Evolv Technologies Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 9, 2023

There are 7 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Evolv Technologies Third Quarter Earnings Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Instructions will be given at that time.

Operator

As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Brian Norris, Senior Vice President for Finance and Investor Relations for Evolv Technologies. Mr. Norris, please go ahead.

Speaker 1

Thank Thank

Speaker 2

you, Eric, and good afternoon, everyone, and welcome to today's call. I'm joined here today by Peter George, our President and Chief Executive Officer And Mark Donahue, our Chief Financial Officer. This afternoon, after the market closed, we issued a press release announcing our Q3 results and our business outlook. This press release is available on the IR section of our website. During today's call, we will make forward looking statements Within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 and the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 that relate to our current expectations And views of future events, including, but not limited to, statements regarding our future operations, growth and financial results, Our potential for growth and ability to gain new customers, demand for our products and offerings and our ability to meet our business outlook.

Speaker 2

All forward looking statements are subject to material risks, uncertainties and assumptions, some of which are beyond our control. Actual events or financial results may differ materially from these forward looking statements because of a number of risks and uncertainties, including without limitation the risk factors set forth under the caption Risk Factors in our annual report on Form 10 ks for the year ended December 31, 20 22 filed with the SEC on March 24, 2023 and as updated in our other documents filed with or furnished to the SEC from time to time. The forward looking statements made today represent our views as of November 9, 2023. Although we believe that the The expectations reflected in these statements are reasonable. We cannot guarantee that future results, performance or the events and circumstances Reflected in our forward looking statements will be achieved or will occur.

Speaker 2

Except as may be required by applicable law, we disclaim any obligation Please note that our commentary today will also include non GAAP financial measures, which we believe provide additional insights for investors. These measures should not be considered in isolation from or as a substitute for financial be found in our press release issued today. Please note that our definition of these measures may differ from similarly titled metrics presented by other companies. We will be discussing key metrics such as annual recurring revenue or ARR, remaining performance obligation or RPO, Deployment activity and total number of subscriptions, each of which we believe is helpful to investors in understanding the progress we are making as a business. Investors should note that today we are providing additional transparency to investors by presenting hardware license revenue on the face of our income statement.

Speaker 2

This is the new revenue stream that we receive upfront from Columbia Tech when our customers elect to purchase hardware under our new distributor model. We once again have an active IR outreach schedule planned for the Q4. Highlighted by the UBS Credit Suisse Technology Conference, The Craig Hallum Conference and the Northland Capital AI Conference. For more information about these conferences or any of our IR outreach plans, Please contact me at bnorrisevolvtechnology.com. With that, I'll turn the call over to Peter.

Speaker 2

Peter?

Speaker 1

Thanks, Brian, and thanks, everybody, for joining us today. I'm going to spend a few minutes on our results for the Q3, discuss the key trends we believe are driving those results and then spend a few minutes updating you on the progress we're making with several other important initiatives across the business. Mark will then walk through our financial results and our outlook for the remainder of the year as well as provide some insights into how we're thinking about next year. During the Q3, We delivered strong results across every key measure of the business, including revenue, ARR, RPO, Subscriptions and gross margin. Revenue in the 3rd quarter was a record $20,200,000 with recurring revenue of $14,300,000 up 131% year over year.

Speaker 1

Our growth continues to reflect strong new customer acquisition activity and an overall growth in the number of active subscriptions. We activated over 600 new multiyear subscriptions of Evolve Xpress in the 3rd quarter And have now surpassed 4,000 units deployed. We expect to surpass 7,000 units deployed In 2024, 12,000 units deployed in 2025. We remain focused on reaching 100,000 units deployed over the next decade. We welcomed 70 new customers in the Q3, including such iconic venues As the Nashville Symphony Center, the Philadelphia Zoo, the TGL Golf Arena, the Plaza Live, The Broad Acres Open Air Marketplace, the Unita Casinos and the Alconic Red Rocks Amphitheater in Colorado.

Speaker 1

We continue to see accelerated visitor security screening activity. In fact, we screened over 200,000,000 visitors In the Q3 alone, more than double our screening activity compared to a year ago period. We are now averaging over 2,200,000 visitors screened every day, up from 900,000 visitors In the Q2 of last year, we have officially surpassed the TSA in terms of average daily visitor screened. Furthermore, I'm pleased to report that we have just surpassed 1,000,000,000 visitors screened since the launch of Evolve Xpress. We're not aware of any other company in the world That is screening more people every day than Evolv technology.

