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Vocera Communications (NYSE:VCRA)
Q1 2020 Earnings Call
Apr 23, 2020, 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 Chantelle, and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. [Operator instructions] Please be advised that today's conference is being recorded.

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, and hello, everyone. Welcome to Vocera's conference call to discuss our first quarter fiscal 2020 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 for new -- 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 the 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'll 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, and thank you for joining us. I hope you're well and getting by during this challenging time. On today's call, I'll start by summarizing the highlights from the first quarter.

Then I'll provide some commentary on the current market environment, and our role in the COVID-19 pandemic. I will conclude my prepared remarks with some details on how we are responding to the crisis, both for our customers and internally as an organization before turning the call over to Justin for more details on our financials. Q1 was a strong quarter for us, especially in these challenging and uncertain times. In this rapidly changing environment, it's very difficult to make predictions about future results.

So, my comments today will aim to provide a balanced look at our business from my standpoint today. I'm extremely proud of our team's quick response to the global crisis and how we rushed to help our customers care for patients while keeping their team safe. We pivoted quickly from an internal operations standpoint by rapidly and effectively transitioning to a work-from-home paradigm. On the bookings front, we are selling into a very dynamic environment.

There are some bright spots, including a couple of million-dollar deals, which is positive for any Q1, and strong performance from our international and federal business. Overall, however, as the crisis unfolded in March, our wins were increasingly weighted toward urgent bookings to serve hospitals focused on preparations for COVID rather than traditional pipeline developments. As a result, while we continue to have high activity levels in the business, even this week, our business is less predictable than it was before the crisis. For the quarter, revenue grew a robust 15% to $41 million, driven by our efforts to help customers expand and in some cases, accelerate deployments of our solution to enable rapidly changing and demanding care environments.

If there's one thing we've taken away from Q1, is that our mission to transform communications in healthcare and ensure patient and fast safety has been reinforced by the challenges of the pandemic. Since the beginning of the crisis, we've seen a surge in device revenue, which rose 38% in Q1 over a year ago. This included increased demand for Smartbadges as the wake word feature drove higher interest levels, especially for its unique application for use under personal protective equipment of PPE. I'm proud of how our teams quickly and creatively delivered our message and solutions to hospitals adapting their environments to COVID.

In a push to serve hospitals that wanted to leverage our devices and software in ICU and isolation environment, we accelerated shipments, issued temporary licenses, and pushed to ramp our badge production in a supply constrained world. We move to remote deployments when possible to ensure the safety of care teams. We're honored that many hospitals are recognizing the unique contributions our solution can make to their efforts at this time. Earlier this year, we talked about 2020 being the year of the nurse and how our mission revolved around serving these heroes.

On April 4, the front page of the Raleigh, North Carolina News & Observer featured a UNC nurse as the symbol of heroism involved in the fight against coronavirus. If you look up this article, you'll see a powerful image of a nurse serving on the frontline with this war. You'll also see she's wearing a black Vocera Badge on her scrubs, symbolizing our role in protecting care teams and caring for patients. Safety is at the heart of our mission, and we believe the current crisis only underscores our long-term thesis.

Now I'd like to provide you with some more detail on our performance in Q1 before discussing what we're seeing in the market and giving Justin an opportunity to cover our financial results and our outlook for the rest of the year. During Q1, we successfully closed two large enterprise deals amid the COVID disruptions. We had a $1.1 million expansion for new construction at William Beaumont Army Hospital, and Kaiser Permanente placed an urgent $1.2 million COVID-related order to outfit their SoCal region's eight hospitals with hands-free communication gear to be used in their isolation rooms and ICUs. University of Virginia and several VA hospitals placed urgent orders with us as well.

Internationally, we saw strong results in the Middle East, with key wins in Kuwait and the UAE. And we also delivered good growth in the United Kingdom, fueled by several urgent orders to address the crisis, which catalyzed some net new customer wins there. Despite these highlights, overall bookings were below our original expectations as several hospitals in final deal stages began to focus only on responding to the outbreak. In some instances, that meant an urgent order for a more limited application of our solution.

These broader strategic deals have not gone away, and conversations to close them will restart as soon as possible. In addition to the Kaiser deployment I mentioned earlier, we deployed urgent requests for our solution at several other customers. We also completed a number of previously planned deployments in Q1, including Albany Medical Center, University of Chicago, and a large VA facility. In addition, Nordstrom went live in a fulfillment center in Riverside, California, a small but strategic expansion.

However, we did see and continue to see some delays of customer installations as hospitals are shifting their priorities as well as restricting access to their facilities. As a result, expanding our remote deployment capabilities will be an important initiative as we continue into Q2. This is one particularly dynamic aspect of our business in the near term. Now I'd like to spend a moment describing the role our solution is playing in these COVID environments.

