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

Good afternoon, everybody. Thank you for joining us. My name is Shaul Eyal. I'm the research analyst covering cybersecurity at Cowen. We are very pleased to host Peter George, CEO of Evolv. We also have Mark Donohue, CFO, who started today. That's his first day. Yes?

First day of school.

First day. So we're going to kick it off, I think, with a clip, I think like a short video. And then we're going to switch to a fireside chat.

Please.

Water, please? [Presentation]

Awesome.

Yes. So that's -- we just wanted to -- we don't have any slides, but we wanted people to experience the system by seeing the video. And what you saw there was groups of people, 3,600 people an hour walking through the system without taking any of the things they normally carry on them. And unless they have a weapon on them, they get to walk right into the venue. So we make lines go away. We make venues safe. We normally can save customers' money, and we like to -- and we'll talk about it in a second. We like to talk about democratizing security. Think about putting systems like this everywhere where people gather. And with all the things happening in the world these days, in schools, in grocery stores, in stadiums, this technology should be everywhere and can be everywhere. And so we're really pleased that we're in this unique position to make the world a little safer so people can gather together.

Absolutely, which, anyway, leads me to my first point or my first question here. So reflecting on last week's devastating events in Texas, 19 dead. And given that education is your largest vertical, correct me if I'm wrong, do you think -- if we were to have such a solution in schools, universities, without a doubt, I would imagine the number of those events that are unfortunately are escalating domestically and internationally would have been lowered to a degree. Is that the case? And why is it education currently the biggest vertical? Maybe what about some of the other verticals, such as sports venues, places of worship?

Yes. So we operate in a very big TAM. It's a $20 billion TAM. $2 billion of that TAM is regulated. So think about airports, business and professional sports regulate that you have to have some kind of security technology so people can be safe. But the other $18 billion, there's no regulation at all. So all those other verticals like casinos, like schools, performing arts venues, distribution warehouses, there's no regulation. And the only alternative for the last 80 years has been a metal detector, which is really good at finding metal, but the truth is not very good at finding weapons. And because most of us are carrying lots of metal and not many weapons, the only way to get into a venue is to take your metal out to walk in. It's awful. So most people don't do anything. So other than the places that it's regulated, people are choosing not to use the conventional technology because nobody wants to make their venue feel like a prison or their school like a prison. So they do nothing. And while they're doing nothing, every single day, people are buying more guns, there's more anxiety. We have a gun violence epidemic in North America. We have 432 million guns here, more than one per person. This year, we'll set a record for the number of mass shootings. There have already been 202 mass shootings in North America so far this year. By the way, there's only been 154 days. So that tells you there's more than one mass shooting a day. And the mass shooting is defined as 4 people or more dying. That's considered a mass shooting. So we have a problem here. Long and short of it is we understand why schools and casinos and places didn't want to use the old technology because it creates long lines. It's not a very good experience. But there's no excuse now. Now with Evolv technology and technologies like it people can walk right into the venue, not have to take their belongings out, not stand in the line, have a touchless experience, and they know that they're safe inside. So to answer your question, now that there's new technology and AI is changing everything from autonomous cars to everything, it's also changing physical security, and we're disrupting physical security using artificial intelligence. And everyone should -- this technology is available now. So when I think of schools, when I joined this company, and I'm a cybersecurity person for 20 years, I thought about Sandy Hook; I thought about Parkland; I thought about Oxford High School just on November 3; and now, of course, we think about Texas and the hate crime in Buffalo. That problem is escalating. More guns, more violence. Now there's technology that can help. And we need to reverse the trend that's going on in the world, and it's going to take technology and people and process, maybe even some legislation, to do it. But something needs to change.

Sure. Sure. And when we think about the secret sauce of Evolv, the AI/ML-driven engine, maybe in simple way, kind of layman's word, can you maybe describe to us what is it kind of -- how does it operate the data which is being collected, analyzed and the output that it generates?

Sure. So as you saw in the picture there, there's a sensor platform. There's 50 sensors in that platform, and we've written the signatures for all the weapons in the world, and we create a magnetic field around that system. But when somebody is walking through the system and they're carrying a weapon, we have the signature for that weapon, and it triggers the magnetic field and sends an alert. And then there are 2 beautiful large iPad-like tablets that take a picture of the person so you can identify who's carrying the threat. So we use the camera not to do the security and detection work. We use the camera actually to identify the person who has the threat. And then we can resolve the threat because we put a box around where the threat is so it can quickly be resolved. If it's a gun or a knife, we deal with it there. Sometimes it goes off and it's not a real threat but looks like one, and it can quickly be resolved and people can go through. While that's going on, people are flowing into the school, people are flowing into the stadium or the performing arts venue and getting right in. So we make the lines go away. We make the venue safe. We normally in stadiums save money for our customers because one of these systems replaces 10 or 15 metal detectors, which each require 3 security guards to run. So you can imagine shrinking both the footprint of the system and the amount of labor you need, so you get to save money, too. And the final benefit is we collect all the data on those scans. So we know we've scanned more people other than the TSA than anyone in the world. In fact, we've scanned 270 million people. And by next year, in Q1, it will be close to 1 billion. And we take those scans and when we see new threats, we're able to run the machine learning models, to your original question. And the system gets smarter all the time. And part of our subscription model as a company is we update our software 4 times a year remotely. So our customers get the benefit of all the scans from all the other customers in the world so that we can stay ahead of the threat.

