Evolv Technologies Holdings, Inc. (NASDAQ:EVLV) Q1 2023 Earnings Call Transcript May 12, 2023

Operator: Ladies and gentlemen, thank you for standing by and welcome to the Evolv Technologies First Quarter Earnings Call. At this time, all parties are in listen-only mode. Later, we will conduct a question-and-answer session and instruction will be given at that time. [Operator Instructions] And as a reminder this conference is being recorded. I’d now like to turn the call over to our host Mr. Brian Norris. Please go ahead sir.

Brian Norris: Thank you, sir 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 Donohue, our Chief Financial Officer. This afternoon after the market closed, we issued a press release announcing our first quarter results and our updated business outlook for 2023. This press release is available on the IR section of our website, as well as all major news outlets. 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 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 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-K for the year ended December 31, 2022, filed with the SEC on March 24th, 2023 and as updated in other documents filed with or furnished to the SEC from time-to-time. Our forward-looking statements made today represent our views as of May 10, 2023. Although we believe 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.

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 an additional insights for investors. These measures should not be considered in isolation from, or as a substitute for, financial information provided and prepared in accordance with GAAP. Reconciliations between non-GAAP measures and the most directly comparable GAAP measures can 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 are helpful to investors in understanding the progress we’re making as a business.

In addition, investors will note that today’s press release also included additional disclosures around recurring and non-recurring revenue, which we believe provides further transparency as to the fundamentals of our revenue growth. Let me briefly remind investors that we’ll be hosting our first ever Evolv Technology Analyst Day on Thursday May 25. That event will take place immediately following the JPMorgan Technology Conference. So if you’re planning to be in Boston for that event we encourage you to join us for our Analyst Day. For more information about that event or all of our IR programs please contact me at bnorris@evolvtechnology.com. With that I’d like to turn the call over to Peter. Peter?

Peter George: Thanks, Brian, and thank you everyone for joining us today. I’m going to spend a few minutes on our results for Q1, and then review the trends that are driving those results and then close by sharing a few highlights from a couple of recent implementation stories to shed more light on the benefits our customers are realizing from our solutions. Mark will then walk you through our financial results and our outlook for the remainder of the year. During the first quarter, we delivered strong results across every key measure of the business. Based on the strength of those results and the confidence we have in our outlook for the remainder of the year, we’re raising our guidance for 2023. Revenue in the first quarter was $18.6 million, up 113% year-over-year.

Our growth continues to reflect strong new customer acquisition activity and the continued expansion of our subscription base. We welcomed over 60 new customers in the first quarter, including our hometown Boston Red Sox and activated another 520 new multiyear subscriptions of Evolv Express. We now serve nearly 600 customers, with close to 2,800 units deployed. We continue to believe that our new customer acquisition efforts are resulting in a first-mover advantage due to the strong network effect dynamics of our market. And as we introduce new applications, we believe we can extend our customer value proposition, which we believe will drive higher revenue per customer and optimize renewal rates. We grew ARR from $34 million at the end of 2022 to $42 million at the end of the first quarter of 2023, reflecting growth of over 23% sequentially.

As Mark will describe more fully, our efforts over the last six months to shift more of the business to pure subscription is already beginning to impact our operating results, as demonstrated by strong gross margin expansion in Q1. We remain on track to double ARR in 2023, which, combined with the gross margin expansion and prudent expense management gives us confidence in our ability to deliver adjusted EBITDA ahead of our earlier targets. We also believe, we’re in a much stronger net cash position today, than we were just a quarter ago, thanks to faster gross margin expansion and certain strategic initiatives we’ve implemented on the partnership side, which we will expand upon during this call. We remain well capitalized and expects to reach cash breakeven with between $75 million and $100 million in net cash.

Mark will share more thoughts on our results and our upwardly revised outlook in a few moments. Our mission is to make the world a safer place to live, work, learn and play. And there’s never been a more important moment for our company, than right now. 2023 tragically, began with an unprecedented level of gun violence in America, with 202 mass shootings in the first 130 days of the year, ahead of last year’s pace, which resulted in 647 mass shootings. In just a few short weeks, we lost six people including three children at a school in Nashville, five employees at a bank in Louisville, four teenagers at a sweet 16 birthday party in Alabama and eight people just this past weekend in a shopping mall, in Texas. These events underscore the urgent need to take more proactive steps to prevent gun violence.

