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Vocera Communications (NYSE:VCRA)
Q2 2019 Earnings Call
Jul 25, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good afternoon, ladies and gentlemen, and welcome to the Vocera Communications conference call. My name is Jesse, and I will be your coordinator for today. [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.

Sue Dooley -- Investor Relations

Thank you. Hello, everyone. Welcome to Vocera's conference call to discuss our second-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'd 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'd like to turn the call over to Brent.

Brent Lang -- Chief Executive Officer

Thanks, Sue. Good afternoon, everyone. Thank you for joining us. The second quarter of 2019 was another solid quarter for Vocera with revenue of $45 million and good profitability as a result of strong software sales.

There are four key accomplishments from the quarter that I want to emphasize on the call today. First, our software bookings performance continued to be a highlight and was the fastest growing part of our business. Second, our performance in the federal sector was excellent, with several big VA wins in the quarter producing strong growth. Third, we continue to stay focused on the launch of the Smartbadge.

Customer feedback has been positive, and our sales force is educating customers on the benefits of the larger screen and the potential to display important patient context when used with our Engage software. Fourth, we had another successful quarter of strategic go-live installations including some Nordstrom flagship stores and two Northwestern University hospitals. Our professional services expertise remains a meaningful differentiator. Let me go into more detail on each of these areas before discussing what we're seeing in the market and giving Justin an opportunity to cover our financial results.

From a bookings perspective, software was the fastest growing part of our business as customers embrace our unified platform and the power of our clinical integration, intelligent workflow engine and best-in-class voice messaging and alerting solutions. We added new facilities and saw healthy badge refreshes and expansions with existing customers, demonstrating the proven value of our solution. One strategic win was at Hoag Hospital where we already had a large Engage installation. Hoag is expanding their use of our solution from Engage to our full platform on smartphones.

In international, Latifa Hospital in Dubai is expanding use of our solutions to its physician staff. And we added two aged care facilities in New Zealand. Outside of healthcare, we have had a particularly strong results so far this year. We won business at Hope Creek Nuclear and we added the new Equinox at Hudson Yards in New York, Equinox Hotel in Hudson Yards in New York.

We're really pleased with the opportunities in this space. Within our federal government business, the highlight of the quarter was a $4.8-million booking at the North Texas VA We also had a $1.3-million win at the Wilkes-Barre VA. Our fed team continues to leverage our strong track record, our new authority to operate with the Navy and the Air Force and the SATOC purchasing vehicle with the D.O.D. to build momentum.

After completing a good first half of the year, our team is excited for the Q3 spending season in the federal government. Another big area of focus for us in Q2 was the continued introduction of the Smartbadge and our efforts to create awareness around the new product. The unknowns we were most eager to learn about were the weight and pricing of the new product, and we are pleased that the feedback around both of these topics has been positive. Customers are pleased we've been able to maintain the magic of our wearable device while also offering a compelling economic alternative to a smartphone.

In fact, the Smartbadge was just awarded the 2019 MedTech Breakthrough Award for Best Internet of Things Health Care Wearable Device, selected from more than 3,500 nominations in more than 15 countries. Our sales team is engaging customers about the benefits of the new Smartbadge. We are expanding the deal pipeline and growing the number of pilots in the market. While we continue to believe the shift in Smartbadge will be gradual, we are seeing orders start to come in.

As an example, the University of Virginia ordered Smartbadges for their emergency department and thoracic cardiovascular ICU. Last year, UVA expanded from a single department installation of our voice solution to our full platform. In their purchase of the Smartbadge, they were particularly excited about the dedicated panic button and expanded screen size, and they are looking forward to adding integrations over time. Customers seem excited about the larger screen and the ability to receive patient context on a wearable device.

We believe the Smartbadge has the potential to accelerate our software revenues in the long run with the greater attach rate of our Engage software. We are still in these early days of introduction, and some of the conversations about the Smartbadge are leading to more involved investigations about how Engage can handle clinical workflow. This new dynamic can result in longer evaluation periods since it's not a simple replacement of their prior Badge. However, selling software is at the core of the Smartbadge strategy, and we view it as a positive for our business over the longer term.

During Q2, we had another busy quarter of customer go-lives. One notable deployment in Q2 was at Northwestern Medical's Lake Forest and Marianjoy hospitals. Northwestern is moving away from in-building wireless phones and is adopting our Engage software, analytics and smartphone application to connect physicians and staff across multiple hospitals and different EHRs. The key to our success at Northwestern has been our complete solution since they, like many large hospital systems, prefer a single vendor for communication, clinical integration and mobile applications.

Another new deployment during the quarter was at the Alaska Native Medical Center, which is using our products to improve staff safety. We believe staff safety is a critical topic that is rising in importance in hospitals today, with physical assaults in hospitals happening way too frequently. I recently published a blog on Vocera can help address this urgent challenge. We completed several deployments in the federal space, including VAs in Oklahoma City, Memphis and San Jose.

