Vocera Communications (VCRA) Q2 2020 Earnings Call Transcript

Vocera Communications (VCRA)
Q2 2020 Earnings Call
Jul 27, 2020, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon, and welcome to the Vocera Communications conference call. My name is Gabriel, and I'll be your coordinator for today. [Operator instructions] Please be advised that today's conference is being recorded. [Operator instructions] I would now like to turn the presentation over to Justin Spencer, Vocera's chief financial officer.

Please proceed.

Justin Spencer -- Chief Financial Officer

Hello, everyone. Welcome to Vocera's conference call to discuss our second-quarter 2020 earnings. Joining me on the call today is Brent Lang, our CEO. Sue Dooley is currently out on personal leave, so please reach out to me directly with any follow-up requests.

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, let me turn the call over to Brent.

Brent Lang -- Chief Executive Officer

Thanks, Justin. Hello, everyone. I want to wish all of you good health and safety as we live through the global endemic. Once again, this quarter, a main theme for our call will be describing how we are operating and excelling in this changed -- challenging environment.

I want to start the call by saying, I could not be more proud of the job that Vocera's employees have done to remain focused on the task at hand and to deliver outstanding results for our customers and our investors. Q2 was an incredibly challenging quarter for our world and for our company. We fought through rapidly changing market dynamics, accelerated our supply chain, executed in an unprecedented work-from-home environment and navigated the economic and psychological impact of the global pandemic. We evolved our marketing messages, innovated our product offerings and adapted our go-to-market approach for both sales and service to delivery to a remote work environment.

Through it all, our employees were inspired by our mission to improve the lives of patients and caregivers, and we rose to the occasion to meet these challenges. This translated to excellent performance in our business across the board. Revenues for the quarter were over $47 million, representing solid year-over-year growth and exceeding expectations. We also had a great bookings performance, driven by both urgent orders to respond to COVID outbreaks and large strategic wins with some new marquee customers.

Our professional services team persevered by continuing deployments, both on-site and via remote needs. Badge shipments remain strong, and importantly, our Smartbadge is building meaningful momentum as customers recognize the value in choosing the right device for the right role. Despite the difficult environments and budgetary challenges facing our hospital customers, our engagement with them continues. Our teams took quick action to transition as many meanings as possible to virtual discussions.

And as a result, our pipeline is strong and engagement with prospects is high. Our teams have risen to the challenge and are excelling in this new normal. Now let me go into a little bit more detail on some of the highlights from the quarter. Our Q2 bookings performance was great.

We won several very large strategic deals, and we saw continued strength in urgent COVID-related orders as hospitals worked quickly to try to prepare for and respond to this crisis. Our strong bookings performance underscores our relevance and importance, both today and over the longer-term as we streamline clinical workflows and communications, drive efficiencies and cost savings and improve patient and care teams' safety. Our sales team really delivered this quarter. In the VA alone, we booked over $6 million in large and strategic new facility wins.

We also won an important $2 million expansion at UT Southwest, where they will be using our Smartbadge, and we received a follow-on expansion order from Kaiser that was equal in magnitude to last quarter's big win. Interest in our hands-free device remains high and badge orders grew substantially over last year as customers leveraged our software platform during these challenging times. In a dynamic supply chain environment, we met the demand for our badges by ramping our assembly capacity in Mexico and Taiwan, and we are proactively building higher inventory to prepare for future demand. We have positioned our hands-free solution as an essential part of clinician's personal protective equipment and based on our strong first-half performance, it is clear to me that our badge is now viewed by many of our customers as PPE.

One of the highlights of the quarter was growing momentum around the uptake of Smartbadges as new features like the wake word and panic button are driving interest from customers. For example, Norton, a large new customer for us in Q4, shifted their plans in Q2 to include Smartbadges rather than smartphones for certain roles. They told us they are now able to include almost 50% more of their care teams in the deployment of our solution because of the cost savings of using the Smartbadge rather than smartphone. This means we can have greater impact on patient safety and staff experience across the health system.

Other new Smartbadge customers include the University of Arkansas Medical Center and South Coast Health. We believe the Smartbadge is elevating its importance in an environment where customers are picking the right device for the right role. The federal market was especially robust for us in Q2, and we are delighted that strong demand from the Fed is no longer just a Q3 event. This quarter's Fed bookings included urgent COVID-related business plus some large strategic wins.

The Fed's continued roll out of our solution as the de facto standard underscores our future opportunity there. With roughly half the opportunity remaining to lay in new facilities and cross-sell in existing customers, we expect strong bookings from the federal market in Q3 and beyond. International was another bright spot from Q2, particularly in the United Kingdom as funds became available from motivated buyers trying to respond to the pandemic. Our COVID-bundled starter kit made that move to adopt our solution easy.

Belfast City Nightingale in Northern Ireland with one COVID-related deployment. Meanwhile, Salford Royal, one of the NHS' most innovative hospitals, recently showcased our solutions to their peers as a crucial element of their aspiration to lead the NHS in applying technology to the hospital experience. We are optimistic that these successful showcases will help develop the pipeline for future opportunities. An example of the adaptability of our solution is VIDO-InterVac, an infectious disease center in Canada.

This is an existing customer that purchased more badges and licenses to handle the surge of new scientists joining their team. They have one of the most advanced level 3 containment facilities in the world to work with COVID-19. While working in the containment area, scientists had to interrupt their work hourly to find a phone and connect with the administration for a health check. Now they just call in every hour using their badge, which they can also use to seamlessly reach out to colleagues in other regions.

