Vocera Communications (VCRA) Q3 2020 Earnings Call Transcript

Vocera Communications (VCRA)
Q3 2020 Earnings Call
Oct 29, 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 Mariama, and I'll be your coordinator for today. [Operator instructions] I would now like to turn the presentation over to your host for today's call, Sue Dooley, of Vocera investor relations. Please proceed.

Sue Dooley -- Investor Relations

Hello, everyone. Welcome to Vocera's conference call to discuss our third 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 from normal news sources. This conference call is being webcast live on the IR 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'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. And with that, I'd like to turn the call over to Brent.

Brent Lang -- Chief Executive Officer

Thanks, Sue. Hello, everyone. With continued impact of COVID-19 on our lives, our resiliency and determination were tested, and once again, we rose to the occasion. I am so proud of the job that our teams are doing by staying focused on serving our customers and supporting each other.

Q3 was certainly another challenging quarter for the world, but Vocera's true colors as an organization have been shining through this and our connection to our mission have never been stronger. The highlights of the quarter include the achievement of several company records, including record bookings, revenue, profitability and our combined balance for backlog and deferred revenue. Let me jump right into some of the details. We delivered excellent performance in our business across the board.

Revenues for the quarter were roughly $54 million, representing solid year-over-year growth and exceeding expectations in this challenging environment. Software revenue returned to be the fastest-growing part of our business. We also delivered standout profitability numbers, demonstrating the leverage in our operating model. Q3 bookings rose to the highest level of any quarter in the company's history, driven by an acceleration of our outstanding momentum in federal government hospitals and several large health system expansions.

Our backlog and deferred revenue balance rose again this quarter and reached a new record for the company. The hands-free capability of our communication devices remains a key differentiator for us in the market, and we had another strong quarter of growth in shipments of the Smartbadge. We completed the successful acquisition of the patient-facing company, EASE, while maintaining a very healthy balance sheet for future M&A. EASE is a SaaS-based offering that expands our total available market to present an attractive cross-sell opportunity for us.

Finally, we undertook several key industry-facing initiatives this quarter, aimed at advancing how hospitals prioritize our solutions. I'll talk in more detail about that in a moment, but let me summarize by saying, I believe our sizable market opportunity and leadership position have been enhanced by our response to the events of this year. Despite the ongoing pandemic, a difficult delivery environment and budgetary challenges facing our hospital customers, our teams have adapted well. Engagement with prospects is high and our pipeline is strong.

Our teams have risen to the challenge and are excelling in this new normal. Let me take a moment to describe some of the bookings highlights from the quarter. Our Q3 bookings performance was simply outstanding. This quarter, large deals led the way with hospitals looking to standardize processes, and improve preparedness and efficiency as we look toward to the future.

We won a large number of deals over $1 million with both new customers and expansions. Our Fed team delivered an outstanding quarter. COVID added sense of urgency, and our strong track record, security authorization and federal contracting vehicles continue to help us penetrate this market. We're also seeing an increasing number of large deals.

In this quarter, a big contract with the South Texas VA led the way. We added nine new hospitals within the federal government market this quarter, and we believe plenty of opportunity remains to land and expand. Outside the federal market, large expansions at SwedishAmerican Hospitals and McLaren Health Care exemplified the growth potential that exists within our installed base. University of Alabama at Birmingham also expanded its use of our solution this quarter and is rapidly becoming a top showcase account.

Moving on to international. In Canada, where awareness of our hands-free communication solution has increased because of COVID, we won a large deal at Lake of the Woods in Northern Ontario. Our Canadian team also secured a new purchasing agreement with the Northern supply chain, which handles procurement for nearly 40 Northern Ontario hospitals. This is the third such agreement we have negotiated in Canada, and we expect it will speed up the acquisition process by enabling the hospitals to buy from us without having to issue an RFP.

International is a large opportunity and a top priority for us, and we are pleased to have a growing overseas pipeline. I was also pleased with the growth of our software bookings coming from those new customers I mentioned earlier as well as healthy cross-sell into our installed base. As an example, we won a large competitive displacement at University Hospitals in Cleveland, Ohio for our Engage integration software, adding to our existing deployment. Our services organization also had a very busy quarter.

