VOCERA COMMUNICATIONS, INC. Forward-Looking Statements The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and in our otherSecurities and Exchange Commission , orSEC , filings, including our Annual Report on Form 10-K for the year endedDecember 31, 2020 , filed with theSEC onFebruary 25, 2021 . These discussions contain forward-looking statements reflecting our current expectations that involve risks and uncertainties which are subject to safe harbors under the Securities Act of 1933, as amended, or the Securities Act, and the Securities Exchange Act of 1934, as amended, or the Exchange Act. These forward-looking statements include, but are not limited to, statements concerning our plans, objectives, expectations and intentions, future financial position, future revenues, projected costs, expectations regarding demand and acceptance for our technologies, growth opportunities and trends in the market in which we operate, prospects and plans and objectives of management. The words "anticipates," "believes," "estimates," "expects," "intends," "may," "plans," "projects," "will," "would" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those in the forward-looking statements, including, without limitation, the risks set forth in Part II, Item 1A, "Risk Factors" in this Quarterly Report on Form 10-Q and in our other filings with theSecurities and Exchange Commission . We do not assume any obligation to update any forward-looking statements. Business Overview We are a provider of secure, integrated, intelligent communication and clinical workflow solutions, focused on empowering mobile workers in healthcare, hospitality, retail, energy, education and other mission-critical mobile work environments, inthe United States and internationally. The significant majority of our business is generated from sales of our solutions in the healthcare market to help our customers enhance quality of care, safety, patient and staff experience and improve operational efficiency. We primarily sell devices, software, subscriptions and support, and professional services directly to end users. Total revenue increased$26.6 million from$141.8 million for the nine months endedSeptember 30, 2020 to$168.4 million for the nine months endedSeptember 30, 2021 . Our total deferred revenue and backlog was$252.7 million as ofSeptember 30, 2021 compared to$173.9 million as ofDecember 31, 2020 . For the nine months endedSeptember 30, 2021 , we recorded a net loss of$7.8 million compared to a net loss of$9.8 million for the nine months endedSeptember 30, 2020 . Our diverse customer base ranges from large hospital systems to small local hospitals, as well as other healthcare facilities and customers in non-healthcare markets. We do not rely on any one customer for a substantial portion of our revenue. While we have international customers in other English-speaking countries such asCanada , theUnited Kingdom ,Australia ,New Zealand and parts of theMiddle East , most of our customers are located inthe United States . International customers represented 9.7%, 10.7% and 8.7% of our revenue in the nine months endedSeptember 30, 2021 , and the years endedDecember 31, 2020 and 2019, respectively. 30 -------------------------------------------------------------------------------- Table of Contents We outsource the manufacturing of our hardware products. Our outsourced manufacturing model allows us to scale our business without the significant capital investment and on-going expenses required to establish and maintain manufacturing operations. We work closely with our contract manufacturers, including Sercomm andSMTC Corporation , and key suppliers to manage the procurement, quality and cost of components. We seek to maintain an optimal level of finished goods inventory to meet our forecast for sales and unanticipated shifts in sales volume and mix. In the second quarter of 2021, we acquired PatientSafe for$36.0 million , net of$0.2 million of cash acquired. For further discussion on the acquisition, please refer to Note 12 in the notes to the condensed consolidated financial statements. COVID-19 Pandemic The outbreak of the novel coronavirus, SARS-CoV-2, or COVID-19, has evolved into a global pandemic and public health emergency. Many federal, state and local governments and private entities have mandated various restrictions, including travel restrictions, restrictions on public gatherings, stay at home orders and advisories and quarantining of people who may have been exposed to the virus. Since our last filing, COVID-19 infections have continued despite an