Speaker 1

That new screening data becomes part of our unique Screening data late that helps our systems become smarter over time. This continues to extend our competitive advantage We grew ARR from $54,000,000 at the end of Q2 The $66,000,000 at the end of Q3, reflecting growth of over 20% sequentially and nearly 130% year over year, again, Fueled by increased subscriptions, strong new customer adoption and the accelerating shift to reoccurring revenue. Tonight, We are reaffirming the upwardly revised outlook for 2023 we issued just 4 weeks ago. Specifically, we remain on pace to deliver our ARR growth of at least 115% in 2023. While we're still in the planning stages for next year, our preliminary models are focused on delivering another very strong year in 2024 With expected ARR growth of about 50%.

Speaker 1

That would drive us to well over 100,000,000 In ARR in 2024, with gross margins of about 60% and accelerating leverage from our investments, We believe this would put us in an excellent position to reach positive adjusted EBITDA in the first half of twenty twenty five without The need of any additional capital. There are several drivers for our industry leading growth, most importantly, the pressing need For improved security. Every day, we all see the reports of escalating gun violence in the very places that should be free of firearms: Schools, hospitals, warehouses, stadiums and places of worship. But it's in these very same places where we expect yet another year of tragic gun violence. In fact, in 2023, We've had 597 mass shootings so far this year, including the recent tragedy in Lewiston, Maine, Just 3 hours north of us here in Boston, which took the lives of 18 innocent people and wounded many more.

Speaker 1

To mitigate the risk of mass casualty incidents, our customers are increasingly turning to technology to help. Evolv Express leverages robust sensor technology, advanced AI driven algorithms, cloud connected connectivity And extensive data analytics. We continue to see broad adoption of our solutions with particularly strong end market demand In education, healthcare and professional sports, the education market represented about 40% of our business in the Q3. We added nearly 2 dozen new education customers in the Q3, including the Wilkinsburg School District in Pennsylvania, the Rochester Institute of Technology, the Inwood Academy for Leadership in New York City, The People for People Charter School in Philadelphia and the Muskegon Public Schools in Michigan. Evolve Express can now be found in 17 of the top 100 school districts in the country and is being used in over 700 School buildings to screen about 325,000 students every single day.

Speaker 1

Nothing represents our mission more And keeping kids safe at school. We're expecting a strong quarter again in education here in Q4. We continue to extend our early leadership lead in the healthcare market, which is comprised of over 6 1,000 hospitals and where 70% of workplace violence takes place. We added over a dozen new care customers in the Q3, including Parkland Health, one of the largest public hospital systems in the United States Windsor Regional Health, which is the 15th largest hospital in Ontario and just down the 401 from Toronto And the University of Missouri Healthcare. For the 2nd consecutive quarter, we saw 50 plus percent sequential growth In our healthcare business, Evolv Express is being used in 250 hospital buildings to screen over 400,000 Hospital visitors every day compared to just 40,000 a year ago.

Speaker 1

We're seeing growing returns in the investments we're making In the Healthcare and expect the market to be one of our top verticals for quite some time. We delivered our strongest quarter ever in professional sports, which represented about 15% of our activity in the 3rd quarter. We're proud to now partner with over 40 teams and stadiums across the National Football League, Major League Baseball, The National Hockey League and Major League Soccer. New additions during the Q3 included the Houston Texans of the NFL, The Minnesota Wild of the National Hockey League and the Football Club of Dallas in Major League Soccer. We also accelerated our entry into college sporting facilities, highlighted by our win here at Boston College Here in our backyard, we just deployed 16 Evolv Express systems to enhance safety for fans of the Eagles.

Speaker 1

We're pleased to announce our recent entry into the National Basketball Association, where we are now supporting fans of 2 NBA teams, including the 2023 NBA Champion Denver Nuggets and the Phoenix Suns with more teams With our entry into the NBA, we are now in all 5 major professional sports leagues here in the U. S. And are now screening over 20,000,000 sports fans per quarter. We continue to see accelerated momentum With our channel partners, we've been clear about our plan to efficiently and effectively scale the company by leveraging demand through our partners. We continue to see evidence of our progress here as over 70% of our sales activity in the Q3 came from our channel partners, including Alliance Technology, Johnson Controls, Motorola, Stanley Security, Allied Universal, ICU Technologies and many, many others.

