Vocera Communications (VCRA) Q1 2021 Earnings Call Transcript

Vocera Communications (VCRA)
Q1 2021 Earnings Call
Apr 29, 2021, 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 Shantel, and I'll be your coordinator for today. [Operator instructions]. I'll now like to turn the presentation over to Sue Dooley.

Please proceed.

Sue Dooley -- Director of Investor Relations

Thank you. Hello, everyone. Welcome to Vocera's conference call to discuss our first quarter fiscal 2021 earnings as well as the acquisition we announced today. This is Sue Dooley of Vocera's investor relations and joining me today are our CEO, Brent Lang; and Justin Spencer, our CFO.

And I would like to welcome Steve Anheier to our call. Steve will become our CFO in June. Earlier today, we distributed two press releases detailing our two announcements. Both releases are posted on our website and are also available from normal news sources.

This conference call is being webcast live on the IR page of our website or 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'll make forward-looking statements regarding projected operating results, and anticipated market opportunities, and the impact on our business and financial results of the acquisition we are announcing today. This forward-looking information is subject to the risks and uncertainties described in our 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 measure is provided in our posted earnings release. With that, I'd like to turn the call over to Brent.

Brent Lang -- Chief Executive Officer

Thanks, Sue. Hello everyone. I hope you're all doing well. I'm pleased to report that 2021 began with an outstanding Q1.

We continue our strong momentum from Q4 winning more new customers and expansions from existing customers. We started Q2 feeling great about our market position, financial outlook, and product differentiation and are excited to share the latest updates on our business. We have a lot to cover on today's call. So I want to give you an idea of what to expect.

First, I'll review the highlights of the first quarter along with a market update, and then I'll comment on our acquisition of PatientSafe that we announced today. Finally, I'll turn the call over to Justin and Steve who will go into detail about our Q1 results and discuss the financial aspects of today's M&A transaction and its impact on our guidance. After concluding our prepared remarks. we'll open up the call for your questions.

Let me start by reviewing the highlights of Q1. We began the year with strong performance throughout our business continuing the momentum we had last year. COVID specific demand is being replaced by a broader awareness of the importance of our valued proposition raising the priority of our solutions and translating into great performance in our business. Our field team executed well and delivered excellent Q1 bookings, and our services organization utilized our clinical and technical expertise to effectively deploy our solutions in some very strategic accounts.

Our bookings growth was driven by large new customer wins and sizable expansions with existing health systems continuing the trend toward larger deals. International was a highlight this quarter with broad-based strength. We had large wins and robust bookings growth in the Middle East, Canada, The United Kingdom, Australia, and New Zealand. Revenue growth accelerated to 20% year over year as investments we've made in our products and sales organization continue to pay off.

Software-related revenue was particularly strong with both engagement and ease performing well. But Vocera Smartbadge continues to build momentum and was a big part of the large new win we booked this quarter in the Middle East. Hands-free definitely remains one of the key differentiators of our solution. We received two important security certifications this quarter adding to our differentiation.

We earned FIM certification for the Smartbadge, an important milestone for our federal business, and in the U.K., we are now Cyber Essentials Plus certified, which should streamline our sales into these strategic markets. Before we get into the market commentary, I'd like to go into some greater detail on our sales and service successes in the quarter. Our Q1 bookings performance was simply outstanding with very high year-over-year growth, particularly in our software booking. Our solution is driving meaningful ROI across these organizations as customers expand to new users and new use cases for our products.

In general, we saw very little COVID-related demand and we believe the strength of our business this quarter was about Vocera becoming the new high priority standard. RWJBarnabas Health was the largest booking in the quarter and one of the largest bookings in our history. This leading healthcare system continues to expand its use of Vocera and will leverage our voice, messaging, and Engage software across the health system. In parallel, we expanded our deployment at ease from the Barnabas Children's Hospital to all adult patient areas.

As I mentioned, International was another highlight for Q1 in an exciting 15 hospital win in the UAE, we signed a multimillion-dollar deal at the Ministry of Health and Prevention. This ministry already has Vocera deployed in one of their hospitals and is now standardizing systemwide on Vocera solutions. What began in 2017 with a small deployment of 55 B Smartbadges has now grown into an enterprisewide unified clinical communication strategy built around 4,500 Smartbadges. We believe this broad deployment of our solution will build our presence there and set the standard of care across the region.

We also see achieve success in New Zealand with a new customer win at Auckland City Hospital, the city's largest acute care facility. This represents significant progress in our goal to leverage our strong brand in the long-term care market in Australia and New Zealand to begin penetrating the sizable acute care market there. In the U.K., we had a big win at Belfast Health and Social Trust, and we had good success in Canada where the renowned University Health Network completed a pilot of our solution and expanded to all three ICUs at Toronto General. International remains a big opportunity for us and it's great to see widespread success this quarter.