increase in vaccinations. Infection rates could continue to increase due to a variety of factors, including new variants of the disease. Over the course of the COVID-19 pandemic, our business has been impacted in several ways, including the following: •We have taken measures to protect the health and safety of our employees, primarily by shifting the majority of our employees to remote work. •Our access to our healthcare customers' locations for sales and implementation activities remains limited in some cases. The sales cycle and implementation timeline for broader strategic deals in some cases has been elongated as they shifted their primary focus to preparing for and responding to the pandemic. •We have experienced some delays in receiving parts due to supplier and shipping issues. Overall, the outbreak did not have a material impact on our operating results or business in the nine months endedSeptember 30, 2021 . While future impacts cannot be predicted at this time, the shift in hospital resources, attention to treatment of COVID-19 patients and declines in hospital revenues may result in reduced demand for our products and solutions, longer sales cycles, delays in receiving parts and/or delays of customer implementations, which could negatively impact our financial condition. We have generated operating cash flows in the past and our$304.6 million in cash and short-term investments provides us with ample liquidity to meet our current needs. However, given the dynamic nature of this situation, we cannot accurately estimate the impacts of COVID-19 on our financial condition, results of operations or cash flows. Convertible Senior Notes InMarch 2021 , we issued$200.0 million aggregate principal amount of 0.50% Convertible Senior Notes, due 2026 (the "2026 Notes"). We used part of the net proceeds from the issuance of the 2026 Notes to retire approximately$102.9 million aggregate principal amount of the 2023 Notes in privately-negotiated transactions for consideration of$102.9 million in cash and 1,277,731 shares of common stock (the "2023 Note Repurchase Transactions"). We separately settled the accrued interest of approximately$0.5 million associated with the retired 2023 Notes in cash. In connection with the 2026 Notes, we granted to the initial purchasers an overallotment option under the purchase agreement to purchase up to an additional$30.0 million aggregate principal amount of the 2026 Notes to cover overallotments within a 30-day period. The purchasers partially exercised the overallotment option onApril 5, 2021 and we issued an additional$24.5 million of the 2026 Notes. In connection with the pricing of the 2026 Notes, we entered into privately negotiated capped call transactions with certain counterparties, the "2026 Capped Calls". The 2026 Capped Calls have an initial strike price of approximately$60.14 per share, subject to certain adjustments, which correspond to the initial conversion price of the 2026 Notes. The 2026 Capped Calls have initial cap prices of$77.96 per share, subject to certain adjustments. We used proceeds of$15.5 million to purchase the Capped Calls, which were recorded as a reduction to additional paid-in capital. Additionally, in connection with the partial exercise of the overallotment option and the issuance by us of$24.5 million of 2026 Notes, onApril 5, 2021 , we entered into$1.9 million of additional privately negotiated capped calls. The 2023 Capped Calls were not impacted by the 2023 Note Repurchase Transactions and continue to remain outstanding. For further discussion on the Capped Calls, please refer to Note 8 in the notes to the condensed consolidated financial statements. We expect to use the remaining net proceeds for general corporate purposes, which may include funding research and development, increasing working capital, acquisitions or investments in complementary businesses, products or technologies and capital expenditures.
Critical Accounting Policies and Estimates
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There have been no changes to our critical accounting policies and estimates as
compared to the critical accounting policies and estimates described in our
Annual Report on Form 10-K for the year ended December 31, 2020 , except as
disclosed in Note 1 to the condensed consolidated financial statements "Recently
Adopted Accounting Pronouncements".
Results of Operations
The following table presents our results of operations for the periods
indicated. The period-to-period comparisons of results are not necessarily
indicative of results for future periods.