Currently, nurses and doctors say that they are at war with an invisible enemy. Comments like this from the frontline remind me of the conversation I recently had with a friend who is an Army Ranger. He told me that as a young officer heading off to combat, the most powerful thing at his disposal was his radio and the ability to communicate with his platoon. "It was way more important than any weapon system", he said.

Thinking about my friend's story and what I'm seeing and hearing from healthcare workers around the world, it has become clear that hands-free communication is an essential part of PPE. The Vocera Badge or Smartbadge is not just something that nurses can use with PPE, but we believe these wearable devices are part of the essential protective gear that care teams require. Effective patient care demands we apply and protect three important human senses: touch, sight and hear. In hospitals, this means gloves, goggles and Vocera.

Soldiers would not go into battle with only their boots, helmets, and rifles. They require their radios to stay connected and safe. And on the frontlines of healthcare, clinicians need access to PPE, including an effective communication solution. Working under PPE presents a real challenge.

Any care team member wearing PPE, caring for a patient in isolation and meeting to contact a team member is in a very difficult position. In most cases, they will have to leave the patient's bedside, go to an ante room, or remove their PPE, and then go out and ask for help or pick up a phone. Every time, members of the care team remove or replace PPE, there is a risk of contamination. Whether in a triage tent, in the ICU or in an isolation room, our solution provides access to a clear, secure communication channel that is hands-free, underneath the PPE, increasing care team safety, and improving the quality of patient care.

The global pandemic is highlighting the need to protect the people providing care, while at the same time, optimizing patient throughput. Without effective communication, patients cannot be moved through the hospital. And yet, with a highly infectious virus, the simple act of communicating using conventional tools can put care providers at risk. There are big economic benefits as well.

Using Vocera's hands-free solution, we can help preserve PPE by avoiding unnecessary removal and replacement from extra trips in and out of the isolation room. And the wake word feature is a striking new addition to our offering that is particularly relevant in this environment. We are hearing from the frontline that clean phones between patients is a huge use of scare supplies and takes valuable time. During a crisis, companies are defined by how they respond to the challenge, both in terms of their interactions with customers and in terms of how they evolve their internal operation.

As a result, I'd like to take a moment to discuss our responses to the pandemic, both in terms of our customers and our internal activities. In our customer-facing efforts, we are leading with urgency, experience, and innovation. Our field teams reacted quickly to requests from customers for new and unique uses of our products. For example, new COVID-specific care team roles and groups are being created with our software to extend care teams to include temporary workers and even reach outside hospital walls.

Our solution was built for changing environments. It is flexible, robust and easy to use. Just this week, we heard from our customer PeaceHealth, who told us they were able to extend our solution to temporary care team tents on their own. They're using Vocera to announce codes, call for ventilators and convey important patient information without having to be face-to-face, saving time and lives.

We now have a dedicated section of our website, including more than a dozen used cases describing specific workflows that batch can enable in a COVID environment, highlighting the robustness and flexibility of our solution. Here are some of the specific ways we supported our customers in Q1. In response to inbound requests from existing customers, we distributed several thousand free surge license keys for the use of our software related to COVID environments. We hope to convert some of these to permanent paid licenses in the future.

We developed a COVID response bundle of our core voice solution to rapidly deliver to customers. We quickly outfitted 8-Kaiser hospitals in Southern California with Vocera gear to use in their isolation rooms and ICUs. These are already up and running. Based on input from customers, we created a temporary patient communication solution by attaching a Vocera Badge to the patient's bed in temporary hospitals and in single rooms being converted to double rooms or otherwise, there will be no access to a traditional nurse call system.

This solution massively simplifies communication and preserve valuable PPE. Additionally, it allows for care teams to do remote rounding and even include a patient's family member in a three-way call. As we work urgently for our hospital customers in the face of COVID, it is equally important that we make the right internal decisions to effectively lead the company through this crisis. Vocera took an early leadership position by deciding to pull out of HIMSS to protect our employees and focus resources on supporting our customers.

Prior HIMSS, we had scheduled a robust set of meetings, and we quickly transitioned as many of these sales development meetings as possible to virtual meetings in order to continue building a longer-term pipeline for our business. We also assumed the leadership role in transitioning to remote work, ahead of formal directors from the government. Our migration to remote work has been nearly seamless and is a testament to our IT preparedness, disaster planning, and strong culture. We continue to lead via virtual connections to employees worldwide with townhalls and regular initiatives to preserve our unique culture.

On the professional services front, our teams are acting quickly to accelerate our remote deployment capabilities when possible. For the safety of our employees and to ensure patient care is uninterrupted, early in the crisis, we successfully pivoted to remote service offerings for planning, configuration, installation, and training of our solutions. Our services team can now complete many deployment services off-site. As for our supply chain, we ramped up our manufacturing in both Mexico and Taiwan in order to meet the strong demand for the badge.

