Evolv Technologies Holdings, Inc. (EVLV) Earnings Call Transcript & Summary

All right. Okay. Thank you everyone for joining us. I'm Sami Badri with Credit Suisse, and we have the Evolv Technologies team. Thank you, Peter George and Brian Norris. And I'll hand it over to you.

Awesome. Great. Good afternoon, everyone. Thank you so much [indiscernible] Credit Suisse and everybody for joining. We're going to speak a little bit through some slides and then take you [indiscernible] quick video to -- a picture speaks a thousand words. Hopefully, there's a little bit of sounding on this too. [Presentation]

All right. So again, we're going to go real fast. I'll try to make a couple of key points here. So Evolv Technology is the leader in AI-based SaaS weapons detection. Nobody screen more people in the world other than the TSA other than Evolv Technology. We have a lot of things, secular tailwinds working in our favor these days. They include over 400 million guns in North America in terms of what people have, more than one gun per person. The pandemic accelerated everyone's need to come back together, but come back differently, right, not stand in lines. And when they go to a venue, they want to be safe. We have a really compelling business model, which is an AI-based, SaaS-based security as a service. Nobody is doing that in the space today, a very compelling value proposition and a huge TAM to go get. Everybody stood on the line in the left, right, you go to see your favorite sports team. And while the whistle is going off, you're standing in that crazy line, it's the worst experience going to a professional sporting game. We completely changed that, and we're changing security forever. Think about getting 80,000 people into an NFL football game in 3 hours, really hard to do. And the thing on the left is what people are used to. We now have 10% of the NFL using our technology, 15% of the MLB and we're doing what you see in the right. People walking in with all their belongings, keys, the metal they normally carry and because they don't have a weapon, we let them walk right from the street to their seat without breaking stride, which is really compelling. I'm a cybersecurity person. I came to this physical security company because I knew there was something really, really big going on here. And just like in other categories like personal fitness, like automotive and now physical security, this is a market right for disruption like I have never seen before. The fact that if you want to make your venue safe, the only technology available prior to Evolv was an 86-year old metal detector is crazy, right? So we're disrupting that. And you can see just like Tesla is disrupting automotive and Peloton disrupting fitness, we're disrupting physical security in a really compelling way by making the platform a digital platform. The big protection paradox, how do I balance making my venue safe and having a great user experience. And the truth is, it's really hard to do. We broke the code on this, the Rubik's cube on how to do it. So a couple of things. The picture you see is our sensor platform. Think about telecom, that's our bike. The magic is in -- the secret sauce is in the machine learning algorithms where we can differentiate between a phone and a firearm. Nobody can do that at the pace of life, particularly when it's concealed. So we're 10 times faster than anything in the industry. We integrate because we're a digital platform into any infrastructure like turn styles and video analytics that's there and we're using over 100 patents in our core technology. We raised about $75 million as a venture capital based company, build engagement with our largest investors. We went public on July '19 and we're thrilled about where we are today as a company. I mentioned big TAM. This TAM is a $20 billion TAM, $2 billion is regulated. So think about airports, professional sports and prisons, but the $18 billion rest of that TAM are all those places, schools, performing arts venues, distribution warehouses, hospitals that always wanted to have security, but their only alternative was or choice was a metal detector. So guess what, they did nothing until Evolv. So a huge market to go get and of course, the market expands and I'll show you why. Again, quickly, this is one of our customers, The Tennessee Titans. As I said, we're in the NFL here. 82,000 people in these seats. If you were to go there to the Titans today, this is what we do for them today, right? We can screen for all kinds of weapons, guns, bombs and knives don't get in to the stadium. We also can do health screening. So we add it because we're a digital platform, elevated body temperature to the platform. So if you have COVID-19, we'll keep that out as well. The point is we can quickly add new kinds of capabilities to the platform and future-proof our customers because once we own that real estate, they want us to do a lot for them. But what does a lot look like? So in the future, this is not available today, but this is where we're going. Our customers want us to do more. So what does more look like? Beyond screening, when you go into a ticketed venue, and we just heard from Vivid, you stop 2 times, you stop to ticket screen and you stop for your ticket, whether it's on your phone or wherever it is, our customers want us to do that, too. So think about taking clear and putting it on our platform, you could walk from the parking lot into your seat and not break stride at all because we screen and rip your ticket in the same motion. Because we're there, they want us to do that, take away that other friction point. But a best-in-class, I said it was a cybersecurity person, the best-in-class security is when you expand the perimeter and move it out of the away from where the people are. So again if we're a digital platform, what if you came to the parking lot and we knew before you got out of the car because we could run the license plate, are you a good guy or a bad guy? Is it a family to go into the family. But if you're on a [indiscernible] list and/or a threat for the crowd, we're going to know it way when you're out [indiscernible]. We can consume threat intelligence, crowd intelligence, any