And while Q1 is historical quiet in our federal business, we continue to expand our presence in the DoD this quarter with a new win at Naval Medical Center Camp Lejeune. The Navy still represents a meaningful opportunity for us to add new hospitals as we grow our federal business. And the significant highlights have happened since the end of the quarter, I am very pleased to report that we just booked the single largest deal in the history of the company with a highly prestigious healthcare system. The majority of the revenue from this sizable deployment will occur in 2022 and beyond, and adds to our long-term revenue visibility.

Now, I'd like to shift to some highlights from our services team. Despite the dynamic environment to COVID, our teams continued both remote and in-person customer engagements in Q1 delivering on a number of important projects. Our professional services business is settling into a new normal that manages travel and access restrictions with a combination of remote services and online tools. I'm really proud of the innovation and customer focus of our services organization.

In fact just last week, our services team was awarded the Business Intelligence Group's 2021 Excellence in Customer Service Award for innovative service with hospitals in need during the pandemic. Overall, Q1 was a tremendous start to the year; we achieved our strategic priorities, including further penetration into the market, expansion within our existing customer base, building momentum for our Smartbadge, growing our international presence, and advancing our solution outside of healthcare. Our teams on healthcare on all of our targets this quarter and our success in achieving these priorities positions as well for the rest of the year. Now, under some observations on the current market environment for our solution.

I fundamentally believe the events of the past year have solidified our solution as a strategic imperative of lasting importance. Based on my conversations with hospital CEOs, the physical, emotional, and psychological safety of care teams is a priority that is rapidly on the rise. Safety has long been a core part of our mission and a compelling part of our valued proposition. At Vocera, we are taking a leadership role in helping our customers and our industry define a new era for hospital operations as we address both safety and operational efficiency challenges.

We are continuing to build awareness of staff safety as a crucial priority in healthcare, and throughout this year, you will see this become even more visible and active around this important topic. One example of how the industry is stepping up to create standards around safety. It's a society of critical care medicine with members in more than 100 countries, this society is the largest non-profit medical organization dedicated to promoting excellence and consistency in the practice of critical care. This organization maintains a collection of guidelines for ICUs.

They recently made three recommendations aimed at ensuring safety and expanding ICU capacity, including communicating under PPE, keeping families informed, and remote monitoring of ventilators to protect the care team. Vocera addresses all three of these recommendations. We are also growing our presence outside of the acute care hospital setting. Last month, we announced a partnership with Status Solutions to empower clinical care team members in long-term care facilities with clinical -- clinical and contextual information needed to quickly mobilize the right people and resources.

This opportunity demonstrates broadening acceptance of our solution outside of the acute care environment providing evidence on the rising importance of having modern, clinically oriented solutions for care team communication. On a related note, we are renewing our exploratory conversations around school safety, and schools are opening on-campus learning and we are resuming the process of reaching out to schools and working with partners who have influence in the education market to help them understand the value that we can bring to this environment. It's early days for us in this market, but we are hopeful that we can reengage and meaningfully develop this new market opportunity. With that, I would like to turn the call over to focus on today's acquisition announcements.

We are delighted to announce Vocera is acquiring PatientSafe Solutions for approximately $35 million in an all-cash transaction. Based in San Diego, California, the company delivers safety, quality, and productivity improvements to health systems. The solution unifies existing clinical workflow applications and communications infrastructure into a smartphone app for care teams to communicate, collaborate, and execute on mission-critical workflows. We believe this is an excellent strategic fit for Vocera and complementary to what we do.

We anticipate this transaction will accelerate our evolution to the cloud and will add to our high margin software and recurring revenue base. It will enable us to further penetrate our addressable market through an offering targeted for regional health systems and small to midsize healthcare facilities as well as ambulatory facilities and clinics that may not have the I.T. resources to maintain an on-premises solution. This acquisition also represents an opportunity to leverage some important relationships with key industry participants.

For some time now, we've been describing our eminent strategy as a way to expand our software platform in order to achieve our mission of improving outcomes, lowering cost, enhancing patient and staff experience with a goal of keeping everyone safe. We look for businesses that enable us to expand our reach across the care continuum and empower us to become more clinically relevant. We like software businesses that have complementary offerings, enjoy high gross margins, produce recurring revenue, and are consistent with our business model, which has a high degree of financial leverage. We have successfully executed the strategy with our two most recent acquisitions, extension healthcare, in-depth applications and we believe we can be equally successful with this acquisition.

The PatientSafe platform is a cloud-ready solution that integrates communication and clinical workflows by consolidating secure messaging, voice-over IP calls, alerts, EMR clinical data, and task-driven workflows into a single mobile smartphone app. PatientSafe customers encompass 85 healthcare facilities and include some marquee names, we are delighted to serve. This customer base is highly complementary to IRs and represents an opportunity for us to more effectively reach new target markets that have been historically under-penetrated by Vocera core products. Hospitals want simplified communication and workflow solutions from a partner who understands their clinical challenges and has the right solution for their size, scale, and use cases.