As we move into Q2, this remains a priority as we react to the impact from the pandemic on our suppliers and work to fulfill the strong demand from our customers. As we move into Q2, our strategic initiatives for 2020 will continue in the context of COVID. Our Vocera sales and support teams around the globe are working to help our customers through this crisis by innovating, creating and delivering COVID-specific used cases and by providing the remote and on-site services and support they require. In some instances, this may mean we complete a bookings sooner than originally anticipated, but in a configuration that is smaller and specifically targeted to the immediate challenge of COVID.

Our priority is to address these immediate and pressing needs, and we will revisit the opportunity for a more complete deployment of our solutions after the immediate crisis settles down. We will also continue with deployments where possible and work to continue to make progress with our large deal pipeline. Despite the elevated uncertainty, I believe we are creating lasting goodwill and meaningful used cases that demonstrate compelling value over the long run. I'm very proud of the work of our teams and the impact our unique solutions have had during this crisis.

We had a strong Q1 despite the challenges and uncertainty presented by this crisis. With that, I'd like to turn the call over to Justin. Justin?

Justin Spencer -- Chief Financial Officer

Thanks, Brent. Hello, everyone. I'd like to briefly review our Q1 results before discussing our outlook. We had a strong start to the year, beating both our first quarter revenue and profitability goals.

Total revenue in Q1 was $40.7 million, up 15% over last year. Product revenue, which includes both devices and software, increased 27% to $17.9 million. Device revenue was $13.9 million was robust, up 38% versus last year, and was driven in part by customer requests for badges in response to COVID. We were equally pleased to see a healthy increase in Smartbadge volume, and we expect sales of this device to steadily grow over time and complement our B3000n Badge.

Software revenue in the first quarter was $3.9 million, which was flat compared to last year. Software revenue is typically the lowest during Q1 as bookings in software tied to new deployments tend to increase as the year progresses. While we delivered some additional paid software licenses for COVID, we were pleased to help several customers quickly power fair users on Vocera by providing three temporary surge licenses. As Brent mentioned earlier, with even more badges in service, and these surge licenses expiring in a few months once COVID urgency subsides, we expect several customers to convert these to paid licenses, furthering longer-term demand for our software.

Additionally, we continue to have healthy software backlog which should help fuel our software revenue in the future. Services revenue was $22.8 million, which is comprised of software maintenance and professional services, was up 7% on a combined basis. Software maintenance revenue was up 10% and was driven by ongoing expansions and new deployments of our software as well as a high customer renewal rate on our existing maintenance contracts. This consistent and recurring revenue stream continues to provide a strong foundation of growth and profitability for our business and reflects, in large part, the overall health of our installed base.

Our professional services revenue was down slightly compared to last year as we had some customers, particularly new ones, pushed the timing of their deployments so that they could focus their energy on responding to COVID. We expect to see more of this in the near-term until this crisis subsides. Despite some short-term headwinds associated with scheduling new customer deployments and the associated delivery of software and hardware, we continue to have a very healthy combined level of backlog and deferred revenue. At the end of Q1, our combined backlog and deferred revenue was $125 million, up 5% versus Q1 last year.

This continues to be a key part of our revenue picture for the year. Now I'd like to comment briefly on our profitability. Our adjusted EBITDA loss was $2 million, better than last year and our own expectations. Our GAAP net loss for the quarter was $10.5 million, also better than expectations.

Here is some color on our non-GAAP gross margins and operating expenses. Non-GAAP gross margin in Q1 was 61%, right where we expected and followed our typical seasonal pattern for the first quarter. Product margin decreased slightly compared to last year due mostly to a lower mix of software revenue in the quarter. Our devices gross margin continues to be very healthy and consistent with historical levels.

Services margin improved year-over-year as a result of the higher mix of software maintenance and support revenue and some adjustments we made in Q4 to further optimize our cost structure in professional services. Non-GAAP operating expenses of $27.2 million were up 6% compared to last year. As we and most other companies manage through this period, we are proactively managing our expenses. We have refocused on critical hiring and cut nonessential discretionary expenses.

Most of our workforce is currently working from home following local government guidelines. As a result, our operating expenses will not grow at the rate we previously anticipated. To cap off my Q1 commentary, we again added to our cash balance, ending at approximately $234 million. Our balance sheet continues to provide a strong foundation for our business, especially at a time like this, with both ample liquidity to weather near-term market headwinds in capital to fuel our longer-term growth.

Now I'd like to take a moment to describe some of the factors in play as we think about our outlook for the business. We started the year on a strong note in Q1 despite some delays of implementation and in customer bookings due to the pandemic. And we have continued to see strong product orders from existing customers in early Q2. We also continue to have a solid amount of backlog and deferred revenue, which in normal times would convert at a predictable rate to adequately support our initial expectations for the year.

