Evolv Technologies Q1 2024 Earnings Call Transcript

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May 9, 2024

There are 7 speakers on the call.

Operator

Thank you for standing by, ladies and gentlemen, and welcome to the Evolve Technologies First Quarter Earnings Call. At this time, all lines are in a listen only mode. Later, we will conduct a question and answer session. As a reminder, today's conference is being recorded. I'd now like to turn the conference over to Senior Vice President of Finance and Investor Relations for Evolve Technologies, Brian Norris.

Speaker 1

Thank you, Ryan, and good afternoon, everyone, and welcome to the 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 Q1 2024 results and our business outlook for the remainder of the year. Press release has been furnished with the SEC and is also available on the IR section of our website. During today's call, we will make forward looking statements within the meaning of the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995.

Speaker 1

These statements 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. 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 those 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, 2023, filed with the SEC on February 29, 2024, and our quarterly report on Form 10 Q for the 3 months ended March 31, 2024 filed with the SEC earlier today. The forward looking statements made today 2024. Although we believe that 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 1

Except as may be required by applicable law, we disclaim any obligation to update them to reflect future events or circumstances. 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 information prepared in accordance with generally accepted accounting principles. These measures include adjusted gross profit, adjusted gross margin, adjusted operating expenses, adjusted operating income, adjusted EBITDA, adjusted earnings and adjusted earnings per diluted share. Reconciliations between these non GAAP measures and the most directly comparable GAAP measures can be found in our press release issued today.

Speaker 1

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 a business. With that, I'd like to turn the call over to Peter. Peter?

Speaker 2

Thank you, Brian, and thanks, everyone, for joining us today. I'm going to spend a few minutes on our Q1 results, provide a brief update on the regulatory front and then walk through the trends that we're seeing in the business. Mark will then walk through our financial results and our outlook. Revenue in the Q1 was $21,700,000 up 17% year over year, reflecting new customer acquisition activity, strong expansion from our installed customer base, continued traction with our channel partners and growth in subscriptions of Evolv Express. Our growth rate reflects the transition away from onetime product sales, which was central to our revenue just a year ago.

Speaker 2

Reoccurring revenue was 89% in Q1 compared to about 50% in Q1 of last year. We welcomed over 50 new customers in Q1 and now serve about 7 50 customers across 10 key vertical markets. ARR grew 10% sequentially and 96% year over year to $83,000,000 at the end of the Q1 of 2024. Adjusted gross margin expanded to 61% in Q1 compared to 26% in Q1 of last year. This is largely attributable to the shift to the distribution subscription model we introduced last year and the related transition to a higher level of reoccurring revenue.

Speaker 2

We activated 377 new multiyear subscriptions of Evolv Express, which is lighter than we were anticipating for the quarter. Notably, this figure excludes units from the high number of direct rentals we shipped. Since the year began, we've sent about 75 of Alvexpress systems to support major events, including the world's largest sporting event taking place in France and to the Detroit Police Department in support of the annual college football draft. Rentals like these accelerate our presence in the geography and further raise awareness of evolved technology. Again, none of these units were included in our deployed unit count.

Speaker 2

While our overall win rate improved to 79% from 71% in Q1 of last year, certain late stage deals we were working on in the final weeks of the quarter were pushed into the 2nd quarter. Some of these opportunities were delayed as customers worked to satisfy the incremental due diligence requirements related to, among other things, the regulatory increase and slanted coverage from the select media outlets we have discussed on previous calls. Our recently completed analysis of the quarter revealed that our average sales cycle lengthened by about 40% in Q1 of 2024 to 5 months compared to 3 months in Q1 of 2023. Customers are asking more questions as they make their way through the buying journey. We are simply not going to rush our customers through that process or that decision.

Speaker 2

We have a lot of confidence in the outcomes of those decisions. The good news is that several of these deals have already closed here in Q2, and we're off to a strong start to the Q2. We continue to work with the FTC as they complete their work and have provided documentation and information responsive to their inquiry. We're also working with the SEC, but their work is still in its earliest stages. So what does all this mean to our business?

Speaker 2

While we believe the regulatory overhang has lengthened sales cycle, it does not appear to be impacting our win rate. It is a little less clear as to what impact, if any, there has been on opportunities in which we're not invited to participate because of uncertainty in the marketplace. It has, however, made it a bit more challenging to provide forecast in the near term since possible deal slippage is by its nature uncertain. For that reason, we think it's prudent to be a bit more cautious in our annual outlook. That said, we remain committed to reaching positive adjusted EBITDA by the Q2 of 2025.