With the loosening up of restrictions on visiting hospitals, they were able to ramp back up in-person customer engagements. We had several really important go-lives, which enabled us to deliver on our large software backlog, and Justin will expand on that in a moment. Here are a few other highlights from the professional services this quarter. We are now live at six Norton facilities as we progress toward a systemwide deployment.

Norton's goal is workflow standardization across multiple sites aimed at improving patient satisfaction and utilizing analytics and workflow optimization. We're also live at hospitals, each with an impressive 12 clinical integrations. These state-of-the-art facilities are relying on Vocera as best practice among leading hospitals. In addition, Northwestern is up and running at their Geneva and Central DuPage facilities, leveraging our solution and to bring together specialists for disparate locations.

We completed some important international deployments, including a hospitalwide pager replacement in Dublin, Ireland. And in Japan, we are now live at the VA Camp Zama. Our business is becoming virtualized, replacing some pre-pandemic strategies with COVID-inspired travel mitigation, remote services, sales conversations and online tools. These tools are rapidly becoming effective new normals that we're incorporating into our operations as we compete to win and look to serve our customers.

Finally, I'm pleased to say that we've seamlessly integrated the EASE acquisition into Vocera during Q3. EASE enables healthcare providers to send updates regarding the patient's status to their family members and loved ones easily and securely through secure transmission of texts, voice messages, photos and videos. We've already had a few wins since the deal closed, including the NICU at UC San Francisco, and we're working diligently to introduce EASE to our customers and prospects. I'm thrilled to have this new capability and expanded market opportunity as part of our portfolio.

Turning to some broader market commentary. Q3 was a busy quarter of meaningful interactions with our customers and prospects that provided us with valuable insights into the market. We learned about the challenges facing hospitals today and how that translates into expectations for their future spending priorities. We are working to build on our deep mindshare and influence, the priority with which the industry views our solutions.

I'd like to take a moment to describe these interactions. We held our first virtual user conference called the Vocera Affinity Network. We achieved great participation, representing meaningful customer insights that will drive future innovation as we continue to lead in our market. We received feedback that we are viewed as a trusted partner who will be able to lead our customers toward their goal of enabling the real-time health system.

Additionally, we ramped up our lobbying efforts to highlight the importance of safety and preparedness as core values among healthcare leadership, ensuring our place as the recognized thought leader. We are working with various government agencies to elevate the conversation around staff safety and preparedness for future emergencies. We are arming our sales team with the latest messaging and clinical workflows. And as it relates to COVID-19 funding streams, we are effectively helping our customers identify available funds, develop collateral and speaking points, and take a best practices approach to tapping into these resources.

And finally, in September, we conducted our Humanize health conference, a major industry thought leadership event. Held virtually this year, this event featured a range of exciting and thought provoking speakers. We've built tighter executive level relationships with our customers and continued our momentum around staff safety and resilience, which is crucial to the future of delivering care. With all that's going on, as you can see that on top of our normal sales cadence, we spent a lot of time with customers and prospects this quarter.

While our world continues to face uncertainty around the pandemic, we are doing what we can to ensure our solution rises on the spending priority list, and it's my belief that our value proposition has never been stronger. The puts and takes around future market conditions remain difficult to predict. But here are some of our thoughts on hospital spending priorities over the coming months and years. I believe one of the most significant learnings from this pandemic has been the importance of preparing and protecting caregivers.

Many hospital systems are recognizing that they've 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. Customers and prospects are embracing the idea that communications technology is an essential part of personal protective equipment or PPE. Nurses and other frontline workers simply can't do their jobs unless they have the ability to communicate with their teams.

Being able to do so, hands-free, under PPE is invaluable, and we are learning this is not just a COVID requirement as hospitals expect to continue the use of PPE even after the pandemic. In addition, as hospitals strive to resume elective surgeries to recapture lost revenue, operational throughput becomes a critical element of restoring financial liability. Throughput and improving hospital operations are core parts of our value proposition. With our solution, we can improve quality, satisfaction, safety and operational efficiency.