However, as mentioned earlier, some customers have temporarily delayed their implementations as they focus all of their resources on responding to the COVID crisis. Additionally, we believe the broader spending environment for hospitals will be very challenging in the near-term as they experience significant budget pressures and are distracted from longer-term strategic initiatives in the face of this crisis. We anticipate this will lead to some delays in purchasing decisions around our solution, particularly with some of our larger, newer -- new customer prospects. That said, the majority of our revenue comes from existing customers.

In addition to the recurring revenue from software, maintenance, and supplies, many existing customers are expanding Vocera within their facilities to address new COVID used cases. Even in these uncertain times, existing customers help provide a strong foundation for our business. The COVID-19 crisis has already had and will likely continue to have a significant impact on our customers, including a tightening of budget and redeployment of resources. We are all now in a period of unprecedented uncertainty without a specific timeline for recovery.

After considering both the positive trends we are seeing and the potential headwinds ahead for hospitals, we've decided to withdraw our 2020 guidance and suspend our practice of current quarter guidance as it is difficult for us to adequately predict the impact of these offsetting factors on our business at this time. For the reasons described earlier, our revenue and profitability will likely be lower than we originally expected in 2020. In the face of this, we have already implemented expense management control to help mitigate the near-term impact on our profitability. Despite this period of uncertainty, we are fully engaged to help our customers during this crisis, which is reflected in our Q1 results and are confident that we are well positioned for growth once these headwinds subside.

Our recurring revenue and loyal customer base, along with a solid sales pipeline and healthy backlog and deferred revenue, provided a strong foundation for growth. Based on the urgent applications of our solution we are seeing during this crisis and the clear need to prioritize care team's safety for the foreseeable future, we believe our solution will have magnified importance on the other side of COVID-19. I'll now turn it back to Brent.

Brent Lang -- Chief Executive Officer

Thanks, Justin. It's early in the year and early in the time frame to fully understand and predict the impact of the pandemic crisis. There are a lot of unknowns as we head into Q2, but Q1 was a strong quarter for us, and I'm confident in the promise of our market and our unique solution to drive our future success. We remain assured that as we transition out of this unprecedented crisis, we will resume cadence of strong growth.

In fact, we are working with our customers to translate the learnings from these crisis so that we can apply them to increase the velocity of customer adoption of our solution in a COVID new-normal paradigm with care team safety a prioritized value. Meanwhile, I'm very grateful that we have a resilient business with a strong cash balance and demonstrated demand for our unique solution that is so relevant during this crisis. I want to conclude by thanking the entire Vocera team and by saying we value our relationship with the investment community. Our whole team extends our best thoughts for you, your teams, and your families.

With that, we'll conclude our formal remarks. Thank you for listening today. Operator, we're ready to open up the line for questions. Thank you very much.

Questions & Answers:


Operator

[Operator instructions] Your first question comes from Sean Dodge with RBC Capital Markets. Your line is open.

Sean Dodge -- RBC Capital Markets -- Analyst

Thanks, and good afternoon. Brent, you mentioned bookings during the quarter shifted to more of a kind of an urgent order kind of profile as opposed to some of the more traditional projects or installs that you'd be selling? I think you touched on it a bit during your prepared remarks, but what is an urgent order look like compared to a more traditional one? It sounds like it's a little bit more device-heavy. Are there any other kind of hallmarks or things worth mentioning or pointing out there?

Brent Lang -- Chief Executive Officer

Yes, Sean, certainly, would be more product-oriented, both device and, in some cases, software, but heavy on device, less professional services because they are typically existing customers. And when I say urgent, in many cases, this was less than a 24-hour turnaround. You know, these -- the orders that were coming in one afternoon, and they were shipping out by the next morning because hospital customers were desperate to try to set up their environments for the surrogate patients that was coming in. And so, in some cases, the whole sales pipeline from identification is the need, booking the order and shipping the order was turning around in a very, very short period of time as opposed to more of the traditional sales pipeline development that we work on with some of the larger deals.

Sean Dodge -- RBC Capital Markets -- Analyst

OK. That's helpful. Thank you.

Operator

Your next question comes from Ryan Daniels with William Blair. Your line is open.

Ryan Daniels -- William Blair and Company -- Analyst

Yeah. Thanks for all the color thus far and for everything you're doing to help the healthcare community. Let me ask you a quick question about implementations going forward. It sounds like with the Smartbadges or heavy device orders, that's something you can probably ship out and they can install pretty quickly.

But if we think of the core business in new accounts, in particular, how much of that can you really do remotely to continue to drive implementations and start recognizing sales? And how varied is that based on what the client is buying, meaning type of device and alarm management and integration capabilities? Thanks.