One of the highlights of San Jose VA is an example of one of the many clinics within the VA which are additive to our broader expansion opportunity beyond the acute care hospitals. Q2 also saw the deployment begin at Nordstrom. In these early days of deployment, enthusiasm for our solution is high, and we are hearing positive feedback that we are already delivering on the promise of improvements in operational efficiencies and customer experience. Now I'd like to take a moment to comment on the market opportunity and competitive landscape.

My interactions with hospital executives continue to demonstrate that improving margins and quality of care consistently rise to the top of their priority lists. Hospitals are looking at ways to reduce cost and improve throughput by eliminating friction and bottlenecks and streamlining operations. These investment priorities remain top of mind, and they play right into our strengths. We are also seeing consolidation within the hospital market as mergers and acquisitions of hospitals and health systems continue.

As a result of this consolidation, there is a trend toward standardizing on a communications platform and reducing the number of vendors across each health system. These trends are benefiting us, and we are clearly seeing larger deal sizes and a preference for a single vendor. Increasingly this year, decision-making is becoming more centralized, with multiple layers in the approval process and increasing involvement from various constituents. The marketplace is demanding a unified platform from a proven vendor that has demonstrated capability to support the entire health system.

This dynamic has resulted in a record pipeline of enterprise deals we are actively pursuing. However, this complex buying environment extended the sales cycle in some instances in Q2. From a competitive perspective, I believe our differentiated leadership position continues to grow. Our loyal customer base and proven ROI demonstrates the value of our solutions.

The experience of our sales and services teams and our clinical approach to the market enable us to understand and deliver on the needs of our customers. The depth and breadth of our products and solutions are unmatched in the market. With our unique device-of-choice strategy, military grade security, deep clinical integration and intelligent software platform, we are well positioned to continue to win in the market. Our solutions are helping hospitals drive higher throughput and deliver more timely care for patients.

I'd like to highlight one example at Metro Health in Michigan. Metro Health was recently awarded HIMSS Level 7 status, the most prestigious distinction in the use of technology to improve patient care. Vocera is directly helping them make measurable improvements to the safety and quality of care for patients. Specifically,, they report they were able to use our technology to improve stroke treatment time from 53 minutes to 29 minutes.

Before I turn things over to Justin, I want to discuss two other areas where we are investing for growth. First is the new version of Vocera Care Experience that was launched in Q2. This entirely cloud-based SaaS offering includes the next generation of our rounding solution and our post-discharge patient communication platform called Care Inform, both of which are now closely integrated with the rest of our platform. Vocera Rounds now uses artificial intelligence and machine learning to track patient satisfaction trends faster and provide sensitive analysis to enable healthcare providers to quickly understand patient perceptions.

The customizable user experience of Rounds enables nurse leaders to prioritize rounding based on information about patients' past experiences, feedback and risk factors and risk factors. Care teams can customize questions within the rounding tool to gather data about patients' risk of falling or infection, mental status and other clinical indicators. In the new release, care teams can now navigate directly to Care Inform from our smartphone application and send updates and record personalized discharge instructions for family members. Both of these applications represent new software growth opportunities and give us more avenues to extend our reach into hospitals and health systems.

The second area of investment I want to highlight is international. During the quarter, we hired new leadership for both our Canadian and Australia-New Zealand sales teams. We have also invested in marketing resources and programs to bolster our international sales efforts. As an example, we recently signed a new direct sales contracting vehicle in Canada, facilitating the adoption of our solution across Ontario, and we are hopeful that we can convert this into bookings in the future.

We are continuing to learn what it takes to be successful in these international markets, and I remain excited about the growth that international markets represent for Vocera's future. Overall, I'm pleased with our progress in Q2 and our growing leadership position in the market. We need to continue to execute on the Smartbadge introduction and work to harvest our large deal pipeline. We remain confident in the business, bolstered by new strategic customer bookings, successful large-scale deployments, enthusiasm around our new products and high customer loyalty.

Now I'd like to give our CFO, Justin, a chance to cover our financial details around our Q2 results and our guidance. Justin?

Justin Spencer -- Chief Financial Officer

Thanks, Brent. Hello, everyone. We had a solid second quarter as we exceed our expectations for both revenue and profitability. And as expected, Q2 was markedly stronger than Q1, reflecting the normal seasonal pattern we have typically seen in our business over the last several years.

Total revenue in Q2 grew to $44.8 million, compared to $42.7 million in the same period last year. As expected, growth improved significantly from the first quarter, particularly in our product revenue, which is comprised of devices and software. Our device revenue increased from $10.1 million in the first quarter to $14.5 million in Q2, fueled by a higher level of shipments to both new and existing customers. As expected, the Smartbadge represented a small portion of overall device mix in Q2, and we continue to be encouraged by the pipeline for this device and the associated software.

We anticipate that the Smartbadge mix will gradually 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 market, and we anticipate sales of this device to be robust in the second half of the year, driven by our federal business, Nordstrom and other key customers. Our software revenue grew 27% compared to last year, returning to strong growth after Q1. Software revenue was fairly diversified this quarter across a wide range of both new and existing customers.

