-- to the Evolv Technologies Fourth Quarter Earnings Results Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions]. And as a reminder, this conference is being recorded. I would now like to turn the conference over to our host Mr. Brian Norris, Senior Vice President of Finance and Investor Relations. Please go ahead.

Thank you, Grace and good afternoon everyone. 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 fourth quarter results and our business outlook for 2023. This press release along with an accompanying slide presentation is available on the IR section of our website. During today's call, we will make forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934, and the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 that relate to our current expectations and views of future events, including, but not limited to, statements regarding 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 31st, 2021, filed with the SEC on March 28th, 2022 and as updated in other documents including our quarterly reports on Form 10-Q, all filed with or furnished to the SEC from time-to-time. Our forward-looking statements made today represent our views as of March 1st, 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…

Thanks Brian and thanks everyone for joining us today. We're pleased to be reporting strong fourth quarter results, which capped a historic year for the company. Our results were highlighted by record growth in new customers, revenues, ARR, and RPO. 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 five, to remind everyone of our mission, which is to democratize security, making venues, facilities, and people everywhere more secure. We're focused on making the world a safer place and more enjoyable place to live, to work, to learn, and to play. As we prepare to commemorate our 10th anniversary as a company later this year, I can tell you categorically that the mission our founders laid out in 2013 is timeless and yes intact. We are a mission-driven company made up of mission-driven people as we are the human security company. Moving to slide six. Revenue in the fourth quarter was $20.9 million, up 217% year-over-year and 26% sequentially. For the year, revenue was $55.2 million, up 136% year-over-year. Our growth continues to reflect strong customer acquisition activity and the continued expansion of our subscription base. We welcomed over 100 new customers in the fourth quarter and nearly 300 in the year. We activated 575 new multi-year subscriptions of Evolv Express in the fourth quarter alone and nearly 1,600 in all of 2022. Further, we grew ARR from $13 million at the end of 2021 to $34 million at the end of 2022, reflecting growth of over 160%. We anticipate ARR to again double in 2023, which combined with expanding gross margins and prudent expense management, should enable us to reduce our adjusted EBITDA losses by as much as 20% in 2023, while reducing…

Thanks Peter and good afternoon everyone. I'm going to review our fourth quarter results in more detail and walk through our thoughts on 2023. I will start here on slide 20. As Peter mentioned, total revenue was $20.9 million, up 217% year-over-year and 26% sequentially. This compares favorably to our previously issued guidance of $12 million to $14 million Our revenue growth in the fourth quarter continued to be fueled by strong new customer acquisition activity, continued hardware purchase activity, and rapid acceleration in subscriptions. TCV was $57.6 million, up 222% year-over-year and 27% sequentially. We saw broad vertical market contribution with strength in education, healthcare, and professional sports. Moving to slide 21, ARR at December 31st, 2022 was $34.1 million compared to $12.9 million at December 31, 2021, reflecting growth of 164% year-over-year and 19% sequentially. This compares favorably to our previous guidance of $31 million to $32 million. Remaining performance obligation or RPO as of December 31st, 2022 was a record $144.6 million compared to $51.4 million at December 31, 2021, up 181% year-over-year and 32% sequentially. Flipping to slide 2022, adjusted gross margin, which excludes stock-based compensation, was 1% in the fourth quarter of 2022 compared to negative 9% in the fourth quarter of last year. As a reminder, we recognize all the product costs related to product sales in the period of the sale rather than over the associated subscription term, which is typically four years. As we've discussed previously, our gross margins do not yet reflect the overall business value we are delivering the customers as we're using two very different accounting treatments between our pure subscription sales and our hardware purchase subscription sales. As a reminder, since August of last year, we have been transitioning more of the pipeline and opportunities to a pure…

Thank you, Mark. At this time, I would like to turn the call back over to our friends at AT&T to open up the call for Q&A. Again, we're going to ask participants to limit themselves to one question and one follow-up.

Thank you. [Operator Instructions] We'll go to the line of Mike Latimore with Northland Capital. Please go ahead.

Great. Thanks. Good afternoon. Super results there. I mean, the bookings growth of over 200% is very impressive number of seven figure deals really stands out as well. I mean here, but congrats on the year end quarter. I guess two questions. If I look at -- if you think about the SaaS for the subscription business, I think you said it was 55% of bookings I believe in 2022. And how are you thinking about that as a percent of bookings this year?

Mike, this is Mark Donahue. We're moving -- we're really moved trying to shift the business our hardware enabled SaaS business to subscription. So I would expect that the subscription side of our business will be a pretty heavy number. We made comments in the script about starting to move away from selling hardware. But no matter what, whether the hardware is rented through us or bought through a third-party in the future, we'll always be recognizing that subscription. So I would expect the subscription line to start to grow substantially and move towards 80% plus of our business going forward.

Yes. Got it. And then on the last quarter you talked about kind of redesigning the hardware. Can you just kind of give a little bit of update on that in terms of timing and what kind of cost changes you might see there?