Brent Lang -- Chief Executive Officer

Yeah. It's a good question, Ryan. And I would say it's evolving over time. First, I would highlight for everyone, just to remind everyone, that somewhere between 75% and 80% of our bookings and ultimately, revenue comes from our installed base.

So, we've got a very heavy emphasis on the installed base with a combination of maintenance renewals, the supplies business and then expansions within existing customers. And in those environments, we can continue to serve those customers without a whole lot of professional services, either on-site or off-site. As it relates to the new customers, certainly, the larger projects -- a lot of the planning and implementation design can be done off-site. Even some of the training can be done off-site.

Some of the things that are hard to do on-site would be things like the wireless site survey where we're going around and measuring the wireless coverage throughout the facility to make sure there's no coverage gaps. And then certain kinds of integration, and particularly if we're trying to do integration with other clinical systems, that oftentimes requires on-site work. And frankly, it requires the time of the hospital clinicians to be able to define policies. Much of the value, for example, within the Engage platform, is creating rules for escalation and understanding the clinical workflows, that requires the attention and time of the clinicians.

And even if we were able to go on site, those teams are so focused right now on responding to the crisis. They don't have a lot of bandwidth for doing more of the complex workflow. So, what we've seen is the shift to what I would describe as simpler workflows, really focused on delivering these urgent communication needs, and maybe less of the complexity associated with more of the complex integration type of work.

Ryan Daniels -- William Blair and Company -- Analyst

Very helpful. Thank you.

Operator

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

James Stockton -- Wells Fargo Securities -- Analyst

Hey, good evening. Thanks for taking the question. I guess I'd love to just touch on the software line. I think Justin said in his comments that Q1, seasonally weak.

It was kind of flattish with last year. There was a huge pickup as we kind of progress through the year last year. You know, I think Justin said, you guys have a good backlog. Obviously, the environment is very uncertain right now.

Is it reasonable for us to still expect kind of the seasonal pick up the rest of this year, although I know you guys don't want to put an exact number around it?

Justin Spencer -- Chief Financial Officer

Yeah, I think – Hi, Jamie, the software revenue picture continues to be quite solid. We have -- first of all, we have a really healthy software backlog, it's high as it's ever been in the last few years and -- in part by the strength of our bookings, particularly as we closed out the last -- the Q4 last year. We have seen some of these customers that Brent alluded to delay their implementations, and that does have an effect on the timing of when that software can be shipped and delayed. But overall, the underlying metrics once -- at some point in the future, when things normalize a bit, the software will be delivered maybe shipped and will convert to revenue.

The other thing we mentioned is that in the near term, we have really -- we've been proud of how we've been able to step up and help our customers, particularly those customers that have needed to augment their capacity really quickly and we provided several thousand temporary software licenses. And some of those, we believe, based on our history we'll convert. We don't know exactly how many or what percentage, but some of them will likely convert to paid licenses. So, once – you know,  once we do get back into a normal cadence, we'll see the software backlog convert to revenue, and that will, you know, continue to fuel the growth of that part of our business over the long term.

James Stockton -- Wells Fargo Securities -- Analyst

OK. Thank you.

Operator

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

Matt Hewitt -- Craig-Hallum Capital Group -- Analyst

Good afternoon, and thanks for taking the questions. I guess, as I look at the situation, are you seeing from your hospital customers that there's, I don't want to say, maybe a reluctance to adopt new technology where historically, there might be a candidate to acquire the Smartbadge, but given the current situation, they just need badges. So you're likely to see at least over the near term, more adoption or more reordering of the B3000ns versus a customer that maybe you had already pegged or they even signed a contract for the Smartbadge, maybe they come back for that later, but right now, they just need that -- the technology that their nurses and doctors are comfortable using?

Brent Lang -- Chief Executive Officer

Hey, Matt, it's Brent. We're actually seeing strong demand from both. And I think, you know, frankly, they're very comfortable if they're happy with the B3000n, they're placing more orders for B3000ns. In some cases, they're seeing real value in some of the functionality of the Smartbadge, particularly the wake word.

And you know, for those who are looking to make badge purchases and sort of headed down the migration path, they're comfortable moving to the new migration. We've definitely seen more robustness with existing customers, but I will also tell you we've seen instances where there might have been a deal that would talk about with a customer that's a year old or more. And you know, the customers got together to figure out how they could respond to crisis, and it's actually accelerated the deal that may have been stale or stalled out, and that actually resulted in and several new customer wins for us in the quarter as well. So, I don't think I would characterize it as just people keeping with the same old thing.

I think we've seen a mixture of both.

Matt Hewitt -- Craig-Hallum Capital Group -- Analyst

Great. Thank you.

