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.

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.…

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…

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,…

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.

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

Great. Thanks for taking my questions. Nice great job on the quarter. The unit number was staggeringly good and it's good to see all the metrics going forward going up. So just -- I think the one maybe missing part of the forecast that we're thinking about is your expectations on unit growth this year. I think you've talked about doubling units this year. I don't know if that's been raised. Obviously, you -- I think you hinted towards on the fourth quarter call kind of seasonality in the first half or first half being slower. Certainly, didn't see that in Q1 you had a very strong Q1. So, just kind of what are you thinking about unit growth? And then a follow-on on to that is with the new CT arrangement I know you're talking about more of a mix shift towards subscription. Do you still think that is the case for the year and any insight there? And then talk a little bit more about how much of those direct purchase units do you think will go through CT during the year? Thanks.

Great. Thanks, Chad. Welcome to the call and we really appreciate you following us. Let me take the first part of that and Mark will take the second part as it relates to CT. So we're -- our expectation for the year is to be north of 4,000 units in the market. And we're off to a very good start there. We are still learning a lot about our business. And as you know over 50% of our business is coming from schools. So we traditionally -- and we saw this last Q3, we traditionally saw a very strong Q3 when we're deploying lots of systems into schools before they open up for the school New Year. So we expect the same thing. We wanted to take a conservative view on that until we're there. So we feel very good about being north of 4,000 units. And if we see ourselves doing better than that well obviously when we get there we'll be able to describe that to you. What we're taking conservative pros but we're confident in 4,000 units that we've outlined. And as it relates to CT, Mark, why don't you pick that one?

Yes. Sure. Chad, again, welcome to the call. In terms of the mix shift that we're seeing in the business, we have been pushing towards pure subscription, which is when we rent the hardware and the software. And that's really to replace over the long-term the legacy method where customers purchase directly from us. But we have recently, I think, come up with a program with Columbia Tech, which is distributing the hardware now for us that will allow the customers to buy that. We will see that come into play by the end of this quarter. We'll start to see some activity and then it'll grow in the Q3 and Q4 time frame. Our anticipation is that we can see about an even mix into next year of the purchase activity versus the peer subscription activity, if we're going to -- if we look at the different verticals that we serve. Again, like I said, a lot of the K-12 and healthcare verticals like to purchase the hardware upfront and they represent about half the business.

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

Hey, guys. Thanks for taking my question. Very strong quarter, I think here. Two questions. First one is, your - the performance of the industrial space, is that something that you originally factored into your estimation of your opportunity? And if not, has that opportunity expanded? What do you think your TAM is now? The second question is going to be on profitability. So, I know you have some plans for next year to improve the cost on the -- well, you did on the manufacturing side that may shift a little bit now. But I know there's some embedded higher margins on your balance sheet. Is that going to impact your -- or how will that impact your gross margins going forward into next year?

Sure. So, hopefully we're going to see you here at the analyst conference later in the month. We're going to talk a lot about the TAM and the vertical market sizing there, so important to them. From a high level, as we think about this year, we have a target market. As you know, there's an $18 billion TAM that we're chasing that's undeveloped places for Express. We've targeted for the next couple of years the high-risk states the ones that are having the most gun violence, the high-risk verticals like schools and stadiums and hospitals. Industrial warehouses were not part of the original target TAM and we expect that to come on later on in the year. So, our TAM is expanding and what we normally do is we get penetration in a certain vertical. We add vertical experts. We have an expert team of former administrators and superintendents for education that are operating at a very high level in terms of talking to our customers and helping our customers with their layer security. Same thing with health care, we just hired a healthcare executive to help us really penetrate the market. And we see later on this year and next year adding somebody with industrial warehouses. So we see that as a big future market and we're starting to see have a difference in our business early enough in this year we feel good about it. The other vertical which you know we added an expert in is professional sports. So we have a team of people from the industry that are driving that. So that's our methodology. Identify key verticals start to get penetration, bring such matter experts and expand the TAM. We see industrial warehouses expanding our TAM later on this year and well into 2024.

