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$16.8 million from$88.0 million for the six months endedJune 30, 2020 to$104.8 million for the six months endedJune 30, 2021 . Our total deferred revenue and backlog was$218.4 million as ofJune 30, 2021 compared to$173.9 million as ofDecember 31, 2020 . For the six months endedJune 30, 2021 , we recorded a net loss of$9.9 million compared to a net loss of$13.9 million for the six months endedJune 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 10.0%, 10.7% and 8.7% of our revenue in the six months endedJune 30, 2021 , and the years endedDecember 31, 2020 and 2019, respectively. We believe certain international markets represent attractive growth opportunities. 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 current quarter, 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 and are increasing in many geographies of the world. Although there is 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: 28 -------------------------------------------------------------------------------- Table of Contents •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 six months endedJune 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 and/or delays of customer implementations, which could negatively impact our financial condition. We have generated operating cash flows in the past and our$291.9 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$1.9 million of additional privately negotiated capped calls. The 2023 Capped Calls were not impacted by the 2023 Note Repurchase Transactions and continue to remain outstanding. For further discussion on the Capped Calls, please refer to Note 8 in the notes to the condensed consolidated financial statements. We expect to use the remaining net proceeds for general corporate purposes, which may include funding research and development, increasing working capital, acquisitions or investments in complementary businesses, products or technologies and capital expenditures. Critical Accounting Policies and Estimates There have been no changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in our Annual Report on Form 10-K for the year endedDecember 31, 2020 , except as disclosed in Note 1 to the condensed consolidated financial statements "Recently Adopted Accounting Pronouncements". 29 -------------------------------------------------------------------------------- Table of Contents Results of Operations The following table presents our results of operations for the periods indicated. The period-to-period comparisons of results are not necessarily indicative of results for future periods. Three months ended June 30, Six months ended June 30, Consolidated statement of 2021 2020 2021 2020 operations data: (unaudited) (in thousands) Amount % Revenue Amount % Revenue Amount % Revenue Amount % Revenue Revenue Product$ 28,344 50.5 %$ 23,951 50.6 %$ 50,952 48.6 %$ 41,801 47.5 % Service 27,836 49.5 23,396 49.4 53,896 51.4 46,219 52.5 Total revenue 56,180 100.0 47,347 100.0 104,848 100.0 88,020 100.0
Cost of revenue
Product 7,541 13.5 7,710 16.3 14,497 13.9 14,074 16.0 Service 12,383 22.0 9,694 20.5 23,210 22.1 20,217 23.0 Total cost of revenue 19,924 35.5 17,404 36.8 37,707 36.0 34,291 39.0 Gross profit 36,256 64.5 29,943 63.2 67,141 64.0 53,729 61.0
Operating expenses:
Research and development 12,006 21.4 9,349 19.7 22,356 21.2 18,381 20.9 Sales and marketing 18,425 32.8 15,998 33.8 36,095 34.5 32,961 37.4 General and administrative 9,064 16.1 6,923 14.6 16,339 15.6 13,314 15.1 Total operating expenses 39,495 70.3 32,270 68.1 74,790 71.3 64,656 73.4 Loss from operations (3,239) (5.7) (2,327) (4.9) (7,649) (7.3) (10,927) (12.4) Interest income 295 0.5 913 1.9 641 0.6 2,033 2.3 Interest expense (794) (1.4) (2,308) (4.9) (1,571)
(1.4) (4,582) (5.2) Other income (expense), net 1,544 2.7 210 0.4 (1,002) (1.0) (381) (0.4) Loss before income taxes (2,194) (3.9) (3,512) (7.5) (9,581) (9.1) (13,857) (15.7) Provision for income taxes (88) (0.2) 44 0.1 (334) (0.4) (81) (0.1) Net loss$ (2,282) (4.1) %$ (3,468) (7.4) %$ (9,915) (9.5) %$ (13,938) (15.8) % Revenue: Three months ended June 30, Six months ended June 30, 2021 2020 Change 2021 2020 Change (in thousands) Amount Amount Amount % Amount Amount Amount % Product revenue Device$ 16,256 $ 17,100 $ (844) (4.9) %$ 31,529 $ 31,003 $ 526 1.7 % Software 12,088 6,851 5,237 76.4 19,423 10,798 8,625 79.9 Total product 28,344 23,951 4,393 18.3 50,952 41,801 9,151 21.9 Service revenue Subscription and support 22,641 18,994 3,647 19.2 43,600 37,063 6,537
17.6
Professional services and training 5,195 4,402 793 18.0 10,296 9,156 1,140 12.5 Total service 27,836 23,396 4,440 19.0 53,896 46,219 7,677 16.6 Total revenue$ 56,180 $ 47,347 $ 8,833 18.7 %$ 104,848 $ 88,020 $ 16,828 19.1 % 30