On all these points, Vocera has delivered. With over 1,300 U.S. hospital customers and market-leading product capabilities, Vocera is the leader in the clinical communication collaboration market. Its acquisition positions us to extend our reach into the small and mid-market with a simple easy-to-use solution.

With this addition, Vocera further extends our leadership role both in terms of market reach and capability. Now I'd like to give our CFO, Justin a chance to cover the financial details around our Q1 results. After that, Steve will cover the financial details of the transaction and our guidance for the rest of the year. Justin?

Justin Spencer -- Chief Financial Officer

Thanks, Brent. Hello, everyone. We had a very strong start to the year exceeding our expectations across the board. Total revenue in Q1 was $48.7 million, up 20% over last year.

Product revenue, which includes both devices and software increased 27% to $22.6 million. Device revenue increases 10% to $15.3 million, which we were pleased with considering that Q1 last year was such a strong quarter for bad shipments. Additionally, our Smartbadge momentum continued as we shipped a record number of units in Q1, including deliveries to several large customers. Software revenue in the first quarter was $7.3 million, over 85% versus last year.

This year-over-year increase came from strong bookings and a software backlog that we converted to revenue in the first quarter. We continue to have a healthy software backlog, which should help fuel our software revenue in the future. One final comment on our software business. On our last call, we discussed how we evaluate the health of our software business overall by combining software with the subscription and support revenue streams, which we view holistically as our software-related business.

We'd like this to use because subscription and support revenue includes the software maintenance contracts that are tied to the ongoing customer use of our software as well as our recurring SaaS offering such as these. Software plus subscription and support revenue combined grew 29% in Q1 and represented 58% of our total revenue. We expect this mix to increase even more in the future as our software-related business growth fueled in part by acquisitions such as Ease and PatientSafe. This increasing mix of high-margin software-related revenue will also be a key driver of our profitability growth going forward.

Our services business also had an outstanding quarter. Services revenue increased 14% from last year to $26.1 million with growth in both our professional services and subscription and support revenue streams. Our professional services team successfully managed a full schedule of customer deployments with a mix of both onsite and virtual work, and the momentum of these along with high customer renewal rates for our software means as contracts enabled us to increase our recurring subscription and support revenue by 16% versus Q1 last year. Due to the strong bookings in Q1, we continue to have a very healthy combined level of backlog and deferred revenue.

At the end of Q1, our combined backlog in deferred revenue was $169.3 million, up 35% versus Q1 last year. As we discussed last quarter, we have a higher proportion of multi-year subscription and support contracts and a growing number of larger multi-facility deployments that spanned more than one year. So, we are anticipating a higher percentage of this backlog in deferred revenue to convert to revenue beyond 2021. For example, the Barnabas Men's Ministry of Health and the large Q2 deal that Brent just mentioned will contribute much more to revenue in 2022 than in 2021, based on the currently expected deployment schedules.

This increasing mix of the longer-term backlogs is a positive trend for the future growth of our business. Meanwhile, we believe that the combined backlog in deferred revenue scheduled for the remainder of this year continues to provide good visibility to our revenue for 2021. Now, I'd like to comment briefly on our profitability, which was also a real bright spot in the quarter. Our adjusted EBITDA with $5.2 million, significantly better than last year and above our own expectations.

Our GAAP net loss for the quarter was $7.6 million, also better than last year and include a $2.1 million one-time expense related to our convertible notes financing. Absent this one-time charge, our cash net loss would have been even better. Here's some color on our non-GAAP gross margin and operating expenses. Non-GAAP gross margin in Q1 was 66%, the highest gross margin for a first -- for a first-quarter that we have ever had.

Both product and services margins increased substantially from Q1 last year due to higher overall revenue in a favorable revenue mix from our higher-margin revenue streams. Non-GAAP operating expenses of $28.1 million, were up 3% compared to last year with the additional ongoing expenses from the acquisition we announced today, and some returned to travel, which we assumed in our guidance when we began the year. We anticipate that our non-GAAP operating expenses will increase sequentially as the year progresses and be approximately 55% to 57% of our total revenue in 2021. Transitioning out of the balance sheet.

We ended the quarter with roughly $315 million in cash, up roughly $85 million from the end of last year. This includes the impact of our recent financing as well as $9 million of cash that we generated in Q1. In March, we strengthened our balance sheet by redeeming most of our 2023 convertible notes and issuing new 2026 convertible notes with a lower interest rate and higher conversion price. Our capital structure is now even more efficient as we will have much less interest expense than we did before and at a higher level of cash available to fuel our growth.