With gun violence now surpassing car accidents as the number one cause of death for kids under 18, our country is crying out for more effective solutions. With modern advances in sensor technology, data-driven software, the ubiquity of cameras, cloud connectivity artificial intelligence and machine learning models, technology can play a crucial role in addressing this tragic epidemic. Just like digital advances can bring civilians to space, drive cars autonomously and help address challenges in climate change, developments and artificial intelligence can be applied to the gun violence epidemic gripping the country. Our customers across stadiums, schools, hospitals, theme parks and performing arts venues have partnered with Evolv Express for this help.

As security professionals, we know that there’s no perfect solution, no absolute prevention, but with advanced cutting-edge technology like ours, combined with a multilayered defense architecture that includes trained people and proven security processes, we believe that as a society, we can begin to reverse the escalating trends that we are now seeing. We believe we are making a positive difference to our rapidly growing customer base. We have now screened over 600 million visitors and are now finding on average over 450 guns every single day. We’re partnering with our customers to create safer zones, and our relenting focus to get Evolv Express in places, where people gather and to truly democratize security in America inspires our team every day to help prevent even one more violent interaction with a gun.

I want to share with you some insights into some of the key trends we’re seeing in the business. We continue to see broad adoption of our solutions with strong end market demand in education, in health care and professional sports are key vertical markets. Of note, we’re beginning to see growing traction in industrial workplaces, which was our fastest-growing market in Q1 and which we believe will be a fundamental driver of our growth in 2024. The demand in education continues to accelerate. The education market again represents 50% of our business in the first quarter. We added over 65 more school buildings in the first quarter, up from 400 school buildings at the end of 2022. I believe that we will add at least one more school building every single day here in Q2.

We extended our penetration rate among the 100 largest school districts in the country, which now stands at 11. We’re pleased to welcome the Cobb County School District in Georgia, the Baltimore City School District in Maryland and the Douglas County School District in Colorado. We also added Clovis Municipal Schools in New Mexico as well as the Hopewell City Schools and the Manassas City Public Schools both located off the interstate of 95 in Virginia. We’re also beginning to accelerate our presence in schools out West with new deployments in Colorado, New Mexico, Utah and in California. Evolv Express can now be found in schools across 34 states and is now being used to screen hundreds of thousands of students every single day. We continue to extend our early leadership position in the healthcare market, which includes over 6,000 hospitals where over 70% of workplace pilots takes place.

We’re pleased to report that we added another 20 new healthcare customers in the first quarter including Nemours Children’s Hospital in Delaware, the Gerald Champion Regional Medical Center in New Mexico and Doylestown Health in Pennsylvania. We’re now deployed at over 150 hospital buildings across the country, which is up more than 10x over last year. Professional Sports remains a high-visibility vertical market for us. We now partner with 10 teams across the National Football League four teams across the National Hockey League and seven teams across Major League Soccer. We had a very busy spring across Major League Baseball as we helped open the seasons for the Boston Red Sox, the Minnesota Twins, the Philadelphia Phillies, the Houston Astros, the New York Mets, the Pittsburgh Pirates and four other franchises.

We now screen millions of fans of nearly three dozen professional sports teams across the NFL, MLS, MLB and NHL. We continue to see accelerated momentum with our channel partners, which include Johnson Controls, Securitas, Motorola, Alliance, Stone and over 70 other partners a record 80% of our bookings activity in the first quarter came with or through a channel partner. We’re also pleased to announce our expanded relationship with Columbia Tech our long-time contract manufacturing partner. CT is now an authorized distributor of Evolv Express and will play an important role for customers that prefer to purchase Evolv Express, while concurrently entering into a long-term subscription contract with us for those related software. We believe this expanded partnership will ensure that we can fully support the buying preferences of our customers, while also driving gross margin expansion over the next several years.