kind of software capability we could add to the platform and extend the perimeter and create an experience that's elegant experience for our customers. And then when you cross the threshold inside the venue, making sure you don't stand in the line because we know who you are, you can go up to the swag store or the concessions stand, buy your food, not have to come out with any money and then you leave at the end of the game with outstanding in the line. That's the new proxy for how people want to gather again, right? We want to get together again. I heard the presentation before the Roaring Twenties. But we're only going to do it if we're not standing in a line, if we're not at risk from people touching our stuff and that we can have this frictionless and data-informed experience. We create that for our customers. So this is what's possible. We're going to add these capabilities as subscriptions onto the platform. The platform is about $2,500 a month, you'll save for the platform, and then we can add $100 capabilities to that in the form of what I just showed you. So we have a land and expand strategy. It's proven. We know exactly where to land and what key verticals and how to expand them. We've grown now to over 700 subscriptions. And there are 4 reasons why people choose us, right? The main reasons are, number one, how do I increase my security posture? I want my venue, my museum, my school, my hospital to be safer. So that's number one. Number 2, how do I change the visitor experience, no lines, nobody touching your stuff, walk right into the venue, right, game-changing for big venues that want to get a lot of people to their seats very, very quickly. When we're replacing older technology, legacy technology, and by the way, 90% of our deals [indiscernible] because they're really good at finding metal, they're crappy at finding weapon. We go specific to find the needle in the haystack, wallets in [indiscernible]. And then finally, we have a set of data because we know everyone that comes into the venue, their arrival times, what they're carrying, what the detection rate is, and we can use that data, both to help our venues monetize inside the venue because we know who's coming in, where they're sitting in their seat and when they align. So really, really important for our customers. The economics are very compelling when we're swapping out for old technology. So an example, the Atlanta Falcons took 150 metal detectors and 450 security guards to get 82,000 people in Mercedes-Benz Stadium in Atlanta. We did a wholesale change to them. They have 25 of our systems, but guess what everyone, 75 guards. You can't find people today to work these at $25 an hour. So not only they save about 70% on their security costs, they have a lot less cars. Their fans are having a great experience. But guess what, most important, everybody is safer and having a different kind of experience. So very compelling ROI savings. We have a lot of amazing customers. Here are just a few of our customers that we wanted to highlight. But if you look at some of the key verticals, again, where people are gathering either ticketing or non-ticketing, we've won some of the most iconic venues in the world, some of them we can't show you here, but think about the most valuable and largest theme parks and [paying] companies are all using our technology. And once we get those, we can expand the vertical in a very, very dramatic way. So very, very compelling. We're really proud of our customer base. We have a go-to-market motion. So we have people in territory in every theater around the globe. In North America, we have people in every state, but our primary way to go-to-market is through the channel. So we have 36 channel partners in North America and around the globe and a particularly important channel partner, one of the companies presenting here, Motorola Solutions. So when they saw our technology and saw they had a gap in their portfolio around concealed weapons detection, they immediately knew they needed to have our technology. So we private labeled our product, Motorola Solutions, you can see that here, powered by Evolv Technology. They're bringing this product through their 650 salespeople and 2,000 channel partners to market. We're having great success with this partnership and we're excited about what the partnership will bring. I mentioned to you early, we're a SaaS company. These are 40-year non-cancelable subscriptions that people sign up for, right? So it's about $2,500 a month for 48 months, right? We will guarantee that revenue. Our customers absolutely love it. And after 4 years and then upselling other capabilities, you might imagine, it's going to be very, very hard for anyone to displace us. So part of our strategy, now that we've strengthened our balance sheet by going public, we have $300 million on our balance sheet is to really get scale in the market and extend our technical advantage to a market advantage, get into thousands and thousands of entry ways or threshold or egress and ingress points to pass so we can defend that position. And we love our model because it's frictionless and easy for our customers to get it. Again, the economics of our system are really, really compelling. We're going to have -- right now, we have gross margins north blended, north of 50%, but they're on their way to 70% in the next 18 months as we deal with all the global supply chain issues and grab the demand that's in the market. And we just announced a record quarter, our first quarter as a public company. Again, we're still on the small side and we're scaling dramatically. But you can see we've been growing about 40% quarter-on-quarter this year and we see lots of demand out there and gravity pulling us to the market in a really compelling way. And these are the final thoughts we opened up with this, but we're in a really, really unique position. No competition really in the market other than those legacy metal detectors and a big stocking sound gravity pulling us to the market because the market needs what we have today, and we're trying to capture that market in a really compelling way. So I know I went fast, but I did that so we can sit down with all of us here.