We're proud to be able to support the fight against COVID in this way. Finally, our nonhealthcare team also executed well in Q2, demonstrating the broad appeal of our solution with several new customers, including some nuclear power facilities and veterinary clinics. Overall, I was very happy with the performance of our sales organization this quarter, and in particular, the newer reps who are ramping well. We had a large number of reps hit their quarter this quarter as they drove a healthy mix of expansions, as well as a sizable number of new facilities.

It's gratifying to see how our investments in sales, international and product innovation are paying off for our business and positioned us well for the evolving market environment. In the months ahead, we expect hospitals will continue to grapple with what shifting COVID caseloads will mean to their operations and their economics, including the timing and volume of elective surgeries, an eventual return to more normal operations and the resulting impact on their budgets. Medical experts are learning about this disease, and there's still a lot they don't know. Having said that, I believe one of the most significant learnings from this pandemic has been the importance of preparing and protecting caregivers.

The pandemic has opened eyes about the importance of preparedness and safety for frontline workers, and we believe this is the beginning of a wave that will sweep across the healthcare industry. For instance, the Cleveland Clinic just appointed the industry's first Caregiver Officer to lead care team safety and resiliency efforts. We want to do our part to increase awareness around the importance of improving care team safety and reducing burn out. As a result, we are encouraging national and state government leaders to further elevate the idea of using communications technology as a core element of PPE.

The idea that communications technology is an essential part of PPE is one that has high engagement in my conversations with customers and prospects. Nurses and other frontline workers simply can't do their job unless they have the ability to communicate with their teams. Being able to do so, hands-free, under PPE is invaluable. PPE shortages the challenge of changing in and out of PPE many times per day and the risk associated with pulling a smartphone out of your pocket to make a call, all illustrate how powerful Vocera's value proposition can be.

We have always focused on investing in technology and delivering solutions that improve the lives of caregivers. In the past, we have talked about things like reducing alarm fatigue or cognitive overload and the risks associated with interruptions. During the COVID crisis, we have made our frontline workers more effective while keeping them safe by enabling them to reach help when they need us. I think many hospital systems are recognizing that they have been underinvesting in care team safety and resiliency.

And as they think about preparedness for the future, we believe they are likely to focus more investment dollars on this important topic. In addition, as hospitals strive to resume elective surgeries and try to recapture lost revenue, operational throughput becomes a critical element of restoring financial viability. Defining a new normal for hospital operations is the sweet spot of our value proposition as we can address both safety and operational efficiency challenges. If you go to our website, you'll see great new content highlighting COVID specific use cases for our solution and how we're keeping care teams safe and improving throughput and cycle times in the ED and the OR.

As a company, we have continued to advance the ball with a sense of urgency. Our engineering and product teams continue to innovate and deliver solutions that are grounded in our clinical approach to the market and our deep knowledge of our customers. Last quarter, we talked about using our Smartbadge strapped to the bed for patient communications in ICU rooms that are being used at double capacity. Expanding this to a whole other level, we are developing a new Alexa skill that will allow patients to use voice commands to communicate with their care team on Vocera through an Amazon Echo in the room.

In addition to asking for water, blankets or bathroom assist, patients will be able to ask questions about their care team or about the hospital, such as who is their nurse? Or what are the visiting hours? We're hoping to do some pilots of this exciting initiative later this year. Vocera has been the leader in voice-based communication for many years and integrations of this nature showcase the power of our software and are a natural extension of our business. Q2 was an extremely challenging quarter for everyone, but it was also a quarter where we demonstrated great progress and resiliency as a company. I'm proud of our results and the positive impact we're having on our customers.

This pandemic has given us the opportunity to illustrate our perseverance and the value that we can deliver to our employees, our customers and our investors. With that, I will turn it over to Justin to discuss our Q2 financials in more detail. Justin?

Justin Spencer -- Chief Financial Officer

Thanks, Brent. Hello, everyone. We had another strong quarter, beating both our Q2 revenue and profitability goals. Total revenue in Q2 was $47.3 million, up 6% over last year.

For the first half of 2020, our revenue increased 10%. Product revenue, which includes both devices and software, increased to $24 million. Device revenue of $17.1 million was robust again this quarter, up 18% versus last year and was driven in part by customer demand for badges in response to COVID, where our unique hands-free capability is very important in infectious environments. Our Smartbadge continued to gain momentum with a record number of units shipped in Q2.

Software revenue in the second quarter was $6.9 million, a decrease from last year. We were pleased to help several of our customers respond to the crisis by providing three temporary software licenses. However, this did have a negative impact on short-term software revenues. While most of the temporary licenses are still active, some licenses have been converted to pay licenses.

Some licenses have expired while others have been extended beyond the original expiration as many hospitals continue to have heightened COVID patient levels. In several instances, these temporary licenses have driven new badge orders as customers expanded their communication capability to more users. As we enter the second half of this year, we have a record software backlog with several large deployments scheduled. Services revenue, which is comprised of software, maintenance and professional services, was up 8% to $23.4 million.

Software maintenance revenue was up 12% 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. However, as the quarter progressed, many of these projects resumed or were rescheduled, and we now have a relatively full slate of deployments planned for the second half of the year.