Three months ended September 30, Nine months ended September 30,
Consolidated statement of 2021 2020 2021 2020
operations data: (unaudited)
(in thousands) Amount % Revenue Amount % Revenue Amount % Revenue Amount % Revenue
Revenue
Product $ 32,936 51.8 % $ 28,510 53.0 % $ 83,888 49.8 % $ 70,311 49.6 %
Service 30,632 48.2 25,305 47.0 84,528 50.2 71,524 50.4
Total revenue 63,568 100.0 53,815 100.0 168,416 100.0 141,835 100.0
Cost of revenue
Product 8,361 13.2 7,139 13.3 22,858 13.6 21,213 15.0
Service 12,230 19.2 10,346 19.2 35,440 21.0 30,563 21.5
Total cost of revenue 20,591 32.4 17,485 32.5 58,298 34.6 51,776 36.5
Gross profit 42,977 67.6 36,330 67.5 110,118 65.4 90,059 63.5
Operating expenses:
Research and development 12,294 19.4 9,559 17.8 34,650 20.6 27,940 19.7
Sales and marketing 19,132 30.1 15,291 28.4 55,227 32.8 48,252 34.1
General and
administrative 8,162 12.8 7,464 13.8 24,501 14.5 20,778 14.6
Total operating
expenses 39,588 62.3 32,314 60.0 114,378 67.9 96,970 68.4
Income (loss) from
operations 3,389 5.3 4,016 7.5 (4,260) (2.5) (6,911) (4.9)
Interest income 227 0.4 645 1.2 868 0.5 2,678 1.9
Interest expense (812) (1.3) (2,368) (4.4) (2,383) (1.4) (6,950) (4.9)
Other (expense) income,
net (549) (0.9) 264 0.5 (1,551) (0.9) (117) (0.1)
Income (loss) before
income taxes 2,255 3.5 2,557 4.8 (7,326) (4.3) (11,300) (8.0)
(Provision for) benefit
from income taxes (178) (0.2) 1,604 2.9 (512) (0.4) 1,523 1.1
Net income (loss) $ 2,077 3.3 % $ 4,161 7.7 % $ (7,838) (4.7) % $ (9,777) (6.9) %
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Revenue:
Three months ended September 30, Nine months ended September 30,
2021 2020 Change 2021 2020 Change
(in thousands) Amount Amount Amount % Amount Amount Amount %
Product revenue
Device $ 20,650 $ 17,027 $ 3,623 21.3 % $ 52,179 $ 48,030 $ 4,149 8.6 %
Software 12,286 11,483 803 7.0 31,709 22,281 9,428 42.3
Total product 32,936 28,510 4,426 15.5 83,888 70,311 13,577 19.3
Service revenue
Subscription and support 25,069 20,387 4,682 23.0 68,669 57,450 11,219 19.5
Professional services and training 5,563 4,918 645 13.1 15,859 14,074 1,785 12.7 Total service 30,632 25,305 5,327 21.1 84,528 71,524 13,004 18.2 Total revenue$ 63,568 $ 53,815 $ 9,753 18.1 %$ 168,416 $ 141,835 $ 26,581 18.7 % Three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 . Total revenue increased$9.8 million , or 18.1%, for the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 . Product revenue increased$4.4 million , or 15.5%, for the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 . Device revenue increased$3.6 million , or 21.3%, and software revenue increased$0.8 million , or 7.0% for the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 . The increase in device revenue was driven primarily by an increase in the volume and average selling price for our Badges and related accessories. The increase in software revenue was mainly driven by revenue associated with Edge products and higher average selling prices for software licenses. Service revenue increased$5.3 million , or 21.1%, for the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 . Subscription and support revenue increased$4.7 million , or 23.0%, and professional services and training revenue increased$0.6 million , or 13.1%, for the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 . The increase in subscription and support revenue was primarily the result of an increased number of customers who purchased software maintenance contracts, and the additional subscription revenue from the Edge and Ease products. The increase in professional services and training revenue was due to an increase in implementation services for our solutions. Nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 . Total revenue increased$26.6 million , or 18.7%, for the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 . Product revenue increased$13.6 million , or 19.3%, for the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 . Device revenue increased$4.1 million , or 8.6%, and software revenue increased$9.4 million , or 42.3% for the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 . The increase in device revenue was driven primarily by an increase in volume and higher average selling prices for our Badges and related accessories sold. The increase in software revenue was mainly a result of an increase in the number of software licenses delivered to customers, and the additional revenue from Edge products. Service revenue increased$13.0 million , or 18.2%, for the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 . Subscription and support revenue increased$11.2 million , or 19.5%, and professional services and training revenue increased$1.8 million , or 12.7%, for the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 . The increase in subscription and support revenue was primarily the result of an increased number of customers who purchased software maintenance contracts, and the additional subscription revenue from the Edge and Ease products. The increase in professional services and training revenue was due to an increase in implementation services for our solutions. 33 --------------------------------------------------------------------------------
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Cost of revenue:
Three months ended September 30, Nine months ended September 30,
2021 2020 Change 2021 2020 Change
(in thousands) Amount Amount Amount % Amount Amount Amount %
Cost of revenue
Product $ 8,361 $ 7,139 $ 1,222 17.1 % $ 22,858 $ 21,213 $ 1,645 7.8 %
Service 12,230 10,346 1,884 18.2 35,440 30,563 4,877 16.0
Total cost of revenue $ 20,591 $ 17,485 $ 3,106 17.8 % $ 58,298 $ 51,776 $ 6,522 12.6 %
Gross margin
Product 74.6 % 75.0 % (0.4) % 72.8 % 69.8 % 3.0 %
Service 60.1 % 59.1 % 1.0 % 58.1 % 57.3 % 0.8 %
Total gross margin 67.6 % 67.5 % 0.1 % 65.4 % 63.5 % 1.9 %
Three months ended September 30, 2021 compared to the three months ended
September 30, 2020 .