Over the last several quarters, software has been the fastest-growing part of our business and contributes significantly to our expanding margins. Plus, we had a healthy software backlog exiting Q2, and we expect software revenue to continue to grow in 2019. Our software maintenance and support revenue, which provides a solid economic foundation for our business, grew 9% in Q2 compared to 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 was our high customer renewal rate, which continued to be well in excess of 95%, reflecting the benefits our customers experience from using our solutions. Professional services was down slightly compared to last year as a result of our continued efforts to streamline our implementation process. This enables us to be even more competitive with the delivery of these deployment-related services and shift more of the revenue to our software. We had a healthy backlog of professional services that should fuel growth in this part of our business in the second half of 2019.

Lastly, our combined backlog and deferred revenue increased to roughly $116 million in Q2, up from $109 million in the second quarter last year. Although this balance is higher than last year, we had anticipated that it would grow even more in the second quarter as a result of the timing of some of our large enterprise bookings. I'll address this further when I discuss guidance. On the profitability side, our adjusted EBITDA was $4 million in Q2, better than we expected and reflected the leverage we have in our financial model as we grow.

Our GAAP net loss for the quarter was $4.9 million. Now let me get into some more detail on our non-GAAP gross margins and operating expenses. Non-GAAP gross margin in Q2 was 64%, right where we expected. Product margin improved significantly from the first quarter to 73% and was consistent with last year due to healthy shipments of both devices and software.

One of the underappreciated aspects of our financial model is that unlike many hardware technology products, our devices have a healthy gross margin, reflecting the unique value and experience these devices offer to our customers. Services margin also continued to be strong at 55%, reflecting the continued growth of our recurring software maintenance and support revenue. Following our historical pattern, we'd expect gross margin to increase even further in the second half on higher revenue and a solid mix. Non-GAAP operating expenses of $25.6 million were flat sequentially and up roughly 6% compared to last year.

The investments we have made over the last few years to enhance our scalability have enabled us to keep our operating expense growth quite modest overall while continuing to invest meaningfully in the areas that we believe will drive long-term growth. As a result, we continue to believe there is more opportunity to drive operating leverage as we grow. To cap off my Q2 commentary, we continue to have a strong balance sheet with roughly $215 million in cash and believe we are well positioned to capitalize on new growth opportunities. Now I'd like to turn to guidance.

We have had a solid first half overall and believe the health of our business remains strong. Our sales pipeline is robust, including a higher number of large deals. And we anticipate seasonally higher bookings and revenue in the second half of the year. However, our current level of backlog and deferred revenue is a bit lower than we would like due to the timing of some of our large enterprise bookings.

As a result, we are updating our annual guidance and expectations for the second half of the year. For the year, we now expect revenue to be between $182 million and $190 million, adjusted EBITDA to be between $19 million and $23 million and GAAP net loss per share to be between $0.42 and $0.58. We expect to be GAAP profitable in the second half of the year at the upper end of this range. For the third quarter, we expect revenue to be between $48 million and $52 million, adjusted EBITDA to be between $7 million and $9.5 million and GAAP earnings to range from a net loss of $0.09 to $0.0 per share.

With our revised guidance, our implied revenue growth for the second half of the year is 14% at the high end of our guidance range. We continue to have a strong leadership position in a still underserved market with multiple growth drivers. We expect our second half growth to be a strong driver of momentum for us as we look forward into 2020. I'll now turn it back to Brent.

Brent Lang -- Chief Executive Officer

Thanks, Justin. With Q2 behind us, we are focused on execution in Q3 and beyond. Our differentiated solutions and a large greenfield opportunity inspire us to build upon the momentum we've established in the market and motivate us as we grow revenues and profitability. It's still early days in the evolution of the hospital communications away from pagers, loudspeakers and wireless phones.

We are helping hospitals improve their bottom line, their quality of care and the resiliency of their staff. I believe our success underscores both our leadership position in this large growing market and the strategic importance customers are seeing in our products. With that, we are ready to conclude our formal remarks. Thank you for listening today.

Operator, we're ready to open the line for questions. Thank you.

Questions & Answers:


Operator

Thank you. [Operator instructions] Your first question comes from Ryan Daniels with William Blair. Your line is open.

Ryan Daniels -- William Blair and Company -- Analyst

Hey guys, thanks for taking the question. Not to nitpick too much on guidance because I know the sales guidance was only off about 3%, but can you talk a little bit more about the enterprise deals in a couple regards? Number one, what's driving these larger deal sizes? Does it relate to the new device and integration and therefore more applicability across more service areas? Or is it just the strategic importance of the deal? That's number one. Number two, how big of an uptick in the deal sizes and pipeline are you seeing? And then number three, how would you kind of rate the visibility at this point of the year given where the pipeline is? So I apologize for the three-part single question there.