CT continues to be a strong partner for the company. Another important trend that we saw throughout the first quarter was the increased adoption of our full subscription model. As we’ve shared with investors in the past, we’ve been leading with our subscription model for over six months now and that effort is beginning to pay dividends. In fact, over 60% of all unit bookings in the first quarter were via our pure subscription model. That was directly correlated to the gross margin expansion we delivered in Q1. Finally, we saw deal sizes continue to increase with ASPs up about 20% from the year ago period. That reflects the trends we’re seeing in both expanding ARPUs and average deal size. Specifically, the average deal in Q1 included five Evolv Express units compared to four in the fourth quarter and three in the first quarter of last year.

So that’s a look at some of the trends that are shaping the business early in 2023. Let me shift and bring to life two brief customer stories one in education and one industrial warehouses to shed more light on the value of our solutions that are being delivered. When it comes to the safety of students, administrators, teachers, staff, parents and visitors many would consider James Island Charter High School in Charleston South Carolina to be ahead of the class. The school which is home to 1.600 students began using hand-worn metal detectors in 2018 and walk-through metal detectors in 2020 to elevate their security posture. But they ultimately determined that traditional metal detectors were problematic as lines would form outside the school creating anxiety and frustration as well as soft targets.

They established new goals to reduce long wait times, minimize false alarm rates, eliminate potential security streaming biases and reduce the number of staff members require to manage security screening. School officials elected to implement Evolv Express and the results have been staggering. The long lines and soft targets have been eliminated. Security screening staff have been reduced by 33%. Student concerns over security screening biases has been reduced and they’ve begun to develop plans to further extend their deployment to include athletic events for additional layered security. Let me shift and share some insights from the industrial workplace market, which is home to tens of thousands of manufacturing plants, distribution centers and warehouses.

Purple Innovation based in Alpine, Utah designs and manufactures a variety of products including mattresses, pillows, bedding and frames. They have over 1,500 employees and operate over 50 manufacturing and retail locations across the United States. They established specific criteria as they launch the search for security screening solutions for their manufacturing facilities, which operate across two 12-hour shifts six days a week. First and foremost, they were looking to dramatically reduce the likelihood of a weapon getting into Purple manufacturing facility. They also wanted to enable employees to focus on work and feel a sense of safety while on site. They needed to screen hundreds of employees during shift changes in a matter of minutes.

Lastly, they wanted to brand security screening and promote safety for HR recruitment. After seeing Evolv Express in action at a sports stadium members of the Purple Innovation management team decided to move forward with our solution and the outcomes have been very positive. They’re now screening over 300 employees in less than five minutes during shift changes. This is significantly faster compared to their legacy walk-through metal detectors and with far few nuisance alarm rates. They’ve minimized the risk of weapons entering one of the company’s facilities and they’ve also improved their security posture by integrating Evolv into the security technologies including their milestone video security system. Next for them is the installation of revolving doors at their facilities with an API connection to Evolv Express, so that those doors can be automatically locked when a weapon is found.

So to summarize, we’re reporting solid first quarter results, highlighted by strong growth in revenues, ARR and RPO. We again delivered strong growth both in new customer acquisition and in expanding deployments within our existing customer base. We’re continuing to see evidence of the leverage in our business model as the revenue growth again outpaced operating expense growth. We remain on track with a growth plan for 2023, which is focused on doubling our ARR. And we believe that the strength of our balance sheet will enable us to reach cash breakeven without the need to raise any additional capital. With that, let me turn things over to Mark who will take you through our financial results and our outlook. Mark?

Mark Donohue: Thank you, Peter, and good afternoon, everyone. I’m going to review our first quarter results in more detail and then walk through our upwardly revised business outlook for 2023. As Peter mentioned total revenue was $18.6 million, up 113% year-over-year. Our revenue growth in the first quarter continued to be fueled by strong new customer acquisition activity and rapid acceleration in our number of revenue generating subscriptions. Annual Recurring Revenue or ARR at March 31, 2023 was $42 million, reflecting growth of 153% year-over-year and 23% sequentially. This is a key metric for us. As we mentioned previously, we retired total contract value or TCV as a key metric at the end of last year, since it is no longer a consistent indicator of future performance.