We called this the quadrant plane for some time now, and this mission is more relevant today than ever. Hospitals tell us all the time that they're looking to consolidate the number of vendors they're working with, and they want to build platforms that are unified, fully integrated and built for the future. Demand for a partner of choice in clinical communications is on the rise. During the pandemic, we've been able to immediately deliver search licenses and urgent badge shipments to meet their changing needs.

We were able to address their workflow challenges with an eye toward ROI. Our current approach, our focus on customer experience and our ability to innovate with a mix of internal development and careful M&A make us the leader in our space and the perfect partner of choice. Wrapping up my comments, I fundamentally believe that this pandemic crisis is elevating the priority of communication and workforce solutions to be a strategic imperative of lasting importance. We are well positioned to capitalize on this opportunity with the most complete clinical communication and workflow solutions on the market.

Now I'd like to turn the call over to Justin for a discussion of our financials. Justin?

Justin Spencer -- Chief Financial Officer

Thanks, Brad. Hello, everyone. We had a very strong quarter, and our financial results demonstrated a significant leverage in our operating model. In what continued to be a challenging market environment overall, total revenue was $53.8 million, up 6% from last year.

Importantly, our substantial bookings growth enabled us to meaningfully increase our combined backlog and deferred revenue, which I'll comment on in more detail in just a moment. Product revenue, which includes both devices and software, was $28.5 million. The highlight here was our software revenue growth. As we had mentioned previously, several new customer deployments and our record level of software backlog entering Q3 enabled us to increase software revenue 21% to $11.5 million.

Additionally, our strong bookings enabled us to achieve another record level of software backlog. Device revenue was down this quarter due primarily to timing. Revenue in this category is up 10% year to date, and we have a very healthy device backlog that we expect to ship over the next several quarters. Our badge has continued to be a key differentiator for us in the market where hands-free communication is more important than ever.

In our services revenue, we have changed the name of one of the revenue subcategories. Moving forward, maintenance and support revenue will be called subscription and support revenue, as it will now include our recurring subscription revenue streams such as EASE in addition to software maintenance and extended warranty. This way, investors will be able to see all recurring revenue that we provide as a service in one place. Overall services revenue was up 14% to $25.3 million, driven mainly by a healthy increase in the subscription and support revenue category.

Subscription and support revenue was up 16% in Q3 as a result of our growing customer base, a high maintenance renewal rate and a small amount of subscription revenue from EASE. We see ourselves as a software-enabled business with a strong and growing recurring revenue base. Our software and subscription and support revenue streams combined were nearly 60% of our total revenue this quarter, positively impacting our gross margin and profitability. The other part of our services revenue is professional services, which was up again this quarter, reaching $4.9 million.

We quickly responded to meet a higher demand for deployments, many of which were virtual, and we had a healthy slate of projects scheduled for Q4. Now before I transition to our profitability, I'd like to comment on backlog and deferred revenue, another big highlight in the quarter. Our combined backlog and deferred revenue increased 23% to a record $151.1 million, driven by our strong bookings and overall execution. As is typical for us, many of the new deals we added to our backlog in Q3 will likely be deployed over the next few quarters.

Most of the federal deals we closed in Q3 will contribute to our 2021 revenue based on the current deployment schedules. Regardless of any uncertainties and headwinds that might arise in the near term, our backlog in deferred revenue provides a solid foundation of future revenue. Now on to profitability, another bright spot. Our adjusted EBITDA in Q3 was a record $13.5 million, up 41% from last year.

Our adjusted EBITDA margin was 25% of revenue, exceeding our target annual financial model goal of 20%. Year to date, our adjusted EBITDA is at $17.2 million, up substantially over last year. We also generated GAAP net income of $4.2 million in the quarter, also up meaningfully. These results reflect the significant profit expansion potential inherent to our business as we grow revenue and drive our software-related business even higher.

Here's some more color on our non-GAAP gross margin and operating expenses. Non-GAAP gross margin in Q3 was 70%, up nearly four percentage points versus last year. Both product and services margins increased from Q3 last year, reflecting the revenue growth and higher main contribution of our software-related revenue stream. We also have a continued focus on delivering our products and services more efficiently, including lowering the cost of our badges, moving more of our professional services work to virtual, and a variety of other cost savings initiatives.