Speaker 2

We are maintaining our commitment to profitability with prudent expense management and the leverage we're expecting from the advanced data driven methodologies we're implementing across the company. So we're on the final stretch to profitability. I want to share a few other updates across the business. Investors will recall that we bought on board several senior sales and marketing professionals in the last 6 months, including a new Chief Commercial Officer, a new Chief Marketing Officer and a new senior channel leader. We did this to address gaps we had previously identified in our sales execution process, which we believe contributed to the softer than expected start to the year.

Speaker 2

We're pleased to report that the new team is making great progress in restructuring demand generation efforts, up leveling brand awareness and optimizing channel partner effectiveness to improve our overall go to market motion and scale in our business. We are seeing strong levels of customer interest in Evolv Visual Gun Detect, our newer offering designed to detect individuals with brandished guns in or around the venue. We are seeing demand for this solution across multiple vertical markets. Staying on the new product front, Mike, Parab and the R and D team are working on some very interesting initiatives in our innovation labs. These new products, which we will be a mix of both digital and physical, will provide additional capabilities in our vertical markets, addressing our customers' needs and extending the Evolv ecosystem to continue on our mission.

Speaker 2

We expect these subscription based products to be sold to new and existing customers, expanding the lifetime value of our customers and helping them create safer environments. I expect us to make a major new product announcement before the end of the year. Stay tuned for that. Moving to our go to market partners. Over 70% of our sales activity came with or through our channel partners in Q1.

Speaker 2

These are partners that extend our reach into certain verticals or geographies where they have a particularly strong presence. We saw strong activity with Motorola with whom we had the most booked units since Q4 of 2022. We expect to continue to see strong activity with Motorola, Johnson Controls, Securitas Technology and dozens of other regional partners like Alliance Technology Group and Stone Security. These relationships will be central to our plans to scale over time. We had our first meaningful set of units come up for renewal in the Q1 of 2024.

Speaker 2

And as expected, over 90% of the units did in fact renew. Nothing speaks more to the confidence and the value that our customers realize in our company and our products than renewing a subscription contract. In addition to renewal rates, we believe that bookings contribution from existing customers can provide very strong validation of customer trust and confidence. We're pleased to report that 49% of our booked ARR in Q1 was from existing customers compared to 43% in Q1 of 2023. These are customers that have thoroughly tested and deployed our technology and have made the decision to expand.

Speaker 2

So strong validation there. I want to turn to the trends we're seeing in our end markets, starting with education, where we welcome 15 new customers. In Q1, we did not have any 7 figure ARR deals in Education, which has been a driver in prior quarters. We believe that, that may indicate a little bit of seasonality in the education market. We are seeing a shift as more school districts change the way they fund security technology in preparation for the expiration of ESSER funding later this year.

Speaker 2

School boards are finding ways to fund our solution using their operating budgets and capital projects funding. This can make Evolve more embedded in a district standard purchasing motion as opposed to a one time grant. School officials are finding creative ways to prioritize our solution in the absence of obvious funding sources. We're also seeing larger school districts in states like Maryland and Kentucky increasingly phased their deployments over multiple quarters. So while we are winning large opportunities, they do not always show up as booked ARR or deployed units in a single quarter.

Speaker 2

We have several potentially significant education deals in the pipeline for the latter half of twenty twenty four. We're proud to be deployed in 20 of the 100 largest school districts in the country in over 800 school buildings. Our daily school visitor screenings have surged to nearly 700,000 during Q1 of 2024 compared to 250,000 in Q1 last year. Our health care market remains robust with over a dozen new customers added. We're now operational in about 3 50 hospital buildings nationwide.

Speaker 2

We achieved an exceptionally high win rate in health care in Q1 and are beginning to gain traction at the hospital system level, which is an exciting development. Daily visitor screenings in health care facilities tripled to nearly 600,000 in Q1 of 2024 from $200,000 in Q1 last year. Professional sports continues to be a key vertical market for us, and we're proud to be part of the layered security for about 40 teams across all 5 major professional sports leagues. Recent wins include teams like the Charlotte Hornets, the Portland Trail Blazers, the Tampa Bay Rays and AT and T Stadium, home of the Dallas Cowboys. We're excited to welcome these teams and their fans on board.