Operator

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

David Windley -- Jefferies -- Analyst

Hi. Thanks for taking my questions, and good afternoon. Good to hear healthy voices on the other end of the line. I wanted to get a little bit more clarity on gross margin.

And I think you basically answered it, but if you could clarify. Is the composition of your product revenue, I think Justin talked about lower software, was it also a bias toward the 3000 badge in the quarter? Or was there also some tech resale in there that pulled the gross – the product gross margin down year-over-year? Just wanted to kind of get into the composition of product revenue a little bit more, please.

Justin Spencer -- Chief Financial Officer

Sure. Hi, Dave. The product revenue is comprised of our device revenue and our software revenue. The majority of our device revenue did come from the B3000n, although as we mentioned we're starting to see more uptake at the Smartbadge, which is really encouraging.

Our overall margins, if we look at the individual components or the device margins and the software margins, independently, they were very healthy. The dynamic we faced in product margin in the quarter was just simply the higher mix or proportion of revenue from devices versus software. That happens quite frequently. We have quarters that move up and down based on that relative mix.

In other quarters, we've had product margin be a lot higher because the software is a higher proportion of the revenue. And that will, you know -- that will continue. So there's nothing fundamentally challenging with the overall health of our product margins, be it as well as devices and software.

David Windley -- Jefferies -- Analyst

Understood. Thank you.

Operator

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

Sean Wieland -- Piper Sandler -- Analyst

Thank you. So, I thought your comments around the designation of Vocera as a critical part of PPE was pretty interesting. And you know, 90 days ago, I didn't know what PPE stood for, but now we're all going to be stockpiling it once this pandemic is over. So, my question is, like, how does this change the strategic importance of Vocera if it is seen as part of PPE as they're probably going to think about how do they prepare for the next wave of a pandemic?

Brent Lang -- Chief Executive Officer

Hey, Sean. It's Brent. I think it absolutely increases the relative importance of it. We are putting a heavy push on right now not just at the individual hospitals, but within local, state, and federal government agencies about the significance of communications as it relates to PPE.

We're talking to some of their key decision-makers across these different agencies. And if you listen to the workflows and you listen to the challenges from the frontline, communication is one of the top concerns that they have. And the amount of wasted PPE that's being thrown away just because they had to go outside the room to ask a question or get access to some information on their phone or something, we can eliminate by bringing that communication inside the room with them and making that entirely hands-free is, I think, a game changer. And I was just talking to some of our sales reps this morning and they were highlighting for me that customers that didn't really fully appreciate the value of hands-free.

And in some cases, we're working on RFPs where they asked us to only quote the Smartbadge version, or smartphone -- sorry, smartphone version of our solution. They're now are coming back to the table saying, you know that hands-free capability sounds pretty interesting and pretty important right now. So, I think not only are we going to see more interest in hands-free, but we're also rising up into the must-have category for a lot of these purchase decisions as they recognize just how important communication is in this crisis environment.

Sean Wieland -- Piper Sandler -- Analyst

That's great. Thank you.

Operator

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

Matthew Gillmor -- Baird -- Analyst

Hey. Thanks for the question. I was hoping you could expand on some of the supply comments you made with respect to the badges. Do you feel confident that you have all the pieces in place to keep up with the demand? Or are there pressure points that may cause delays that we should be considering?

Brent Lang -- Chief Executive Officer

Yeah. Hey, Matt. So it's definitely a very dynamic situation. I think the fact that the COVID crisis hit Asia first created further challenges.

We don't have any manufacturing directly in China, but we obviously rely on raw materials that come out of China that go into the finished goods manufacturing that occurs for us in Taiwan and Mexico. And so, you know, we did see some delays coming out of China. For example, plastics or displays or some subcomponent parts. We were able to manage through that during the quarter, and we're able to meet the needs of our customers.

And then obviously, on the supply side, we've seen kind of unprecedented demand -- sorry, on the demand side, we've seen unprecedented demand with the increase in demand for the badges. And so, we're managing through it. It's something we're watching very closely. We're trying to build up excess inventory to be able to respond to, you know, any coming waves or additional surges that might come in the future.

You know, there's always going to be risk there. We're happy that our main manufacturing locations are in Taiwan and Mexico, and we've avoided some of the higher-risk environments. And we feel pretty comfortable about the way things sit right now. But obviously, there's going to be risk there in this unusual environment.

Even with simple things like getting air shipments out of Asia. There's been delays in the amount of time it takes for shipments to get here to the U.S. There's a backlog in a custom site that's taking longer than usual. But for the most part, we've got things under control, and we're comfortable going forward.

It's so hard to predict what else might happen. But for right now, we're feeling pretty good.

Matthew Gillmor -- Baird -- Analyst

Got it. Thanks very much.