While we continue to face some short-term headwinds associated with scheduling new customer deployments and the associated delivery of software and hardware, we have a very healthy combined level of backlog and deferred revenue. At the end of Q2, our backlog and deferred revenue was $127.5 million, up 10% versus Q2 last year. Now I'd like to comment briefly on our profitability, another bright spot for the quarter. Our adjusted EBITDA in Q2 was $5.7 million or 12% of revenue and was up 46% from last year.

Our GAAP net loss was $3.5 million, also better than last year. Here's some more color on our non-GAAP gross margins and operating expenses. Non-GAAP gross margin in Q2 was 66%, right where we expected, and followed our typical seasonal pattern of sequential improvement for the second quarter. Our product margin percentage decreased from 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 due to a higher mix of software maintenance and support revenue and profitability gains we've achieved in professional services as a result of our ability to complete more of the deliverables virtually. Non-GAAP operating expenses of $26.7 million were up a modest 4% compared to last year as we focused our hiring on the most critical positions in the near term and proactively managed our expenses. Most of our workforce continues to work from home following local government guidelines, which resulted in lower travel expenses in the quarter.

To cap off my Q2 commentary, our cash balance remained 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 uncertainty and capital to fuel our longer-term growth. Now I'd like to make a few comments about the factors in play for the remainder of the year. We were able to deliver very strong financial results in the first half of the year despite market headwinds and delays in purchasing and deployments by customers.

As a result of the pandemic and our efforts to promote our solution in this new environment, we now have an even stronger value proposition as many customers view our solutions as essential to their efforts to provide high-quality care. Our newer products, including our Smartbadge and Vina Mobile app, are gaining traction. In end, we are now benefiting from the investments we made to enhance our enterprise sales capability, both here in the United States and abroad. While these are all really positive developments for our business over the longer term, the market uncertainty we highlighted on our last call continues, and we are maintaining our cautious view in the near term.

There is evidence of some healthcare market improvement, including more elective surgeries being scheduled, some easing of hospital access restrictions and increasing patient volumes, but it varies widely by geography. Hospitals are far from normal operating levels, and we see many of them continuing to be cautious with spending and new projects. Despite this continued uncertainty, we are fully engaged to help our customers during this crisis. Our recurring revenue and loyal customer base, along with a solid sales pipeline and healthy backlog and deferred revenue, provide a strong foundation for growth.

I'll now turn it back to Brent.

Brent Lang -- Chief Executive Officer

Thanks, Justin. As we begin the second half of the year, there are still pandemic related challenges that none of us can fully predict at this time, but I'm really proud of what we've accomplished so far. Our business is performing well, and our solution is in high demand. We have a broad set of products that are better suited to today's environment than ever before, and I'm inspired by the ability and commitment of our team.

I am grateful that we have a resilient business with a strong cash balance and robust demand for our unique solution that is so relevant during this crisis. At Vocera, safety is core to our mission. Our Q2 and first half performance underscore our leadership in this large and untapped market. While there may be some uncertainty for our business ahead as hospitals grapple with their budgets and the new reality of delivering care, we believe that we are well-positioned for success.

Our value proposition, illustrated by the ROI of our case studies, the innovation in our new products, the expertise of our enhanced sales engine, and our deep clinical experience will enable us to lead our customers toward improving hospital preparedness, efficiency, quality of care and safety. I want to conclude by thanking the entire Vocera team and by saying we value our relationships with the investment community. Our whole team here extends our best thoughts for you, your teams and your families. With that, we're ready to conclude our formal remarks.

Thank you for listening today. Operator, we are ready to open the line for questions. Thank you very much.

Questions & Answers:

Operator

Thank you. [Operator instructions] And our first question will come from the line of Sean Dodge of RBC Capital Markets. Please go ahead. Your line is open.

Sean Dodge -- RBC Capital Markets -- Analyst

Great. Thanks. Good afternoon, and congratulations on a great quarter. Maybe, Brent, starting with your comments around the strong bookings performance and outlook.

I know you've retooled your direct sales force, not all that long ago and as part of it, had hired some more experienced individuals to help shorten the productivity ramps there. Where do you think that group -- your quota-carrying reps are overall in terms of productivity? Are they still ramping? Are they running full speed now? Or is it just tough to tell with the pandemic right now?

Brent Lang -- Chief Executive Officer

Yeah, Sean. Good question. I think that most of those new hires occurred in Q2 and Q3 of last year. Some running into Q4, but the bulk of it was sort of in the middle of last year.

And as a result, they've had a good period of time to learn the products and ramp up. And so I feel like most of them are at full productivity at this point. Obviously, it varies a little bit from region to region and person to person, but I've been really pleased with the level of expertise and capability that they've brought to the sales organization. And the results are sort of speaking for themselves.

Many of the top performers at the end of the quarter were some of the newer reps. And every quarter, I place calls out to all the quota achievers who make quota. And I was really struck as I was doing that how many of the names were, some of the newer names on the list. So I think the strategy of moving toward more of an enterprise oriented sales force was the right one, and it's definitely paying off in the results that we're seeing.

And I think there's still room for overall productivity as the sales organization continues to focus more on these enterprise deals, but I'm really happy with the performance of the newer folks.

Sean Dodge -- RBC Capital Markets -- Analyst

OK. And then on the gross margins in the services business, Justin, you mentioned some of that improvement being driven by lower costs associated with more remote implementation. I guess, how much better are the margins on a virtual implementation? And to what extent you think that's sustainable? Over the medium term or the longer term, do you expect that to reprice those professional services to share some of that efficiency gain back with clients?