Hey, Mike, it's Peter. We're spending this year doing a cost reduction plan, we call it 2-hour next generation product that will be available in early 2024. So that's on track. We have a lot of confidence that we'll be able to deliver that in earnest and at scale in the beginning of 2024, which should bring -- it will have very similar attributes and capabilities and features of our existing product, but will be cost reduced, which it should help our gross margins next year in a pretty significant way. So between the move to subscription this year and then the cost reduced next generation too well, we feel very, very good about our gross margin outlook in the next couple of years.

Okay. Excellent. Thanks very much. Congrats again.

Thanks Mike.

Thanks Mike.

Thank you. Next, we'll go to the line of Shaul Eyal with TD Cowen. Please go ahead.

Hey, guys. This is Hugh [ph] on for Shaul. Congrats on the strong quarter.

Thank you.

Thank you.

Two, first for Peter, you guys talked about, I think you said three of the Fortune 28 and the Fortune 100. You tell me is your -- how's that discussion progressing? Has it changed in light of the uncertain economy? Is it -- are the motivations changing because of e-commerce? Is it just still being primarily or solely driven by the sort of the increasing number of mass shootings with it?

Yes, I think the combination of the anxiety in mass shootings that continue to be prevalent everywhere. In the month of January Q, there were 30 days in January and 48 mass shootings in the United States. In California alone in a six-day period, or a 13-day period, there were six mass shootings. So it's becoming a daily event and such a sad way that I think that's driving CEOs at major enterprises and every executive to think first about the safety of their employees and the safety of their people. And that's encouraging them to make decisions with evolve to keep their employees or get their employees back to work in the office than a hybrid model or fully, but know that when they come back to work they're going to be safe. So workplace violence is a big issue and we can certainly help with our technology and our people.

Okay. I wanted to squeeze in one for Mark about the gross margin embedded in the RPO. But Peter, back to you again, When you spoke a lot earlier about what seems to be a strategy for expanding data in and data out customers and integrating with other platforms.

Yes.

And this question is really about the sort of add ins that we talked about earlier in your life cycle. I think we talked about ticketing and things like that. When you're having discussions with your customers, is there one particular application that a lot of them are interested in?

There are several that come up and a lot of the infrastructure actually is already there. So video management system, the VMS systems from the leading providers that are already there, they want us to connect to those. Access control systems, turn styles, our badge readers, they want us to connect to those systems. Video analytics systems for outdoor detection of weapons. As you know, we can find concealed weapons, but connecting to companies that are doing video analytics for gun detection. So we can see somebody who's drawing a gun outside of a building is something that they want us to connect to. So in addition to biometrics and ticketing that we've talked about before, there's a high desire to connect the security infrastructure to give companies and security people, situational awareness that they just didn't have before. So those are the three or four areas that we're integrating with our key customers.

Thanks Peter.

Great.

And your question on RPO2, for the quarter, we're at the $144.6 million level. That represents the unbilled activity on both deployed and undeployed units over the next three-plus years. Some of this is pure subscription and some of it is the back end software portion of hardware that we've already brought together. So when you look at the combination of those two things, we have analyzed that the margins sitting within that number are about 65% plus right now that we'll recognize over the next three years.

Great. Thank you, Mark.

No problem. Thank you.

Thank you.

Thank you. Next, we'll go to the line of Brett Knoblauch with Cantor Fitzgerald. Please go ahead.

Hi, guys. Thanks for taking my question and congrats on the quarter and strong finish to the year. Can you just walk through me, I guess, the sequential growth in subscription revenue, given how strong ARR growth was last quarter and this quarter as well I would have thought you would have seen a bit more flow through to subscription. So I guess can you just help me understand the dynamics there?

Sure. And Brett, welcome to the call. We appreciate it having you on board. In terms of subscription, revenue quarter-over-quarter. We made an announcement to both our sales force and as well as to our base that we were moving to more full subscription beginning on January 1. So we had a fair amount of activity in the pipeline that was still bent towards the purchase subscription model. So we executed on that quite a bit. Q4 was actually meant to be more purchase subscription than it was pure subscription as we kind of went through that process. In the beginnings of Q1, we've already seen that trend starting to change, but in terms of the growth in subscription or the ARR. One thing you got to remember is that a lot of what we booked in Q4 will not show up until Q1. We -- most of what we did incrementally in ARR from Q3 to Q4 is represented on what we shipped at the end of Q3 in the very beginnings of Q4. We tend to have more back end loaded quarters and we probably do about half our business in the first two months and the other half in the final month. So that really kind of, I would say, if you look at kind of a blend of Q3 and Q4 that would give you a sense of where that is and but that -- but what we did in Q4 is a good indication of how the strength we may see in Q1.

Perfect. That's helpful. And you mentioned a bit about seasonality. So you guys are growing extremely fast when units deployed, it's seemingly not being impacted by seasonality as every quarter is a new record. How – when we look at 2023, should we expect maybe units deployed in the first half to be lower than what we've just seen in the last couple of quarters? And then to pick up again in the back half of the year?