Operator

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

Gene Mannheimer -- Dougherty and Company -- Analyst

Thank you. Hey, guys. Congrats on the quarter under the circumstances, Brent and Justin. The second half of March, when you know, normally, you would -- would be the most active part of the quarter or the month.

And I understand you saw a surge in badge demand owing to the COVID related orders. But where was the inflection point in the quarter in which you saw that shift from your normal cadence of bookings and implementations to the more emergent response to the crisis?

Brent Lang -- Chief Executive Officer

Yeah. I'd say it was in the last two to three weeks of the quarter, Gene. That's when things really started heating up. And it was a story of puts and takes, right? I mean, on one hand, we had customers who said, you know what, I'm just overwhelmed right now preparing for the surge or dealing with the surge, and they wanted to put some of the purchase decisions and some of the deployments on hold.

And then at the same time, we had this wave of urgent orders coming in where they needed the product very, very quickly. And so, we had to pivot the business very, very rapidly because the dynamic of what we're dealing with is very different from what we experienced in a normal last couple of weeks of the quarter. And that kind of continued into the early part of Q2, where we've continue to see strong demand for these urgent shipments and product orders, while at the same time, some of the longer-term strategic deals are being kind of put on hold for the time being until they can get the situation under control. So, I would say the last kind of two to three weeks of Q1 and flowing into Q2.

Gene Mannheimer -- Dougherty and Company -- Analyst

Right. Makes sense, Brent. And if I heard you correctly, the mix of those customers, the ones who were not shy about ordering badges right away were -- tend to be existing clients and some of those newer, bigger implement projects tended to be more of those pushing out? Is that the way to characterize it?

Brent Lang -- Chief Executive Officer

Yeah. I think that's fair. I mean, we were lapping internally. But we've been we've been talking about this migration from the smaller departmental deals to these large enterprise deals with long sales cycles and also to complexity.

 And you know, in the space of about three weeks, we pivoted right back to where we used to sell smaller deals, very urgent turnaround. Solving very specific use cases and proof points. You know, these larger deals are not going away. I think the conversations that our sales reps are having with strategic customer accounts that are working their way through the pipeline remain really positive.

And all indications we're getting from those customers is that those deals are still going to happen, but the time frame is just going to be somewhat subject to what happens with the crisis that we're currently dealing with.

Gene Mannheimer -- Dougherty and Company -- Analyst

Yup, yup. Makes sense. And Justin, just last one for me. In terms of -- how has your recurring revenue percent evolved over the last 12 to 24 months or so? Would you say it's stayed roughly about the same with the increase in device revenue? Or is it moving higher as a percent? Thank you.

Justin Spencer -- Chief Financial Officer

Over a multiyear period, it definitely trended up higher, but it's also relatively stable and was in Q1. So, the recurring revenue, which is mainly made up of our software maintenance and support revenue, and our supplies performed really solidly in Q1. And again, that comes from the largely existing customers.

Gene Mannheimer -- Dougherty and Company -- Analyst

Right. Perfect. Thank you.

Operator

Your next question comes from Vikram Kesavabhotla with Guggenheim Securities. Your line is open.

Vikram Kesavabhotla -- Guggenheim Securities -- Analyst

Yeah. Hey, thanks for taking the question. If I look back to last year, you guys made a lot of changes to your sales force, both in terms of the size of the team but also the transition toward the strategic account. I'm curious if the current environment has had any impact on your broader approach to managing the sales effort overall, both from a near-term perspective but also longer term, as you think about getting ready for a more normalized purchasing environment?

Brent Lang -- Chief Executive Officer

Hey, Vikram. Yeah, I would say that we're continuing down that path. We feel really good about the progress we've made there, and a lot of the strategic hires we've made over the last 9 to 12 months are getting more and more settled into their new jobs and feeling more comfortable with the product line and building their pipeline. We added a few more in Q1, and there's a couple of additional spots that remain open that we're continuing to hire for aggressively.

You know, as Justin mentioned, you know, focus on cost, the hiring of these open sales positions is not one area that we've tried to cut any cost out. We want to be aggressive there and continue to invest, bringing on really high-quality, high-caliber enterprise salespeople and -- because we think that's still the direction the business is going over the longer term. And we're almost done with this transition and feeling really good about the progress we've made.

Vikram Kesavabhotla -- Guggenheim Securities -- Analyst

Great. Thank you.

Operator

Your next question comes from Stephanie Davis Demko with SVB Leerink. Your line is open.

Stephanie Davis Demko -- SVB Leerink -- Analyst

Could you give us an update on the federal business? Just any impact you've seen in light of the delays at the VA for the IT platform modernization project. You did have a big state talk contract?