Speaker 1

Throughout the Q3, we saw an accelerated adoption of our distributor model, which is an important trend as we continue to drive towards About 30% of all unit bookings in the Q3 were via our distributor model. As Mark will describe more fully, that shift was directly correlated to the gross margin expansion we delivered in Q3. Our new distributor model enables customers that prefer to purchase the hardware component of Evolv Express To do so through our contract manufacturer, Columbia Tech, while simultaneously placing a long term software subscription contract with us. We believe this expanded partnership will enable us to fully support the procurement preferences of our customers, particularly those working with grant resources or accustomed to working under a CapEx model. I want to briefly highlight some other important developments during the Q3.

Speaker 1

First, on the go to market front, We are absolutely delighted to welcome Jay Muehlhoffer, who recently joined us in the newly created role of Chief Commercial Officer. In this role, Jay will oversee all sales, marketing, alliances, channels and customer success efforts With the aim of expanding brand awareness, driving global revenue and enhancing customer experience. Jay has an extensive background in both domestic and international sales and marketing, SaaS, AI, Big Data and Analytics. He most recently served as the Chief Marketing Officer at Kinaxis, a supply chain management applications provider. His previous experiences across privately held and publicly traded technology companies includes executive roles at Intralinks, IBM And PTC, where he served as VP of Sales.

Speaker 1

He holds an MBA from Harvard Business School and multiple engineering degrees from MIT. He's based here in Waltham, and I can tell you he's already making a big difference in our business. So we're thrilled to welcome Jay to the company. Switching gears to the product side. In Q3, we introduced a new product named Evolv Extend, which is designed to detect individuals with brandished guns as they approach a venue, expanding security well beyond the doorway.

Speaker 1

Evolv Extend pushes the perimeter out further and addresses a new threat vector, openly brandished firearms. As we've seen with incidents in Louis De Nain and Monterey Park, California, mass shooters may attempt To enter a facility with a gun brandished, Evolv Xtend provides an opportunity to use video based AI to identify this critical threat vector and create time to potentially prevent an incident. This innovation aims to provide crucial, timely information to 1st reactors operating the Evolv Express system, enabling them to swiftly respond to visible guns. In a world where rapid response are vital to preventing gun violence, This technology becomes absolutely paramount. We partnered with OmniAlert, integrating their AI visual gun detection software, Omni Alert Gun Detect with Evolv Express.

Speaker 1

Using high resolution 4 ks cameras and AI, This system can identify brandished guns at distances up to 100 feet outside the building and can quickly transmit images and live video footage To security staff or first reactors for quick evaluation and yes decision making. This early warning system empowers security operators to initiate appropriate actions at the threatened entrance And implement emergency procedures promptly, which in turn provides enhanced safety and security. During the quarter, we also introduced Express 7.0, our latest version of our AI based detection algorithm And updated tablet software. These upgrades, which are available to all of our customers, are available through our cloud based SaaS model and continue to set Evolve apart from others in the marketplace. Key advancements with 7.0 Include a new tablet interface, which offers a simplified home screen, a more efficient identification of alerting individuals, Improved alert resolution workflow and a more visually appealing and intuitive user interface.

Speaker 1

7.0 also offers an updated detection algorithm, which further enhances our ability to detect potential threats, while simultaneously reducing the frequency of targeted nuisance alarms. The combination of our accelerating customer deployments And the overall growth in gun ownership are driving the collection of an unprecedented amount of visitor data across our customer base. With our advanced AI based algorithms, we're able to leverage this data and over time improve our detection Which we believe makes our customers' venues safer. We are absolutely pleased to report That our customers used Evolv Express to tag nearly 300,000 guns and knives Through the 1st 9 months of 2023. Q3 was another strong quarter for the business We're focused at delivering a solid finish here in Q4 and getting off to a strong start in 2024.

Speaker 1

We're optimistic for our prospects moving forward and remain committed to our mission. The market for AI based weapons detection is one of the largest and fastest growing markets across the technology space, and we're well positioned As its leader, with over 4,000 units deployed, representing a penetration rate today of less than 1%, And we're just getting started. We're focused on leveraging our 1st mover advantage to capture the market and effectively scale the business. With that, let me turn things over to Mark, who will take you through our financial results and our outlook. Mark?