Brent Lang -- Chief Executive Officer

That's OK, Ryan. Always appreciate the interest. If I forget one portion, please remind me of it. So I'll start with the makeup of the deals.

I would characterize the increasing size in the deal and increasing complexity of the deal as being more to do with the way hospital systems are buying communication and technology platforms, much more so than anything to do with the Smartbadge per se. This is a trend that we've seen and we've talked about for quite some time. And as hospitals continue to merge and consolidate and, more importantly, as they continue to pull budget dollars out of the department levels into a consolidated CIO office for the decision making, the deals become much more strategic because they're not just looking for a point product solution within a particular department. They're really looking to standardize on a communication collaboration platform.

As a result of that, they need to get buy-in from lots more stakeholders across different departments and also different levels of decision-making. As the dollar value of the deal size increases, in many cases it requires additional signatures from additional members of the C-suite and, in many cases, we're seeing even signatures required at the board level or some sort of capital committee level. And so the uptick in deal size from where we were several years ago is pretty substantial. We started seeing it in a flow of these larger deals back in 2016 timeframe and now we're seeing where the majority of the new deals that we're chasing are these larger enterprise deals.

And we see it is a very much of a strong trend line because it favors the market leader, it favors our platform capability, it favors being able to deliver the complete solution to the customers and having the expertise and experience of having deployed other large deployments with other hospitals. So our competitive win rate remains really, really strong and actually I think the shift in the marketplace to our advantage. But it does make the predictability of the timings around bookings a little bit harder to predict. And so to go the third piece of your question, the way we thought about guidance was to use the same sort of visibility model that we have used in the past, where we have analyzed backlog and deferred revenue.

So that's kind of our visible revenue that's going to be recognized within the quarter. We add to that supplies and we look at the percentage of book shipped. And because of the timing of some of these larger deals moving into the back half of a year, we didn't have enough visibility to keep to our initial guidance, and that's exactly what drove the revised guidance. Now I would say that our guidance, the revised guidance, the visibility we have to the revised guidance is at or better than the standard visibility that we would have.

So we use very much of a conservative and almost formulaic approach to converting that visibility into what we believe is a reasonable guidance number for the remaining portion of the year.

Ryan Daniels -- William Blair and Company -- Analyst

OK, perfect, thank you for the color guys.

Operator

Your next question comes from Matthew Gillmor with Baird. Your line is open. Matthew Gillmor, your line is open.

Matthew Gillmor -- Robert W. Baird and Company -- Analyst

Hey thanks, sorry about that. So following up on Ryan's question on the guidance reduction. I was curious if there were specific large deals that got pushed out. Was this just one or two deals? Or was it a little bit more broad based? And then sort of where do you think you are in the cycle with these, getting these larger deals and then that impacting your, the activity with signing level and bookings? And I guess the perspective is that once we get to some sort of steady state, then you won't have this issue of deals getting pushed out.

So if there's any perspective you can share on that front that would be helpful.

Brent Lang -- Chief Executive Officer

Yes, so the way I would characterize it, Matt, is that at any given moment in time we're working a large number of these enterprise deals and the exact timing of when they come in does vary. And in some quarters, they come in sooner than we think and in other quarters, they come in later than we think. I think this quarter, we felt particularly unlucky with the timing of several of them that we thought would close in the quarter and that's really what resulted in the change. In terms of where we are, I feel like we're going to continue to be in this space where there are a number of large deals that are being worked.

The market is moving in that direction. And given the low level of market penetration, there's a lot of health system level deals left to win. I think the key for us is to increase the pipeline. And so by increasing the number of large deals that we're working on at any given moment in time, it tends to smooth out the impact of any particular one.

But I think this is, in terms of the large number of large deals, I think it's the new normal. That's the way the market is buying. And I think from our perspective, we continue to have really good visibility as it relates to revenue moving forward, but the timing of bookings can be somewhat unpredictable for us.

Matthew Gillmor -- Robert W. Baird and Company -- Analyst

And just one clarification. The several deals that you mentioned that got pushed into the back half, do you think you have good line of sight in terms of getting those signed for the rest of the year?

Brent Lang -- Chief Executive Officer

We do, yes. We've been named the vendor of choice. We've gotten verbal commitments from them and in many cases, it's just about getting final signatures on a document. So I think our level of confidence in closing these deals is very high and we're really encouraged.

And I think as we said earlier in the prepared remarks, the ongoing pipeline of these large enterprise deals is at record levels for us right now. And so we're very encouraged by what that means for the rest of this year and actually even cutting into next year.

Matthew Gillmor -- Robert W. Baird and Company -- Analyst

OK, thank you.

Brent Lang -- Chief Executive Officer

Yes.

Operator

Your next question comes from Jamie Stockton with Wells Fargo. Your line is open.

Jamie Stockton -- Wells Fargo Securities -- Analyst

Thanks for taking my question. Maybe just to follow up on Matt's. From an environment standpoint, is there anything that you felt like hospitals were particularly paying attention to? So for example, were we going to get a budget deal and avoid any kind of sequester or anything like that later this year that you think might have slowed things down, but now it's freeing deal flow back up? Just any thoughts on that would be great.