Speaker 2

Finally, I'd like to provide a brief update on the competitive landscape. We believe there is a significant market for AI based weapons detection with a few substantial players that are deploying at customers. Our extensive customer base and widespread deployment of units solidify our leadership position in the AI based weapons detection market. Evolve Express is a critical part of a layered security solution and is used to screen 2,500,000 visitors every single day. Our 7.50 plus customers use Evolve Express to tag on average more than 500 firearms every single day.

Speaker 2

While the market has room for multiple players, we continue to see customers select our products for the detection capabilities, strong focus on end user experience, integration into broader security infrastructure and ongoing continuous improvements through software upgrades. More recently, we've been securing more head to head wins, and we're seeing revisitation of previously lost opportunities. We've had at least 5 recent instances of previous lost opportunities in education and professional sports, not only reengaging with us, but replacing their existing deployments with the ball. Initially, venues might opt for a cheaper, more limited solution that offers a simplistic and uninformatic red light, green light alerting system. But we're witnessing a shift back to Evolv Express due to its superior capabilities.

Speaker 2

This is not a 1 quarter phenomenon. We look forward to sharing more about our progress on the competitive front in future calls. Before handing things over to Mark, I want to close with our mission, which is to democratize security, making the world a safer and more enjoyable place to live, work, learn and to play. We will continue to innovate and to deliver on our mission, while simultaneously advancing on our long term operating model and the rule of 40. We look forward to continuing to update investors on all these goals.

Speaker 2

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 Q1 results in more detail and then walk through our outlook. As Peter mentioned, total revenue was $21,700,000 up 17% year over year. Annual recurring revenue or ARR at March 31, 2024 was 83,000,000 dollars reflecting growth of 96% year over year. Total recurring revenue during the Q1 of 2024 was 19,400,000 dollars compared to $9,100,000 in the Q1 of 2023, reflecting growth of 114% year over year.

Speaker 4

Of note,

Speaker 3

89% of our revenue in Q1 2024 was recurring compared to about 50% in Q1 2023. Remaining performance obligation or RPO as of March 31, 2024 was $254,000,000 up 57% year over year and 6% sequentially. As we've told investors on prior calls, we expect the rate of growth in RPO to attenuate as there is less lower margin product revenue running through our financial statements with the implementation of the distributor subscription model. Adjusted gross margin, which excludes stock based compensation and other one time expenses, was 61% in the quarter of 2024 compared to 26% in the Q1 of last year. Our improved gross profit and gross margin primarily reflects our continued transition to recurring revenue streams, both through our peer subscription model and our newer distribution subscription model.

Speaker 3

Adjusted operating expenses, which excludes stock based compensation, loss on impairment of equipment and certain other one time expenses, were $27,300,000 compared to $22,200,000 in the Q1 of last year. The increase year over year primarily reflects headcount investments across the business, particularly in revenue generating positions and in research and development. The increase sequentially is also due to a higher payroll tax comment at the start of the new year. Adjusted loss, which excludes stock based compensation, non cash charges and other one time items, was $13,100,000 compared to $16,900,000 in the Q1 of last year. Adjusted EBITDA, which excludes stock based compensation and other one time expenses, was negative $10,700,000 compared to negative $15,400,000 in the Q1 of last year.

Speaker 3

This reflects strong gross margin expansion and prudent expense management. Turning to the balance sheet, we ended the quarter with $81,000,000 in cash, cash equivalents, restricted cash and marketable securities, compared to $119,000,000 dollars at the end of Q4 2023. This primarily reflects the significant resources we dedicated to build inventory as we prepared for the transition to our next generation Express system. That inventory is found on our balance sheet in both actual inventory as well as in property, plant and equipment. In fact, over $39,000,000 of our ending PP and E was for undeployed inventory.

Speaker 3

To be clear, we believe we have reached the high point for inventory for the year and we will now be strategically depleting that for the rest of the year. To a lesser extent, the cash usage in the quarter also reflects capital to support our pure subscription model and the timing of certain cash payments. I want to close with a few comments on our outlook. When we shared thoughts about our 2024 outlook during our last earnings call in February, we told investors that we assumed no significant changes in the demand environment because of the FTC and SEC inquiries. That assumption has changed.

Speaker 3

Some opportunities have been delayed as customers work to satisfy the incremental due diligence requirements related to, among other things, these regulatory inquiries and the slanted coverage from select media outlets we have discussed on previous calls. While our win rates are up year over year, we see deals taking longer to close. In the interim, we're going to continue to focus on improving sales execution, raising brand awareness, driving demand generation and optimizing our channel partner program. While these matters resolve, we're going to be more cautious in our near term outlook. Our recently completed analysis of the quarter revealed that our average sales cycle lengthened about 40% in Q1 of 2024 to 5 months compared to 3 months in Q1 of 2023.