And shareholders have significant solution protection given the higher conversion premium on the new notes and the cap call instrument we put in place. After the quarter ended, we issued an additional $24.5 million of the 2026 convertible notes through the exercise of the underwriters this year, which brings our total convertible debt to approximately $265 million, and increases our cash balance by an additional $21.9 million in net investments cost. Now, I'm excited to introduce to you Steve Anheier, who will be our next CFO on June 15. I have really enjoyed working with Steve who is an outstanding leader in our company.  I believe he has the right skill set to work effectively with Brent.

Our board of directors, our investors, and the rest of the Vocera management team to help take Vocera to the next level. I'll turn it over to Steve to talk about the financial aspects of the acquisition we announced today and our updated 2021 guidance. Steve?

Steve Anheier -- Chief Financial Officer

Thank you, Justin. And hello, everyone. I'd like to start off by saying how much I have enjoyed working with Justin over the past few years. Now turning to the announced acquisition and guidance.

I'll start by providing a financial summary of this transaction, and then talk about how the acquisition impacts 2020 guidance. That position is an all-cash debt-free transaction of approximately $35 million. Much like our previous acquisition of extensive healthcare needs, we are acquiring a software base high-margin business that nicely complements our product portfolio. While the acquisition will only add a modest amount of revenue in 2021 to the standard purchase accounting and associated deferred revenue adjustment, we expect it to contribute roughly $10 million in 2020 to revenue.

I like to take a moment to discuss the PatientSafe revenue model. Historically, the company has sold licenses with multi-year terms with software revenues being recognized up fine and then maintenance revenue over time. However, as a solution eventually moves to the cloud, we see an opportunity to grow and expand feature recurring SaaP subscription revenue. We plan to quickly integrate the business into our existing organizational structure to help us realize the cost synergies we have identified, and focus our investment on our base product capability.

We expect to fully realize the cost synergies over the next 12 months to 18 months at which point we believe the acquisition will be accretive to our business. Now turning to guidance. Reflecting on the revenue, we expect from this acquisition in 2021, we are increasing our annual revenue guidance to a range of $218 million to $228 million. The strength of our recent large booking increases our confidence in the priority being placed on our solution in the long-term growth and visibility in our business. As Brent and Justin discussed, the large enterprise bookings typically have longer deployment time and therefore, are projected to have a much greater impact on revenue beyond 2021.

Our key drivers for revenue continue to be healthy, including our bookings, backlog, and deferred revenue, which provides strong visibility into 2021 revenue. We want to emphasize that we continue to expect approximately 45% of our revenue to occur in the first half of the year, and 55% of revenue in the second half of the year. Turning to guidance for profitability. We now expect adjusted EBITDA 2021 to be in the range of $26 million to $31 million, reflecting the impact of the acquisition.

We expect to see our typical pattern of higher adjusted EBITDA in the second half of the year both from the increased revenue and ongoing realization of acquisition cost synergies. The rest of our GAAP and non-GAAP guidance, which now includes the expected impact of acquisition and our recent financing can be found in our press release. In closing, we are very pleased with the financial results in the first quarter and our overall business momentum, but with this acquisition, we have an opportunity to accelerate our progress in our market and over time a greater reoccurring high margin software replicant. This is a transaction that aligned closely with our existing financial story and has a compelling long-term strategic and financial profile.

Thank you for your time. I look forward to working with all of you in the future. And now, I will turn the call back to Brent.

Brent Lang -- Chief Executive Officer

Thanks, Steve. I'm really excited to be working with you through this transition, and as you step into the new role as CFO of Vocera. I'm happy to have you meet our investors on today's call. I look forward to a busy quarter on investor outreach with you during Q2.

But also, I'd like to take a moment to thank Justin who has been a great partner to me for several years now. He has contributed so much to the building of our culture, growing our business, and bringing Vocera to where we are today. We wish you the best in your next chapter. Before we conclude, and as a follow-up to our last call, I wanted to let you know that we have recently published our initial framework for ESG.

This is an important step for us, and we are excited to share the framework with you. I hope you will take some time to review it on our website. Our business is performing well and our uniquely differentiated solutions are in high demand. We began the year with great execution achieving impressive Q1 bookings, accelerating our revenue growth, and making an important strategic move with the PatientSafe acquisition.

We have a resilient business, loyal customers, a strong cash balance, a powerful selling engine, and a large market opportunity in front of us. I am excited about our future. With that, we will conclude our formal remarks. Thank you for listening today.

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

Questions & Answers:

Operator

[Operator instructions]. Our first question comes from Sean Wieland with Piper Sandler. Your line is open.

Sean Wieland -- Piper Sandler -- Analyst

Hi. Thanks so much. So my one question is around PatientSafe, and I want Steve to start with you. Congrats, on the new role.

I want to confirm that the guidance change is entirely related to the acquisition, or were there some other moving parts in that.