Brent Lang -- Chief Executive Officer

I would say that the one area that we're seeing a lot of focus on is around cost savings and trying to drive operational efficiency. I think most health systems know that there is more reimbursement cuts coming or expected with many of the changes that are on their way, and so they're trying to get ahead of that by driving better operational efficiency and throughput. Beyond that, I think the two themes that we're hearing a lot about right now in our space particularly is around cognitive overload, concern around the number interrupts and alerts that are being sent to nurses and the cognitive overload and the interruption fatigue that comes from that. And then the second one, which I mentioned in my remarks, is around staff safety.

And this is becoming a crisis epidemic level in hospitals and a level of concern around physical assault and other attacks in hospitals is becoming very top-of-mind and is driving a level of urgency around thinking about what they can do to drive more help for the clinicians so they can get help when they need it. I have never seen so much emphasis on that in the past, and I think it represents a really interesting opportunity for us. But in terms of the macro level, I think there's some uncertainty around spending, but they're definitely looking for ways to drive operational efficiency.

Jamie Stockton -- Wells Fargo Securities -- Analyst

OK, thank you.

Operator

Your next question comes from Sean Wieland with Piper Jaffray. Your line is open.

Sean Wieland -- Piper Jaffray -- Analyst

Hi, thanks. Just one follow up on Jamie's first. So am I hearing that the delays have nothing to do with being budget related, that these deals are budgeted and you're not seeing pressures on budgets?

Brent Lang -- Chief Executive Officer

I think that's right, yes. I mean there's definitely budget scrutiny going on where they may be looking at additional levels of approval or they might have additional members of the team that are a part of the decision-making process. And so that slows things down. But for the most part, we're not seeing it as a, we don't have money to spend issue.

It's more of a, we're trying to figure out in our new consolidated model where we've got multiple health systems that have come together and new people making the decisions, navigating the decision-making process in order to get the deals closed. But there clearly is a desire for this product category. In fact, we're seeing an increase in the number of RFPs for our product category that are being sent out. So I think it's an area that people want to spend money and have money to spend.

And as I mentioned, we're getting to the stage of being vendor of choice quite successfully and quite rapidly. It's just from that stage to final contract. And as you guys know, we treat our bookings definition very, very disciplined. We won't count something as a booking until it's truly a firm committed signed contract for a booking.

And so that can have an elongated impact on when we count something as a booking.

Sean Wieland -- Piper Jaffray -- Analyst

OK. So are you seeing any impact from the changing competitive landscape, notably Hill-Rom?

Brent Lang -- Chief Executive Officer

We're not. The Hill-Rom acquisition of Voalte occurred earlier this year, and we have not seen any dramatic change in the competitive landscape or the customer reaction to the products.

Sean Wieland -- Piper Jaffray -- Analyst

OK. And then just one more quick one. How many Engage deployments did you do in the quarter or sales?

Brent Lang -- Chief Executive Officer

I don't even know.

Justin Spencer -- Chief Financial Officer

Yes. It's not a metric that we disclose. What we can say, Sean, is that we feel great about the Engage progress. It's a major source of differentiation for us and drives a higher level of clinical workflow.

It gets our solution to become very, very sticky.

Brent Lang -- Chief Executive Officer

And more and more they're buying the complete platform, so we don't separate out the Engage piece necessarily in all these different deals. They're buying the voice messaging and integrations of the unified platform. And so we start to lose visibility into how many Engage installations there were in the quarter.

Justin Spencer -- Chief Financial Officer

The majority of, yes, to build on Brent's point, Sean, the majority of our new customers that we add each quarter include Engage. So it's become a very successful product for us.

Sean Wieland -- Piper Jaffray -- Analyst

OK, thank you.

Operator

Your next question comes from Gene Mannheimer with Dougherty and Company. Your line is open.

Gene Mannheimer -- Dougherty and Company -- Analyst

Thanks, good afternoon, and congrats on a good quarter. I wanted you to maybe expound a little more on the elongation of the sales cycle. I mean, that's not a new thing, right? The higher complexity, the multi-product, the platform. That's something you've been talking about probably for over a year.

So I guess my question is why wasn't that variability contemplated in your initial guidance in February? And is the timing of these deals that pushed the entire reason for the guidance reduction? Or is there anything else at play? Thank you.

Justin Spencer -- Chief Financial Officer

Yes. Hi, Gene. The overall strength of our, or the overall business is actually in a good place. We feel really good about all aspects of our business.

When we set our guidance at the beginning of the year, we did anticipate that a certain number of large deals would close because, increasingly, a larger portion of our bookings over the last three to four years have come from those large deals. However, when we break it down into individual quarters or halves, sometimes there's movement from one quarter to the next. And again, this is mostly kind of a bookings phenomenon because we can smooth that out usually through our backlog and our deferred revenue. So we actually closed a couple of large deals.