Non-GAAP operating expenses at $25.4 million were up a modest 2% 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 significantly lower travel expenses in the quarter. We believe travel expenses will remain low again in Q4. To cap off my Q3 commentary, our cash balance ended at approximately $211 million.

Excluding the cash used for the EASE acquisition, we added nearly $2 million of cash during the quarter, and our operating cash flow in Q3 was $2.6 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. We're very happy with the results we've been able to deliver so far this year, and we are now laser-focused on closing out the year strong so that we can carry this momentum into 2021. Our Q3 results reflect a number of really positive developments from the investments we've made over the last several quarters in our technology, go-to-market and service delivery capabilities.

As we head into the fall and winter season, we are closely monitoring the pandemic and its effect on the world and in particular, our customers. Many of our hospital customers take significant financial and operational pressures, so we continue to maintain a cautious posture for now. Fortunately, we saw signs of improvement in our market during Q3. And we are hopeful that this will continue.

We remain fully committed 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. Before we take your questions, I want to say again how proud I am of our team's great performance this quarter and so far this year. My thanks go out to our employees who remain focused and dedicated as we adapt to the changing times and pursue our mission to deliver the quadrant leg. Our business is performing well, and our solutions are in high demand.

Our products are better suited to today's environment than ever before, and I'm inspired by the abilities and commitment of our team. I'm very grateful that we have a resilient business with a strong cash balance, and a powerful selling engine and robust demand for our unique solutions. As we enter Q4 and look to close out a strong year, there are still pandemic-related challenges to face, but we see great opportunity before us. Our technology solutions and our sales and services capabilities have never been better aligned with the market.

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

Questions & Answers:

Operator

[Operator instructions] Your first question comes from Matthew Gillmor with Baird. Your line is open.

Matthew Gillmor -- Robert W. Baird -- Analyst

Hey. Thanks for the question. I guess I wanted to follow up on some of the bookings commentary, it sounds like it was — the strength was pretty broad-based. For the core U.S.

hospital market, how much would you say the booking strength was attributed to the maturation of the sales force? And can you talk about how that's progressed versus other factors that may be related to COVID?

Brent Lang -- Chief Executive Officer

I think it was a really important factor, Matt. As you know, over the last two years, we have been going through a process of retooling our sales force to be much more tuned toward enterprise C-suite level selling, and we brought in a number of new people into the sales force, with a real good strong track record of enterprise selling and complex solution selling into the C-suite. And I think the movements toward these larger deals has really accentuated that transition. We are largely through with that transition.

We completed that earlier this year, and most of those newer folks have had six to nine months to ramp up in terms of learning the product and learning our market. And they are now representing many of our top performers. If you look at stack ranking of our sales people, a lot of the newer folks are right up there near the top of the list. So I'm really happy with the transition that has happened there, and the deal size continues to increase.

As I mentioned, this quarter was really led by large deals, more of these enterprise level deals. And that was both in our commercial market as well as in the federal market where we saw a number of large deals as well.

Matthew Gillmor -- Robert W. Baird -- Analyst

Great. Thanks very much.

Operator

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

Sean Wieland -- Piper Sandler -- Analyst

Thanks so much. Congrats on the impressive quarter here. So it looks like the initial guide that was pulled is entirely doable. Just wanted to get your thoughts on why you're not reinstating that? And any incremental thoughts you can offer there would be helpful.

Thanks.

Justin Spencer -- Chief Financial Officer

Hi, Sean. Yes. We're really pleased with the performance of the business so far. When we presented guidance, we indicated that it would be for the remainder of the year, and we feel that that's the right thing to do for our business.

We're going into a late fall and winter period where we're starting to see spikes. And so there is some uncertainty out there in terms of how hospitals are going to be affected by us. We do have a stronger level of backlog and deferred revenue. Now that's at a record level, but the majority of that is going to convert to revenue in 2021.