Justin Spencer -- Chief Financial Officer

Yeah, Sean. The services margin is made up of margin from essentially two revenue streams. The first is the software maintenance and support revenue stream. And there, it's really a function of leverage.

So as the revenue has continued to climb we're able to leverage the fixed cost infrastructure that we have and are primarily our technical support team, and they've done a great job just continuing to be as efficient as possible. We have invested over time in that organization. It's largely headcount, but they've also implemented a variety of new tools that have enabled us to grow that revenue without having to add a lot more headcount. So that's one area of improvement.

And then with regard to our professional services margins, those also improved in the quarter. And folks may remember that a few quarters ago, we took some action to adjust our cost structure a bit in their professional services organization. And so that was one clear benefit that we saw this quarter. And then the second is the benefit of moving to more virtual model where our professional services people are not needing to travel as much.

And our -- really, a great shout out to our professional services team because almost overnight, they transitioned a significant portion of their work from on-premise to virtual. And I think that that is something that is going to continue to some degree. I think there -- even once things get back to normal, I think there will be more and more of the work that can be done virtually. There's always clear benefits to being on-site.

And there are portions of our professional services projects and engagements that will continue to be done on-site. But there are other parts that will likely be able to continue to be done virtually. And so from that standpoint, we see those efficiencies just continuing as we work through this COVID period and then into a more normal pattern.

Sean Dodge -- RBC Capital Markets -- Analyst

OK. That's great. Thanks again.

Operator

And your next question will come from the line of Ryan Daniels of William Blair. Please go ahead. Your line is open.

Ryan Daniels -- William Blair and Company -- Analyst

Thanks for taking the question, guys, and congrats on the strong quarter. Look at the sales upside, I'm hoping to unbundle that a little bit. And hoping you can maybe break it down, if possible, to kind of what was due to expansions from COVID-19 and kind of safety-related initiatives related to proactive equipment versus your commentary about the Smartbadge starting to resonate more as hospitals look for cost savings relative to smartphones and then just normal sales activity during the quarter. Is there kind of a way to look at those three buckets, if you will, for the upside versus expectations?

Brent Lang -- Chief Executive Officer

So Ryan, I'll touch on each of them. I would say that the bulk of it was just our core business. We had broad-based performance across the board. And as you know, the bulk of our business every quarter comes from existing customers with supplies, maintenance, expansions, and that really drove the bulk of the growth.

The COVID-related orders were a relatively small portion of the overall mix and Smartbadge, while growing, and we're happy with the momentum still represents a relatively small percentage of the overall mix as well. So I would say that the strength of the business was more broad-based, and it was kind of in our core part of our business.

Ryan Daniels -- William Blair and Company -- Analyst

OK. That's helpful. And then I guess my follow-up just on software sales. Justin, you discussed a little bit some of the free licenses extending, some expiring and some turning into paid sales or customers, how should we think about the cadence of software sales going forward? Is that going to start driving some sequential or year-over-year growth in the back half of the year? Or should we continue to have some conservative expectations there?

Justin Spencer -- Chief Financial Officer

Yeah. I think our sense is that the trend line for software is going to improve. The degree to that -- to which that happens, I think, will be dependent on the timing of the new customer deployments. One of the reasons that the software has been down over the last few quarters is that a few of the larger deployments that we had closed in late -- in '19 and early part of 2020 had been on hold.

The good news is that several of those projects have been rescheduled. And so in fact, just this last week, we shipped a very large software license to a customer in the Middle East. And that was a booking that we had in our backlog for several quarters and just got rescheduled again. So I think as we turn here to the second half of the year, we're going to see more and more of those deployments get scheduled.

Obviously, the broader environment is one we're watching very closely, and that can change at any time. But right now, the trend we've been seeing is more of these projects are getting rescheduled again. And so we've got a relatively full slate of deployment schedule for the second half of the year. And for those new deployments, which tend to be more software heavy, that software revenue tends to follow with that.

In terms of the conversion on the free software licenses, we continue to add to the number of licenses. We granted more additional licenses in Q2 to customers who are responding to COVID. I think it's still early on that. We have many customers whose licenses won't expire for a few months.

We don't know really what the conversion is going to look like. What we do know, and we track this really closely internally is that even if they don't convert the software, they are buying more badges. So we had several instances in Q2 where we provided those free temporary licenses and they bought an accompanying badge with that at full price. So those are all encouraging signs.

And there's no doubt in our minds that our providing the free licenses has generated a tremendous amount of goodwill with our customers.

Operator

Your next question will come from the line of Vikram Kesavabhotla of Guggenheim Securities. Please go ahead. Your line is open.

Vikram Kesavabhotla -- Guggenheim Securities -- Analyst

Yeah. Thank you for taking the question. I was just wondering if you can give us some more color on how your bookings evolved throughout the quarter. And in particular, it sounds like earlier in the year, there was more of an element of maybe some urgency and reactionary spending just to manage through the crisis.

It sounds like based on your prepared remarks, you're starting to see some more normalized activity now. Just if you can walk us through how that purchasing activity and decision-making evolved throughout the quarter and what you're seeing so far in 3Q? That would be helpful.

Brent Lang -- Chief Executive Officer

Yeah. Hi, Vikram. So as we talked about on the last call, we started to see some urgent COVID-related orders in late Q1, and that momentum carried into the first part -- first half of Q2, I would say, through most of April and even really into May, we continue to see a pretty big wave of those. As those started to drop off, we started to see more of the larger enterprise deals coming in, particularly some of the Fed deals and some of the other large deals that I mentioned in my prepared remarks.