We profiled a few of those today in our prepared remarks. But there are a handful of others that didn't close as we anticipated and that effectively shifts the timing of revenue out by a bit. And so as we sat down to look at our remaining guidance or our annual guidance for the full year and looked at the visibility that we had through the backlog and deferred revenue, we didn't quite have the level of visibility that we would normally like to have at this point. We think those deals are going to close.

As Brent mentioned, we have been selected vendor of choice in many of those instances. But we wanted to try and be, continue to try and be conservative in terms of our going-forward visibility and guidance assumptions.

Gene Mannheimer -- Dougherty and Company -- Analyst

Thank you. That's very helpful, Justin. And then to the extent you're comfortable, given where you are mid-year here, what are your thoughts on top-line growth in 2020? How might we be thinking about that at this point?

Justin Spencer -- Chief Financial Officer -- Analyst

Yes. I think, Gene, primarily our focus is really on 2019. Although, what we can say is that if we're able to achieve our revenue goals with this revised guidance, we're growing near the mid-teens and hopefully that will be a catalyst for strong momentum as we head into 2020. But for the time being, we're really focused on closing those large deals and generating the revenue growth that we anticipate inherently that we think we can as a result of the market opportunity that's ahead of us.

Brent Lang -- Chief Executive Officer -- Analyst

I'll just build on that by saying we still feel like we're really in the early stages of this market deployment. There's still a lot of greenfield opportunities in front of us, and we continue to have a really competitive win rate and differentiated solution. And I think those factors together give us confidence that we can continue to grow the business aggressively for quite some time in the future.

Gene Mannheimer -- Dougherty and Company -- Analyst

Very good, thank you.

Operator

Your next question comes from Mohan Naidu with Oppenheimer. Your line is open.

Mohan Naidu -- Oppenheimer and Company -- Analyst

Thanks for taking my questions. Brent, on the enterprise deals that you're referring to, do a predominant portion of them include Smartbadges or any color that the mix of those contracts that could include Smartbadges?

Brent Lang -- Chief Executive Officer

It is a mix. I would say some of them include Smartbadges. Many of them do not. And it sort of depends on when the conversation started and what the focus was for the particular opportunity.

If it's a relatively new deal and they're looking at the full platform in terms of voice and messaging and Engage, then there's a higher likelihood that it would include Smartbadge. But for some, well, for example, the federal deals in particular I would highlight because the Smartbadge has not yet received FIPS certification, many of the large deals that we're working on in the fed can't include the Smartbadge at this point in time. And there are other customers who are more focused on a voice-only workflow and so they're more content with using the Badge rather than the Smartbadge. So it's definitely a mix and I think it sort of depends on the problem the particular customer is trying to solve for.

Mohan Naidu -- Oppenheimer and Company -- Analyst

Thanks, Brent. Maybe one quick follow-up on the guidance. I know you said you have a very high visibility, but should we assume at this point that the second half guidance relies predominantly on your backlog and deferred revenue versus any new book and ship within the second half of the year?

Justin Spencer -- Chief Financial Officer -- Analyst

Yes, Mohan. There's always a component of our revenue that comes from book ship, and I think the way we would frame that is that the level of backlog and deferred that we carry into the second half is consistent with where it's been previously. And as a result, the book ship is in a similar place as well. And we revised our guidance down a bit to just reflect the fact that we don't quite have as much backlog and deferred to achieve the original guidance.

And so we lowered that back to a level that we're more comfortable with. And so the visibility profile based on that backlog and deferred is where we think it should be at this point. But it still requires us to go out and close not just bookings, but convert some of those bookings to revenue. And that's in a pretty normal range as well.

Mohan Naidu -- Oppenheimer and Company -- Analyst

OK. Thank you so much.

Operator

Your next question comes from Matt Hewitt with Craig-Hallum Capital. Your line is open.

Lucas Baranowski -- Craig-Hallum Capital Group -- Analyst

Hi guys, thanks for taking the questions. This is Lucas Baranowski on for Matt Hewitt. I just wanted to drill down on the Nordstrom rollout a little bit. It sounds like the rollout started in Q2 just like you predicted.

So how should we be thinking about the cadence of that in the back half of the year?

Justin Spencer -- Chief Financial Officer -- Analyst

Hi, Lucas. Yes, we're really happy and pleased with how the deployment has started. We've rolled that out to a few stores now. There are many, many more to go that will unfold over the next quarters.

Nordstrom has been, we've received very good and positive feedback from Nordstrom already from the deployments that we've done. We shipped roughly half of the product components, so the devices and the software in the second quarter. And then the remainder will likely be shipped in the second half of the year. And then the professional services work and the ongoing maintenance from the software maintenance and support will be recognized over the next several quarters and into 2020.

So just like most of our brand new customers, we ship the product in conjunction with the deployment and then there's a nice healthy annuity stream that is generated from the maintenance over hopefully the next several years. But we couldn't be more happy with how that is going, and it's been a great, great opportunity for us.