Steve Anheier -- Chief Financial Officer

Hi, Sean. Well, thank you for that. And yes, that is to confirm that the guidance changes entirely reflect the effect.

Sean Wieland -- Piper Sandler -- Analyst

Great. So now on the integration strategy with PatientSafe. Are there any overlaps broadly for the team. Any overlaps with engaging in and if you can maybe talk a little bit about how the two complement each other.

Brent Lang -- Chief Executive Officer

Hey, Sean. So there's clearly some overlap in the products. We are competitors or we're historically competitors in the marketplace but we see the products as more complementary than competitive. The overlap is less on the engaged side and more on the smartphone communication side of our business.

But what we found when we looked at the marketplace was that the customer base that they were serving was pretty complementary to our customer base. They tended to focus on smaller and regional hospital facilities where we are more focused on the larger facilities. And that combined with the fact that they had a more of a smartphone-centric approach to the business and the cloud-ready capabilities of their product offering meant this could be really complementary to our business and an opportunity to consolidate and build share and expand our reach within the market.

Sean Wieland -- Piper Sandler -- Analyst

And Justin, thank you. And just one more on the financial side. Are there any acquisition-related intangibles any that can be written off that's going to mess with numbers?

Steve Anheier -- Chief Financial Officer

No, Sean. So you'll see the acquisition-related costs going through our updated adjusted EBITDA. I think from a bigger picture perspective, we've taken down EBITDA but PatientSafe will be breakeven next year then accretive thereafter and what we're really excited about is the software-based business, high margins and it's really nice into our long term financial profile.

Sean Wieland -- Piper Sandler -- Analyst

Superb. Thanks so much. And Justin, best of luck.

Justin Spencer -- Chief Financial Officer

Thank you.

Operator

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

Sean Dodge -- RBC Capital Markets -- Analyst

Thanks for taking the question. I'm just telling you there's a little bit more about your partnership with status solutions and maybe some of those opportunities you guys are seeing in the long-term care space?

Steve Anheier -- Chief Financial Officer

Yeah, you can draw a lot of parallels between what we're doing with status solutions and what we're doing in the acute care market around delivering situational awareness and contextual insights to caregivers status solutions product is really designed as an integration tool that connects us to many of the others monitoring systems and clinical solutions inside the long term care facilities and was a different set of integrations and a different set of clinical data. And what we are typically integrating within the acute care marketplace. So there are some parallels to what we do with engaging within the acute care marketplace. And we saw this as a way of delivering some of the same value proposition into this newer market opportunity.

And we're really excited about the partnership with status.

Sean Dodge -- RBC Capital Markets -- Analyst

Congratulations Steve. And best of luck, Justin.

Justin Spencer -- Chief Financial Officer

Thanks, Sean.

Operator

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

Ryan Daniels -- William Blair -- Analyst

Yeah, thanks for taking the questions team and Justin and Steve. Wishing you both the best in the future. Maybe we could start again with the transaction. I want to understand if you think there's an opportunity to cross-sell into your existing client base.

Obviously, you've got relationships with large systems, but those systems often have smaller facilities and probably ambulatory offices, ASCs. So is there a kind of land and expand strategy there as well where you can leverage your base to sell? And maybe facilities that your current product offering wasn't as applicable for?

Brent Lang -- Chief Executive Officer

Yeah, absolutely Ryan. That's core to the strategy. When we looked at their customer base there and around 85 hospitals today, there were portions that were unique that there was no overlap in. And as I mentioned, many of those were smaller facilities.

And then there was a portion, maybe a third a little less than a third that was actually joint customers where the health system was using the center and certain parts of of the environment and the PatientSafe solution in other parts of environment with different groups of users. And so we do think that there's a natural synergy here. We also feel that as the movement toward class or supercell rate there may be customers who want to have a portion of their customer run -- running and the cloud solution. And then finally, I think we realized that there were just deals that we were not even aware of or maybe even being invited into. I think there's still a little bit of legacy associated with Vocera as the best company or whatever that may prevent us from getting visibility into some of the more smartphone-oriented deals.

And so, this is a great opportunity to extend our reach there. But we see the products working very complementary together, and we definitely see this as a way of really accelerating our ability to penetrate all of our TAM as opposed to more the higher end of the marketplace that we've been focused on over the last couple of years.

Ryan Daniels -- William Blair -- Analyst

Ok. Makes a lot of strategic sense. And then one quick follow-up if I could. You mentioned the largest bookings in company history.

I think it's a part of Barnabas, but why I want to check that. No. 2, more importantly, can you just discuss in a little bit more detail what led to the selection of Vocera there. I assume given the size of it it was probably a highly competitive bid.

So talk a little bit about some of the key things that help` Vocera win that. Thanks.

Brent Lang -- Chief Executive Officer

Yeah. Ryan thanks for clarifying the question. Actually, if we have we have a wealth of riches this quarter. So the same Barnabas deal was a very large deal in Q1.