Cost of product revenue increased $1.2 million , or 17.1%, for the three months
ended September 30, 2021 compared to the three months ended September 30, 2020 .
This was primarily driven by an increase in software amortization related to the
PatientSafe acquisition and an increase in the number of Badges and related
accessories sold. For the same comparative periods, product gross margin
decreased primarily as a result of amortization of intangible assets related to
the PatientSafe acquisition and a lower proportion of software revenue versus
hardware revenue.
Cost of service revenue increased $1.9 million , or 18.2%, for the three months
ended September 30, 2021 compared to the three months ended September 30, 2020 .
Cost of service revenue increased due to higher compensation and benefits costs
as a result of increased headcount related to the growth in the core services
business as well as the acquisitions of PatientSafe and Ease. For the same
comparative periods, service gross margin as a percentage of service revenue
increased primarily as a result of increased Services revenue and associated
leverage.
Nine months ended September 30, 2021 compared to the nine months ended
September 30, 2020 .
Cost of product revenue increased $1.6 million , or 7.8%, for the nine months
ended September 30, 2021 compared to the nine months ended September 30, 2020 .
This was primarily driven by an increase in software amortization related to the
acquisitions of Ease and PatientSafe, partially offset by lower overhead costs
for the devices. For the same comparative periods, product gross margin
increased primarily as a result of higher average selling prices and lower
overhead costs.
Cost of service revenue increased $4.9 million , or 16.0%, for the nine months
ended September 30, 2021 compared to the nine months ended September 30, 2020 .
Cost of service revenue increased due to higher compensation and benefits costs
as a result of increased headcount and costs related to core business and the
acquisitions of PatientSafe and Ease. For the same comparative periods, service
gross margin as a percentage of service revenue increased primarily as a result
of increased service revenue and associated leverage.
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Operating expenses:
Three months ended September 30, Nine months ended September 30,
2021 2020 Change 2021 2020 Change
(in thousands) Amount Amount Amount % Amount Amount Amount %
Operating expenses
Research and development $ 12,294 $ 9,559 $ 2,735 28.6 % $ 34,650 $ 27,940 $ 6,710 24.0 %
Sales and marketing 19,132 15,291 3,841 25.1 55,227 48,252 6,975 14.5
General and administrative 8,162 7,464 698 9.4 24,501 20,778 3,723 17.9
Total operating expenses $ 39,588 $ 32,314 $ 7,274 22.5 % $ 114,378 $ 96,970 $ 17,408 18.0 %
Three months ended September 30, 2021 compared to the three months ended
September 30, 2020 .
Research and development expense. Research and development expense increased
$2.7 million , or 28.6%, for the three months ended September 30, 2021 compared
to the three months ended September 30, 2020 . This was primarily due to an
increase of $2.2 million in compensation, benefits and hiring costs associated
with increased headcount and an increase of $0.5 million in outside services and
development.
Sales and marketing expense. Sales and marketing expense increased $3.8 million ,
or 25.1%, for the three months ended September 30, 2021 compared to the three
months ended September 30, 2020 . This was primarily due to an increase of $2.9
million in compensation, benefits and hiring costs associated with increased
headcount, $0.5 million increase in travel, an increase of $0.3 million in
marketing development costs and an increase of $0.1 million in costs primarily
related to amortization of intangibles.
General and administrative expense. General and administrative expense increased
$0.7 million , or 9.4%, for the three months ended September 30, 2021 compared to
the three months ended September 30, 2020 . This was primarily due to an increase
in compensation, benefits and hiring costs of $0.7 million .
Nine months ended September 30, 2021 compared to the nine months ended
September 30, 2020 .
Research and development expense. Research and development expense increased
$6.7 million or 24.0%, for the nine months ended September 30, 2021 compared to
the nine months ended September 30, 2020 . This was primarily due to an increase
in compensation, benefits and hiring costs of $5.0 million due to increased
headcount, an increase of $1.4 million in outside services and development and
an increase of $0.3 million in research and development equipment.