Speaker 3

We are now modeling full year revenues of about 100,000,000 dollars compared to our previous estimate of $115,000,000 This reflects growth of about 25% year over year. We now believe we can exit 2024 with ARR of about $100,000,000 compared to our previous estimate of between $108,000,000 to $112,000,000 This reflects growth of about 33% year over year. We are reaffirming our estimate for adjusted full year gross margin of about 60%. And further, we are reaffirming our belief that we can deliver improvements in full year adjusted EBITDA of at least 40% in 2024. And we believe we remain on track to get to positive adjusted EBITDA in the first half of 2025.

Speaker 3

With that, I'll turn the call back over to Brian.

Speaker 1

Thanks, Mark. At this time, we'd like to open the call up for Q and A. Again, we're going to ask participants to limit themselves to one question and one follow-up.

Operator

Our first question will come from the line of Mike Latimore with Northland Capital. Please go ahead. Your line is open.

Speaker 4

Hi. This is Aditiya on behalf of Mike Latimore. Could you tell me how many sales people you have hired this year? And what is the total number of sales people you have?

Speaker 1

This is Brian North. I just want to make sure that I got the question. Was it quota carrying sales people now and was that the question how many folks we have? Yes. The answer to that question is we have about 35 quota carrying sales executives, which is relatively unchanged since the end of last year.

Speaker 4

All right. Got it. And also could you give some color on how the industrial warehouse category is? Do we see a good amount of bookings coming from the industrial warehouse?

Speaker 2

Yes, we're just beginning the Industrial Warehouse vertical orientation, which is how we go to market on verticals. We think it can be in one of the top two verticals over time for the company. Obviously, education is very big, healthcare, but industrial warehouses is going to be a big one. So, it's still early days, but we're confident that both this year and next year, we'll make good progress there.

Speaker 4

All right. Got it. Thank you.

Speaker 1

Perfect. Thank you. Operator, ready for the next question, please.

Operator

And the next question comes from the line of Brett Knoblauch. Please go ahead. Your line is open.

Speaker 5

Hi, guys. Thanks for taking my question. Maybe if we could just start on the full year guidance. I guess my math kind of suggests that to get to $100,000,000 ARR you need to add maybe 1100 new units over the remaining 3 quarters, which obviously is down a bit from last year. But I guess to that extent, how confident are you that maybe Q1 is the low point from installs?

Speaker 5

Or is that what we should be expecting?

Speaker 3

Yes, Brett. Thanks. This is Mark Donahue. Look, we feel like we are at a low point. We do for this quarter.

Speaker 3

I mean, I think Q1 is seasonally a low quarter for us. I think we saw some of the extensions of the deals, which have gone out from 3.5 to 5 months, actually coming in, in the April timeframe. So we're starting to see that tick up a bunch and give us some confidence going into Q2. That said, you're right. I think that I think for the year, we're looking probably in the 16 to 1900 unit range or 6,100 to 6,400 for the year as we kind of work through this these sales cycle extensions and some of the regulatory overhang that we've been going through.

Speaker 3

We've had good conversations with customers when we get on the phone with them and we do often now as they're going through their buying cycle. The conversations go well and we're to a close. It's just taking a little bit more time than it used to. In fact, we had our win rates overall were about 79% in Q1 for the deals that we're invited to. So we're still getting this done.

Speaker 3

It's just going a little bit slower right now due to some of the, I would say, slanted media and regulatory overhang that we're dealing with.

Speaker 5

Awesome. And then I guess within the hospital segment, I went to a hospital last week and which was the second time I went there over the last month and there was a new unit there and it was very seamless. I was just curious on the sales cycles, is that specific to one end market or are you seeing it across the board?

Speaker 2

Yes. I would say it's across the board. The longer impacts have been actually in education because of they end up being longer anyway. Healthcare sales cycle is still about 5 months. On the positive side, we had an extraordinary quarter in healthcare as it relates to win rate.

Speaker 2

We won close to 100% of the deals that we were in. As we said earlier, we're in 3 50 hospital buildings right now. We see that as a really, really important vertical for us. It represents 70% of the violence at the workplace is happening in healthcare. And when we put a system in, normally our customers test it first, they'll do a POC.

