Ladies and gentlemen, thank you for standing by. Welcome to the Evolv Technologies Third 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. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Brian Norris, Senior Vice President for Finance & Investor Relations for Evolv Technologies. Mr. Norris, please go ahead.

Thank you, Eric. And good afternoon, everyone, and welcome to today's 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 third quarter results and our business outlook. This press release 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 our future operations, growth in 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 24, 2023 and as updated in our other documents filed with or furnished to the SEC from time to time. The forward-looking statements made today represent our views as of November 9, 2023. 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 maybe required by…

Thanks, Brian. And thanks, everybody, for joining us today. I'm going to spend a few minutes on our results for the third quarter, discuss the key trends we believe are driving those results and then spend a few minutes updating you on the progress we're making with several other important initiatives across the business. Mark will then walk through our financial results and our outlook for the remainder of the year, as well as provide some insights into how we're thinking about next year. During the third quarter, we delivered strong results across every key measure of the business, including revenue, ARR, RPO, subscriptions and gross margin. Revenue in the third quarter was a record $20.2 million with reccurring revenue of $14.3 million, up 131% year-over-year. Our growth continues to reflect strong new customer acquisition activity and an overall growth in the number of active subscriptions. We activated over 600 new multi-year subscriptions of Evolv Express in the third quarter and have now surpassed 4,000 units deployed. We expect to surpass 7,000 units deployed in 2024 and 12,000 units deployed in 2025. We remain focused on reaching 100,000 units deployed over the next decade. We welcomed 70 new customers in the third quarter including such iconic venues as the Nashville Symphony Center, the Philadelphia Zoo, the TGL Golf Arena, The Plaza Live, the Broadacres Open Air Marketplace, The Oneida Casinos and the iconic Red Rocks Amphitheatre in Colorado. We continue to see accelerated visitor security screening activity. In fact we screened over 200 million visitors in the third quarter alone, more than double our screening activity compared to a year-ago period. We are now averaging over 2.2 million visitors screened every day, up from 900,000 visitors in the second quarter of last year. We have officially surpassed the TSA in…

Thanks, Peter, and good afternoon, everyone. I'm going to review our third quarter results in more detail and then walk through our business outlook for 2023 and share some thoughts on how we're thinking about 2024. As Peter mentioned, total revenue was $20.2 million, up 22% year-over-year. Our revenue growth was again fueled by strong new customer acquisition activity and the rapid growth of revenue generating subscriptions. Annual recurring revenue or ARR at September 30, 2023 was $65.8 million, reflecting growth of 129% year-over-year and 21% sequentially. Total recurring revenue during the third quarter of 2023 was $14.4 million, compared to $6.2 million in the third quarter of 2022 reflecting growth of 131% year-over-year. Our total number of revenue generating subscriptions increased to 4,014 at the end of Q3 2023 compared to 1,692 at the end of Q3 2022. This was the primary driver of the strong growth in recurring revenues. Adjusted gross margin, which excludes stock-based compensation, was 57% in the third quarter of 2023, compared to 3% in the third quarter of last year and 38% in the second quarter of this year. Our improved gross profit and gross margin primarily reflects growing demand for our distributor model, which accounted for nearly 30% of all units booked in the third quarter. Adjusted operating expenses; which excludes stock-based compensation, loss on impairment of equipment and certain other onetime expenses; were $25.2 million, compared to $19.8 million in the third quarter of last year and $23.7 million in the second quarter of this year. The increases primarily reflect headcount investments in revenue generating positions and in research and development. Our revenue growth continues to grow significantly faster than operating expenses. We exited the quarter with 281 employees compared to 273 at June 30, 2023 reflecting an increase of 8 FTEs…

Thanks, Mark. Eric, at this time, we'd like to open the call up for Q&A.

Thank you. [Operator Instructions] And we'll go with line of Mike Latimore with Northland Capital Markets. Please go ahead.