Speaker 3

Thanks, Peter, and good afternoon, everyone. I'm going to review our Q3 results in more detail and then walk through our business outlook for 2023 and share some thoughts on how we're thinking about 2024. As Peter mentioned, total revenue was $20,200,000 up 22% year over year. Our revenue growth was again fueled by strong new customer acquisition activity and the rapid growth of revenue generating subscriptions. Annual recurring revenue or ARR at September 30, 2023 was $65,800,000 reflecting growth of 129 percent year over year and 21% sequentially.

Speaker 3

Total recurring revenue During the Q3 of 2023 was $14,400,000 compared to $6,200,000 in the Q3 of 2022, reflecting growth of 131 percent year over year. Our total number of revenue generating subscriptions increased to 4,014 at the end of Q3 2023 compared to 1692 at the end of Q3 2022. This was the primary driver of the strong growth in recurring revenues. Adjusted gross margin, which excludes stock based compensation, was 57% in the Q3 of 2023 compared to 3% in the Q3 of last year and 38% In the Q2 of this year, our improved gross profit and gross margin primarily reflect growing demand for our distributor model, which accounted for nearly 30% of all units booked in the 3rd quarter. Adjusted operating expenses, which excludes stock based compensation, loss on impairment of equipment and certain other one time expenses were $25,200,000 compared to $19,800,000 in the Q3 of last year and $23,700,000 in the Q2 of this year.

Speaker 3

The increases primarily reflect headcount investments in revenue generating positions and in research and development. Our revenue growth continues to grow significantly faster than operating expenses. We exited the quarter with 281 employees compared to 273 at June 30, 2023, reflecting an increase of 8 FTEs sequentially. Adjusted EBITDA, which excludes stock based compensation and the other one time items, improved 38% year over year and 20% sequentially. It was negative $11,100,000 in the 3rd quarter compared to negative $18,000,000 in the Q3 of last year We ended the quarter with $140,000,000 in cash, cash equivalents, restricted cash and marketable securities, Down about $16,000,000 sequentially, primarily driven by our net loss as well as fixed asset additions to support the Pure subscription business.

Speaker 3

We continue to encourage investors to review property and equipment on the balance sheet, which is where the cash effectively sits that we invest in Evolv Express Systems And future inventory for our pure subscription customers. Property and equipment has grown by nearly $50,000,000 year to date as more of our business has transitioned to our I want to close with a few comments about how we're thinking about the future, starting with the close of 2023. In short, we believe we're well positioned to deliver results in line with the upwardly revised growth plans we shared with investors on October 12. To that end, we are reaffirming the outlook for 2023 that we shared that day. We are Full year revenue of between $75,000,000 to $77,000,000 We expect to exit the year with ARR Between $73,000,000 to $75,000,000 reflecting full year growth in ARR of approximately 115%.

Speaker 3

We expect adjusted full year gross margin to be between 43% to 45%. We also expect adjusted EBITDA to be between negative $50,000,000 and negative $53,000,000 Finally, we expect to exit the year with cash, cash equivalents And marketable securities at the high end of our previously issued guidance of $110,000,000 to $120,000,000 Turning to 2024, as Peter mentioned, we remain encouraged by the growth opportunity we see ahead. While we are still developing our final plans for next year, we want to share some high level perspectives on how we're thinking about 2024. We are currently modeling full year revenues of about $115,000,000 in 2024, reflecting growth of about 50% year over year. We believe we can exit 2024 with ARR of between $108,000,000 $112,000,000 reflecting growth of about 50% year over year.

Speaker 3

Our models call for adjusted gross margins of about 60% in 2024. While we have not yet finalized our hiring plans for 2024, we expect to continue to moderate expense growth and leverage our earlier investments. Of the hiring that we will do in 2024, I expect more than half of the headcount additions to be customer facing revenue generating roles. Based on our current models for 2024, we expect to reduce our adjusted EBITDA loss by at least 40% in 2024. We believe we remain on track to get the positive adjusted EBITDA in the first half of twenty twenty five.

Speaker 3

And when we do, we expect to have cash, cash equivalents and marketable securities of between $75,000,000 to 100,000,000 Again, we have more work to finalize our growth plans for 2024, but we wanted to share some of our latest thoughts with you. That's it for now. With that, I'll turn things back over to Brian.

Speaker 2

Thanks, Mark. Eric, at this time, we'd like to open the call up for Q and A. Thank

Operator

you. And we'll go with the line of Mike Latimore with Northland Capital Markets. Please go ahead.

Speaker 4

All right. Good evening. Yes, congrats. The $1,000,000,000 number sounds pretty impressive there.

