Evolv Technologies Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 29, 2024

There are 8 speakers on the call.

Operator

Thank you everyone for standing by and welcome to the Evolve Technologies 4th 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. I will now turn the call over to your host, Senior Vice President of Finance for EVOLVE Technologies, Brian Norris.

Speaker 1

Thank you, Kevin, and good afternoon, everyone. 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 Q4 2023 results and our business outlook for 2024. This press release has been furnished with the SEC and is also available on the IR section of our website.

Speaker 1

The format for today's call is as follows: Peter will share his thoughts on our performance in Q4 and 2023, and Mark will review our detailed financial results, provide a brief update on the regulatory front and share some thoughts on how we're thinking about 2024. During today's call, we will make forward looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. 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 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, 2023, which we filed with the SEC earlier today.

Speaker 1

The forward looking statements made today represent our views as of February 29, 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. Except as may be required by applicable law, we disclaim any obligation to update them to reflect future events or circumstances. Before I review some of the non GAAP measures we'll be talking, I'd like to highlight to investors that there is a companion PowerPoint deck available on our Investor Relations website, which will be the basis of today's conversation. Our commentary today will also include non GAAP financial measures, which we believe provide additional insights for investors.

Speaker 1

These measures should not be considered in isolation from or as a substitute for financial information prepared in accordance with GAAP. These measures include adjusted gross profit, adjusted gross margin, adjusted operating expenses, adjusted operating income, adjusted EBITDA, adjusted earnings and adjusted earnings per share. Reconciliations between these non GAAP measures and the most directly comparable GAAP measures can be found in our press release issued today as well as in the companion PowerPoint deck available on our website. 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 we're making as a business.

Speaker 1

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

Speaker 2

Thanks, Brian, and thank you, everyone, for joining us today. I'm going to spend a few minutes on our results for the Q4 full year, discuss the key trends we believe are driving our improving results and then spend a few minutes updating you on the progress we're making with several other important initiatives across the business. We have a lot of exciting news to share with you today. But before we do that, let me take a moment here on Slide 4 to remind everyone of our mission, which is to democratize security, making venues, facilities and people everywhere safer and more secure. We're focused on making the world a more enjoyable place for people to live, work, learn and play, And we strive to do that every single day.

Speaker 2

Our unrelenting focus to help prevent even one more instance of gun violence inspires our team. Moving to Slide 5. We're delighted to be reporting revenue of $80,400,000 in 2023, up 46% year over year. Our growth continues to reflect new customer acquisition activity and the continued expansion of our subscription base. We welcome nearly 300 new customers and doubled our base of Evolv Express subscriptions to just over 4,500.

Speaker 2

Further, we grew ARR from $34,000,000 at the end of 2022 to 75,000,000 at the end of 2023, reflecting growth of 120%. Evolve Express surpassed 1,000,000,000 visitors scanned in 2023. We now routinely scan more visitors on any given day than anybody else in the world, including the TSA. What's more, Evolve Xpress was used to identify and tag nearly 400,000 weapons in 2023. We saw growing momentum with key partners like ASM, Columbia Tech, Alliance, JCI, Stanley Securitas and Ricoh.

Speaker 2

We realized several key product innovations, including Evolve Visual Gun Detection, Evolve 6.0, Evolve 7.0, while also launching a new digital products initiative, all of which combined to further extend our technology moat. Finally, we further strengthened our already strong leadership team with several key additions, including Jay Muehlhoffer, our new Chief Commercial Officer Parag Basch, our new Chief Digital Products Officer Courtney Cunain, our new Chief Marketing Officer and Jeff Seifert, our new strategic channel leader. Fueling the growing demand for venue security is the unfortunate and tragic trend in escalating U. S. Gun violence, which is highlighted here on Slide 6.

Speaker 2

According to recently released reports from the gun violence archive, there were 656 mass shootings in 2023. Sadly, that's twice the number of mass shootings we saw just a decade ago. We're now in a very different world today. As a result, venue operators are demanding solutions that can improve security, enhance the visitor experience, reduce security labor costs, improve worker retention and provide improved visibility to their Slide 7, we screened 720,000,000 visitors in 2023. That's double the number of visitors we screened in 2022.