So once the new year turns and we — or then formally looking at 2021, we'll revisit that. But for the time being, we're really focused on closing out the year strong and carrying a lot of momentum into 2021.

Sean Wieland -- Piper Sandler -- Analyst

Can I squeeze a follow-up in on that? If the strength of the backlog and deferred revenue, is there any composition of that, that is different from a timing perspective as we expect that to transfer to revenue? Or should that be because of the COVID-19 pandemic? Or should that transition be along historical patterns?

Justin Spencer -- Chief Financial Officer

Yes. Overall, we expect the revenue to convert in historical levels. The pandemic has proven to show that sometimes that can disrupt things. So it really depends on kind of what happens in the broader market with hospitals.

But all those are firm orders, and we currently don't anticipate anything different other than a more normal cadence. And many of the federal orders that we closed in the third quarter are going to convert to revenue in FY '21, and that would be minimal, normal for us based on recent years.

Sean Wieland -- Piper Sandler -- Analyst

All right. Thank you very much.

Operator

Your next question comes from Vikram Kesavabhotla with Guggenheim Securities.

Vikram Kesavabhotla -- Guggenheim Securities -- Analyst

Thank you for taking the question. I was wondering if you could just talk about how the purchasing environment is trending so far in the fourth quarter? And when you think about the momentum that you had in 3Q and the conversations that you're having so far, just how you're thinking about your ability to close deals toward the end of the year relative to what you might typically expect? Thanks.

Brent Lang -- Chief Executive Officer

I'd say it's pretty much status quo. We haven't really seen any difference. The momentum that started building in our business in Q2 and Q3 hasn't really changed. Obviously, we've got a lot of uncertainty between now and the end of the year as we head into the winter period of time.

But I think the sales team is feeling good about their pipeline. The large deal pipeline continues to grow, with a number of deals that they're working on. Their ability to access customers has improved over the course of the summer and at least for now, has remained positive. And our Professional Services team's ability to reach out and engage with customers has remained pretty positive.

I think there's uncertainty as we head into the last couple of months of the year, but so far, so good.

Vikram Kesavabhotla -- Guggenheim Securities -- Analyst

Great. And then maybe just a quick follow-up on the software revenue line, up 20% year over year, which is obviously an improvement over the past few quarters. Can you just help us understand the sustainability of that performance going forward? And when you think about the composition of your backlog and the upcoming projects, just how we should be thinking about the progress on that line going forward? Thanks.

Justin Spencer -- Chief Financial Officer

So in general, our software has been and we think will continue to be the fastest-growing part of our business. We're fortunate to now have many of the orders that we closed in Q3, particularly the new customers added more to our software backlog. So we started the quarter with a record level of software backlog, and we continue at a record level. So we've replenished what we converted to revenue and then added to that.

So our overall software backlog, Vik, is at a really solid level. That will likely convert over the next several quarters and enable the software growth to continue. And with all that said, it can be lumpy from time to time. So there may be periods where there's less growth than than other quarters.

But in general, that is driving a significant portion of our growth over the long term.

Vikram Kesavabhotla -- Guggenheim Securities -- Analyst

Thank you.

Operator

Your next question comes from Sean Dodge with RBC Capital Markets. Your line is open.

Sean Dodge -- RBC Capital Markets -- Analyst

Thanks, and congratulations on the quarter. I guess maybe just following on to Justin on what you're just talking about the record software backlog. Can you give us a little bit of insight into what's driving that? Has there been a shift in the use cases clients are buying for that necessitated a little bit more software here post pandemic? Or is it coming out of the expansions? Are you cross-selling more into kind of the legacy badge or device space? I guess any insight there?

Justin Spencer -- Chief Financial Officer

Yes. So there's a few drivers there. I'd say it's broad-based, and we have existing customers that are purchasing more of our software as they expand to new departments and new facilities, and if they do that, they need more software and badges to support their user base. We're also having a lot of success selling Engage, cross-selling that.

In fact, we're really pleased with the momentum that we continued to build with that particular product as our customers are driving a greater level of clinical workflow in connecting Vocera to many more systems. And then the third piece is whenever we have strong periods of customer growth, many of the newer customers are buying the software for the very first time, and that has a dropped impact on the pace of our software bookings and then down the road, the conversion of that to revenue.