It was close -- It was one of the top deals we've done in the history of the company., but that's separate from the deal that I was talking about in Q2, which was in fact the largest deal in the company's history. And we're not disclosing to that health system is at this point in time. But those are two separate -- two separate deals. One in Q1, and one in Q2.

I think part of this deployment was a situation where we have had a small deployment with them for a number of years. And also had a deployment as I mentioned in the prepared remarks with the Ease Solution. So both solutions had a footprint in the marketplace. A big part of what drove the expansion was expanding the use of engaged to a broader set of use -- users in use cases and then rolling off communication solutions across the marketplace.

I think that's the classic case where we're looking at hospital customers who are looking to reduce the number of vendors that they're wanting to work with. They're looking for a unified platform that they can handle for voice messaging, clinical learning, and alarming, and having all kinds of run together with a common database and common administration from a trusted brand with the professional services to back it up. And a long history of having delivered positive outcomes for them. `So they were able to measure the impact of our solution in their environments, and they were able to use that to justify the expansion out to the broader health system.

Ryan Daniels -- William Blair -- Analyst

Perfect. Thank you for that color. And again, best of luck to Justin and Steve. Thanks, guys.

Operator

Our next question comes from Scott Schoenhaus with Stephens. Your line is open.

Scott Schoenhaus -- Stephens Inc. -- Analyst

Hey, thanks for taking my question. And Justin, best wishes for your next journey. And Steve congrats, again. So all my questions regarding the mutation on the acquisition [Inaudible] let me go back to some of your legacy business and ongoing opportunities there.

So, my first question is about federal certification. You guys received at the end of March, you guys are over 55% penetrated in the federal market exposure across over 100 hospitals, and some of these federal contract -- contracts start to come up for renewal from 2016 when they were first signed or when they were signed. Can you provide some color on the upselling opportunities here in the federal market from your legacy standard badge to the Smartbadge?

Brent Lang -- Chief Executive Officer

Yeah. It's something we're really excited about. The federal team has been waiting to get its certification and they have been talking about Smartbadge with the customers and the DHA with you both the customers as you mentioned and a large number of those VA customers, in particular, have badges that are reaching the three to four year typical, useful life and many of them are now out of warranty. And so we do think that there's a replacement cycle that we can now pursue and the advantage of getting with its certification now early enough in the year that we can actually respond to this and sell into this marketplace during this fiscal year for the federal government, which would end at the end of September was an added bonus for us.

And so, we had previously communicated that we were hoping to get this certification in the first half of the year. Now with the book and COVID and all those sorts of uncertainty within the federal government, there was some question in our mind as to when exactly we would get the certification. But I would say that this ended up happening sooner than we originally anticipated. So we're happy with that result and the sales team is now going to go back and start those conversations with their installed base customers about that the upgrade and replacement cycle.

Scott Schoenhaus -- Stephens Inc. -- Analyst

That's a great color. Thanks, Brent. And I guess as a follow-up. You mentioned briefly about your Ease software.

Can you talk more about the traction you're seeing there with the cross-selling? Correct me if I'm wrong, but if you're at 60 hospitals that had when you first acquired Ease. And just talk about kind of where your cross-selling? Where you are in these cross-selling opportunities and where they can go in the next 12 months. Thanks.

Brent Lang -- Chief Executive Officer

Yeah. I think at the time of the acquisition it was closer to 80 customers that were using the product. And we continue to cross-sell. We're happy with the progress we're making there.

The team is executing really well. We are continuing to invest in that business. We've added those salespeople and engineering and services people to that business unit to help them match the growth that they're seeing in the marketplace. And we're making introductions.

I think it's in some cases, it's a different decision-maker, so it's not an automatic cross-sell but at least we have a relationship with those customers and we can use that to open doors. I would say that so far, the acquisition has exceeded our expectations in terms of the growth of new customers and overall revenue.

Scott Schoenhaus -- Stephens Inc. -- Analyst

Thanks, Brent.

Operator

Our next question comes from Gene Mannheimer with Colliers Securities. Your line is open.

Gene Mannheimer -- Colliers Securities -- Analyst

Thanks, everyone, and great, great quarter and start to the year. I joined the call a little late, but can you tell us on PatientSafe. I mean this is a company that's been around for nearly 20 years and in various forms and iterations. Just curious what does -- what these patients say forgive you that you don't already do or that you couldn't build yourself? And why is now the right time to acquire? Thanks.

Brent Lang -- Chief Executive Officer

Yeah. Gene, it's a great question. And you're absolutely right. The company has been around for a while.

It has pivoted its strategic market focus a couple of times during that period time. You may remember early on they were in the med administration and barcoding business and only in the last few years have pivoted moreover to the clinical communications and clinical workflow side of things. And they were a competitive product as I mentioned before, but serving a slightly different part of the marketplace. So for us, No.1 is, really extends our reach into the middle and small hospital market.