Speaker 2

We've now screened well over 1,000,000,000 visitors since the release of Evolve Express just 4 years ago. With continued momentum in customer growth and deployments, we expect to surpass 2,000,000,000 visitors screened by the end of 2024. We believe we're making a fundamental difference in visitor safety around the world. Our customers use Devolve Express to tag about 400,000 weapons in 2023, including about 180,000 firearms and another 220,000 knives. That's an average of more than 1,000 weapons every single day.

Speaker 2

Another significant development is what we view as our growing technical advantage in the market, which is highlighted here on Slide 8. Building on our already strong technical lead in 2023, we released several major advancements. We introduced Express 6.0, which bought many new advancements to our software capabilities, including a new higher sensitivity threat level option, which has proven effective at detecting smaller threats, including broader variety of 3.5 to 5 inches folding knives. That has been very well received by our customers. In fact, we saw 168% year over year spike in the number of knives tagged by our customers to just over 220,000 or about 600 knives per day.

Speaker 2

So based on this data, we believe the higher sensitivity level is delivering an increase in knife detection across our customer base. We expanded our API library, extending integration from Evolv Express to various security systems, including video management, incident response and mass notification. We also introduced Express 7.0, which bought yet another level of improvement to our detection algorithm. It reduces nuisance alarms of certain benign items. The new tablet interface introduced a simplified home screen, more efficient identification of alerting individuals, improved alert resolution workflow and a more visually appealing and intuitive user interface.

Speaker 2

Because our customers are on long term subscription contracts with us, they can easily take advantage of these breakthrough capabilities as they're released through our cloud based environment. With enhanced data and superior products, we believe we offer an extraordinary value proposition to our customers. With our extensive data set, we believe that our advanced algorithms enable us to identify new threats quickly and classify all learned threats more accurately over time. Through our cloud based environment, we can efficiently deliver advancements to our customers, making their venues safer. More venue operators are turning to us to power their digital thresholds.

Speaker 2

We are digitally transforming physical security with critical capabilities not only in concealed weapons detection, but in adjacent areas such as crowd assessment, mass notification, people flow analytics and now brandished weapons. Switching to Slide 9. In 2023, we introduced Evolv Visual Gun Detection, a new product offering designed to detect individuals with brandished guns as they approach a venue, expanding security well beyond the doorway. This provides an opportunity to use video based AI to identify this critical threat vector and create additional time to potentially prevent an incident. Using high resolution 4 ks cameras and AI, brandished guns at distances up to 100 feet outside the building can be identified with images and live video footage quickly transmitted to security staff for rapid evaluation and decision making.

Speaker 2

Feedback from early adopters, which include some of the most discerning customers, has been overwhelmingly positive and the pipeline for Evolv Visual Gun Detect is growing nicely. We believe new products enable us to continue to raise the bar of innovation, optimize ARPU and maximize renewal rates. We believe this is the beginning of customers not only buying Evolv Express, but rather buying the Evolv platform. As highlighted here on Slide 10, we're seeing strong customer acquisition activities. We added 75 new customers in the Q4 and nearly 300 new customers in 2023.

Speaker 2

We firmly believe that highly differentiated new customer acquisition efforts provide a 1st mover advantage due to the strong network effect dynamics of our market. We're excited to welcome dozens of iconic venues, which recently selected Evolve Express, including the TV Garden in Boston, which is home of the 17 time world champion Boston Celtics and 6 time Stanley Cup champion Boston Bruins. The Houston Rockets and the Charlotte Hornets of the NBA, 3 more universities including Belmont University, the University of Utah and the New England Conservatory of Music. Several additional healthcare facilities, including the University of Pennsylvania Medical Center, the Memorial Regional Hospital and the Shore Medical Center. Several local theaters, including Paper Mill Playhouse, Canary Hall and the Whitewater Amphitheater.

Speaker 2

We also added one of the most iconic venues in North London, Alexandria Palace, which has a storied history with the BBC. And finally, we added the Hollywood Bowl, the world renowned amphitheater in Hollywood Hills of Los Angeles. We proudly welcome these and dozens of new customers to the evolve community. As you can see here on Slide 11, our newest customers join a large and rapidly growing list of iconic venues that have chosen to deploy Evolv technology. We now serve over 700 customers across our key vertical markets.