Sean Dodge -- RBC Capital Markets -- Analyst

Thank you.

Operator

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

Ryan Daniels -- William Blair & Company -- Analyst

Thank you for taking the question and congrats on the strong performance this quarter. You had some commentary during the prepared comments I thought was interesting talking about how clients are even more than ever turning toward really a fully integrated platform. So I'm curious, No. 1, if that indicates also larger deals on average given that they're buying more of the product at once and probably deploying that more on an enterprisewide versus a departmental basis? And then No.

2, are there any gaps you see in the current portfolio that you need to either develop internally or potentially tack on via or tuck-in to meet the full complement of the platform that they're looking for? Thanks.

Brent Lang -- Chief Executive Officer

Thanks, Ryan. So with regard to the first question, you're absolutely right. We are seeing larger enterprise deals where they're choosing to roll out the solutions across the entire enterprise, and they're also choosing to buy all the various components upfront, which would be not just the voice communication and secured texting, but the alerting and alarming, the Engage portion that Justin talked about earlier for the clinical integration. So it's truly being viewed as a clinical communications and collaboration suite, if you will.

And as they look to standardize on a few number of vendors, then they kind of make the decision more of the C-suite, and they deploy it uniformly across the health system. And so that's driving up the size of the deals as initial deals are becoming larger and larger at the front end. With regard to the second part of the question, we're not seeing a lot of gaps in the product portfolio right now. I don't think there's deals that we're losing because we don't have a particular feature or a particular piece of functionality.

And as we look at both our internal organic development as well as our M&A pipeline, it's primarily focused on looking at TAM expansion opportunities, maybe connecting to adjacent markets. But most of the work we've been doing is along those lines, and we don't feel like we've got a major gap that we need to close in the existing product portfolio.

Ryan Daniels -- William Blair & Company -- Analyst

That makes a lot of sense. And then, if I follow-up a little bit different. You may have mentioned this, so I apologize, when you're talking about the cost going forward. But do you feel that the implementation team/technology is up to the task of implementing the record bookings and deferred backlog, meaning do you need to hire there or really expand anything on the IT front? Or can you kind of meet that without further investments going forward? Thanks.

Justin Spencer -- Chief Financial Officer

Yes, Ryan, we do. We feel really good about our service and delivery capability, and we've invested in that part of our business as we've become more, even more efficient. And a big movement for us has been moving more the deliverables to more of a virtual model that inherently just creates more efficiency. And so we've seen our margins go up in that part of our business as a result of that.

As we continue to kind of scale the revenue in that part of our business, we don't necessarily have to add as much cost as historically we might have needed to do. Now we will add resources to support our customers. We're in good that we feel like the existing team and the capability they have is more than capable of being able to continue delivering high-quality implementations at our customer site.

Ryan Daniels -- William Blair & Company -- Analyst

Great. Thank you. And I hope you're all well.

Operator

[Operator instructions] Your next question comes from Dave Windley with Jefferies. Your line is open.

Dave Windley -- Jefferies -- Analyst

Hi. Good evening. Ghanks for taking my question. Brent, you've over several quarters, you've talked about how you have been going through this transition as was discussed a little bit ago, going through this transition to more larger and the enterprisewide type deals that were taking somewhat longer to close.

And then COVID kind of interrupted in the middle of that and you were responding very quickly to surge capacity. As we sit here today — or to serve capacity needs, I guess, I should say. As we sit here today, has it kind of fully cycled back to the kind of the water temperature that you were in, in the end of last year and January of this year? Or what's the kind of put and take in terms of sales cycle?

Brent Lang -- Chief Executive Officer

So I think the business has moved back toward more of a traditional cadence of larger deals that are going through the sales process. But I do believe that COVID has created a sense of urgency for even those larger deals as customers recognize the significance and the value that we can deliver for them. So it's not the cadence we were seeing in early Q2, where it was very tactical and pointed and just kind of trying to react very quickly to an urgent situation. It's more the cadence of the larger, more strategic deals, but it's created a level of urgency on top of that as a result of COVID that's maybe streamlined some of the decision-making process and allowed us to get those deals closed successfully.