All right. So I guess I wanted to kick start with the $20 billion TAM number. Could we just unpack how you guys brought that number together just so we can understand how you identified that TAM and how you guys are going after and addressing it?

Yes. So we identified the high-risk verticals if you will, hospitals, schools, performing arts venues, stadiums, but amateur stadiums, not professional sports. We took a very conservative approach, which is to say, not every stadium may need our technology if there's not a high throughput or every school or every whatever. So we went in, took a very conservative approach in each of those, we came up with 700,000 digital thresholds or locations that have enough people coming through them in a shorter period of time and need to have security to build this TAM to $20 billion. So again, out of the $20 billion, $2 billion is regulated. So think about airports, prisons and professional sports. But the $18 billion TAM is that greenfield TAM of all those places we know, every school, every performing arts venue, every hospital that wants to make their venue safe, but the only thing they could go bad was a metal detector. So what did they do? They did nothing where they got a security guard that would maybe warned you. We're changing all that and creating this frictionless way, I call it democratizing securities, Sami. How about putting our system in, it stands up in an hour. It's about $2,500 a month, and we can get 4,000 people into your venue without stopping. It's game-changing for every kind of venue. And everyone should have it, right? Every parent should be saying to their principal at school, right? Why don't I pay $100 security fee, I'm paying the sports fee to make sure that my child is safe, so that they don't have to worry about somebody coming into the school and doing some harm. And I told this story many times, my daughter is a second grade teacher in Boston. And then on the second day of school, she's hiding under the desk, teaching 8-year-old how to hide from an active shooter. Today on CNN, on my way in here, there was a shooting. You may have seen it in Detroit school, 3 kids were killed. That shouldn't happen in this country, right? Now there's technology, and we stay away from the Second Amendment. There's technology to keep weapons at of places they shouldn't be. So whether you believe in the Second Amendment or not, here's what I know. Gun shouldn't be in schools, they shouldn't be in stadiums, assault rifle shouldn't be in places like malls and we have technology to make sure they don't come in.

And then a lot of these schools or institutions have metal detectors. And that is the market that you guys can quickly see your quick rapid value add, right? You guys can go in there and essentially be the disruptors to the typical metal detectors, right?

So the truth is, there's 1 million metal detectors deployed around the world. Most of those are in the regulated places. So airports, we all go through them, prisons and professional sports. The low-hanging fruit for us, honestly, is to go to the $18 billion places that always wanted security but never could because the technology was so far bearing. So that's where really we're getting most of our traction. But of course, in professional sports, making those lines go away is really important. So we're just standing up a sporting division now. We're going to go capitalize on taking down a professional sports because we transform the fan experience in a way that no other technology can.

And then competition in this part of the market. Who actually has a comparable product if that even exists?

Nobody.

Got it.

I'm not saying we don't have competition. The competition is the legacy technology, right? You can get a metal detector and you can wrap 3 security guards around them with wans, and you can do that all day, and people have been doing it for 86 years. If you want to change that experience and make your security better, the fan experience or employee or visitor experience better, we're the only technology today. And I'm not saying that's going to be that way always because we have a technical lead that we think is measured in months, if not years, now we want to make it a market leader.

Got it. One thing that would be helpful is how do supply chain issues or constraints effect Evolv?

Yes. That's a great question because there's a thing that sensor platform that you saw, we outsourced to a contract manufacturer in Massachusetts. We're a Boston-based company. All the sourcing of the parts, there are 174 parts in the system, they build everything, they create it, they fact tested it and they ship it directly to our customers. So once we get an order, we ship it to them, we don't touch any hardware. So you should think of us as a software company, but we have a contract manufacturer building the systems for us. One of the big advantages of going public and strengthening our balance sheet is we've been able to forward order in big quantities, like in thousands of lots, parts so that we can bring the cost down, but mostly get those parts in-house, so we can make sure we can meet the demand. So that's really given us a capability we wouldn't have before. So to-date, because of that capability, we haven't had a global supply chain problem and we hope that doesn't change next year, which is the question I think.