Got it. Got it. And it begs the question, sizable TAM, indeed. We have the TSA doing airports. Why not think about -- why not go into the airports? Or is it just you don't want to step on anyone's toes there? Or what's the thinking?

Yes. Well, there's 2 things. The first one is that $18 billion is greenfield. You don't need to replace a thing. Almost every place wants to have security. They could have chosen a metal detector and didn't choose it. But when we walk in, our system is so easy to operate. We run it as a subscription pricing model. So the barrier to entry is very low. Think about $1,500 a month or $2,000 a month. People sign up for 48 months, so low barrier to entry. And finally, for that little amount of money, you can finally make your venue safe. So that's where the big opportunity is. The other thing I would say is that the threat vector for airports is different than stadiums. When people are getting on to planes, they -- the TSA needs to create a sterile environment because we're all getting on a plane with a couple of hundred people and going up in the air, and anything that would take that plane down could kill everyone in the plane. So it has to be sterile. Our use case is really threats to crowds, right? So we're not trying to find the little box cutter or the razor blade or the pen knife. We're trying to find the weapon that's going to hurt 4 or more people. So every gun, large tactical knives and a bomb like the Boston Marathon Bombing, we'll find that. So it's really the threat.

Understood. One of the main questions we typically get, I know this is something we've discussed in the past, who's the buyer? Within the organization, within the enterprise, who's the buyer? You come from -- formerly from the cyber arena. That's kind of how we got to know each other. So the CISO, the VP R&D, the CTO. In your case, who's the buyer? Who's making the decision? Who's signing the checks other than the CFO?

Yes. So the person that makes this decision is the person responsible for physical security in most of these venues or places, including schools. And the pedigree of those decision-makers are they're former police officers, CIA secrets, they're security guys. And in the cybersecurity world, the world that we've -- where we're from, it's normally the CISO. And when I would call on the CISO, I would go into a big building and I hit up, and I go up to the C-suite because he got a seat at the table for the last 20 years. The physical security persons, I go -- I hit down because that person is in the bunker, and their responsibility is to keep everybody safe. But what's happening in our industry in physical security is replicating what happened in cybersecurity. That physical security executive or a person in the bunker is now riding the elevator upstairs because the top-of-mind issue for every CEO in the world is how do I keep my employees safe, safe from COVID, but also safe from all the threats in the world. Then how do I bring them back to work in the office? And we have technology that allow for people to come back together and gather again. So safety is becoming the top priority for CEOs. And that guy in the bunker downstairs is now riding the elevator with us because he's got something important to do to keep employees safe when they come back to work, to keep kids safe when they come back to school and to keep people safe when we want to come gather again, whether it's to see your favorite sports team or go to a show. So he's becoming a very important person in most companies.

Got it. Any education phase that he needs to take his clients through? Or it's pretty much you go through a proof of concept? I think the use case, that's an easy one. You can quickly understand why this thing is a must-have rather than nice-to-have.

Yes.

Does he have to go, he or she, through some pay kind of their clients from some educational phase, explain? Or it's pretty much, "Let's talk about kind of what I can do for you."

You mean internally or when we sell to a customer?

When you sell.

Yes. Everyone understands the problem. Oftentimes, when they can go to a like-minded venue -- so if a performing arts venue could go to another performing arts venue and see it work, that's enough. And they could say, "Okay, it's going to work here." Because they have the same kind of customer and they know what the flow's like. And sometimes they like to try it themselves. But normally when they do that, they keep it because it transforms -- the security posture, the visitor experience and the data understanding is so transformative that they keep it.

Got it. Maybe shifting to the business model. So we have product subscription, maintenance. Maybe can you outline to us what -- you mentioned kind of the course of the system, but how should we be thinking about, let's say, Museum of Modern Arts, Smithsonian, for example? How many systems would they buy potentially? What's the opportunity, kind of the land-and-expand opportunity later on?