Hi, good evening, yes. Congrats, the 1 billion number sounds pretty impressive there.

Got to be in it, Mike.

That's it. Very good. So I think at your Analyst Day, you talked about a long-term growth rate of 30% to 40%. The initial number you gave there for '25 was the unit growth of well over that number. Can you just kind of help provide a little more context around that?

Mike, we can give you a little bit more context there. I mean what we're really looking at I think over the long term here is a transition to our distribution model, which is going to happen next year. So we talked about that at the May Analyst Call. The growth that we're giving next year is, I would say, at least 50%. That's sort of a starting point for us as we're thinking about the early parts of our annual operating plan, which we're still refining through the end of this year. Peter talked about 12,000 plus units in 2025, that's a number that we're pushing up above 20% from our prior comments there. So I think that's a good indicator of where we're going over that period of time.

Got it. And then the mix here, are you still thinking purchase subscription could be sort of 50% of new adds?

Yes, we are. I think if we go into next year, there's two real components; there's pure subscription and there's distribution. We're moving away from the purchase model that we used to have where we actually ran some of the hardware sales through our books. We're now really driving that distribution model just in the third quarter alone. In the first quarter we really drove it, we did about 30% of our business that way. So we're on path to do the 50:50 going into next year. You'll probably see somewhere in the 40% zone in the fourth quarter to kind of get to that 35% that we talked about in the back half of the year. We probably will see some quarters where it's not 50:50. As we go through the year, I think we're really thinking about an annual number of 50:50. It's a little bit hard for us to tell exactly what's going to happen from a quarter-to-quarter basis.

Yes, yes. Makes sense. All right, great. Congrats on a great quarter.

Great. Thanks, Mike. Appreciate it.

Yes.

Next we'll go to the line of Hugh Cunningham with TD Cowen. Please go ahead.

Thank you. Hey, guys, thanks for taking my questions. Congratulations on a strong quarter especially the unit growth there and on the CT transition and for the 2024 guidance. Couple of quick things. First thing is on the product revenue line. Can you remind me, Mark, what in there in addition to what portion of that is direct sales? And then, I think another piece of that is add-ons that you guys sell like the, I'm guessing the new product, the one you're partnering with for the brandished weapons, that's not going to be there because that's coming from your partner, but what else is in that number? And then the second part of that question is on the product line. So first thing is what's in there basically and then how fast do you expect it to come down?

So the product line, Hugh, it really is a combination of a few things. It's really the piece parts that we sell, whether it'd be tablets or other parts of our business as well as the products that were sold through the old purchase model. We still have units that we sell from time to time including demos that you'll see go through that line. So think about the things going through that line as demos, accessories and our direct product sales overall. The Extend is likely to have nothing to do with that line, it's going to be a recurring revenue element in our business for the most part. I would say that we're going to continue to see a reduction in that product revenue line. We had booked quite a few units in the Q2 timeframe and a lot of those shift in Q3. So I expect that to continue to decline into Q4 because we're not booking as many in that area. We will see some next year, but I would say that the units for the entire year next year would be sub 200.

All right. And then Peter for you, two quick ones. One, you talked in the past about the sort of verticalization of the go-to-market and the teams you're building. Can you talk about that? And then can you talk about the experience of your buyers? So when you go talking to a customer, who is the -- what's the experience of the person actually making the decision to purchase? What sort of due diligence do they do? Can you talk a little bit about that?

Sure. So in terms of verticals, two years ago as you know in 2022, we verticalized our sales organization and focused on education, sports, health care, distribution warehouses and we continue to do that. In 2023, we regionalized so we created five discrete regions that are operating with sales people of about seven or eight in each of those regions that carry quota and they're focused on the high risk verticals in their region. So those were really important organizational changes that are helping drive our growth in the company and we're going to continue to stay focused on that. As it relates to the buyer experience, most of our customers have security experts on staff. These are retired police officers, people in the secret service, military. They're steeped in understanding security and oftentimes when they come and see our product, they do their own testing. So we give them the information that we have around what our systems can detect, but they do their own testing as well. And they are just absolutely phenomenal and it's a trusted network of security professionals that all know each other and trust each other. On the school slot side, it's slightly different. There's not only CROs and superintendents, but there's a whole set of reseller partners that are subject matter experts that help schools understand their security posture as well. So our sales in experiential sale and most of our customers, in fact almost all of them, have subject matter experts testing the product themselves.

