. And that is where we're seeing probably an even longer elongation as these organizations that have gone through, in many cases, mergers with other health systems or structural changes within their own internal administrative bodies are trying to navigate what's required in order to get from vendor choice to purchase order. And that can involve statements of work the other legal aspects of it. It can involve the funding mechanisms. It can even involve just simple operations in day-to-day activities getting in the way of getting into final paperwork close. When you're talking about over $1 million size deals, there is just more hands in that. And I think probably that's the piece that we're seeing more elongation where we've been named vendor of choice. But in order to get approvals for $1 million plus or $2 million plus or larger deal, it's oftentimes having to go through several additional committees for final approval up to including at the board level approvals. And obviously the board meetings only occurred on a sporadic basis and so in some cases we're bound by the calendar. I would tell you that we're not seeing any change in terms of competitive front. Our win rate remains very, very high customer level of excitement for our solution remains very, very high. We're just not losing deals in that context. It's really more of that time from vendor of choice into to PO and then ultimately to deployment. It's taking longer than the smaller deals with that.

Okay, great. And maybe just as a quick follow up. As we look ahead to the fourth quarter and to 2020. Can you just give us some comments on what you're seeing in terms of RFP volume and the pipeline right now, relative to what you saw this time last year? Thanks.

I would say both are up substantially. The pipeline right now, in particular our marginal pipeline is larger than it's ever been before and I think that's what gets us excited about the future. More and more of this business is going to RFP and I think that's the reflection of the fact that this is not a one off initiative by an individual inside of the department. But it's more of a strategic evaluation and initiative that's being managed and funded at the C3 level of the health system. And typically, in that environment, they're going to go through more of a formal RFP process.

Great, thank you.

Your next question comes from a line of David Windley from Jeffries.

Hi, thanks for taking my question. Good afternoon. I joined a little late. So I apologize if my context on this is a little off. But in our notes at the top of your comments you talk about I think eight deals over $1 million. Relative to your answer to last question are those deals where you're describing that you've gotten the vendor of choice not or whether actually progressing the bookings?

So those are all formal bookings. We don't typically talk about deals until we received an actual booking from the customer. And that's a very disciplined approach that we take where the firm commitment to buy in the form of a purchase order. And so anything that is in that kind of vendor of choice to booking category is something that still in process and we wouldn't talk about on a call like this.

Okay. And so make sure I'm clear on terminology. So, I think you also talked about in terms of sales force, attention and deployment that 80% are focused on new deals 20% focused on upsell. In light of lengthening cycle time, would it make sense to have more of your selling effort focused on kind of existing clients and moving, say already friendly clients up the consumption continuum, rather than having to break into somebody new where the cycle time to ultimate revenue is less known?

Yes, directionally. I agree with what you're saying. I would correct the notion that 80% of sales force is focused on new deals. I think maybe, maybe we've said that its 80% of the effort or something. But in terms of the actual sales force deployment, the vast majority of them have a mixed bag of both install base of customers as well as new customers that they're targeting. And in fact, there's chunks of the sales organization that's focused on either maintenance renewals or on our supplies business and then there's a number that are focused on those existing customers as well. One thing that I would highlight to support your point, actually is that, I believe four of those $8 million deals, were in fact expansion deals. So you're absolutely right, the strategy, even when these larger over $1 million deals is to work with the install base, either in cross selling, engage or expanding into new groups of users or new departments and we've had good success in that environment.

And then, last question, again sorry if you discuss this in detail. But last quarter, and when we were together during the quarter, you talked in some granular detail about two very large deals that had pushed out of the quarter for reasons that seemed very achievable, eminently achievable during the third quarter. Did those land in the third quarter or have they still been pushed out further?

Yes, I don't think we want to get into the specifics of individual deals. But I would tell you we are feeling very good about that process. The analogy that I've used before is kind of the planes circling here, each landing individually. And, it's the actual the arrival time that someone is up in the air on some of them. None of those deals have disappeared. I think, all the ones that we were talking about in the Q2 timeframe of now close. But the more relevant point is that we need to have more airplanes in the air and more arrivals at any given point in time. And none of the ones we were talking about went away. I think they've all looked at this point in time.

And your next question comes from the line of Matthew Gillmor from Baird. Please go ahead.