Speaker 2

I'd note that our measure of a customer is arguably a conservative view because of us. One new customer could mean a dozen or more buildings in 1 new school district or 1 new health care system. We are not aware of any other market participant that has more customers or more long term subscriptions than Evolv technology. We expect to surpass 1,000 customers here in 2024. As highlighted here on Slide 12, our strong new customer activity coupled with expanding deployments among our existing customers has led to significant growth in our installed base of Evolv Express subscriptions in 2023.

Speaker 2

In 2023, we deployed over 2,200 of ALVE Express units that are under long term subscription contracts. We had fewer available installation days in the Q4 due to the seasonal holiday schedule, but we were still able to activate about 500 subscriptions in the quarter. We now have over 4,500 Evolve Express units deployed. The expansion in our subscriber base was the primary driver to the 120 percent year over year growth in ending ARR. Moving to Slide 13.

Speaker 2

We've seen and expect to continue to see momentum with our channel partners. We're delighted with our partnership with Columbia Tech or CT, our long term local contract manufacturer, who have assembled every one of the Evolv Express systems that have rolled off the assembly line. In 2023, we expanded our partnership with CT,

Speaker 3

of

Speaker 2

our of our sales activity came with or through our channel partners in 2023. These are partners that extend our reach into certain verticals or geographies where they have a particularly strong presence. We expect to continue to see strong activity with 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. Finally, we're delighted with the early progress we've had together with Ricoh, one of the largest service delivery organizations in the world.

Speaker 2

That partnership enables us to expand and scale our own customer service program by leveraging Ricoh's well established and comprehensive service advantage program. The Ricoh partnership provides our customers with increased field service resources, expanded technical sport and an expedited part availability. Turning to Slide 14. I want to dig into the demand drivers in our end markets, starting with education, which is made up of nearly 130,000 schools across the nation. Gun violence in schools remains a top issue for district leadership, school administrators, parents, teachers and students.

Speaker 2

The Center of Disease Control and Prevention reports that firearm related activities have surpassed car accidents as the leading cause of death among children and adolescents. Additionally, when considering the impact to children experiencing nonfatal injuries and the increasing levels of anxiety among our youth, the resulting pain and emotional distress are poised to have an enduring effects across the nation. School administrators are also turning to advanced security solutions to improve teacher retention without using outdated legacy metal detectors and the potential negative impact they can have on the overall learning environment. We're on a mission to improve the safety of young people. And for us, that starts with students and their schools.

Speaker 2

This continues to be our number one end market and represented about 45% of our business in 2023 and 35% of our business in the Q4, which also highlights the seasonal trends that appear to be developing in education. We can now be found in over 800 school buildings and are now screening on average 600,000 school visitors every day. We can now be found in 20 of the 100 largest school districts in the country. We're pleased to welcome the Jefferson County School District in Kentucky, Belmont University, the New England Conservatory of Music, the University of Utah and Windsor Learning Center among other many new education customers. Turning to Slide 15.

Speaker 2

Another major market for Evolve continues to be healthcare, which includes over 6,000 hospitals and where over 70% of workplace violence takes place. Hospital administrators are making investments to enhance patient and staff safety, and we stand well positioned to fill this market need. We added many new healthcare customers in the Q4, including the University of Pennsylvania Medical Center, the Memorial Regional Hospital and the Shore Medical Center. We're pleased to report that we now serve about 300 hospital buildings across the country and are screening almost 500,000 healthcare visitors every single day. One more market to highlight here on Slide 16 is professional sports, where we continue to transform the guest experience for millions of fans at stadiums, arenas and ballparks around the country.

Speaker 2

We enable fans to enjoy a faster, more convenient and more secure screening process. We are thrilled to have hit for the cycle in New England Sports. Building on our previous wins at the New England Patriots and the Boston Red Sox, we are proud to now provide security screening at the DD North Garden, which, of course, is home of the Boston Bruins and the Boston Celtics. We further expanded in the NBA with key wins at the Houston Rockets and the Charlotte Hornets. We also added the T Mobile Arena, home of the 2023 Stanley Cup Champion Vegas Golden Knights.

Speaker 2

We're excited to have added 100,000 seat Melbourne Cricket Grounds, which is the largest stadium in the Southern Hemisphere. We've already deployed there and were used to screen hundreds of thousands of locals Taylor Swift bands during the 3 day concert stop there earlier this month. That's on top of the close to 2,000,000 Swifty's that we screened in 2023 during the North America leg of the Eros tour. Moving on to Slide 17. We are absolutely delighted to announce our recently formed partnership with ASM.