[indiscernible]

Yes. It's not about the friction from the legacy systems at all. It's about, first, it's about awareness. People don't know us and are opening up without us, right? And I think for every deal we're getting, we may be missing TAM, right? Because people want to open up in a new way. Nobody wants to stand in a line, no one wants anyone touching their stuff and that's what we provide and yet people have to reopen to get their businesses going again. So number one, I think it's awareness. Number 2, it's scale, right? We have a couple of hundred people in the company, but we're hiring very quickly and trying to grow organically. And then of course, our go to market, we have partnerships with Stanley Black & Decker and Johnson Controls and Motorola. Activating them and getting their scale and reach to the market is going to help us capture the demand that's out there. So I think time, execution, scale and awareness will make a really big difference. Going public has given us kind of a platform for people to know who we are, but we have a lot of work to do and Super Bowl commercials is not out of the question, right. We want to get our name out there, so that people -- you saw the video we opened up with it. That's what it's like to go back and see our professional sports team, which walk right from a parking lot to your seat, we think the adoption rate is going to be huge.

[indiscernible]

Yes, it's a great question. So we haven't gone to the TSA purposely, right? Because that's where everybody is focused. And the TSA is built to create a sterile environment so that when people get on that long metal tube and go 50,000 feet in the air, then nothing happens, right? Nothing can be in there. Shoes come off, alcohol, liquids, all of that. We're about threats to a crowd. That protection paradox slide I showed you is about the balance between creating a safe environment, but also having a great fan experience. That's what we do. So we've been focused in the non-regulated places other than professional sports. We're in 9 airports now, but they're using us for employee screening and terminal screening, not between people and the airplane. And we're going to let the TSA worry about that, and we're going to spend all of our time in that $18 billion greenfield that nobody else is at because that's the low-hanging fruit for us.

[indiscernible]

Yes. There's somebody a physical security executive at the airport that's responsible for that. So Heathrow, for example, if there's a high alert, they roll our systems because they can be indoor and outdoor. They're also mobile. They're on wheels. They wheel them to Terminal 4 and make sure that people coming into the terminal are safe. So that's what we call on there. And most of the people we call on are former law enforcement, former secret service, CIA, this is a bit of a trust sell, right, because of what's at risk here. And so they really appreciate our technology.

One thing I want to hit on, and this is a big tailwind for Motorola is the American Rescue plan, CARES Act funding, NDAA, what I would describe as a 900 pound gorilla worth of incremental funding entering the industry. How do those federally or municipally driven funds end up making their way to Evolv? Like do you see a demand profile worth translating or would you say not that much of a connection just yet?

I'd appreciate Brian's point of view as well. But it's a little bit early for us right now, and we haven't made the -- we've just begun in a lot of these big markets like Fed Gov or SLED, but it's happening. The places we're seeing it the most is with schools. There's lots of grants for school safety. And so a lot of people -- most of our customers in schools are using those grants to buy our systems. But I'm hoping that if that money starts flowing in all different kinds of verticals, then we'll be able to take advantage of it. But it's still a little bit early for me on this line.

I think the only thing I would add to that is -- so I think it's a little early for us to have put that kind of connection together. What we're seeing is, again, there's about 700,000 locations that are candidates for our technology and we're the worldwide leader with 700 subscriptions as of the end of September. So there is a vast majority of opportunity that is still to be taken advantage of, if you will. And we haven't yet determined whether or not that federal funding per se or others that you described are correlated to us being able to attack that opportunity. I think a lot of it is actually connected to what Peter was describing before, which is around brand awareness, is around partnership and is around scaling in general. So there's an enormous opportunity in front of the company, and we're really just at the base of that mountain.

But I'm excited about if that happens because 90% of our deals go uncontested. When a customer doesn't choose us, it's mostly because they don't -- they haven't budgeted for it yet, right? So it's -- I have no budget. If that changes, and there are dollars available to keep venue safe so that we can all move around in a frictionless and safe way, I think everyone's going to take advantage of that.

Peter, you, I actually have formally heard you use this example of stadium security and the headcount required of that. And when you guys finally go in and deploy headcount can go down, operational expenses also go down and processing speeds go up. Can you just walk us through kind of this value-add service that you guys can deploy for a customer?

You mean how we deploy it, Sami?

So I want to just run through the example of when you go service a stadium, the headcount security, let’s say it is 200 people. That obviously goes down once Evolv Technologies is actually deployed, could we just run through that?