Total recurring revenue during the first quarter of 2023 was $9.1 million compared to $3.2 million in the first quarter of 2022, reflecting growth of 187% year-over-year and nearly 50% of total revenue. Recurring revenue includes the recurring portion of revenue related associated with pure subscription contracts and hardware purchases. Our total number of revenue generating subscriptions increased to 2,787 at the end of Q1, 2023 compared to 910 at the end of Q1, 2022. This increase in subscriptions was the primary driver to the strong growth in recurring revenues. Remaining performance obligation or RPO as of March 31, 2023 was a record $162 million, up 154% year-over-year and 12% sequentially. Adjusted gross margin, which excludes stock-based compensation was 27% in the first quarter of 2023 compared to 12% in the first quarter of last year.

Our improved gross profit and gross margin primarily reflects our continued transition to largely a subscription business structure. As Peter mentioned during the first quarter about 60% of all units booked were via our pure subscription business model, which again includes subscription for both hardware and software. That’s a trend we’ve seen strength in here in Q2 as well. As we continue to shift towards subscription and we continue to engineer product cost down, we expect overall gross margins to continue to expand. Investors will note that we had higher gross profit in the first quarter of 2023, than we did all of last year. We have made gross margin expansion a corporate priority, and we look forward to building upon that improvement going forward.

Adjusted operating expenses, which excludes stock-based compensation, loss on impairment of equipment and certain other onetime expenses were $22.2 million, compared to $19.9 million in the fourth quarter of 2022 and USD19.4 million in the first quarter 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 higher payroll taxes which is common at the start of the New Year. We exited the quarter with 247 employees, compared to 225 at December 31st 2022. The majority of the headcount growth was in Quota Carrying Sales Executives and Channel Development Personnel, as we invest appropriately in our growth plans for the rest of the year and into 2024.

Adjusted loss, which excludes stock-based compensation non-cash charges and other one-time items, was $16.9 million, compared to $18.5 million in the first quarter of last year. Adjusted EBITDA, which excludes stock-based compensation and other one-time items, was negative $15.4 million, compared to negative $18 million in the fourth quarter of 2022 and negative $17.3 million in the first quarter of last year. This reflects about a 10% improvement both sequentially and year-over-year, primarily due to higher gross profit and careful expense management. Turning to the balance sheet. We ended the quarter with $182 million in cash and cash equivalents down about $48 million sequentially. That reflects the full $30 million payoff of the debt facility with Silicon Valley Bank, which we had previously installed in the fourth quarter of 2022.

So, our net cash position went from $200 million at the end of 2022 to about $182 million at the end of Q1 2023, primarily driven by our net loss and fixed asset additions to support the pure subscription business all of which was partially offset by the positive change in working capital. I want to close with a few comments on our updated thinking for 2023. As we shared with investors last quarter, we think seasonality trends combined with ramping of channel enablement and the timing of certain hiring decisions will lead to a greater percentage of our sales activity coming in the second half of the year, like we saw in 2022. That’s how we continue to see this year shaping up. Based on our strong performance in Q1 and the current indications, we are seeing in the business we are raising our outlook.

We expect revenues of between $60 million to $65 million in 2023, compared to our earlier guidance of between $55 million to $60 million. We expect to end 2023 with ARR of between $67 million to $71 million, compared to our previous guidance of $65 million to $70 million and compared to $34 million at the end of 2022. We expect gross margins to improve throughout 2023 and we are currently modeling 35% to 40% for the full year, up from our prior outlook of 30% to 35%. This reflects the benefits associated with the accelerated adoption of our peer subscription pricing model as well as the expanding ARPUs for Evolv Express. Based on the strength of our revenue outlook and our improving gross profit expectations we now expect adjusted EBITDA to range between negative $53 million and negative $58 million, compared to our previous forecast of negative $55 million to negative $60 million.