Speaker 2

And then in their first early days of having the system in, they end up finding things that they never thought were coming in before. So it's hard to get the system back out. So we think hospitals is a place we're going to continue to double down on.

Speaker 1

Yes. I'd only add to that, Brett, that we're also starting to see sales cycles engage at the hospital system level. So that's a difference from a year or 18 months ago when we were selling at the local hospital level. Today, we're starting to see much bigger opportunities emerge. Is there any follow-up questions there, Brett?

Speaker 5

Maybe just one on a different topic. I think it was about a month ago, maybe a bit over a month ago now where Mayor Adams gave a press conference press conference. But as Steve is talking about, Subway Safety and you're standing next to the AVOD system. Could you talk about how you view your product protecting subways in New York Cities and other metro areas across the United States? And is there any update on New York City in particular?

Speaker 2

Yes. So look, we've always said, we believe before and we believe today that subways are a challenging environment for security period. Having said that, the NYPD came to us. They wanted to partner with us. They asked us to use our technology.

Speaker 2

We're supporting them. And we have full confidence that the NYPD knows how to keep New Yorkers safe, and we're going to support them from a technology standpoint. They're still in their investigation and learning phase right now.

Speaker 1

And Brett, before we get to the next question, I'll just say that none of the public transit opportunity is included in the TAM analysis that we've ever shared with the Street. And so all that again, we're still going through our testing phases there. All of that would be accretive to the TAM estimates that we've provided. More to come on that in the quarters ahead. Brian, I think we're ready for our next question if there's anybody left in the queue.

Operator

Our next question will come from the line of Eric Martinuzzi with Lake Street. Please go ahead. Your line is open.

Speaker 6

Yes. Curious to know about the pricing environment and if you could comment on it with regard to both the education and the healthcare verticals. Are you seeing prospective buyers coming back and asking for lower prices or

Speaker 3

we've been seeing some competitive behaviors I think we haven't seen before. We've seen more and more pricing competition in some of the deals. I think there's a clear technology benefit to what we're doing. So I think the comparative on the technical perspective is very high. But from a pricing perspective, we are a premium price product.

Speaker 3

We have though gone and been amenable to pricing and particularly in the school systems where there's a lot of volume. So that we have actually gone down that path to work with our customers and prospects to actually kind of ensure that we're mitigating the delta between some of the competition out there. In other verticals, there's still we're still able to maintain pricing because of the value we're providing. The throughput that we can provide and the technical differentiators, I think, still are helpful to maintaining our pricing position.

Speaker 6

And it's safe to say that those in the education environment and those volume based deals that the potential lower prices is captured in this outlook, the new outlook for

Speaker 1

24? 100%.

Speaker 3

I mean, we have our pricing and we did that in January. So everything that is in our outlook and has been in our outlook reflects our pricing model for the entire year.

Speaker 6

Okay. And then a follow-up on the path to breakeven adjusted EBITDA breakeven in the first half of twenty twenty five. What should we be looking for on the cash balance when you reach that point?

Speaker 3

I think that you'll see us in the range of $65,000,000 to $75,000,000 as a cash balance. We look at the top line revenue necessity probably being in the $32,000,000 to $35,000,000 range to actually reach that EBITDA neutrality. Well, probably slightly EBITDA positive and cash neutrality. So that's still our goal as a business. We're going to get there by really maintaining judicious spending habits as we have in the past.

Speaker 3

I would say also that we're going to really be looking to ensure that we stay on this path to profitability that we announced about a year ago.

Speaker 6

Got it. Thanks for taking my questions.

Speaker 1

Yes. Terrific. I think that's the last question. So I'm going to turn it over to Peter for a few closing remarks.

Speaker 2

Thanks a lot, Brian. Look, we delivered really strong reoccurring revenue this quarter. Our gross margins went up, adjusted EBITDA, but the year started a little bit lighter and slower than we expected. There certainly has been a lot of evidence of regulatory overhang, which has shown up in that expanded sales cycle from 3 months to 5 months and we're dealing with that. We stay very, very focused right on improving our sales execution.

Speaker 2

As we mentioned earlier, we added some senior leadership there that are making a big difference already. We remain really committed to our long term operating model and our rule of 40. And as Mark just mentioned, getting to EBITDA positive in the Q2 of 2025. And finally, this is all about our mission, making the world a safer place for people to live, work, learn and play together, and we feel honored to have that mission in the company. So thank you, everyone.

Operator

Okay, ladies and gentlemen, that does conclude today's conference. I'd like to thank you for your participation. You may now

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