Thanks guys, Appreciate it.

Thanks, Hugh.

Thanks, Hugh.

[Operator Instructions] Our next question comes from the line of Chad Bennett. Please go ahead.

Great. Thanks for taking my questions. Nice job again on the quarter, guys. I guess a couple of questions. First, Mark, can you give us an update on Express 2.0, the new system and hardware, kind of how we're progressing there on the cost savings there and timing wise of when we expect that to hit the market?

No problem. So Express 2.0, that's really our cost-down effort on our Express flagship product. About 95% of the functionality we have in 1.0 will be the same in Express 2.0. We've added a few new things to it. But generally speaking, the whole purpose of 2.0 is to really to help with quality, to really think about how to service it in a more modular way and to really kind of take the learnings we had in 1.0 and kind of position them. It's the same software stack so there's no difference there. But in terms of the timing of it, I think, we're expecting it to really kind of start to ship in earnest by the beginning -- maybe the end of Q2, but definitely by the beginning of Q3. That's the plan we're on. The cost-down efforts, we still see that being in the 30% to 35% range and we've kind of locked that in at this point. We're really just going through the final testing and points on the product there and we're now building pilot systems and everything like that. So we think that'll be a big push for us in the middle of next year. While I'm on that point, I think, that cost-down effort is more of a 2H situation. So I think as we talked about our 60% gross margins, we'll see a greater benefit from that in the second half of the year.

Chad, this is Peter. I just wanted to reiterate something that Mark said, which is when we make improvements in our software around efficacy and accuracy, the cloud infrastructure we have, the data analytics; all the improvements that we can bring to our customers are happening on our platform today and will happen on our future sensor platforms in the future. 2.0 is one of those and we're going to get a cost-down benefit there. But the magic is really in the software and so all of our customers get the benefit of that no matter what sensor platform they're on.

And then maybe just a follow-up. Just in light of kind of recent events and attention around the company, it doesn't seem like there's been any abatement in demand and demand actually seems to be almost accelerating to some extent for you guys. Can you just talk about just kind of the demand environment that you're seeing out there? Obviously you've reiterated your upped guide for the year and gave us a great early look to '24. But just considering some of the noise out there, can you just speak to the demand and awareness of the product today?

Look, we haven't seen any abatement in demand at all. And in fact when we did this results, we've seen an increase in our health care penetration. We grew health care by 50% year-on-year. We had a great quarter in sports. Education was about 40% of our business. So all the secular tailwinds that have been driving our company from our early days even before we went public continue in an unabated way. I mean to date there have been 597 mass shootings this year, which is two a day. There's lots of gun violence and a lot of anxiety in society. And people want to be safe wherever they go not just in venues, but when they're , gathering with other people in bowling alleys, in bars, in places where people gather; and technology can help now create safe zones that people can gather together and know that nobody has a weapon. And we don't see that changing anytime soon and we certainly don't see any legislation on the horizon that will change that. So we're working really, really hard as a company to make sure that we enhance our product, our detection capability and that we can get as many systems in places to keep people safe and that's our primary mission and goal as a company.

Got it. Thanks so much. Nice job again.

Thanks.

Terrific Chad. Thank you very much. Operator, I think, we have time for one more question.

Okay. And we'll go to the line of Brett Knoblauch with Cantor Fitzgerald. Please go ahead.

Hi, guys. Thanks for taking my question. I guess, on the deployment guidance for '24 and '25. Is there any chance that you guys deploy a fewer amount of units in '24 than you do in '23, or, I guess, expected to do in 2023?