Speaker 2

Headquartered in Los Angeles, ASM's venue network spans 5 continents with a portfolio of more than 350 of the world's most prestigious arenas, stadiums, convention and exhibit centers and performing arts venues. We have been selected as ASM's preferred technology provider for patron screening in North America. The partnership represents both our continued leadership in delivering advanced screening for professional sports and entertainment fans and ASM's commitment to creating the best guest experience at its venues around the globe. Evolve Express is currently screening guests at 10 ASM Global Venues in Jacksonville, Houston, Denver, Long Beach and Ontario and in California. This is in addition to several ASM global venues in the United Kingdom that we began supporting in 2022.

Speaker 2

We look forward to providing updates on our progress among the 3 50 plus facilities in the North America portfolio. So to summarize here on Slide 18, we're reporting strong 4th quarter results, highlighted by record revenues, ARR and RPO. We've been seeing a growing market awareness and strong new customer acquisition activity. We've continued to see evidence of the leverage in our business model. And we have an exciting growth plans for 2024, which is focused on again delivering market leading growth in ARR.

Speaker 2

We expect adjusted gross margins of about 60% in 2024, which combined with accelerating leverage from our investments puts us in an excellent position to reach positive adjusted EBITDA in the first half of twenty twenty five without the need for any additional capital. 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 Q4 results in more detail and walk through our thoughts on 2024. I will also provide an update on the regulatory front. I will start here on Slide 20. As Peter mentioned, total revenue was $21,800,000 up 4% year over year.

Speaker 3

For the year, total revenue was $80,400,000 which compared favorably to our earlier guidance. Our revenue growth was again fueled by strong new customer acquisition activity and the rapid growth of revenue generating subscriptions. We are particularly delighted with the strong growth in our recurring revenues, which represented 65% of our full year revenues and reached 80% of our 4th quarter revenues. Our total number of revenue generating subscriptions increased to 4,505 at the end of 2023 compared to 4,014 end of Q3. This was the primary driver of strong growth in recurring revenues.

Speaker 3

Moving to Slide 21, annual recurring revenue or ARR at December 31, 2023 was $75,000,000 reflecting growth of 120% year over year and 14% sequentially. Remaining performance obligation or RPO as of December 31, 2023 was a record $241,000,000 up 67% year over year and 9% sequentially. As we have been sharing with our investors on prior calls, we continue to expect the rate of growth in RPO to temper as lower margin revenue hardware revenue begins to come off the P and L and more unit bookings go through the distribution model. We expect the result to be faster growth and recurring revenue and higher overall gross margins for the business, which is exactly what we saw in the 4th quarter. Flipping this to Slide 22 and moving down the income statement beyond revenue, adjusted gross margin, which excludes stock based compensation, was 57% in the Q4 of 2023 compared to 1% in the Q4 of 2022.

Speaker 3

Our improved gross profit and gross margin primarily reflect demand for our distributor to we reported adjusted gross margin of 45% compared to just 5% in 2022, again reflecting the strength of our distributor model. We continue to expect adjusted gross margins of at least 60% in 2024. Adjusted operating expenses, which excludes stock based compensation, loss on impairment of equipment and certain other one time expenses were $24,900,000 compared to $19,900,000 in the Q4 of last year and $25,200,000 in the Q3 of this year. We exited the quarter with 293 employees compared to 281 at September 30, 2023, reflecting an increase of 12 FTEs sequentially. Adjusted EBITDA, which excludes stock based compensation and other one time items was negative $9,500,000 compared to negative $18,000,000 in the Q4 of last year.

Speaker 3

We saw strong improvement throughout the year. Turning to the balance sheet, we ended the quarter with $119,000,000 in cash, cash equivalents, restricted cash and marketable securities, down from $140,000,000 at the end of Q3 and down from $230,000,000 at the end of last year, primarily driven by our net loss as well as our fixed asset additions to support the Pure subscription business. We encourage investors to review property and equipment on our 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 increased by $68,000,000 in 2023. All that cash comes back to the company over the underlying subscription terms.

