Vocera Communications (VCRA) revolves around modernizing the way healthcare professionals communicate, explains Hilary Kramer, growth stock expert and editor of GameChangers.
The company provides integrated and intelligent communications and clinical workflow solutions to nearly 1,900 healthcare facilities worldwide. The key to the platform: lightweight, wearable voice-controlled devices known as badges, which are bound together by an enterprise software system.
Through this software system, which recognizes over 100 voice commands, users can connect instantly with other staff simply by saying the name, function or group name of the desired recipient without knowing their phone number or even their name.
An example of how Vocera can improve communications in a healthcare setting comes from Birmingham Children’s Hospital in England, a reasonably large facility with 361 beds and a staff of 3,700 working with approximately 90,000 patients annually.
Upon installing Vocera, the verbal response time for inquires dropped from 60 seconds to 10 seconds for bedside staff, from 120 seconds to 9 seconds for roaming staff, and from 35 seconds to 11 seconds for incoming telephone calls. This improved response time leads to improved productivity from the nursing staff and a better experience for the patients.
Despite a slow start to the year due to COVID disruptions, VCRA ended fiscal 2020 strong with revenues up 9.9% to $198 million, driven primarily by higher unit sales of badges, which offset a decline in software sales which reflected timing issues.
Subscription and support service revenues are also strong, up 14% for the year, with these revenues, which are recurring in nature, now accounting for 40% of the total top line.
Margins improved on higher sales volume, improved profits per device sold and lower travel expenses due to COVID-19. As a result, earnings per share (EPS) for the year improved to $0.57 from $0.30.
The strong results continued in the first quarter of this year, with revenue growth accelerating to 19.7% as product revenue increased 26.7% on strong badge unit volume growth.
Profit margins continued to expand on the higher volume and improved role of software in the sales mix. Profitability also improved from lower interest expense, with EPS recovering to $0.09 from a loss of $0.14 in the year-ago quarter.
There are several reasons to believe the growth can continue. Deferred revenues and backlog at the end of the first quarter were up 35% from the prior year. The company is also signing larger deals and software will be a larger part of deals, further boosting profitability.
In April, the company acquired PatientSafe Solutions, which consolidates secure messages, voice calls, alerts and nurse call notifications with data from the electronic medical record (EMR) to enable care teams to quickly manage mission-critical workflows in one mobile smartphone app. The deal is expected to extend the company’s reach into small and mid-size hospitals, where PatientSafe has a significant footprint.
While acquisition costs will likely keep EPS flat this year, I believe a 50% increase to $0.80 a share is possible in 2022 as VCRA still has plenty of room to expand margins through higher volume and more software sales. Further debt reduction leading to lower interest expense is also likely.
In summary, VCRA has a unique business and there are signs that organic growth is accelerating, Valuation is "reasonable" given prevailing market conditions at 50X next year’s EPS estimates. Another potential kicker for growth is the company moving into other industries, with education being the most likely candidate.
Buy VCRA under $42. My target is $50. Given the company’s relatively small size and still emerging profitability, I rate the shares as high risk.