Hey, thanks for the question. Following up on the elongation of the sales process. Sounds like that's driven by a combination of both larger deals, and then maybe some additional consideration around Smartbadges and folks trying to understand how that'll best fit within their strategy. Can you give us any sense for where you think you are in this process of the -- it seems like the elongation has gotten longer and longer and longer? Are you seeing any evidence that we're at a nadir, or at a trough I should say? And then how are you kind of factoring this into guidance? Can you just give us any sense along those lines?

Yes, so thanks for the question. I think the way I would characterize it is it's not that the large deal sales itself is getting that much longer, but more of the deals are in that large deal sales cycles. So as we move, if you move to a dozen deals from a department level deal to these enterprise deals. And each of those transitions representative change from, a 9 months sales cycle to an 18 months sales cycle, then you're going to have this natural value during that transition period of time. And I think what's happening to our business is that more and more of it is moving into that that category of the larger enterprise deals. Yes, there are some factors that even on the enterprise deal, because of the dynamics in the market are being elongated. But I think the bigger dynamic for us is just the number of deals that are falling into that larger deal category. I think, we're getting closer to the point of reaching a steady state, although the challenge is just understanding the specific timeframe associated with those. And I think part of the reason why we're being more conservative with guidance, and I'll let Justin speak to this as well is that we just are recognizing that there's a natural lumpiness in the business as we as we navigate these larger transactions.

Yes. And as we look forward here over the next few quarters, I think this is clearly a dynamic that we've tried to factor into our overall guidance. What we're seeing is, we see a robust pipeline of large deals. We're definitely seeing a clear shift, purchasing from a departmental level to these larger deals. And so in terms of our expectations over the next few quarters while we work through this is, we've moderated our growth assumptions. But in long term, we think this is a real net positive because the larger deals have inherently larger deal sizes, and there's a much larger annuity stream that comes with those, which we think will add even more stability to our business model over the long run.

And maybe one follow up. Can you -- if you can just quantify sort of how large some of these very large deals are just to give us some sense for the opportunity that's ahead?

Yes, we have a fairly kind of simplistic artificial cut off of anything over $1 million is what we call a large deal. And as Brent mentioned earlier, they can fit either with as, as an existing customer who is expanding to a new hospital or even within a hospital across multiple products or a brand new customer who is purchasing the solution on an enterprise level across the entire health system. We have deal in our pipeline that are in that large scale category that range from that $1 million and up to several million dollars. And when you get into the larger health systems, there the opportunities are in the multimillion dollar levels.

Okay, thank you.

Your next question comes from the line of Sean Wieland from Piper Jaffray.

Hi, thanks. So given all this, have you updated how you're calculating your guidance, your third quarter-to-quarter guidance or predicting the deal closure cycles in any way can you share that with us?

Yes, good. Hi, Sean. For the current quarter, we've applied a very consistent framework for how we calculate our guidance and our guidance relative to our results then quite strong in terms of forecasting revenue in the current quarter. And so we start with our backlog and our deferred revenue, we end the visibility that we expect from that in our suppliers and the remainder is the amount of book ship. When we're estimating the amount of books shift that we expect to close in the quarter. We look at the size of pipeline relative to our bookings targets and calibrate from there. Well, we are saying the reason we chosen to provide a little bit longer term view here, or I should say view as moderated growth over the next few quarters is to just make sure that expectations are in line with this transition that we're going through as we transition our bookings pattern from more departmental purchasing to larger deal sizes and in February will come out with formal 2020 guidance at that point.

So you've used the word moderate, a few times in describing your outlook, which I'm not quite sure what that means and is moderate going to be above zero. And can you comment on 2020, we should be expecting 2020 to be a flat year or now what is moderate need in your view?

So the language that I have tried to highlight in my portion of the script was that we expect growth to be similar to what we've seen in the last couple quarters as we look into the next couple of quarters. So it's clearly not zero. It's not down. But it's also not in the mid-teens range that we've talked about, historically.

All right. And then one last quick one. How did the Fed business do relative to your expectations in the corner?

It was right on track. I think we were really pleased. Obviously Q3 is always a big quarter for the Fed, and they delivered as expected. So we were really happy with how that played out.

Okay, thank you very much.

And your next question comes from the line of Gene Mannheimer from Dougherty and Company.