Sales and marketing expense. Sales and marketing expense increased $7.0 million
or 14.5% for the nine months ended September 30, 2021 compared to the nine
months ended September 30, 2020 . This was primarily due to an increase of $5.9
million in compensation, benefits and hiring costs associated with increased
headcount, an increase of $0.7 million in amortization related to the
acquisitions of Ease and PatientSafe, an increase of $0.4 million in outside
services and an increase of $0.2 million in marketing development. This increase
was partially offset by a decrease in travel expense of $0.2 million .
General and administrative expense. General and administrative expense increased
$3.7 million or 17.9% for the nine months ended September 30, 2021 compared to
the nine months ended September 30, 2020 . This was primarily due to an increase
in compensation, benefits and hiring costs of $2.5 million due to increased
headcount, severance and retention costs related to the acquisition of
PatientSafe and achievement of performance related compensation targets and an
increase of $1.2 million in outside services.
Interest income and Other income (expense), net:
Three months ended September 30, Nine months ended September 30,
(in thousands) 2021 2020 Change 2021 2020 Change
Interest income $ 227 $ 645 $ (418) $ 868 $ 2,678 $ (1,810)
Interest expense (812) (2,368) 1,556 (2,383) (6,950) 4,567
Other (expense) income, net $ (549) $ 264 Three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 . Interest income. Interest income decreased$0.4 million for the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 . This decrease was due to earning a lower rate of return on our investments. 35 -------------------------------------------------------------------------------- Table of Contents Interest expense. For the three months endedSeptember 30, 2021 we had interest expense of$0.8 million resulting from the amortization of debt issuance costs and the contractual interest incurred on the Notes. This decrease of$1.6 million fromSeptember 30, 2020 was primarily due to the impact of the adoption of ASU 2020-06 Accounting for Convertible Instruments and Contracts in an Entity's Own Equity which eliminates the debt discount and its amortization. The amortization of the debt discount was previously accounted for as part of interest expense and represented$1.6 million of the total interest expense for the three months endedSeptember 30, 2020 . Other (expense) income, net. The change in other income in the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 was primarily due to losses resulting from$0.5 million of fluctuations in foreign currency and due to a change of$0.2 million in the fair value of the Ease contingent consideration included in earnings. Nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 . Interest income. Interest income decreased$1.8 million for the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 . This decrease was due to earning a lower rate of return on our investments. Interest expense. For the nine months endedSeptember 30, 2021 we had interest expense of$2.4 million resulting from the amortization of debt issuance costs and the contractual interest incurred on the issuance of the Notes. This decrease of$4.6 million from the nine months endedSeptember 30, 2020 which primarily due to the impact of the adoption of ASU 2020-06 Accounting for Convertible Instruments and Contracts in an Entity's Own Equity which eliminates the debt discount and its amortization. The amortization of the debt discount was previously accounted for as part of interest expense and represented$4.8 million of the total interest expense for the nine months endedSeptember 30, 2020 . Other income (expense), net. The change in other expense in the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 was primarily due to the$2.1 million inducement loss resulting from the repurchase of the 2023 Notes partially offset by the change in the fair value adjustment of the Ease contingent consideration included in earnings of$1.1 million for the nine months endedSeptember 30, 2021 . Liquidity and Capital Resources As ofSeptember 30, 2021 , we had cash and cash equivalents and short-term investments of$304.6 million . InMarch 2021 , we issued$200.0 million aggregate principal amount of 0.50% Convertible Senior Notes and we used part of the net proceeds from the issuance of the 2026 Notes to retire approximately$102.9 million aggregate principal amount of the 2023 Notes. In addition, inApril 2021 , the purchasers partially exercised the overallotment option and we issued an additional$24.5 million aggregate principal amount of the 2026 Notes. For additional information, see Note 8 of Notes to the condensed consolidated financial statements. Additionally, during the three months endedSeptember 30, 2021 , the conditions allowing holders of our 2023 Notes to convert were met because our stock price traded above the minimum price specified in the indenture governing the 2023 Notes. Our 2023 Notes are now convertible at the option of the holder until at leastDecember 31, 2021 We believe that our existing sources of liquidity will satisfy our working capital and capital requirements for at least the next twelve months and the foreseeable future. 36
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