And so it was kind of a first-half, second-half story, two different stories in the quarter. I would say now as we headed to Q3, with some of the COVID cases starting to ramp up again, we are seeing some COVID-related business, not as much as what we saw in late March and in April. But the return to normal is also starting to free up the conversations for more of our traditional business. So they tend to kind of counteract each other a little bit.

We were pleased with the fact that we got off to a strong start in Q2, and we're able to recognize higher portion of bookings and revenue in the first month of the quarter than what we would normally see, which was a great way to start the quarter. And Q3 is always very dependent upon our business with the Fed, particularly with the VA. And we're hopeful that we'll have a strong quarter here with the VA. We anticipate that that will be a strong quarter for us in the VA, but it's always a little bit back-end loaded as we wait for those Fed orders to come in.

But the overall awareness of the role that Vocera can play in these COVID environments, I definitely think has helped build awareness and excitement around the solution and that's translating as they think about sort of the longer-term preparedness even in the post-COVID environment.

Vikram Kesavabhotla -- Guggenheim Securities -- Analyst

OK. Great. And then maybe just a follow-up. You talked about the momentum that you're seeing with the Smartbadge.

Can you just talk about a little more the level of demand you're seeing for that product relative to the B3000? And as you think about the pipeline and the RFPs that are coming across now, just how you're thinking about the adoption of that product going forward, that would be great. Thank you.

Brent Lang -- Chief Executive Officer

Yeah. The way we think about it is we now have two products in the marketplace. And our intention is that we'll keep both products in the marketplace and really give customers the opportunity to fit the device that's most appropriate for their use case. And that could be a smartphone.

It could be the Smartbadge or it could be the Vocera badge. The unit volumes for the Smartbadge are still lower -- quite a bit lower than the unit volumes on the traditional Vocera vantage. Some of that is driven by the fact that during the pandemic people were somewhat reluctant to be evaluating new products, they wanted to stick with what they knew, particularly among the existing customers. But as I mentioned in my prepared remarks, we are seeing more and more of the new customers shifting their demand over to the Smartbadge.

And I think the Norton example that I gave in the prepared remarks is a good example that where the original order actually came in for more smartphones and traditional Vocera badges, and they're now moving over toward more smart badges as a third use case for a large group of their users. So I think the awareness is building. I think that the product is evolving as we develop new features and functionality for the Smartbadge, that's getting people's attention and in the COVID world where gowns and caps and gloves are mandatory, the wage for fictionality in particular, I think, is growing awareness and growing in its overall value.

Vikram Kesavabhotla -- Guggenheim Securities -- Analyst

Great. Thank you.

Operator

Your next question will come from the line of David Larsen of Verity Research. Please go ahead. Your line is open.

David Larsen -- Verity Research -- Analyst

Hi. Congrats on a good quarter. I just wanted to maybe get a little more detail on the device revenue. I mean, it looks like it was up 38% year over year in 1Q, 18% year over year in 2Q.

I mean, growth for device sales in the first half of the year is, I mean, tremendous. Like year-to-date, our bookings up year over year? I'm just trying to get a sense for how much of that was like, I think you call it drop ship or book ship versus how much of that like was taken from backlog? Just any more color there would be very helpful.

Justin Spencer -- Chief Financial Officer

Sure. Hi, Dave. Yeah, the device business has been very, very strong for us. And there's some COVID demand that as Brent mentioned earlier, there's really broad-based strength even in device revenue.

So we had shipments to both existing customers, as well as some new customers, and that has been a really positive driver for the overall device revenue. The other factor has been the Smartbadge as the Smartbadge is ramping, it's still not yet of the proportion as the original Vocera badge, but it's gaining a lot of traction. And there's a higher price point on the Smartbadge. So those are kind of two of the drivers.

We're really happy and pleased with the overall performance of our device business. And we see that -- we see growth continuing. The device just has really has become really an essential part of the communication solution for many of our customers in this -- particularly in this environment. And so the hands-free wearability of both badges and the application of the badge in delivering better patient care and also staff safety are really important drivers for us from a market standpoint.

Brent Lang -- Chief Executive Officer

And Dave, you could see from the continued high backlog and deferred revenue number that this was not just pulling to backlog, this was from orders that came in this year.

David Larsen -- Verity Research -- Analyst

OK. Great. And then any color around bookings, are they -- I'm assuming bookings are up year-to-date on a year-over-year basis?

Brent Lang -- Chief Executive Officer

Yeah. We had a great quarter. Yeah.

David Larsen -- Verity Research -- Analyst

OK. Thank you.

Operator

Your next question will come from the line of Sean Wieland of Piper Sandler. Please go ahead. Your line is open.

Sean Wieland -- Piper Sandler -- Analyst

So you mentioned a large number of reps hit their quota this quarter. I presume you mean that that's the annual quota that they had for the year, so meaning that they're ahead of plan. Brent --

Brent Lang -- Chief Executive Officer

I wish, no. No. No, it's not at all. If they were hitting their annual quota in the middle of Q2, then we set the quarter too low.

We annualize their number, but then obviously, it's broken down quarter by quarter. And there is a target for each rep for each quarter based on the seasonality that we set for the business. And so they have a quarter for Q1, they have a quarter for Q2, then quarter for Q3. Obviously, their overall compensation plan has accelerators in it that are tied toward their annual performance, but we track their quarter achievements on a quarter-by-quarter basis.

And so my comment was related to the number that made their Q2 quarter.