Sure. So we just want to deal with the Tennessee Titans. They had over 100 metal detectors, 280 security guards to get fans into that NFL stadium. They were having a really difficult time finding security guards at $25 an hour to man those metal detectors. So when the team went away in an away game, we came in, installed. We took all the metal detectors out. We dropped in 17 of our systems because you need a lot less systems. But more important, instead of 280 guards, they have more like 70 guards today. So 3 things happened -- well, 4 things happened. Number one, their security got a lot better. Number 2, their fans walked right into their seats, game-changing for them; 3, they're saving a lot of money because instead of 280 guards, they have a lot less of that. And they also now have data and understanding of who's coming, when they come, all of that, they didn't have the data before, and they absolutely love it. And by the way, after 2 games with the Tennessee Titans, we stopped 54 prohibitive items from coming in. So guns, knives, bombs or alcohol, we stopped it from coming in. So they got safer, but also got all the other benefits. And we go in and do that work for them. So my team in 3 or 4 days can uncreate our system, stand them up, train their security guards and be ready to go before the next Sunday.

[indiscernible]

How many more items did we stop versus those other ones? I don't have that data, but I can tell you that in every place that we go, we stop lots of things from happening. There's a mall in outside of Atlanta, called the Lenox Mall, that there was a young girl that was shot by a straight bullet [indiscernible]. We got asked to go to the mall and put our system in the main lobby of the mall because they wanted people to come back to shop. From 10 in the morning to 1 O' clock, we stopped 57 guns from coming into the mall. They bought 7 systems at 3 O' clock, right? So in carry states where people are carrying guns, it's not that like they're coming in to hurt anybody. They are just carrying stuff they shouldn't carry. And we make sure that those things don't come in. If they have a license to carry, then put the gun back in the car and you're allowed back in. Just as many people that we found had guns, you could see them walking into the mall they saw us, they went back to their car and drove away. So there's also a deterrence factor to having that system there because nobody would have done [indiscernible].

Yes. I was just going to add to the question about the before and after, specifically with the Tennessee Titans. If you move to the second point that Peter was making with regard to the improved fan experience, the folks of the Tennessee Titans, and this is in public record, they measure the fan experience at entry, and they did that before and after. And in the weeks before to deploying our technology on a scale of 1 to 5, their average customer experience was like 2.25, all-time low. After deploying our technology and just within 3 weeks, that had more than doubled to an all-time high of 4.6. And you might say, hey, that might not be a big difference. It's a huge difference. That's dramatically improved fan experience. Folks are getting inside the stadium to the concessions for their seats a whole lot faster, driving additional revenue, driving a better fan experience and a likely return visit by that attendee in a future event. So lots of ways we can measure the before and after of our technology.

One thing is, I just want to hit, so right now, you're in a lot of detection systems, but there's obviously a much bigger story here about software as a subscription. The long-term vision of the company is much more than just catching guns going into stadiums. Can we just talk a little bit about the long-term vision of the company?

Yes. So if we go back to the Tennessee Titans slide. Once we solve that friction point of making the venue safer, our customers want us to do more because we're there, and everyone's walking through it and more looks like faces a ticket or e-ticketing. So walking right into the seat, more looks like consuming threat intelligence and retail analytics, crowd intelligence software and creating an experience so that when we all come back and gather again in the future, we're going to know who's coming there before they get out of their home, because we run the license plate. We know if you're a good guy or a bad guy. And we're going to create an experience that's frictionless and touchless and data-driven and informed so that you could -- that's the new proxy for how people want to return. And if that happens on our platform, and we're the only company that's digitized to this, that we're going to be owning that entry way for a long time and providing all those capabilities from a single platform. And we want to do that by either building -- partnering or buying the technologies and operationalizing that on our platform and our customers want more. So we're going to give them more.

And just briefly, from a finance perspective why that's so important. That allows us to drive ARPU expansion over-time for our SaaS offering, right? We can bring more applications to bear to our SaaS platform, also helps us preserve industry-leading renewal rates, right? We don't have customers up for renewal at this point. But over the next 2 years or so, 3 years, that will happen. And as we get further and further into the DNA of our customers by solving all these additional challenges that they're having, we think that, that gives us a great opportunity to have a very, very long relationship with our customers.

Got it. Well, Peter, Brian, thank you very much for joining us. And we're out of time, but really appreciate talking more about Evolv.

Thank you.

Thank you, Sami.