70% of the U.S. hospitals are less than 200 beds. But if you look at our installed base, only about 50% of our customers are less than 200 beds. So, we are underpenetrated in the small to medium-sized hospital marketplace.

If you look at PatientSafe customer distribution they're much more oriented toward that some 200-bed hospital market space. Secondly, this adds some great high-margin software revenue and recurring revenue streams to our business. Particularly ones that we converted to a true fast cloud-based offering. We are on a march to add more fast-paced revenue to our business, and so we saw this as a great opportunity to do that.

Third, we were really impressed with the product that they built. It was a cloud-ready product it was designed for the cloud in mind from the very beginning. Smartphone-oriented solution and a little lighter touch. So for I.T.

organizations it may not have the resources to manage an on-premise solution and are looking for something that's a little lighter touch. This seems like it's a really good match for that into the marketplace and will allow us to target a portion of our TAM that we hadn't penetrated very heavily in the past. And we see this as an opportunity to sort of drive down the total cost of ownership for those types of customers. And I think fourth, we were quite excited about the level of EMR integration that they have developed in the product around transitions of care working with the major each our companies, and part of their selling strategy had been in kind of an EMR compatible or EMR companion mode where they were augmenting some of their core capabilities that the EMR was driving in.

For customers who sort of made a strong commitment to the EMR mobile applications whether that's at the Grover or some of the other mobile clients, we see this as a great opportunity for us to augment those environments and really have an important role to play forward. So strategically, it's a great way to increase our market share and consolidate the market a little bit and add some great strategic revenue streams to our business.

Gene Mannheimer -- Colliers Securities -- Analyst

Oh great, Brent. I appreciate that. Makes a lot of sense. Thanks.

Operator

Our next question comes from Matt Hewitt. Your line is open.

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

I'm, Matt Hewitt. I guess software sounds like it was an area of strength during the quarter. Could you give us an update on the Engage product specifically, and how they attach rates for that that have been trending lately?

Justin Spencer -- Chief Financial Officer

You bet. The software is a real bright spot for the quarter up over 85%. And we've been -- having a lot of success at selling our software really the broader platform, which includes engaging. And we attach rates are very high.

In fact, engage in many instances is actually one of the leading areas of the product for the solution that customers start by becoming interested in and then it often grows beyond that to a much broader communication place. So there are -- now we have over time gradually increase the penetration or the rate at which our customers have engaged and there's now a very meaningful portion of our base that has that. There's still more growth. We think is that we can do and in more expansion within our installed base, but we're just really really pleased with how that product has performed both individually in terms of its contribution or our software but more significantly because it allows us to get deeper and deeper into the clinical workflow of the hospital and that makes our solution even that much more sticky.

And there's a nice recurring component to it through the maintenance contracts that we have associate with that software.

Operator

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

Stephanie Davis -- SVB Leerink -- Analyst

Thank you for taking my question. A lot of my thoughts on the PatientSafe acquisition on our behalf. I have a little bit of an out-of-the-box question. As a result, we've seen some of the tech names start to raise concerns around the microchip shortage and follow on supply chain issues that they have a hardware component.

So two parts. First, are you seeing anything band the supply chain side just given it could be a little bit less adjacent beyond your Smartbadge solution? And secondly, what does your cadence look like booking a new RAM to fulfilling the full badge order?

Justin Spencer -- Chief Financial Officer

Hi Stephanie. Yeah. You're exactly right. There is a -- there's a broad-based concern for around components currently in the overall supply chain more broadly in the industry.

I will say that we anticipated this. And we have historically maintained and if it's actually been building a little bit more inventory that we have added over the last few quarters to hedge this risk. And so we feel very comfortable given the amount of inventory that we currently have on our books that we can just continue to manage this. But we're obviously, watching it very very closely.

We do stay in very very close contact with our two contract manufacturers that manufacture our badges. And feel like we've got very good visibility to our specific and unique supply chain. But we have purposefully built one inventory just to give us the buffer that we feel that we need to continue to satisfy demand. You know in terms of the timeframe.

Typically it varies by customer. You know somebody of these larger customers that we've recently, but won't likely take delivery of barges for several quarters. On the other hand, if we receive a booking from an existing customer they're oftentimes wanting that product fairly quickly. So we design our supply chain to be able to respond.

We never want to be in a position where we're not able to if the customer wants those badges sooner rather than later. And we feel like we've got an adequate level of inventory to manage through this over the next several quarters.

Operator

Our next question comes from [Inaudible]. Your line is open.

Unknown speaker

Hey, good evening. Just a couple of numbers questions on the deal so perhaps it's for Steve. The $10 million of revenue for 2022 got that. For 2021 guidance adjustment as all the detail that's on revenue $3 million.