Sean Wieland -- Piper Sandler -- Analyst

You had me all excited. Well, I guess my -- where I wanted to go with this is in the conventional wisdom of -- I want to get a better understanding of the new business pipeline and the development of the new business pipeline in this COVID world. Like the conventional wisdom is it's a lot of face time impressing the flesh and building relationships in person. And without an ability to do that because of limited face time opportunities, how is the enterprise pipeline or the new logo pipeline developing?

Brent Lang -- Chief Executive Officer

Yeah. It's a good question, Sean. So I would say at the highest level, our tier 1, our enterprise pipeline is at a record level. We're really happy with the number of deals that we've got that are being worked there.

I think some of that is reflective of the market transition that's been happening, and some of that is a reflection of the great job that the reps are doing in building that pipeline. You're absolutely right. It's harder to do it when you can't get on-site to have that face-to-face conversations. And I would tell you that the deals that we've been successful closing through the first half of the year were generally ones where there had been some of that leg work done prior to the pandemic coming in.

So they have done some of that face-to-face work prior to us going into kind of a shutdown mode here. But I would also say that the reps have been really successful and continue to move ball forward through virtual meetings, virtual demos, as I mentioned in my prepared remarks, we've made some investments in virtual marketing capabilities to allow us to conduct virtual demos online. Some of our reps have commented that they actually find it sometimes easier to get the decision-makers onto a conference call or a Zoom call than it is to try to get 10 or 12 people into a conference room in a hospital with everything that's going on. And so there have been some benefits of people working from home and being more accessible.

So I would say we're happy with the growing nature of our new customer pipeline, particularly the large deal customer pipeline. And the reps are being effective. I think they're bringing some of their enterprise selling capabilities, the new ones to the table, and they're learning about the product-specific elements from more of the tenured reps, but I'm happy with the progress they're making.

Sean Wieland -- Piper Sandler -- Analyst

Do you think the evolution of that new business or the enterprise pipeline that you'll be able to maintain current sales cycle times? Or are you concerned about an elongation of the sales cycle?

Brent Lang -- Chief Executive Officer

I think we might see some elongation. Yeah. I mean, for two reasons. One, the one you mentioned just in terms of these times.

But the second one is just simply related to budget uncertainty. I think a lot of hospitals are asking themselves tough questions about what their economic situation is going to be in six months' time. And they're being cautious in spending the same way, frankly, we're being cautious of spending. We're trying to focus our spending on the most strategic elements, not knowing what COVID may bring over the next six months or the next year or whatever length of time it ends up being.

And so in some cases, we're seeing large enterprise orders being broken up into more bite-size pieces. So rather than doing everything all at once. They're maybe going to do a hospital at a time as opposed to the entire health system. In other cases, they're remaining focused on the transaction, but they're postponing the actual purchase order for some period of time as they see what their overall financial situation is going to be.

And I think, as Justin talked about the outlook moving forward, the point of just raising that element of uncertainty was just to make sure people were aware of the fact that we're not through the worst of this, and there's still a lot of unknown factors that we're planning for as we move forward.

Justin Spencer -- Chief Financial Officer

I would just add, Sean, that it's not uniform either across the country. In other words, there's a lot of variability by geography, depending on where there are COVID hotspots, for example. So that's another thing that we have to kind of factor into our thinking as we kind of project out the remainder of the year.

Sean Wieland -- Piper Sandler -- Analyst

All right. And you threw out a win at Kaiser. Was that an expansion at the existing footprint that we heard about last quarter? Or was that a new region within Kaiser? And can you give us any more details on it?

Brent Lang -- Chief Executive Officer

Yeah. It was mainly an expansion. It was primarily in Southern California, where we already have a strong presence, and it was part of their more COVID activities and the first half of the order came in, in Q1 and the second half came in early Q2.

Sean Wieland -- Piper Sandler -- Analyst

Got it. Thank you very much.

Operator

Your next question will come from the line of Matt Hewitt of Craig-Hallum Capital. Please go ahead. Your line is open.

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

Good afternoon. Thanks for taking the questions. I guess, maybe a little bit of follow-up on the hospital budgets and the selling environment. As you look out maybe over the next couple of quarters and given some of the uncertainty, how critical is it, in your opinion, that you're included in the conversation about PPEs versus just being another solution or another tool to treat patients on a normal basis?

Brent Lang -- Chief Executive Officer

So our assumption is with our planning moving forward is there were just another tool. The same value proposition that we've been promoting in the past is kind of core to moving forward. I think there's opportunity to elevate ourselves to being an essential part of PPE really represents upside the business. And whether that ends up becoming in the form of new guidelines that are established at the state local level or even the federal level or whether it's just growing awareness of the impact that technology can have on protecting frontline caregivers.

Those are tailwinds of the business, but the core of the business is still around driving -- set staff safety and operational efficiency and patient satisfaction and the same elements of our mission have been driving the business for the last couple of years. But I think to the extent that people start thinking more holistically around what does PPE really represent, and thinking about it beyond just masks and gowns and gloves, and the role the technology can play in driving better front line safety and better efficiency. That could be a wave that could drive higher levels of growth in the business over the longer term. Because remember, we're serving a market that's still very underpenetrated, generally using very legacy technologies that really are not suited toward this kind of environment and completely unappropriate for our COVID PPE kind of conversation.

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

Got it. All right. And then maybe a second question. Your inventories have stepped up the last couple of quarters.