Speaker 1

Got to be in it, Mike.

Speaker 4

Yes, it does. Very good. So I think at your Analyst Day, you talked about a long term growth rate of 30% to 40%. The initial number you gave there for 20 5 was unit growth of well over that number. Can you just kind of help provide a little more context from it?

Speaker 3

Yes, Mike, we can give you a little bit more context there. I mean, what we're really looking at, I think, over the long term here is a transition to our distribution model, which is going to happen next year. So we talked about that at the May analyst call. The growth that we're giving next year is, I would say, at least 50%. That's sort of a starting point for us We're thinking about the early parts of our annual operating plan, which we're still refining through the end of this year.

Speaker 3

Peter talked about 12,000 plus units in 2025. That's a number that we're pushing up about 20% From our prior comments there. So I think that's a good indicator of where we're going over that period of time.

Speaker 4

And then the mix here, are you still thinking purchase subscription could be sort of 50% of new ads?

Speaker 3

Yes, we are. We are. I think if we go into next year, there's 2 wheel components, there's pure subscription

Speaker 5

and there's distribution. We're moving away from

Speaker 3

the purchase model that that We're moving away from the purchase model that we used to have where we actually ran some of the hardware sales through our books. We're now really driving that distribution model. Just in the Q3 alone, in the Q1, we really drove it. We did about 30% of our business that way. So we're on path to do the fifty-fifty going into next year.

Speaker 3

You'll probably see somewhere in the 40% zone in the Q4 to Kind of get to that 35% that we talked about in the back half of the year. We probably will see some quarters where It's not fifty-fifty.

Speaker 1

As we go through the year,

Speaker 3

I think we're really thinking about an annual number of fifty-fifty. It's a little bit hard for us to tell exactly what's going to happen from a quarter to quarter basis.

Speaker 4

Yes. Thanks, Alex. All right, great. Congrats on a great quarter.

Speaker 3

Great. Thanks, Mike. I appreciate it. Thank you.

Operator

Next, we'll go to the line of Hugh Cunningham with TD Cowen. Please go ahead.

Speaker 5

Thank you. Hey, guys. Thanks for taking my questions. Congratulations on a strong quarter, especially the unit growth there and on the CT transition And for the 2014 guidance. Couple of quick things.

Speaker 5

First thing is on the product revenue line, Can you remind me, Mark, what in there in addition to or what portion of that is direct sales? And then I think another piece of that is add ons that you guys sell like the I'm guessing the new product, The one you're partnering with for the brandished weapons, that's not going to be in there because that's coming from your partner. But what else is in that number? And then the second part of that question On the product line, so first thing is what's in there basically and then how fast you expect it to come down?

Speaker 3

Yes. So the product line, Hugh, it really is a combination of a few things. It's really the piece parts that we sell, whether it be tablets or other parts of our business as well as the products that We're sold through the old purchase model. We still have units that we sell from time to time, including demos that we that you'll see go through that line. So think about the things going through that line is demos, accessories and our direct product sales overall.

Speaker 3

The extend is likely to have nothing to do with that line. It's going to be a recurring revenue element in our business for the most part. I would say that we're going to continue to see a reduction in that product revenue line. We had booked quite a few units in the Q2 time frame and those came a lot of those shipped in Q3. So I expect that to continue to decline into Q4 because we're not booking as many in that area.

Speaker 3

We will see some next year, But I would say that the units for the entire year next year would be sub-two 100.

Speaker 5

Okay. All right. Thanks. And then Peter for you, 2 quick ones. 1, you talked in the past about the sort of verticalization of The go to market and the teams you're building, can you talk about that?

Speaker 5

And then can you talk about the experience of your buyers? So When you go talking to a customer, who's the what's the experience of the person actually making the decision To purchase what sort of due diligence do they do? Can you talk a little bit about that?

Speaker 1

Sure. So, in terms of verticals, We 2 years ago, as you know, in 2022, we verticalized the organization, our sales organization and focused on education, Sports, health care, distribution, warehouses, and we continue to do that. In 2023, we regionalized. So we created 5 discrete regions that are operating with salespeople of about 7 or 8 in each of those regions They carry quota, and they're focused on the high risk verticals in their regions. So those were really important Organizational changes that are helping drive our growth in the company, and we're going to continue to stay focused on that.