Finally, we expect to exit the year with net cash in the range of $110 million to $120 million, which compares favorably to our previous models that called for ending net cash of between $100 million to $110 million. I will remind investors, that we had previously expected to end 2023 with gross cash of about $165 million to $175 million which included debt of about $65 million. That debt facility with SVB was solely to support the purchase of Evolv Express for use by our full subscription customers. As previously disclosed, we elected to terminate that debt facility at March 31st and paid off to then outstanding balance of $30 million. We of course, won’t be drawing down the additional $35 million we had previously planned for the balance of 2023.

Our expanded partnership with Columbia Technology or CT has the potential to change the business dynamics in Evolv’s favor. Rather than needing to procure all of the equipment on our balance sheet to service a mostly pure subscription model, we expect a different mix. We have many end-customers that prefer buying the equipment upfront, particularly in our K-12 and healthcare verticals. That can be due to grants, funding requirements, donor preferences or simply business capital planning. Our commitment to our customers’ needs extends to the way we structure customer contracts. Our goal is to be agnostic on the sales methodology requested by our customers and eliminate friction in the selling process. Our expanded partnership with CT helps us achieve that balance.

Our reseller partners will now go direct to CT for any upfront hardware purchases and CT will in turn pay a hardware IP license to Evolv for each unit sold. The reseller will continue to place direct orders with Evolv for the use of the software under our recurring revenue model. The net of all this is that we will likely be purchasing fewer systems for full subscription customers, who we expect will not purchase hardware front using the CT distribution model option. This reduces our prior views on expected capital outlay and debt requirements for the business over the long-term. We also expect to see accelerated cash receipts associated with the related hardware IP license fee that is part of our new model with CT. This expanded partnership is a benefit to our customers and could pave the way for higher gross margins than our pure subscription model alone.

To reiterate Peter’s earlier comments, we remain very well capitalized and expect to reach cash breakeven with between $75 million to $100 million in net cash. So, in summary, we had a solid first quarter highlighted by strong revenue and gross profit which coupled with the strengthening leading indicators in the business gives us the confidence to raise our outlook for the remainder of the year. Longer-term, we believe there’s an additional leverage in our business model, including a faster route to profitability than we had previously anticipated, and we look forward to sharing our updated views on that during our upcoming Analyst Day on May 25. More to come then. With that, I’ll turn the call back over to Brian.

Brian Norris : Thank you, Mark. At this time, we’d like to open the call up for Q&A. Again, we’re going to ask participants to limit themselves to one question and one follow-up.

Q&A Session

Operator: [Operator Instructions] And we’ll go with Chad Bennett with Craig-Hallum. Please go ahead. Your line is open.

Operator: Our next question is going to come from Hugh Cunningham with TD Cowen & Company. Please go ahead.

Operator: [Operator Instructions] Next we’re going to go to Brett Knoblauch with Cantor Fitzgerald. Please go ahead Brett.

Operator: We have our next call — our next question is coming from Mike Latimore with Northland Capital. Please go ahead.

Operator: Our next question comes from Rob Galvin with Stifel. Please go ahead.

Brian Norris: Thank you, Rob. Operator, we’re going to just turn it back over to Peter George for a couple of closing remarks.

Peter George: Sure. Look we had really solid Q1 results everyone highlighted by strong growth in revenue ARR and RPO as we mentioned. We delivered strong growth with customer acquisitions and our expanding deployments. We continue to see a lot of evidence in leverage in our business model. We remain on track as we said for our growth plans in 2023 this year and we’re focused on doubling ARR. And we’re well capitalized with enough cash to get to cash flow breakeven with $75 million to $100 million of cash still left in the bank. So I want to thank everyone who joined us today. I want to thank our 600 or more customers who have security professionals that work with us to make their venues safe every day. And I finally want to thank our 255 revolvers who wake up every day devoted and dedicated to making the world safer and people safer. So thank you everybody.

Brian Norris: Terrific. Before we close one last comment Analyst Day May 25 any questions on that please mail me to reach out at ir@evolvtechnology.com.

Operator: You may now disconnect.