Brent Lang -- Chief Executive Officer

Yeah, you know, our federal business has been really strong. We had a particularly strong Q1 in the Fed, both with the Beaumont order, which was obviously on the Army side, the DoD side of things, as well as some VA orders. And you know, I think the VA is more on the customer bases that truly understands the value of our solution. They are in a very, very difficult situation.

I don't know how much you've read, but the patient populations that the VA hospitals are dealing with are particularly affected, as are the caregivers. And so, the demand coming out of those environments has continued to be a strong demand, and we feel fortunate that we're able to help with those environments. And our expectation is that our Fed business will continue to be strong for the remainder of the year.

Stephanie Davis Demko -- SVB Leerink -- Analyst

Well, I'm glad you guys are there to help. And then I have one follow-up on the prior sales force question. Just given you had this recent sales force transition to enterprise sales, and now we're pivoting it back for the near-term to smaller departmental sales, how are you reverting some of that training? And to put that in context, what is the mix of new versus legacy folks on your sales team?

Brent Lang -- Chief Executive Officer

Well, the tenure of our sales force is still quite long. You know, when we did the swap out, it was a fairly targeted approach. And we talked about it being roughly 1/3 of the sales force that we targeted to up level to this greater capability over the last call it, 12 to 18 months. So the vast majority of the team is quite tenured.

I think our sales tenure is still measured in four to five years as opposed to having a ton of new people. And those people have the ability to sell near-term deals just as well as they can sell longer-term deals. I think that in this dynamic changing environment, their ability to navigate these complex organizations had been a real positive. And the whole team has really come together in a very tight manner.

We've actually had some innovation going on in the field where, you know, our customers would ask, is it possible to do x, y or z? And in the field working with our professional services team and our implementation team bringing it back to product management and working with engineering. We've had some really excitement -- exciting new product development around that, particularly the patient communication piece that I mentioned earlier in my prepared remarks. So, I would say that the teams are functioning really well and well-positioned for the future.

Stephanie Davis Demko -- SVB Leerink -- Analyst

OK. Thank you for taking my questions.

Operator

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

Matt Hewitt -- Craig-Hallum Capital Group -- Analyst

Thanks for the follow-up. I'm just curious, Brent, I think you touched on this, but has the virus and the reaction by hospitals, has that opened up any opportunities from you from the tech side? I think you mentioned an area that you'd like to work on a little bit more is on the remote deployments. But from a technology standpoint, are you seeing any, whether it's holes or gaps or areas that you could bolster the smart badge and the software, in particular, to help you for that second wave or third wave, as they're talking about it?

Brent Lang -- Chief Executive Officer

Yeah. It's a good question. Obviously, the most obvious thing here is the hands-free capability. And I think there's a new appreciation for how important hands-free is.

And the wake word that even goes beyond just hands-free, while you're in a conversation, being able to start a conversation by issuing behavior command is something that's really interesting. The second one that I would point to is in the alternative care facilities where they're literally setting up beds and, in some cases, in convention centers or in sports facilities or practice fields or warehouses, those environments are not wired for traditional communication, right? They don't have a bed board for traditional nurse call. They don't have traditional room assignments. And so, this use case of using the badge to communicate with the patient and literally strapping the badge to the patient's bedrail, I think it's really gotten our creative juices going a little bit in terms of how we could make that more of a capability moving forward.

Even the idea of communicating with patient family members, it's -- all indications are right now, the family numbers are likely going to be restricted from access to hospitals for quite some time. And the need to be able to communicate from the patient out to the family member in any environment, but particularly in these make shift temporary environments, it's really accentuated in this time. And I think our product capability would be really valuable even to serve that.

Matt Hewitt -- Craig-Hallum Capital Group -- Analyst

OK. Thank you.

Operator

There are no further questions at this time. I will now turn the call back over to Brent for closing remarks.

Brent Lang -- Chief Executive Officer

Thanks, everybody. I really appreciate you taking the time. I know it's a crazy time, and I hope that all of you are happy and well and getting by. And we look forward to following up with you individually.

Thanks a lot for your time.

Operator

[Operator signoff]

Duration: 55 minutes

Call participants:

Sue Dooley -- Investor Relations

Brent Lang -- Chief Executive Officer

Justin Spencer -- Chief Financial Officer

Sean Dodge -- RBC Capital Markets -- Analyst

Ryan Daniels -- William Blair and Company -- Analyst

James Stockton -- Wells Fargo Securities -- Analyst

Matt Hewitt -- Craig-Hallum Capital Group -- Analyst

David Windley -- Jefferies -- Analyst

Sean Wieland -- Piper Sandler -- Analyst

Matthew Gillmor -- Baird -- Analyst

Gene Mannheimer -- Dougherty and Company -- Analyst

Vikram Kesavabhotla -- Guggenheim Securities -- Analyst

Stephanie Davis Demko -- SVB Leerink -- Analyst

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