Yes. So I think a couple of things to understand is that we're really starting to see verticals like K to 12 and healthcare become a very prevalent part of our business. Those two verticals together will likely be more than 50% of our business combined as we go into next year. And between those two verticals, we're starting to see trends in their buying patterns and their budgetary situations. And so coming out of Q4, it was very strong. When we look back at last year and some of the trends we're seeing early in this year, we see – we see a strong pipeline, but actually getting past the goal line, we think it'll be stronger in the second half than it is in the first half in totality.

Perfect. Thank you, guys. I really appreciate it.

Thanks, Brett.

Thank you, Brett.

Thank you. [Operator Instructions] Next, we'll go to the line of Brian Ruttenbur with Imperial Capital. Please go ahead.

Yes. Thank you very much. First of all, question on cash on the year on your fiscal 2023 guidance 165 to 175 is that assuming any debt? Is that a net cash number you ended the quarter just trying to understand your balance sheet where it is right now with cash and some debt roughly $20 million of debt. Maybe you can walk me through that a little bit where you expect your cash debt balance for 2023?

Yes. Brian, it will be -- that number will be our cash figure, we'll obviously have a little bit more debt that comes on. As we start to ship the subscription business, especially the pure subscription business. As we buy that asset, we'll take out more debt throughout the year. We're probably heading in the range of another 10 million to 20 million in debt depending on how much volume comes through that purchasing methodology. The cash number we're showing you is the pure cash number, not the net cash number. So you could do the math on the balance sheet for that.

Okay, perfect. Thank you very much for that color. And then in terms of guidance in terms of revenue, can you give us any -- I know this has been asked a little bit, but it seems like a lot of growth is going to happen in subscription. Can you give us a little breakdown of your guidance between product revenue subscription and service? Because it looks like it's a very different mix than 2023 versus 20 22?

I think you're right to say that that mix will be quite different. I would say what will really happen in the early parts of the year, let's say the first half of the year, you'll see the product number continue to be relevant especially in Q1 and then start to dissipate throughout the year. I don't think our product revenue will ever go to zero. We'll always be selling some element of product through. But our focus and like I think I said to one of the other gentlemen on the call is to really push that subscription line. So going forward, we are either going to be selling pure subscription, which gets recognized in that pure subscription line of the three lines on the P&L or we're going to be selling the subscription that goes along with hardware that's likely to be purchased through a distributor, which will also go through that line. So I think as you model things throughout the year, you should probably think about putting the subscription number up higher and higher as a percentage And I would say over the next 18 months to 24 months, we're probably going to try to achieve 80% subscription during that period.

Okay. Then as a follow-up to that, just trying to model first quarter, should it look something similar to fourth quarter or should we see a big drop in terms of product? Because product was much higher than I anticipated in that fourth quarter?

Yes, I think product will continue to be a pretty prevalent number in Q1, mostly because we continue to take orders as we exited the year and we're continuing to deploy orders out of our backlog. So while I don't think the number will be quite as high, it will be a meaning number in Q1 and start to really decline Q2 forward.

Okay. Very good. Thank you. And then also the services revenue then typically when you have high product revenue, you also have high services revenue. It should be also is that a good logic? Or is there something I'm missing there?

The services revenue, just remember that this -- we took the hardware revenue as part of a deal and that happens one time for all the hardware purchase orders that we've done, which you're seeing the recurring nature of in the service line, we'll continue to see that. We also have a little bit of revenue in the service line that happens due to installations and things of that nature. But again, as we go through this, I think what you'll start to see is that we'll move towards I would say the subscription line being about 80% and the services line being 15% to 20% would some points in product over the long term.

Great. Thank you very much.

Thank you. I have no further questions in queue. We'll turn the call back over to Peter George for closing comments.

All right. Thank you very much. Look everyone, thanks so much for joining us. We had a historic year in 2022 capped by an amazing Q4 where we set records in revenue in ARR and RPO, because we have this amazing sense of platform, our growing awareness in major cities is making us ubiquitous in places. If you go to New York or Nashville, or Atlanta or Chicago, you'll see us in ballpark, in museums, in schools and tourist sites and that has force multiplying effect when people experience going through the system, it's very helpful for us. So we're continuing to get awareness in the market. That's really, really valuable. We're getting tremendous leverage in our business model this year. In fact, we grew revenue twice as fast as we grew expenses. We're excited about 2023 and our growth plans to double ARR. And then finally, as we mentioned, our balance sheet, we're well capitalized and feel very strong about exiting the year with a lot of cash in our balance sheet. So thank you all for joining us. Remember our Analyst Day on May 25. We'll be at the iconic Fenway Park. We'd love to have you all there and thank you for joining us today.

Thank you. Ladies and gentlemen, that does conclude your conference for today. Thank you for your purchase a patient and for using AT&T event conferencing service. You may now disconnect.