Speaker 1

As it relates to the buyer experience, most of our customers have security experts on staff. These are retired police officers, people in the Secret Service, military. They're steeped in understanding security. And Oftentimes, when they come and see our product, they do their own testing. So we give them the information that we have around What our systems can detect, but they do their own testing as well.

Speaker 1

So and they're just absolutely And it's a trusted network of security professionals that all know each other and trust each other. On the school side, it's slightly different. There's not only CROs and superintendents, but there's a whole set of reseller partners that are subject matter experts that help schools Understand their security posture as well. So our sales and experiential sale And most of our customers, in fact, almost all of them have subject matter experts testing the product themselves.

Speaker 5

Thanks guys. I appreciate

Speaker 1

it. Thanks Hugh. Thanks Hugh.

Operator

Our next question comes from the line of Chad Bennett, please go ahead.

Speaker 3

Great. Thanks for taking my questions. Nice job again on the quarter, guys. I guess a couple of questions. First, Mark, can you give us an update on Express 2.0, the new system and hardware, Kind of how we're progressing there on the cost savings there and timing wise of when we expect that to hit the market?

Speaker 3

Yes, yes, no problem. So Express 2.0, that's really our cost down effort on our Express Flagship product, about 95% of the functionality we have in 1.0 will be the same. In Express 2.0, we've added a few new things to it. But generally speaking, the whole purpose of 2.0 is to really To help with quality, to really think about how to service it in a more modular way and to really kind of take the learnings we had And 1 L and kind of position them. It's the same software stack, so there's no difference there.

Speaker 3

But in terms of the timing of it, I think we're expecting it to be to really kind of start to ship in earnest By the beginning, maybe the end of Q2, but definitely by the beginning of Q3, that's the plan we're on. The cost down efforts, We still see that being in the 30% to 35% range, and we've kind of locked that in at this point. We're really just going through the final testing and points on the product there and we're now Building pilot systems and everything like that. So we think that will be a big push for us in the middle of next year. While I'm on that point, I think That cost down effort is more of a 2H situation.

Speaker 3

So I think if as we talked about our 60% gross margins, we'll see A greater benefit from that in the second half of the year. So, Ed,

Speaker 1

Chad, this is Peter. I just wanted to reiterate something that Mark said, which is when we make improvements in our software Around efficacy and accuracy, the cloud infrastructure we have, the data analytics, all the improvements that we can bring to our customers are happening on our platform today and will happen on our future today and will happen on our future sensor platforms in the future. 2.0 is one of those and we're going to get a cost down benefit there. But the magic is really in that in the software. And so all of our customers get the benefit of that no matter what sensor platform they're on.

Speaker 3

And then maybe just a follow-up. Just in light of kind of recent events and Attention around the company just it doesn't seem like there's been any abatement in demand and demand actually seems to be Almost accelerating to some extent for you guys. Can you just talk about just kind of the demand environment that you're seeing out there? Obviously, You reiterated your upped guide for the year and gave us a great early look to 2024. But just considering Some of the noise out there, can you just speak to the demand and awareness of the product today?

Speaker 3

Thanks.

Speaker 1

Yes. Thank you. Look, there's we haven't seen any abatement in demand at all. And in fact, when we did this Results, we've seen an increase in our health care penetration. We grew health care by 50% year on year.

Speaker 1

We had a great quarter in sports. Education was about 40% of our business. So all the secular tailwinds that Have been driving our company from our early days, even before we went public, continue in an unabated way. I mean, there to date, there have been 597 mass shootings this year, which is 2 a day. There's lots of gun violence and A lot of anxiety in society, and people want to be safe wherever they go, not just in venues, but when they're Gathering with other people in bowling alleys and bars in places where people gather and technology can help now Create safe zones that people can gather together and know that nobody has a weapon.

Speaker 1

And we don't see that changing anytime soon. And we certainly don't see any legislation on the horizon that will change that. So we're working really, really hard as a company to make sure that we Enhance our product, our detection capability and that we can get as many systems in places to keep people safe and that's our primary mission and goal as a company.

Speaker 3

Got it. Thanks much. Nice job again.

Speaker 1

Thanks.

Speaker 2

Terrific, Jeff. Thank you very much. Operator, I think we have time for one more question.

Speaker 5

Okay. And we'll go to

Operator

the line of Brett Knoblauch with Cantor Fitzgerald. Please go ahead.

Speaker 6

Perfect. Hi, guys. Thanks I guess on the deployment guidance for 2024 and 2025, is there any chance that you guys deploy a Fewer amount of units in 24 than you do in 2023 or you're, I guess, expected to do in 2023?