Lucas Baranowski -- Craig-Hallum Capital Group -- Analyst

OK, excellent. And then looking at the gross margin for the back half, I mean, you've got probably some large shipments to Nordstrom, which is the old Badge, but then you also have some of your initial shipments of the new Smartbadge. So given those puts and takes, how should we be thinking about gross margin in the back half?

Justin Spencer -- Chief Financial Officer

Well normally, following our seasonal pattern, because gross margin is heavily influenced by the level of revenue and we expect revenue to be sequentially higher in the second half than the first half, we therefore expect our margins to continue to expand. The other piece of that is our software revenue, which has been the fastest growing part of our overall revenue. We expect to have another strong second half with regard to software. So as we look into the second half, we have typically seen, going back now several years, our gross margins are typically higher because of, A, higher levels of revenue overall and, B, mix in particular driven from software.

The last thing that I would just say is that our Smartbadge margins are very similar to the original Badge. So the Smartbadge is not dilutive to our overall gross margins so that's a positive thing as well.

Lucas Baranowski -- Craig-Hallum Capital Group -- Analyst

OK, that's really helpful color. I think that's all I had.

Operator

Your next question comes from Vikram Kesavabhotla. Your line is open.

Vikram Kesavabhotla -- Guggenheim Securities, LLC -- Analyst

Hey, thanks for taking the question. I was wondering if you can give us some color on the feedback you've been getting on the Smartbadge. And in particular from the customers who haven't adopted the product yet, where has the pushback been so far? And then what gives you the confidence you'll be able to convert them down the road? And then as a follow-up, I know you've been talking about a ramp to Smartbadge adoption over time, and I think you recently said that even in the fourth quarter maybe less than half the bookings will come from the Smartbadge. But as we think about your long-term growth rate of growing in the mid-teens and kind of the algorithm that goes into getting there, what type of Smartbadge adoption rates do you need to see down the road? And how should we think about the pace at which you'll be able to get there? Thanks.

Brent Lang -- Chief Executive Officer

So I'll take the first part and maybe have Justin answer the second part. I would characterize the feedback on the Smartbadge as being transformational. I think when people have seen the device and they've thought about its capability, they've gotten really excited about what the potential of this product is in the future. And I think one of the key learnings for us is that it is not simply an upgrade to the existing B3000n Badge.

It really represents a new category of products and it's a game-changer in the sense of its ability to deliver not just voice communications, but messaging and clinical alarms and clinical integration. And the feedback has not been negative. It's been, boy, this changes the game to the point where I need to step back and think about what I'm going to do in my environment. How am I going to think about clinical integration? How am I going to think about messaging? How am I going to think about my smartphone strategy? What's the right mix between Badges, Smartbadges and smartphones? And how do those clinical integrations all come together? And I think probably if there was any sort of new news since the time of the launch it's really been the degree to which this is representing a whole new product category and is causing customers to sort of step back and make more of a thoughtful decision about how they want to move forward.

Now the nice thing about it is that the hardware has been really stable. We've not run into any kind of hardware issue. We've gotten lots of interesting suggestions from customers around software functionality that we can add to it. And because it's a platform really designed to be able to bring more and more functionality to the device over time, customers who buy the Smartbadge today will be able to get the benefit of those new software features in the future.

And the engineering team is already hard at work at incorporating those into the roadmap. And because we've got so much more flexibility with the Smartbadge than we did with the original Badge, there's a lot more we can do with it in terms of enhanced functionality on the software side. So I think overall it's been really exciting to see the reaction and I think that the timing and evaluation of it is more a function of just the degree to which it is really sort of changing the whole landscape of how they think about devices in their clinical environments.

Justin Spencer -- Chief Financial Officer

And to address your second question, the context for growth as it relates to specifically the Smartbadge is that the Smartbadge has been designed to really be an enabler and driver of growth of our software business. And so we touched on this a little bit in our prepared remarks; that one of the things that we're really encouraged by with regard, as we're now engaging with customers on the Smartbadge is that they're wanting to now take a really holistic look at our entire software platform. And so the other thing I would just say about the Smartbadge is we don't necessarily look at the individual device as the driver of growth. We are looking at it as a new device that can continue to keep the overall device portfolio fresh and continue to drive growth in the device category.

More so how we look at growth, though, is across segments. So international, the large-scale component, the federal business and, to the extent that these deals and the new customer wins that are coming onboard are driving the larger platform, that's how we are measuring growth and Smartbadge is one of those components. But we think it's going to be a great product for us over the long run. There's going to be a gradual ramp in that product, as we have said previously.

And it's going to contribute to even more growth of not just devices, but adding more and more software as a result of the platform sale.

Vikram Kesavabhotla -- Guggenheim Securities, LLC -- Analyst

Got it. Thank you.

Operator

Your next question comes from David Windley with Jefferies. Your line is open.