Dave Windley -- Jefferies -- Analyst

Interesting. And then kind of relatedly, you highlighted a bunch of large deals. Are the — but we're also seeing some strong software attachment. Is the number of large deals being driven by PAN enterprise type deals? Or is it more just the intensity of what people are buying, even maybe even at a department level and the enterprisewide stuff is still an opportunity for lift in the future?

Brent Lang -- Chief Executive Officer

So I think it's a mix. With the new customers, we're seeing more PAN enterprisewide purchases, whether including Engage or including voice messaging in the purchase upfront. And so we do think that that's a shift toward this enterprise purchasing. But a lot of our installed base is still only using a fraction of the overall functionality.

And so as Justin mentioned, we had a really strong quarter of cross-selling Engage back into the installed base, both in our federal market customers as well as in the commercial market. And I think that represents people wanting to kind of continue to expand their use of Vocera. We had some big expansions in the quarter as well.

Dave Windley -- Jefferies -- Analyst

Thank you.

Operator

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

Matt Hewitt -- Craig-Hallum Capital -- Analyst

Thank you for taking the question. Maybe just a follow-up from a couple of questions ago. What percentage of your implementations today or this quarter were virtual? And maybe what impact does that had on your margins and how sustainable is that? Thank you.

Justin Spencer -- Chief Financial Officer

Matt, each implementation looks a little bit different. And I think the way we think about it is there's deliverables, the implementation of a number of deliverables along the way from training to configuration to testing, etc. And so it's hard to kind of pinpoint a specific percentage, but there's no question that the significantly greater number of the deliverables that we complete as part of the professional services engagement are now done virtually. Pretty much all of the training is now done virtually, a lot of the configurations and some of the testing.

In some instances, as it pertains to some of the workflow design or more details around that, we are being granted access to customer sites. But that will vary depending on the customer. But I'd say the majority of the work that we're currently doing is able to be done virtually. And that's a huge difference compared to a couple of years ago, when a lot of that was done on site.

Matt Hewitt -- Craig-Hallum Capital -- Analyst

Got it. Thank you.

Operator

Sorry for the interruption. If you can still hear me. I am having technical difficulties, I'm unable to open the next line.

Sue Dooley -- Investor Relations

So can we give it a second to see if we're able — we have two more people who were going to ask questions.

Operator

I'm attempting to reconnect now.

Sue Dooley -- Investor Relations

Ryan, are you on the line?

Operator

Yes, I'm still here. I'm able to open the next question. Unfortunately, my apology.

Sue Dooley -- Investor Relations

Are we still live with the group?

Operator

Yes.

Brent Lang -- Chief Executive Officer

Yes.

Sue Dooley -- Investor Relations

I do see — it looks like we're having problems with the Q&A. I do see two people on the list for Q&A. You guys know who you are. And we're more than happy to continue the conversation with you guys.

But maybe what we'll do now, since we're about finished with the queue and about our time, we will just let Brent say any closing remarks and connect with you guys later as soon as possible.

Brent Lang -- Chief Executive Officer

Thanks, everybody. I appreciate your time. I hope you're all healthy and surviving in these difficult times. And we look forward to connecting with you and seeing you and hopefully virtually or in-person over the coming months.

So thanks a lot for your time.

Sue Dooley -- Investor Relations

Thank you.

Operator

[Operator signoff]

Duration: 41 minutes

Call participants:

Sue Dooley -- Investor Relations

Brent Lang -- Chief Executive Officer

Justin Spencer -- Chief Financial Officer

Matthew Gillmor -- Robert W. Baird -- Analyst

Sean Wieland -- Piper Sandler -- Analyst

Vikram Kesavabhotla -- Guggenheim Securities -- Analyst

Sean Dodge -- RBC Capital Markets -- Analyst

Ryan Daniels -- William Blair & Company -- Analyst

Dave Windley -- Jefferies -- Analyst

Matt Hewitt -- Craig-Hallum Capital -- Analyst

More VCRA analysis

All earnings call transcripts