-------------------------------------------------------------------------------- Table of Contents Three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 . Total revenue increased$8.8 million , or 18.7%, for the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 . Product revenue increased$4.4 million , or 18.3%, for the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 . Device revenue decreased$0.8 million , or 4.9%, and software revenue increased$5.2 million , or 76.4% for the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 . The decrease in device revenue was driven primarily by decreased unit volume sales of Badges and related accessories. The increase in software revenue was mainly a result of an increase in the number of software licenses delivered to our customers. Service revenue increased$4.4 million , or 19.0%, for the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 . Subscription and support revenue increased$3.6 million , or 19.2%, and professional services and training revenue increased$0.8 million , or 18.0%, for the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 . The increase in subscription and support revenue was primarily the result of having a larger customer base purchasing software maintenance contracts. The increase in professional services and training revenue was due to an increase in implementation services for our solutions. Six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 . Total revenue increased$16.8 million , or 19.1%, for the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 . Product revenue increased$9.2 million , or 21.9%, for the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 . Device revenue increased$0.5 million , or 1.7%, and software revenue increased$8.6 million , or 79.9% for the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 . The increase in device revenue was driven primarily by an increased percentage of sales of the Smartbadge out of total devices sold. The increase in software revenue was mainly a result of an increase in the number of software licenses delivered to our customers. Service revenue increased$7.7 million , or 16.6%, for the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 . Subscription and support revenue increased$6.5 million , or 17.6%, and professional services and training revenue increased$1.1 million , or 12.5%, for the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 . The increase in subscription and support revenue was primarily the result of having a larger customer base purchasing software maintenance contracts. The increase in professional services and training revenue was due to an increase in implementation services for our solutions. Cost of revenue: Three months ended June 30, Six months ended June 30, 2021 2020 Change 2021 2020 Change (in thousands) Amount Amount Amount % Amount Amount Amount % Cost of revenue Product$ 7,541 $ 7,710 $ (169) (2.2) %$ 14,497 $ 14,074 $ 423 3.0 % Service 12,383 9,694 2,689 27.7 23,210 20,217 2,993 14.8 Total cost of revenue$ 19,924 $ 17,404 $ 2,520 14.5 %$ 37,707 $ 34,291 $ 3,416 10.0 % Gross margin Product 73.4 % 67.8 % 5.6 % 71.5 % 66.3 % 5.2 % Service 55.5 % 58.6 % (3.1) % 56.9 % 56.3 % 0.6 % Total gross margin 64.5 % 63.2 % 1.3 % 64.0 % 61.0 % 3.0 % Three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 . Cost of product revenue decreased$0.2 million , or 2.2%, for the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 . This was primarily driven by a decrease in the unit volume of Badges and related accessories sold and a decrease in inventory costs. For the same comparative periods, product gross margin increased primarily as a result of a higher proportion of software revenue versus device revenue. Cost of service revenue increased$2.7 million , or 27.7%, for the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 . Cost of service revenue increased due to higher compensation and benefits as a result of increased headcount related to core business as well as the acquisitions of PatientSafe and Ease. For the same comparative periods, 31 -------------------------------------------------------------------------------- Table of Contents service gross margin as a percentage of service revenue decreased primarily as a result of an increase in costs related to the acquisitions of PatientSafe and Ease. Six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 . Cost of product revenue increased$0.4 million , or 3.0%, for the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 . This was primarily driven by an increase in amortization related to the acquisitions of Ease and PatientSafe. For the same comparative periods, product gross margin increased primarily as a result of higher software revenue. Cost of service revenue increased$3.0 million , or 14.8%, for the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 . For the same comparative periods, service gross margin as a percentage of service revenue increased primarily as a result of an increase in subscription and support revenue. In addition, cost of service revenue increased due to increased compensation and benefits as a result of increased headcount and costs related to core business and the acquisitions of PatientSafe and Ease. Operating expenses: Three months ended June 30, Six months ended June 30, 2021 2020 Change 2021 2020 Change (in thousands) Amount Amount Amount % Amount Amount Amount % Operating expenses Research and development$ 12,006 $ 9,349 $ 2,657 28.4 %$ 22,356 $ 18,381 $ 3,975 21.6 % Sales and marketing 18,425 15,998 2,427 15.2 36,095 32,961 3,134 9.5 General and