And Hugh, the second part of your call was on -- your question was on the manufacturing side and the margins we might see. Let me just take you through how we're thinking about margins. For the year, we raised our guidance to the 35% to 40% range. And coming out of Q1 we're about 27%. I think we expect to see continued gross margin appreciation throughout the year. And we'll likely exit the year higher than the range that we gave to actually exceed that range. And that's happening for a couple of reasons. The first is we obviously had a headwind with our legacy product sales, which we're doing less of and expect to do less of every quarter going forward this year. We're also doing more subscription business. And the subscription business tends to be in the ballpark of about 60% margins for us, because we do have the cost that we put into the balance sheet and we depreciate that over the period of the contract along with having some other non-product costs in our COGS. And the third element of this tool really is this CT distribution model. We're really -- the benefit factor of a license that comes from them selling the hardware, because we've designed the hardware and we get that license and to the software, the recurring software. So those deals will probably be in the 80% zip code in terms of how the margins will play out. So the combination of those things, give us confidence in the margin continuing to rise. And to your point about that embedded higher margin, we are about in probably the top of the sixth inning of actually moving towards our cost down efforts on our product. Our efforts on 2.0, which is about 95% of the same product as our original 1.0 was really to design it for better quality, better hardening, really take everything we've learned over the past two years and design it into the product in terms of mobility and other factors as well. We're projecting at this point at least a 30% decline in the cost for that. That will -- that won't benefit us until next year. And I'd say that that benefit probably would be in the range of about 7% to 10%. But I think the most important thing here is really the CT model that we're going to be doing. This distribution model is key going forward. And it actually helps with it actually helps with some of our margins and profitability. I think we've been pretty vocal about thinking that we could be profitable or at least cash neutral in the end of 2025 to 2026 period. We believe we're bringing that in. It's at least six months but potentially more we're still refining that model and we expect to talk about that in earnest more on Analyst Day.

Awesome. Thank you guys. I will see you on the 25th. If you get a chance before the end of the call, can you just explain the revolving door in that industrial warehouse situation?

Sure. We have an open API that can connect to other access control systems video surveillance systems. And we -- with that API, if an assailant comes through and we determine they have a weapon, we can actually lock the door, create a mantrap, and then have a security person resolving the issue. So, part of being a digital platform allows us to connect to the -- physical security infrastructure that's there and turn styles and doors are an example of that.

Awesome. Thank you, Peter. Thanks Mark.

All right. Thank you.

Thank you.

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

Hi guys. Thanks for taking my question and congrats on the great quarter. I guess first on ARR, it increased by amount sequentially more than the sequential increase in the fourth quarter. You added kind of less new installs in the quarter. So, I guess can you just walk me through how that dynamic unfolds?

Absolutely Brett. And welcome to the call. We -- in terms of ARR quarter-over-quarter, we effectively ARR in our books when we actually install systems. And we've seen a stronger balance of full subscription deals. And those are all ARR. So, when we -- some of our legacy purchase deals the purchase portion of the hardware wouldn't be considered ARR only the recurring software revenue. But in the case of our peer subscription business, where we're renting the system and we're renting the software, that's all ARR. And we saw like we've said in the call, about 60% bookings weighted in that direction which is more than we've seen in the history of the company.

That helps. And then just on the kind of the IP latency that you guys are going to receive. Can you I guess go a bit more into that like how much is that going to be? Is that going to be straight kind of 100% margin for you guys? And then I guess on the flip side, maybe would there be no kind of product or hardware cost or revenue that you're going to be recognizing as a result of this partnership?

Yes, we have -- we've gotten into a relationship with Columbia Tech on the distribution side. We haven't disclosed exactly what the license amount is. But they're charging a cost that's, I would say, market neutral out there to our clients and they're covering their costs and they're taking a piece. And then they're paying, I would say, the residual of that in a license fee to us. So, the economics are good for us from a perspective there. The product costs against that are effectively zero. We're just getting the license. But I want to remind you that about a third of the cost that we have in our cost of goods sold are above the line are nonproduct costs. We have people in manufacturing, support, and services. So, while that product side of the equation or that actual license fee won't have any product cost we do have to assign some cost to it overall. And that's why we talk about a blended number between the IP hardware and the service in the CT distribution model being about 80%. Does that help?