Speaker 3

It underscores the fundamental difference between cash burn and cash usage. They are very different in our business. I want to take a moment here on Slide 23 to remind investors of our expanded partnership with CT and the potential impact for EVOLVE. CT, which has been our long time contract manufacturer, became an authorized distributor of Evolvable Express in the middle of 2023. Simply put, customers that prefer to purchase the hardware component of Evolv Express can now do so by placing an order with 1 of our approved reseller partners, which in turn will place a hardware order for Evolv Express directly with CT under a separate reseller agreement.

Speaker 3

So customers don't have to turn to Evolve to purchase the hardware component of their evolve express system. Concurrently, the approved reseller partner will place a second order with Evolve for the long term software subscription contract, which will power the newly purchased Evolve Express. The complete order will be distributed by CT. This is an important expansion of our strong relationship and is designed to make it even easier for our customers to procure and deploy Evolv Express directly from our manufacturer. We believe this expanded partnership will enable us to fully support the contractual preferences of our customers, particularly those working with grant resources or who are accustomed to working under the CapEx model.

Speaker 3

The expected impact of this expanded partnership is highlighted here on Slide 24. As investors will note, this effectively moves us away from a direct purchase model and the related full recognition of the bill of material in the very 1st month of the customer contract. This has been a drag to the business as you can see here with 5% adjusted gross margin in 2022. While we are still very early on in our expanded partnership with CT, we were able to deliver full year adjusted gross margin of 45% in 2023 as we did less direct product sales and as more of the revenue transition to recurring revenue. We expect recurring revenue to eventually represent about 80% of our total revenue, but the remainder to be largely associated with the very high gross margin hardware license fees that we will receive from CT.

Speaker 3

All in all, we expect our overall adjusted gross margins to reach 60% in 2024 with further expansion in the years ahead. I want to share a few comments about how we're thinking about 2024, which is highlighted here on Slide 25. For context, we think the productivity ramp of newly hired customer facing personnel coupled with developing seasonality trends will lead to a greater percentage of our activity coming in the second half of the year. We are also assuming no significant change in the demand environment because of the work we are doing with the Federal Trade Commission and the Securities and Exchange Commission. We began working with the FTC last year on their inquiry into certain of our marketing practices.

Speaker 3

We responded to all their information requests in a timely manner early last fall, and we are prepared to support them in any final steps in their review. We are also working with the SEC on a separate inquiry we received about 2 weeks ago. We are committed to working with both the FTC and the SEC as the progress as they progress through their inquiries and will continue to keep investors up to date on any material developments. So with that, here's how we're thinking about 2024. We are currently modeling full year revenues of about $115,000,000 in 20.24 with about $75,000,000 of that already in hand due to our ending ARR balance as of December 31, 2023.

Speaker 3

We believe we can exit 2024 with ARR of between $108,000,000 to $112,000,000 Our models call for adjusted gross margins of about 60% in 2024. We expect to reduce our adjusted EBITDA losses by at least 40% in 2024. We believe we will remain on track to get to positive adjusted EBITDA in the first half of twenty twenty five. And when we do, we expect to have cash and marketable securities of more than $75,000,000 Flipping to the last slide here, Slide 26, I want to remind investors of our long term target operating model, which is focused on delivering on the rule of 40. This is the same model we shared with investors back at our Analyst Day in May.

Speaker 3

As you can see, we continue to make excellent progress towards our long term goals. First off, we expect to deliver top line growth of 30% to 40% annually. For all the reasons I just reviewed, we expect adjusted gross margin to reach 60%. In fact, we are modeling that here for 2024. Moving to our investment strategy, we expect to continue to see leverage in R and D.

Speaker 3

I expect that we will reach our target spend rate of 15% to 20% as early as 2025. Sales and marketing is one area that you will continue to see us invest in. Clearly, we are already seeing leverage there, but we are investing in the growth opportunity. Again, I expect most of the hiring we do in 2024 will be focused on our go to market function. Longer term, I expect us to invest about 25% to 30% of revenue in sales and marketing.

Speaker 3

We made excellent progress in 2023 on leveraging our G and A spend. We will continue to make very thoughtful investments there as the business demands it. I expect us to get that spending level down to 10% to 12% of revenue over the next few years as we grow into our public company expenses. As you can see from the slide here, we expect longer term to be able to deliver adjusted EBITDA margins of at least 10% to 15%, which coupled with our top line growth rate expectations enable us to deliver on the rule of 40. One final note on profitability.