But that's restrained because it's the partial year and there's the accounting adjustment. So what is kind of a pro forma --but what is Patientsafe they've expected to do for 2021 on a pro forma basis. I'm getting to like $7 million? Is that the ballpark?

Brent Lang -- Chief Executive Officer

Yeah. Hi, Michael. So I think you had the Ryan factor is absolutely where it does a pro-rated year. So our revenues from May through December instead of the full year.

And then you have your standard purchase accounting adjustments. And yes, you are in the ballpark.

Unknown speaker

Perfect. And then on the margin profile, you know several solutions to higher-margin revenue stream can you perhaps help us with a finer point or a range on what their gross margin profile looks like.

Brent Lang -- Chief Executive Officer

Sure. Without getting into too many specifics you know as this expands over time, we do see software base type margins. And what I'll say, so you'll be at both areas or above our standard margins right now. So it should be treated to our business just because there's a software nature.

Unknown speaker

Yep got it. Thank you.

Operator

Our last question comes from [Inaudible] with Jefferies. Your line is open.

Unknown speaker

The question got a lot left to ask. but Brent in your prepared remarks, you talked about the services team managing a full schedule of a mix of on-premise and remote deployment. And I wondered as we kind of get closer to pulling out of restricted access, how much of that deployment do you anticipate will be permanent remote? How much can be virtualized on a permanent basis?

Brent Lang -- Chief Executive Officer

Yeah. Great question. I think it's too early to know, but we're excited about the prospect. Obviously, there are some great synergies associated with doing more than work remotely both in terms of people's time and travel expense.

I've been really happy with the way the teams have innovated and redefined some of the processes. There's always going to be a demand for onsite capabilities and so it's not going to stay as low as it has been during COVID. But we challenge the teams to sort of think about driving more efficiency and synergies with more remote work. And we're building tools actually to allow us to do more remote analysis and remote monitoring as well.

So I can't give you a specific number, but I think it will definitely be more remote than it was historically, and we were actually really excited about the virtualization of our business more broadly both in services and sales in marketing and even in investor relations. So there are some great opportunities across the board.

Unknown speaker

And to try to launch one when it's virtual I guess. The other question I have for you is if you could provide us with an update on renewal rates in your -- and your support line and maybe unofficial metric but as you are engaging with clients around you like you mentioned some of these deployments in the federal that are three or four years old and you're you're coming back around replenishment there. What might we think about as a revenue upsell as a typical metric expansion of your relationships as you hit these renewal points? So kind of renewal rate, but then also what's the revenue on those renewals growth.

Justin Spencer -- Chief Financial Officer

Yeah. Hi Dave. So we continue to see very high rates of all of our software contracts including our federal business. And we've stated publicly that those are in the mid to upper 90s and that's -- that was the case in Q1 and we expect that will continue.

And I think it's just a great reflection of both the stickiness as well as the loyalty and the utility of solution that our customers have. You know our software maintenance is not inexpensive, and so we recognize that and we aim to really deliver great value for that in exchange for the revenue and the fee that we usually charge there. The upside opportunity and the fact is there's a great opportunity I would say. It's going to be very fluid and it's not like there is a kind of a massive wave of upgrades coming right away.

I think it's going to be gradual over time. The Smartbarge the first certification on a Smartbadge is a great new development for us that we're excited about it. And certainly, for those customers that have badges that they purchased back in 2015, 2016, and 2017 as Brent mentioned. Those will eventually need to be replaced, and so over time, we believe that those customers will do that either by purchasing new badges or we hope also the Smartbadge.

Each sale that we make is different and unique. We have some customers that are you know smaller in the Fed space where the initial size was in that. Few hundred thousand dollars and then many other hospitals that were much much larger than that. And so, each sale is an opportunity and this opportunity will be differentiated depending on the customers is.

The federal is actively engaged now and on top of those is an opportunity.

Unknown speaker

Sugar. Thank you.

Operator

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

Brent Lang -- Chief Executive Officer

Thank you. And thanks, everyone for taking your time to join us today. We're really happy to share our Q1 results with you. And strategically behind this acquisition, and we look forward to having a dialogue with you in the quarter to come.

have a great day.

Operator

[Operator signoff]

Duration: 54 minutes

Call participants:

Sue Dooley -- Director of Investor Relations

Brent Lang -- Chief Executive Officer

Justin Spencer -- Chief Financial Officer

Steve Anheier -- Chief Financial Officer

Sean Wieland -- Piper Sandler -- Analyst

Sean Dodge -- RBC Capital Markets -- Analyst

Ryan Daniels -- William Blair -- Analyst

Scott Schoenhaus -- Stephens Inc. -- Analyst

Gene Mannheimer -- Colliers Securities -- Analyst

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

Stephanie Davis -- SVB Leerink -- Analyst

Unknown speaker

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