Thanks, good afternoon. I don't want to be a dead horse here. But I want to do just kind of go back to the increasing complexity of the sales as they get larger. Do you feel do you have the right structure and alignment in place to meet the complexity of these longer sales cycles and decision processes? For example, do you need a more consultative push, do you need more product and domain expertise, do you need to more of a hunter farmer model? I'm just trying to get a handle on and if you're thinking about those things?

Thanks, Gene. Yes, spending a lot of time thinking about those things. And generally feel like we're in a work in progress on that. Clearly, there's been a transition in our sales organization, as we've had to migrate from the more department oriented deals to the larger deals. And that's been in the form of the tools and sales enablement aspects is coming in the form of who we're marketing to and how we're marketing on those. But it's also come in the context of the skill set and capabilities and structure of sales force itself. I would characterize 2019 as a year where we've been more aggressive in changing the makeup and structure of the sales team, where we found certain individuals who were just not able to make the transition to the more enterprise level selling. They may have been very successful, and it was more of a departmental or more of a device sale and so we've been very proactive in making those transitions. And we've got a number of new folks who come in and we believe, have more of that enterprise selling capability. And then the enabling tools that we give them, whether that's the account planning, whether that's the ROI sales tools, whether that's the clinical executive teams, the nurses that support those clinical workflows, or the technical expertise to be able to support the questions around scalability around security, more of the enterprise class questions, it becomes much more of a team based selling. And so well, I think we've made tremendous progress on that. I don't think we're done. I think there's more work to be done there and we continue to evolve, as we move forward on that some of this is learning on our part and some of it's actually also learning on the part of our customers, where they're making decisions that they may not have been exposed to before and they're having to navigate the organizational structure of their own organizations. And so I think we're, we're taking it very seriously and I would say we're on the right path, but we're not done.

Well, thought out. Thanks for that, Brent. And then my other question would be, I guess, about longer term growth, you've discussed that in the near term revenue growth is going to be more muted. But when you talk about the long term resumption of growth, how long term is that and will we be looking at a double digit type of trajectory past next year?

I remain really excited about the long term growth prospects of this business. I think, as I said in my prepared remarks, I think our product solution set right now is better than it's ever been. We remain really excited about the Greenfield opportunity in this business. We still think we're in the early innings here. And so I don't see any reason why we couldn't get back up to that kind of growth level in the future. We see these product and market transitions as temporary. And my expectation is that at some point in the future, we could get back to the higher growth rates that we've experienced in the past. As you know both Justin and I try to be as absolutely transparent as possible about the business and like we see it and we felt like we wanted to be transparent at this point, but also want to make it absolutely clear that we remain very bullish on the long term prospects. And see a market that we're reminded every day is still made up of hospitals that have got bunch of pagers, and in building wireless phones and overhead loudspeakers that are just not getting the job done. And the number of hospitals that continue to come to us and just tell us what an incredible difference our products are making in their environment as they navigate away from these legacy solutions. Particularly in times of stress or particular difficult times during nursing strikes or other challenging environments, the value that our product suite can bring into the environment, both in terms of patient safety, as well as in terms of staff resiliency and quality outcome continues to make it a very, very powerful and compelling solution. So I think our long term prospects are being very positive.

Very good. Thank you.

Your next question comes from the line of Matt Hewitt from Craig-Hallum Capital.

Yes, this is Lucas Baranowski on for Matt Hewitt here at Craig Hallum. Just a couple of questions here. You've talked in the past about the potential for the Smartbadge to drive higher attach rate for engage in some of the software offerings. Now that some of those larger Smartbadge wins have started to come in, has that been the trend that you're seeing?

Yes, absolutely. In fact, several of the deals that I talked about on the call, which were newer customer deployments, they were buying Smartbadges and they are also buying voice messaging and engage clinical integration. So the mix of devices across Smartbadges and smartphones and then the full suite of software is becoming the norm in most of our new customer wins. I would say it's taking longer and what I was trying to allude to in the call was that it's really the existing customers that are taking more time to do the evaluation because they have a lot of inertia tied to historically of doing things with our previous version of the Badge. But in particularly for the new customer wins, we're seeing the Smartbadge be a real driver of selling this full stack of our software and including engage in messaging.

Okay, great. And then turning to the Nordstrom rollout, I believe a large portion of that occurred during the quarter. How much of that is left to occur in Q4?