Speaker 3

We believe we are in an excellent position to reach positive adjusted EBITDA in the first half of twenty twenty five without the need for additional capital. We are very focused on getting to cash flow breakeven. With that, I'll turn the call back over to Brian.

Speaker 1

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

Operator

Thank First question is from the line of Saul Inouye of TD Cowen. Please go ahead.

Speaker 4

Thank you. This is Hugh for Shaul. Thanks for taking my question. First of all, congratulations on the quarter. You did what you said you were going to do.

Speaker 4

And Mark, thank you actually all of you, thank you for this presentation. Those numbers are very helpful. I do have a couple of questions in a couple of areas, so one and one follow-up. The first one is, can you talk a little bit about the diligence that your customers do when they engage you?

Speaker 2

Sure. Hugh, thanks for your call and your comments. So as you know, our customers are the decision makers are former law enforcement, sometimes former 3 letter agency, very experienced security professionals. And we work directly with them. We bring them to venues that are like minded venues like theirs.

Speaker 2

We talk to them fully transparently about what our system can and can't do. We normally do a POC with the customer, so they can see it in their venue. And almost always, those same customers do their own testing. They understand their own threats and they do their own testing. So that's typically how we sell to and work with our customers in partnership.

Speaker 2

And the typical sales cycle is 60 to 90 days depending on who it is.

Speaker 4

Okay. One additional question. My follow-up is related to it appears that you're getting much more comfortable with the sensitivity and performance of the Express because previously, you guys were focused and you're so focused on weapons and devices that can cause mass casualty events. And on this call, you've been talking a bit about sort of an increased focus on knives. Can you talk a little bit about what's driving that?

Speaker 2

So look, the use case for us, Hugh, hasn't changed. We're still about mass casualty events. Having said that, threats that our customers care about are not just guns, but sometimes weapons, large knives. So we've been trying to increase the accuracy of our system. And as you know, we came out with a new sensitivity called Level G, which has helped with that.

Speaker 2

Having said that, we've said many, many times that a best practice for security is a layered approach. We're just one part of that layer. There is no perfect prevention or perfect solution. So we work and all of our customers who are security professionals that have been in the security business know that. When they put in technology like ours, they're buying down risk, but there's nothing perfect.

Speaker 4

Great. Thanks, Peter. I'll jump back in the queue.

Speaker 2

Thanks Hugh.

Operator

Our next question is from the line of Mike Latimore, Northland. Please go ahead.

Speaker 5

Great. Thanks very much, Jeff. Congrats on another excellent quarter here.

Speaker 2

Great.

Speaker 4

Thanks.

Speaker 5

On the system, I guess, kind of redesign license fee would you get then?

Speaker 3

Yes. So thanks, Mike. We're in the midst of kind of running down our first systems. We're kind of at the final stage of building the last ones. By the middle of the year, I would say, starting in April, but probably by the beginning of Q2, we'll be building the newly designed system in earnest.

Speaker 3

So that'll come out at approximately the middle of the year. It's about if I was to kind of ballpark it, it's about 95% the same functionality. We've added a few bells and whistles to it like a 3 d camera and whatnot. But it's largely the same product just with a redesigning cost down. Over the past 3 years, we've learned a lot in the field about the system.

Speaker 3

So really changed it for quality, modularity, the ability to service it faster and better. So those are things that will help us as well as about I think we'll see probably somewhere in the area of about a third of the cost taken out of the system. And that should help us. We'll probably see licenses from our CT relationship go a little, but we're also thinking about how we might actually push some of that savings on to customers in certain verticals when necessary.

Speaker 2

Got it. Got it. Makes sense.

Speaker 5

And then in terms of the industrial warehouse category, did you think you will potentially hire a leader to run that this year?

Speaker 2

We do. We see that as a very, very big and emerging vertical that we're starting to see early signs of really a phenomenal use case. So as you know, we have a team of people in education as the vertical. We have a small team in healthcare and then a pro sports team. We think distribution warehouses is going to be the next big vertical for us.

Speaker 2

It's probably not going to be a big contributor in 2024, but certainly in 20252026. The TAM is so big, The number of those facilities is so vast and the use case so important. Think about shifts, workers' shifts and trying to get 100 or thousands of people in quickly in a new shift. We're pretty good at that. So we think it's going to be a really good vertical for us, and we'll probably have somebody on board who knows it really well.