Is there a way to parse out how much of that is related to what you're seeing with your bookings and the opportunities in the pipeline versus just being prepared for the potential for supply chain disruptions? And where do you kind of see that leveling out? Is that here in the third quarter? Or how should we be thinking about that? Thank you.

Justin Spencer -- Chief Financial Officer

Yeah, I'd say there -- it's probably split between the two. One being that historically over the last couple of quarters, our inventory is probably lower than we were comfortable with. And so we've been working hard here, particularly over the last quarter, to build up our inventory to a level where we have some flexibility to really flex and meet customer demand. And so that's one piece.

And then the second piece is just also just building for future demand. We have a seasonal revenue profile. Our goal, again, is to see seasonally higher revenue in the second half than the first half. And so we're preparing our inventory to be able to support a strong federal quarter that we expect in Q3, some larger deployments and shipments from our existing backlog, and then building momentum into Q4.

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

Understood. Thank you.

Operator

Your next question will come from the line of Stephanie Davis of SVB Leerink. Please go ahead. Your line is open.

Stephanie Davis -- SVB Leerink -- Analyst

Hey, guys. Congrats on the quarter. This might be a total coincidence, but like every time you guys move to departmental sales, you somehow tend to beat my numbers. So thinking about that going forward for your strategy, would you plan on pivoting back to the enterprisewide sales solution post pandemic? Or do you think you'll keep more of like a blended model?

Brent Lang -- Chief Executive Officer

So I don't think we've pivoted to a department level sales model in Q2. Many of the deals that we won were across entire hospitals or health systems. When I was answering Sean's question earlier about the orders being broken up. It was orders that might be for a multi hospital system being broken up into an individual hospital, but we're still seeing a strong transition toward enterprise sales and enterprise deals.

And I don't think we'll see that returning back to department level sales. The budgets have moved to the enterprise. And I think that's here to stay. And I think that the focus of the sales organization is really selling in -- at the C-suite level and building those relationships as customers think about their long-term communication strategy.

Stephanie Davis -- SVB Leerink -- Analyst

OK. Understood. So the talk you guys had last quarter about looking at a bit more departmental sales just didn't play out?

Brent Lang -- Chief Executive Officer

I don't remember that aspect of it. I think that some of the COVID-specific orders, if that's what we're referring to, some of those were obviously targeted to the ICU and some of the areas that were in isolation. But in many cases, they were converting parts of the hospital from traditional med-surg floors into ICU or isolation environment. And so those are oftentimes existing customers who were doing expansions in order to prepare for COVID-related surge in patients.

I guess I don't think of them as departmental sales in the sense that historically, when we talk about departmental sales, it was for new customers where we were making an initial entry into a customer at the department level. The department sales that we talked about on the Q1 call were typically expansions where people were buying Vocera's solutions to be able to prepare for the COVID surge.

Stephanie Davis -- SVB Leerink -- Analyst

OK. Understood. And then one last question. You guys mentioned your nonhealthcare revenues on earlier in [Inaudible] March.

Are you seeing new use cases for certain venues like schools in the context of a pandemic?

Brent Lang -- Chief Executive Officer

Well, I would say it's too early to know. The markets that we have talked about as being growth drivers for nonhealthcare moving forward, education, retail and hospitality are, as you know, all essentially shut down right now. So there's very little activity going on in those markets. They're still trying to figure out how they're going to open schools and that kind of thing.

The strength that we saw in nonhealthcare during the quarter was in some of the other verticals like nuclear and veterinary clinics but I do think there's an interesting opportunity in education as we come back to a new normal there, assuming that students do return to the classroom, the importance of staff safety is going to be critical. And I do think that that could play for us over the longer term. But based on the Q2 results, it wasn't education related. It was nuclear and veterinary.

Stephanie Davis -- SVB Leerink -- Analyst

OK. All right. Understood. Thank you, guys.

Operator

Your next question will come from the line of Matthew Gillmor of Baird. Please go ahead. Your line is open.

Matthew Gillmor -- Robert W. Baird & Co. -- Analyst

Hey, thanks for the question. I guess I wanted to ask about sort of deployment schedules and your interactions with hospitals. I think last quarter, there was a lot of uncertainty about when you'd have access to facilities so you could deliver solutions and, of course, recognize revenue. Do you have any sort of additional updated observations about hospitals allowing you to get back on the campus? And does that give you more confidence that the deployments you're scheduling now will actually come through in the third quarter and the fourth quarter?

Justin Spencer -- Chief Financial Officer

Hi, Matt. Yeah, at the beginning of the quarter, there were a fairly large number of projects that were on hold in part because either resource availability or a lack of opportunity to go on-site. As we mentioned a little bit in our prepared remarks, our professional services team worked really, really hard and did a great job of transitioning many of the deliverables to a virtual format. There are still a few things that need to be done on site, but there were other things that could be transitioned.

So that was a really positive benefit for us. So as the quarter progressed, we were able to do more and more professional services work. And that enabled, in several instances, customers who feel comfortable kind of rescheduling their deployments as they saw more and more of the deliverables being able to be done virtually. Having said that also, though, we did see a little bit of easing in the physical restrictions to some hospitals, not all.

In fact, it really varies widely by geography, the access that we have. So that's something that we continue to monitor and stay close to. But the good news is there are -- there's less, if you will, of the overall kind of project scope that now needs to be done on site compared to a quarter or two ago, and that enabled us to be able to recognize revenue a little bit more quickly than we would otherwise be able to do.