Yes, definitely does help. And maybe if I can sneak one more in there on the raised outlook. Can you maybe help break out how we should be thinking about your full year revenue guidance from a mix perspective given the kind of subscription model the services revenue continues to increase very strongly quarter-over-quarter as a subscription, but I guess a bit more uncertain about the direction of product revenue?

Yes, I mean we're not talking about but let's talk about the first half and the second half. We're not really getting into the quarter side. But we're still transitioning with the CT model. And remember we're going to get -- in totality we're going to get less revenue from the Columbia Tech model but we're going to get stronger margins out of it. So, I don't think -- you'll see from the first half of the year to the second half of the year some growth in revenue. But as we transition, it won't be on a one-for-one basis. That said, I think that if we were looking at seasonality right now, we would probably be in the mid-40s for first half revenue in the mid-50s for second half revenue. As a percentage of 100% in the year.

And just on the mix between the product subscription service, any color on that or...

I think -- let me give you some long-term color, because -- and you can think about the time over that. As a business, we have three lines of revenue that we're recording right now. It's the product revenue, it's the subscription revenue and it's the service revenue. Our goal is to reduce the product revenue by no longer doing the legacy deals. We'll still do one from time to time. There will still be demos. We'll still sell some accessories. So, I would expect long-term, our revenue to move to about 5% to 8% in the product line over the longer term. On the service line, that's where we're going to capture all of our license revenue. And we also will have revenue coming off the balance sheet from some of our legacy purchase contracts. But I would expect that line to kind of settle in at the 15% to 20% level, the service line. The remaining approximately 70%, 65% to 70% will go into the subscription line long term. And that's because, we're either going to be doing deals that are pure subscription where it's 100% recorded in that line, or the subscription portion of a CT distribution deal, which will also be recorded in service. Overall, I think our business will tend to be 80% to 85% ARR and 15% to 20% license over the long term.

[indiscernible] Move on Brett Thanks for the call. [indiscernible]

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

Hi. This is Aditya [ph] on behalf of Mike Latimore. I think you had an international win recently. Could you give some color on, what are the prospects for more international growth?

Sure. So look, we're focused this year primarily in North America, right? We have a gun violence epidemic in North America. We have more guns here, than we have people. And we're really really, really good at detecting guns. So we're focused here and that's where we think the accelerated growth. Having said that, we do have customers in other parts of the world that we've been working with the last couple of years both in Asia Pac and in EMEA. And we expect to expand there in earnest, in the next couple of years, but it's not a priority for the company today. Also you should note that the threat factor is different in other parts of the world as well, right? In certain parts of Europe like the UK, they have more of a knife problem, than they have a gun problem. In Asia Pac, it's explosive. So we're going to make sure that we get our go-to-market absolutely right here on the thing that we're wonderful at, which is identifying guns and then we'll begin to expand our presence through channel partners in the international markets. And we have a lot of confidence that we're going to have a strong business over there. But our focus right now is, in North America where the biggest problems are.

All right. And also some color on the sales cycle? Has the sales cycle been shrinking?

Yes. So, our sales cycle is between 90 and 100 days. And I would say, that our sales cycle has been contracting, both because we have this force multiplier effect that our systems are out invisible, visible in the market. So people are seeing us in stadiums, all over the country whether it's baseball or football or a lot of the biggest iconic stadiums, in theme parks, they're seeing us and the experience is so different, going into a stadium today for example, and not standing in a long line to get screened like you're in an airport, we make those lines go away and that is often a catalyst for people to say "Hey this is different. I want to invite Evolv to our school or to our hospital and understand how you could help us. So that's really helping us today in terms of our visibility and our growth.

Perfect. Thank you guys.

Thank you.

AT&T I believe we have one last call.

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

This is Rob on for Brad Reback. Thanks for taking the question. I believe you had previously mentioned the price increase starting January 1. And I'm wondering if you could speak to how much of an impact that had on Q1 performance on both the top and bottom line? Thanks.

Thanks for the question, Rob. We did have a price increase at the beginning of the year. We really kind of reset our MSRPs and we continue to use a discounting methodology to kind of come into pricing. But it was probably I would say net-net, it was a little north of CPI as we kind of honed in on different verticals but -- and we have seen that come to fruition throughout the first four months of the year.

Great. Thank you.

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

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.

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.

You may now disconnect.