Speaker 5

Yes. Okay. Excellent. Congrats on a great year.

Speaker 2

Thanks, Mike. Thanks, Mike.

Operator

Next, we'll go to the line of Chad Bennett, Craig Hallum. Please go ahead.

Speaker 6

So just maybe for Mark, it's good to see the reiteration of very good growth and improvement in EBITDA in the 'twenty four guide. I'm assuming that the unit target of 7,000 units is still obviously the way to think about that. So just confirming that. And then secondarily, just in terms of how I think you alluded to it in your prepared remarks, but just linearity of units throughout the year by quarter, I think would maybe a little bit of color there would be helpful.

Speaker 3

Thanks, Chad. Thanks for the question. Really appreciate it. That's right. That 7,000 plus units, we're still in that category.

Speaker 3

We're still feeling good about that. And I think that sort of connects with the guidance that we gave before. So we feel good there. In terms of linearity of units, I think that as part of our commentary, we talked about the second half of this year being a little bit stronger than the first half of this year, mostly because of a lot of the investments that we've made in marketing and sales, some of the changes we've made in leadership and absorbing that. We've been kind of moving forward with that.

Speaker 3

In terms of linearity of units, I would say that if we think about them on a quarter over quarter basis, I don't expect Q1 to be up much relatively flattish in Q1. Again, it's not one of the stronger quarters in the year, but as we kind of get into Q2, Q3 and Q4, I do expect the units to ramp throughout the year.

Speaker 6

Okay. And then just on just because of the nature of how conservative you are in recognizing a net new unit when it's actually installed. I guess, was there just from a seasonality standpoint, was there any kind of I don't know how I'd put it, but just timing or push outs of units from Q4 that will be recognized in Q1 just due to the nature of holidays and days off and stuff like that. Was that a quantifiable amount or was it pretty meaningless?

Speaker 2

What we've learned the last couple of years as our businesses developed is that Q3 is looking like it's going to be one of our strongest quarters. It has been the last 2 years. And it's mostly because education represented 47% of our business in 2023. And a lot of our education customers, their fiscal year ends in June, they place orders. And then, of course, we have most of the summer before school starts to get systems deployed.

Speaker 2

So our big deployment quarter looks like it's in Q3. And then in Q4, and when we talk about seasonality, we think the back half of every year is going to be stronger, but Q3 will probably always be stronger than Q4 because we just have more days to deploy, schools out, customers want education, want us to put the systems in. And then in Q4, as you mentioned, there's a lot of holidays in Q4 and not a lot of days to deploy because school's in session other than Thanksgiving and Christmas. So that's how we were seeing things going. So it was a bit of a short quarter in Q4 for deployment days.

Speaker 6

Got it. And then last one maybe for Mark, just in terms of how you're thinking about 24 from a subscription versus purchase split?

Speaker 3

Yes. We've gotten some traction distribution model. I would say coming out of Q4, we were kind of in about the 25% level. I think we're going to continue to track north in Q1 and Q2. It's going to rise.

Speaker 3

I don't expect it to hit it'll probably be kind of 40% in the first half of the year and then kind of drive to 50% plus in the back half of the year. So it's going to be a ramp throughout the year, more bent towards distribution. So for the full year, I'd expect distribution to be 50% or better of our business. Got it. Thanks much.

Speaker 3

Nice job on the quarter.

Speaker 2

Great. Thanks, Chad. Thanks, Chad.

Operator

We'll go next to the line of Brett Knoblauch, Cantor Fitzgerald. Please go ahead.

Speaker 7

Thanks for taking my question and congrats on the quarter. Maybe a similar question on seasonality with regards to margins, especially on adjusted EBITDA margin. I know you kind of gave the number of 40% plus growth. This quarter came in a bit better than expected. So I guess, should we continue to expect the kind of sequential improvements to the magnitude that we have seen?

Speaker 7

And maybe what should we be expecting as you guys look to exit 2024 and go into 2025?

Speaker 3

Are you talking about adjusted EBITDA margin or the gross margin, Brett? Adjusted EBITDA. Adjusted EBITDA. Yes. We came out of the year at $9,500,000 I think that our guidance based on the $49,800,000 that negative $40,900,000 we hit on an adjusted basis would kind of indicate that we're in about the 30,000,000 dollars category.