Matthew Gillmor -- Robert W. Baird & Co. -- Analyst

Got it. And then, Justin, maybe one more for you, just on the guidance front. When do you think you'll be in a position to have the visibility to provide an external guidance? Are there certain things you're looking for? Just any commentary would be helpful?

Justin Spencer -- Chief Financial Officer

Yeah. I think that's something that we'll revisit in the future as the broader market conditions improve. I think that's probably the biggest variable is the uncertainty that still continues in the broader market. And so likely not for the remainder of this year, but something that we'll look at as we turn to 2021 based on the market conditions.

Matthew Gillmor -- Robert W. Baird & Co. -- Analyst

Got it. Thank you.

Operator

Your next question will come from the line of Dave Windley of Jefferies. Please go ahead. Your line is open.

Dave Windley -- Jefferies -- Analyst

Hi. Good afternoon. Thanks for taking my questions. I wanted to follow up on the VA.

Brent, you talked about -- on the VA not being just a 3Q event. And I wondered if that was simply because you got a nice large order in 2Q? Or were they, in fact, more explicit about future plans? And then kind of segueing from there, you sound very confident about activity that you'll get this 3Q is, again, that part of maybe a deeper level of visibility that you have into the VA activity?

Brent Lang -- Chief Executive Officer

Yeah. Thanks, Dave. Appreciate the question. So the sum of the Q2 activity I think represented a sense of urgency on the part of VA to try to prepare for some of the COVID-related surge in patients that they're seeing.

I'm sure you've read that the VA has had some of the most hard hit environments as it relates to COVID patients. And they are -- because we are a preapproved solution for them and they've got a lot of familiar with us, when funding became available for them. Some of it was COVID-related funding. They were able to turn around very quickly and move forward with that.

And that accelerated the time frame for some of those orders that might have otherwise been over the next year or more. As it relates specifically to Q3, we do have a good pipeline of deals that we're working that are targeted to close in this Q3 within the VA. And so we have a good degree of confidence associated with that. It's always a little bit of a black box because we don't really know 100% for sure that those orders are going to come through until we actually receive them.

And oftentimes, the Fed will wait until very late in the quarter to deliver those orders just based on the way they're terminal organizations work. And so we're cautiously optimistic that if things go according to plan, it will be a strong quarter within the Fed, but we can't really count on those for sure until we see the purchase orders.

Dave Windley -- Jefferies -- Analyst

Understood. And then maybe a follow-up to Matt's question. On guidance, if I step back and not specific to numbers and guidance, but what I hear about and what I hear you saying about hospitals opening up and getting more professional services people in to do work. And the trends there and a strong pipeline, I guess I want to interpret in broad strokes that you're feeling better that the environment is more conducive than maybe it was three months ago.

But I also hear some cautiousness in your voice about budgets and things like that at your customers, too. So I guess I wanted to kind of get a net net. Am I reading you right that you do feel better about the environment than kind of the throes of the crisis three months ago?

Justin Spencer -- Chief Financial Officer

Dave, that's exactly how to read our commentary. I think we've definitely seen some improvement as the quarter progressed. We're hopeful that that continues. There are pockets where things are more normal than other areas.

But we still remain cautious, as we all know, that the pandemic is pretty volatile right now. So we see signs that are really encouraging, but we're not out of the woods. So we're just continuing to remain cautious for the time being.

Dave Windley -- Jefferies -- Analyst

Got it. That's very helpful. I appreciate that. Thank you.

Operator

[Operator instructions] Your next question will be from Gene Mannheimer of Colliers Securities. Please go ahead. Your line is open.

Gene Mannheimer -- Colliers Securities -- Analyst

Thank you. Good afternoon, and congrats on a good quarter. My question really is sort of an extension of the non guidance, if you will. I mean, in the absence of guidance, is it still fair to say that the revenue is going to follow seasonal patterns of being better in the back half than in the front half? Or does COVID kind of throw things off here? Thank you.

Justin Spencer -- Chief Financial Officer

No, our goal is to see that seasonal pattern play out again to the degree to which that happens, I think it remains to be seen, but we've got a really solid level of backlog and deferred revenue that provides a reasonable level of visibility. Brent touched on the strength that we anticipated in Fed. So there are some really strong kind of proof points that suggest that our revenue will be seasonally up as it typically always has been. So we're really execute -- focused on really executing on the sales front and then getting as many of the deployments scheduled here in the second half so that our customers can get up and running on Vocera.

Gene Mannheimer -- Colliers Securities -- Analyst

Makes good sense. Thank you.

Operator

And there are no further questions at this time. I will turn the call back over to the presenters.

Brent Lang -- Chief Executive Officer

OK. Thank you, everyone. Appreciate you taking the time to be with us today, and we look forward to the follow-on conversations. Have a great evening.

Operator

[Operator signoff]

Duration: 60 minutes

Call participants:

Justin Spencer -- Chief Financial Officer

Brent Lang -- Chief Executive Officer

Sean Dodge -- RBC Capital Markets -- Analyst

Ryan Daniels -- William Blair and Company -- Analyst

Vikram Kesavabhotla -- Guggenheim Securities -- Analyst

David Larsen -- Verity Research -- Analyst

Sean Wieland -- Piper Sandler -- Analyst

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

Stephanie Davis -- SVB Leerink -- Analyst

Matthew Gillmor -- Robert W. Baird & Co. -- Analyst

Dave Windley -- Jefferies -- Analyst

Gene Mannheimer -- Colliers Securities -- Analyst

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