We reshipped and delivered all of the product, the Badges and the software. The professional services work is ongoing. We're through a meaningful number of stores but there are a few that remain which will be completed by the end of the year. That's gone really well. As Brent mentioned earlier, the new merchant store in New York, just open today and is prominently showing the demonstration of our technology in the store. We're really encouraged by how that deployment is gone.

Okay, thank you very much. That's all I had.

And our next question comes from a line of Mike Oth [ph] from Oppenheimer.

Good afternoon. Thanks for taking my question. With a few weeks of 4Q underway here curious how you're seeing the hospital spending environment in general as we head into 2020. And are you seeing any political headwinds at all?

No, I don't think we've seen any changes at all. I think we're feeling good about Q4 and so far, the issues of staff resiliency and patient safety and quality of care seem to be immune from the DC belt [ph].

That's great to hear. And congrats on the $2 million plus international deals. I realized one was in the UK, but Brexit issues there seem to be heating up more recently. Curious if that has led to any impact on your business?

I think it's too early to know. But with something we're certainly watching, the nice thing about the Cleveland Clinic London deal is that it's a private hospital. So it's not subjected to the same sort of funding mechanisms that the NHS deals would be. And I think in the short term, we probably would prioritize opportunities with the private hospitals in the UK over some of the NHS opportunities. But the team in the UK is actually building good momentum. Some of you may remember we moved one of our star employees over to the UK to manage that organization. And he has done a really nice job of building momentum, both within the install base as well as building pipeline. And I'm actually going to be over there next month meeting with customers, meeting with the team and also meeting with some investors and looking forward to getting on the ground and seeing the dynamic there. But the beautiful thing about the Cleveland Clinic in London is it's going to provide a tremendous lighthouse account for us because other thought leaders in the country will clearly be looking to Cleveland Clinic as they think about their own communication needs. And we think it will become a great showcase account for us as we grow that region.

Great, thanks very much.

Great. And your last question for the evening is from the line Stephanie Demko from Citi.

Thank you, guys. Given the elongation of new client sales, how much room that you have left in the -- across the opportunity? And as a follow up to that is there anything you can do like reshuffling the sales force that could accelerate this just to kind of offset the slowing growth in other channels?

Yes. Great thought Stephanie. In fact, we see a tremendous opportunity remaining for cross sell into our install base. The number of our legacy voice customers who are not using engage is still very, very high. And that could be not just a small cross sell, but in many cases can be a very large dollar amount in those cross sells. And some of the other legacy middleware players in the space are faltering right now. And so we see it as an opportunity to go back in and cross sell our solution into the install base there. There's also an opportunity to cross sell messaging. And obviously as we continue to roll out Smartbadge, we see that as an upgrade opportunity as well. So clearly sales force is balancing between new customer opportunities and install base, but we see the install base opportunity as a great growth driver as well.

Will you have any pushback on the kind of cross sells or elongations there what causes this, given we haven't seen the rapid adoption yet, they kind of seem like a -- given is it they already have a competitor solution or is it just they're not ready for adoption?

So the biggest issue is that they already have our solution. And I say somewhat ironically. But if you go to a customer that's invested millions of dollars into the B3000 and/or B3000 form factor or even B2000 form factor, that form factor was largely compatible with each other. It has the same battery. It uses the same charger. It uses the same accessories. The functionality and the user interface of the device was the same. So it didn't require any additional training. And with some of our larger install base customers who we rely on for large Badge refreshes on a fairly regular basis, they're looking at it and they're saying, there's a lot of inertia associated with the prior form factor for them to make the move to Smartbadge. It requires them to think about everything from batteries and chargers to training and rollout. But more significantly, it has been thinking about the change in their workflow because they've primarily been using pure voice workflows for most of their use of the Vocera. With the Smartbadges, they now can start thinking about in engage in some of these other pieces. And while that's a great opportunity, it's a more complex decision than simply saying, I'm going to swap out, 500 B3000n Badges for 500 Smartbadges because of some of those other infrastructure elements that I mentioned.

Alright. Understood. Thank you. Good day guys.

Thanks, Stephanie. Okay, well, thank you very much for your time today. We look forward to speaking with all of you in the future and have a good evening. All the best.

This concludes today's conference call. Thank you for your participation. You may now disconnect.