David Windley -- Jefferies -- Analyst

Hi, thank you. Good evening. Thanks for taking my question. Setting aside the delay in question, how does the centralization of the purchase, the CIO office that you described, how does that affect the pricing negotiation in these deals? And then these enterprise deals, should you expect that the deployment would follow a similar pattern to your historical deals? Or will that also be affected?

Brent Lang -- Chief Executive Officer

Yes. Hey, David, thanks for the question. terms of pricing, our product scales up and down really nicely. We're able to adjust the size of the license based on the user profiles and we can sell the devices on a unit basis.

And then they have the choice of buying some of the various individual software components. So we don't see a huge difference. Our margins on larger deals are very similar to margins on small deals. And the team has got some flexibility to work within the budget parameters that a customer is trying to roll that into.

But we don't anticipate an impact on margins as a result of this increased deal size. And as it relates to the deployment schedule, typically what happens is that they're rolling it out a little bit at a time. And so it behaves similar to if we had gotten six or seven individual smaller deals that would maybe have been rolled out sequentially. The larger deal tends to be rolled out over time where if it's a multiple hospital deal.

As an example, I had mentioned Northwestern. We're in the middle of the Northwestern rollout and we completed the deployment at a couple of their hospital facilities in Q2 and we'll continue that in Q3 and Q4 with some of the other ones. And so, as Justin mentioned earlier, it tends to give us a little better visibility in the long term because we get the booking, we can create schedule around the deployments and we know when that backlog will then be converted to revenue upon shipments of those and deployments of those various individual systems. So it tends to be more lumpy on the bookings side and then is more smooth on the revenue and deployment side of things.

David Windley -- Jefferies -- Analyst

OK, great, thank you.

Operator

Our last question in the queue today comes from Stephanie Demko with Citi. Your line is open.

Stephanie Demko -- Citi -- Analyst

Hey guys, thank you for taking my question. So you answered a bit on the kind of the smoothness of the revenue ramp up, but when I think about these larger deals, is there any risk that the ramp up cadence could be a little bit more elongated given the size of the deals? Mainly, could these larger deals have [Inaudible] rank of time, kind of pushing the growth story out by a few quarters to get back to this mid-teens level?

Brent Lang -- Chief Executive Officer

I don't think so, Stephanie. I think that what we've seen typically is that once the customer gets the purchase order taken care of, they're generally in a huge hurry to get it deployed. And we have the capacity and the expertise and experience of having done these large deals over the last several years. And so that has not been an issue.

If you'd asked me that question three or four years ago when we were first starting to do these larger deals, I think I was more nervous about it. But our professional service team has demonstrated a really good cadence of being able to deliver on schedule and on task. And we now have a set of best practices that allows us to continue to drive that. And the customers have got a sense of urgency because they want to start realizing the benefit from the product.

So I don't anticipate that. I think for us it's a matter of driving the bookings, building backlog in the business and then the rest of it is just kind of execution, which is fairly straightforward.

Stephanie Demko -- Citi -- Analyst

Understood. Understood. And then when I think about kind of your improved visibility going to the rest of the year, does that imply that more of your second-half revenues is going to come out of backlog than normal versus the more 4Q-weighted new sales?

Justin Spencer -- Chief Financial Officer

Yes. I want to start by, our visibility is just kind of right in line with historical norms. So it's not necessarily significantly better. It's just kind of right in line with where we have historically been comfortable.

And as a result of the lower, slightly lower level of backlog and deferred that we had entering the second half that precipitated the need to just adjust our guidance a little bit. So we've reset it at a point where we're comfortable and is in line with our historical norms. So I think as we look to the second half compared to prior years, we're expecting a similar level of revenue from our backlog and our deferred revenue. And there's also a piece that needs to come from our book ship, but we have a really solid pipeline that we're actively pursuing.

And all those metrics are now realigned with the revised guidance.

Stephanie Demko -- Citi -- Analyst

OK, all right. Thank you so much guys, appreciate it.

Operator

Thank you. There's no further questions at this time. I'll turn the call back to Mr. Lang for closing remarks.

Brent Lang -- Chief Executive Officer

OK, thank you. I want to thank everyone for their time, and we look forward to continuing with the dialogue with all of you. And have a good evening, and take care.

Operator

[Operator signoff]

Duration: 56 minutes

Call participants:

Sue Dooley -- Investor Relations

Brent Lang -- Chief Executive Officer

Justin Spencer -- Chief Financial Officer

Ryan Daniels -- William Blair and Company -- Analyst

Matthew Gillmor -- Robert W. Baird and Company -- Analyst

Jamie Stockton -- Wells Fargo Securities -- Analyst

Sean Wieland -- Piper Jaffray -- Analyst

Gene Mannheimer -- Dougherty and Company -- Analyst

Mohan Naidu -- Oppenheimer and Company -- Analyst

Lucas Baranowski -- Craig-Hallum Capital Group -- Analyst

Vikram Kesavabhotla -- Guggenheim Securities, LLC -- Analyst

David Windley -- Jefferies -- Analyst

Stephanie Demko -- Citi -- Analyst

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