administrative 9,064 6,923 2,141 30.9 16,339 13,314 3,025 22.7 Total operating expenses$ 39,495 $ 32,270 $ 7,225 22.4 %$ 74,790 $ 64,656 $ 10,134 15.7 % Three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 . Research and development expense. Research and development expense increased$2.7 million , or 28.4%, for the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 . This was primarily due to an increase of$1.9 million in compensation, benefits and hiring costs associated with increased headcount and an increase of$0.7 million in outside services and development. Sales and marketing expense. Sales and marketing expense increased$2.4 million , or 15.2%, for the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 . This was primarily due to an increase of$1.8 million in compensation, benefits and hiring costs associated with increased headcount,$0.3 million increase in amortization related to the acquisition of Ease and PatientSafe and an increase of$0.3 million in marketing development costs. General and administrative expense. General and administrative expense increased$2.1 million , or 30.9%, for the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 . This was primarily due to an increase in compensation, benefits and hiring costs of$1.2 million due to increased headcount, severance and retention costs related to the acquisition of PatientSafe and an increase of$0.8 million in outside services. Six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 . Research and development expense. Research and development expense increased$4.0 million or 21.6%, for the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 . This was primarily due to an increase of$2.8 million in compensation, benefits and hiring costs associated with increased headcount, an increase of$0.9 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$3.1 million or 9.5% for the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 . This was primarily due to an increase in compensation, benefits and hiring costs of$3.0 million resulting from higher headcount, an increase of$0.5 million in amortization related to the acquisition of Ease and PatientSafe, and an increase of$0.3 million in outside services. This increase was partially offset by a decrease in travel expense of$0.7 million . General and administrative expense. General and administrative expense increased$3.0 million or 22.7% for the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 . This was primarily due to an increase in compensation, benefits and hiring costs of$1.8 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$1.2 million in outside services. 32 -------------------------------------------------------------------------------- Table of Contents Interest income and Other income (expense), net: Three months ended June 30, Six months ended June 30, (in thousands) 2021 2020 Change 2021 2020 Change Interest income$ 295 $ 913 $ (618) $ 641 $ 2,033 $ (1,392) Interest expense (794) (2,308) 1,514 (1,571) (4,582) 3,011 Other income (expense), net 1,544 210 1,334 (1,002) (381) (621) Three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 . Interest income. Interest income decreased$0.6 million for the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 . This decrease was due to earning a lower rate of return on our investments. Interest expense. For the three months endedJune 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 issuance of the Notes. This decrease of$1.5 million fromJune 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 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 endedJune 30, 2020 . Other income (expense), net. The change in other income in the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 was primarily due to the change in the fair value adjustment of the Ease contingent consideration included in earnings. Six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 . Interest income. Interest income decreased$1.4 million for the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 . This decrease was due to earning a lower rate of return on our investments. Interest expense. For the six months endedJune 30, 2021 we had interest expense of$1.6 million resulting from the amortization of debt issuance costs and the contractual interest incurred on the issuance of the Notes. This decreased$3.0 million from the six months endedJune 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 amortization. The amortization of the debt discount was previously accounted for as part of interest expense and represented$3.2 million of the total interest expense for the six months endedJune 30, 2020 . Other income (expense), net. The change in other expense in the six months endedJune 30, 2021 compared to the six months endedJune 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$0.8 million for the six months endedJune 30, 2021 . Liquidity and Capital Resources As ofJune 30, 2021 , we had cash and cash equivalents and short-term investments of$291.9 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 Consolidated Financial Statements. 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. 33
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