No. No, that's not what we're expecting to do. Look, we're talking about 7,000 plus. We're really talking in 1,000 unit increments. I could see us close to 7,500 plus.

Got it.

First, we're in the fall of 2023 talking about '24. So we're trying to give you our best view early on in the T-box here.

Understood. And then if I kind of look at ARR per unit deployed, it's kind of increased sequentially now for three straight quarters. How should we expect that to trend over the coming quarters? Is there any reason to believe whether that would go down or gyrate or how should we think about that trend?

Look, I think we're going to see -- the distribution model this past quarter was about 30% of our business. I expect it to probably be close to 40% in the fourth quarter and reaching 50% by Q1 and probably holding steady there. So I think mathematically on an average basis, I think you will see our ARR number come down a little bit more and then stabilize as we go forward. That's just part and parcel to the model of actually moving to that distribution cycle where there's less ARR than we had in other models. Just remember too in the distribution model, we have a license revenue component that we didn't have before and that gets recognized immediately and brings in cash to the company quicker than it had before.

And that's not being included in ARR, correct?

And that's not included in ARR. You really need to think about us going forward as being about an 80% ARR company and a 20% IP license company.

It's the expanded gross margins that we’re continuing to deliver, right?

And then if I could just ask 1. I know when you guys preannounced, you also disclosed the FTC was investigating. I don't think you guys brought it up in the call, but just curious if you guys have any color on what they're looking at or to provide any clarity on the situation?

So we're not at liberty to talk too much about that, but we are working with the FTC on their inquiry around questions around our marketing and we're answering every question that they have. There is no question or challenge around our technology. We stand by that. It's really about marketing claims and we're very confident going forward that we'll end up at a really good place. We can't talk much about it. What we can say is it hasn't had any impact at all on our business. Our customers aren't talking about it. It's not getting in the way of anything and we're out serving our customers, living to the mission and keeping kids and people safe every day and that's what we're very, very focused on.

Understood. Thanks, guys. Congrats on the quarter.

I'm going to turn the call over to Peter George for a few closing remarks.

Yes. Thanks, Brian. Well, thanks everybody who joined us today. We're really pleased with the results that we were able to take you through. We thank our customers and our partners, all of the dedicated evolvers that work tirelessly every single day to make our systems better, more accurate and more secure to keep venues safe. We're really pleased with what we were able to talk about today in terms of our results. We had record revenues, record ARR, record RPO and record gross margins. And I just want to reiterate that we took year-on-year our gross margins from 3% to 57%. So huge benefit there. And as Mark talked about, there're some headwinds with our distributor in terms of the purchase subscription, but the benefit there comes in gross margins which should get us to EBITDA positive sooner than we would have thought before. So some real goodness there as a company. We continue to see really great customer activity and acquisition. We had 70 new customers this quarter. I'll remind you our largest customer, Charlotte-Mecklenburg District Schools, has 180 systems but we count that as 1 customer. So we have an expanding ASP with our customers. We continue to innovate in the company. We're thrilled about the Extend product pushing the perimeter out, being able to gain time to prevent mass shootings from happening. Mark already mentioned our distribution bottle and how that's staying off particularly in gross margins. And then as we think about next year, right, the 50% ARR growth and then 50% revenue growth we're thrilled about. So we'll get to adjusted EBITDA positive, as we mentioned, in the first half of 2025 and we're excited about that. All that being said, while we take great pride in our achievements, it weighs heavily on us and our hearts to share tonight amidst the global conflicts and the escalating violence going on around the world. The unfortunate cycle of violence results in sorrow, loss and perpetuates further harm. At Evolv, we are resolute in our belief that the world triumphs over adversity by persisting in the pursuit of positive change. As evolvers, we are relentlessly committed to making the world a safer place to live, to work, to learn and to play. Thanks, everybody.

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