Speaker 3

No, no, that's not what we're expecting to do. Look, we're talking about 7,000 plus. We're really talking in 1,000 unit increments. I could see us close to 7,500 plus. Right.

Speaker 3

It's

Speaker 2

the first, right? We're in the fall of 2023, talking about 2024. So we're trying to give you our best view early on in the

Speaker 1

tee box here. Perfect. Understood.

Speaker 6

And then if I kind of look at ARR per unit deployed, it's kind of increased Sequentially now for 3 straight quarters, how should we expect that to trend over the coming quarters? Is there any Reason to believe where that would go down or gyrate or how should we think about that trend?

Speaker 3

Look, I think we're going to see the distribution model this past quarter was about 30% of our business. I expect it to probably be close to 40% in the 4th quarter And reaching 50 by Q1 and probably holding steady there. So I think mathematically on an average basis, I think you will see our ARR number Come down a little bit more and then stabilize as we go forward. That's just part and parcel to the model Actually moving to that distribution cycle where there's less ARR than we had in other models. Just remember too in the distribution model, We have a license revenue component that we didn't have before and that gets recognized immediately and brings in cash to the company quicker than it had before.

Speaker 6

And that's not being included in ARR, correct?

Speaker 3

That's and that's not included in ARR. You really need to think about Us going forward is being about an 80% ARR company and a 20% IP license company.

Speaker 2

It's the expanded gross margins that we're continuing to deliver.

Speaker 6

And then if I could just ask one. I know when you guys Preannounced, you also disclosed the FTC was investigating. I don't think you guys brought it up in the call, but just curious if you guys have Any color on what they're looking at or could provide any clarity on the situation? Thank you.

Speaker 1

Yes. So we're not at liberty to talk too much about that, but we are working with the FTC on their inquiry Around questions around our marketing, and we're answering every question that they have. There's no Question or challenge around our technology, we stand by that. It's really about marketing claims and we're very confident going forward that We'll end up at a really good place. We can't talk much about it.

Speaker 1

What we can say is, it hasn't had any impact at all On our business, our customers aren't talking about it. It's not getting in the way of anything and we're out serving our customers, Living to the mission and keeping kids and people safe every day and that's what we're very, very focused on.

Speaker 6

Understood. Thanks, guys. Congrats on the quarter.

Speaker 2

I'm going to turn the call over to Peter George for a few closing remarks.

Speaker 1

Yes. Thanks, Brian. Well, thanks everybody who joined us today. We're really pleased with the results that we were able to take you through. We thank our customers and our partners, All of the dedicated evolvers that work tirelessly every single day to make our systems better, More accurate and more secure to keep venues safe.

Speaker 1

We're really pleased with what we were able to talk about today in terms of our results. Well, we had record revenues, record ARR, record RPO and record gross margins. And I just want to reiterate that we Year on year our gross margins from 3% to 57%, so huge benefit there. And as Mark talked about, there's some headwinds with the with our distributor in terms of the purchase subscription, But the benefit there comes in gross margins, which should get us to EBITDA positive sooner than we would have Thought before, so some real goodness there as a company. We continue to see really great customer activity and acquisitions.

Speaker 1

We had 70 new customers this quarter. I'll remind you our largest customer, Charlotte Mecklenburg District Schools has 1 180 systems that we count as is one customer. So we have an expanding ASP with our customers. We continue to innovate in the company. We're thrilled about the Xtend product, pushing the perimeter out, being able to gain time to prevent Mass shootings from happening.

Speaker 1

Mark already mentioned our distribution bottle and how that's paying off, particularly in gross margins. And then as we think about next year, right, the 50% ARR growth and then 50% revenue growth, we're thrilled So we'll get to adjusted EBITDA positive, as we mentioned, in the first half of twenty twenty five, and we're excited about that. All that being said, while we take great pride in our achievements, it weighs heavily on us And our hearts to share tonight amidst the global conflicts and the escalating violence going on around the world. The unfortunate cycle of violence results in sorrow, loss and perpetuates further harm. At Evolve, we are resolute in our belief that the world triumphs over adversity by persisting in the pursuit of positive change.

Speaker 1

As evolvers, we are relentlessly committed to making the world a safer place to live, To work, to learn and to play. Thanks everybody.

Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT and T conferencing service. You may now disconnect.

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Earnings Conference Call
Evolv Technologies Q3 2023
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