Speaker 3

I think we will see improvement every quarter. That will happen gradually throughout the year. We're being careful with our expenses. We're expecting revenue to kind of grow in a thematic way throughout the year as well with our ARR based model. And we're still feeling very good about by Q2 of 2025 hitting that EBITDA neutral state.

Speaker 7

Perfect. And maybe just one follow-up, just on the FTC and SEC stuff. I guess, have you seen any notable impact in any way to demand, customer conversations, pipeline, or would you kind of qualify that as maybe too early to tell?

Speaker 3

Yes, it's a little bit early. It's a little bit early on the SEC for us that really have had any customer impact. There's been we've had a few discussions with customers who want to understand the FTC, but that hasn't really impacted our commercial side. But there's not a lot more we can say. I mean, we're trying to respect the SEC's process that they're going through right here.

Speaker 3

So we can't share a lot of details. But what we have kind of seen at the beginning of the stage is that the SEC inquiry represents really like it's not a dramatic widening of the regulatory questions that we got from the FTC. So we're just going to keep going down the path of cooperating with the FTC and the SEC. As you know in our comments, the FTC was last May and we gave them what they needed by early fall. So we've done a lot of work there and a lot of that effort will be parlayed into the SEC side.

Operator

Awesome. Thanks

Speaker 7

guys. Really appreciate it.

Operator

Okay. We will at this time take one more question and that is from the line of Eric Martinuzzi, Lake Street. Please go ahead.

Speaker 4

Both the education and the healthcare side, if there's any danger of budgets weakening as maybe COVID related funding and grants dry up?

Speaker 2

Yes. Not so much on the healthcare, obviously. And that's where 70% of the workplace violence is happening. So we see opportunity to help our customers there. On education, ESSER funding is drying up this September, so September of 2024.

Speaker 2

We've already been working with a lot of schools on other funding sources, not just their own operating budgets, but other funding sources, other grants that are available to them to help put systems in like ours. So we don't view it being a big impact going forward. It's such an urgent need to keep kids and people safe that it's becoming a priority for parents and educators and everybody.

Speaker 4

Okay. And then last question, the with your go to market partners, curious to see if you're seeing your relationship EVOLVE product line?

Speaker 2

Yes. This is a new category and so selecting channel partners that can work in partnership with us to help create the market is really important. So we're not trying to find every partner. We're trying to find the ones that understand our story, that can offer something in terms of integration to customers that's really helpful with their security posture. So we see this as a big market opportunity going forward.

Speaker 2

We've talked before about the TAM being a $20,000,000,000 TAM and $18,000,000,000 is undeveloped. Think about those places that always wanted security. Their only alternative was a legacy technology, a metal detector. A lot of them did nothing. And now there's technology available that can help keep their venue safe in a different way, and people want to be part of that.

Speaker 2

So it's still early days, but there's a lot of work we can do to keep people in places safe and we like to partner with both systems integrators and channel partners to do that.

Speaker 5

Got it. Thanks for taking my questions.

Speaker 1

Terrific. Eric, thank you for that last question, and thank all of our the folks that asked the question. I'm going to turn the call over to Peter for some closing remarks.

Speaker 2

Yes. Thanks, Brian. Thanks, everybody, for joining us today and joining our mission as a company. Look, we're really happy with our strong results in Q4. We had record revenue, record ARR and our record RPO.

Speaker 2

We're proud of that. We have a growing market awareness. And when we put a system in, people get a chance to experience the difference with EVOLVE. And that's really, really helpful. And it's a force multiplying effect around that brand awareness.

Speaker 2

We continue to see growing leverage in our business model, which is really helpful. So as we think about 2024, we're going to continue to grow our ARR. It's a great get accelerating leverage from all the investments we're making. And as I mentioned earlier, we see a well lit path to positive adjusted EBITDA with no additional capital this year. So we're looking forward to this year and communicating with all of you on our progress.

Speaker 2

And we thank you everyone for attending tonight.

Operator

Thank you everyone for joining today's conference. This does conclude your conference. You may now disconnect. Have a good day.

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Earnings Conference Call
Evolv Technologies Q4 2023
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