Yes. So to secure a facility or a venue or a stadium or even a school, you have to put systems in every entryway, right? Because if you have 5 entryways and you put systems in 3, you're vulnerable, right? So one thing you could do is shrink the attack surface. That's cyber speak. But in a school, instead of having 11 entryways into the school for the kids, have 3. And then once you have 3, make sure that those 3 are monitored with security guards or teachers, make sure that those doors lock, and make sure you have technology in there so that either open carry or concealed weapons don't get in. That's our preferred way of doing it. But you should think about every entryway into every venue has to have a security technology. So when people deploy us, they deploy us fully in all those entryways. The upsell opportunity is other expansion locations or if they want other capabilities that we can run on the platform, like an analytics package or a facial recognition package or a biometrics package, we could provide that on the platform and then charge them as part of the subscription. So that's our model.

Got it. Have you begun to see uplift from some of those additional capabilities that you talked about, I think, also in the past?

Yes.

Or is it still predominantly kind of the major use case?

Yes. The major use case still is security and safety and weapons detection, but our customers are asking us for things like analytics packages, biometrics. "I'd like to understand the risk profile of the people coming in. I'd like face as a ticket, so maybe I could do ticketing as part of the experience." So they're asking about them, but today, we're only providing the security part. But it's such an important part in kind of the foundational platform for all the other things. It starts there. And today, we estimate in that $20 billion TAM that there are 700,000 thresholds or places where our systems could be. And we're in the very early days in the couple of thousands of subscriptions out there. So there's still lots and lots of places to go.

Sure. Sure. How should we be thinking about product gross margins maybe in the longer term?

Yes.

I think, without a doubt, as the business is shifting towards more subscription model right after the initial product sale, what's the current thinking longer term? How do we see or where do we see those margins heading 70 -- more than 70%? Or what's the current thinking?

Yes. So you mentioned your secret sauce. So our secret sauce is our security software and our AI Cortex operating system that can identify these signatures when they come through. Today, we have an effort going underway to reduce the cost of the sensor platform. That will be available mid next year, and that will take our gross blended margins today that are in the 50% range and get a 7 in the number. And it'll start with a 7, not end with a 7. And those are software-like gross margins. So we see that getting there sometime in 2023. But everyone always signs up for a 4-year subscription. Sometimes they buy the sensor platform. More often than not, they have the software on top of the platform and that -- their subscription covers everything.

Got it. As we think about your go-to-market strategy, Peter, can you point to some partnerships, some direct sales? What's the mix? I think in the recent quarter, 60%, 70% I think of bookings came from your partners, if I'm not mistaken.

Yes. It shifted quicker than we thought because we put more of an investment in enabling our channel. So we have very -- we have some really good global channel partners in Motorola, Stanley Black & Decker, Johnson Controls and about 30 other boutique channel partners. And we have 5 or 6 people enabling them so that they can go out and tell our story. Our plan for this year was to be about 50-50, 50% direct. I have 20 to 25 quota-carrying salespeople. They have a $9.5 million quota or think about 100 systems. And we were thinking 50-50. But you're right, last quarter, we saw the channel take up more of a majority of the sales than we thought. And we're seeing in our pipeline that continuing.

And as we think about not just the domestic opportunity but internationally because you can take this thing anywhere. The problem is global.

Right.

What's the current status? What could it be like in the outer-years?

Yes. Well, first of all, there are threats everywhere. The threat vector is slightly different in other parts of the world. So we have a gun epidemic in North America. But if you go to other parts of the world, the threat is different, right? In the U.K., it's large tactical knives. In Asia, it's bombs. But they're looking for different kinds of threats. And so we have people in the U.K. and we have people in Singapore. We're going to reach those international markets in the future through our global channel partners. So we think Motorola, JCI and Stanley will be bringing us into those countries. And instead of putting people in there ourselves, we'll go behind the opportunity of our channel partners. So last year, international represented a very small portion of our business. We're expecting that to grow just a bit this year, and then we'll start making investments in the future there. The predominant opportunity for us right now is in North America for all the reasons we hear about, which is the violence going on in cities around the country and the mass shootings that are going on everywhere.

When you think about Evolv's hiring plan for this year, maybe even with a peak into 2023, with a potentially moderating economy, have you changed anything in recent weeks, your plans, your thinking? We started to hear from some other folks, some other management teams, that it's going to get easier in the second half of this year slightly. So why hire now? Maybe let's halt it a little bit. What's the thinking within Evolv right now?

Yes. So look, there's a lot of demand out there for systems like ours. So we want to make sure we can capture the demand but do it in a sensible way. What I would say, as we think about this year, we're going to tap the brakes a little bit on hiring and let the revenue drive where the hiring is. At the same time, every time we add a quota-carrying salesperson, if they get productive quickly and can overachieve plan, we think that's the right investment to make. So we're going to be strategic and surgical about where we make investments, slow down some of the investments and let the top line grow. But we have a lot of confidence that for the next foreseeable future that we have a lot of demand to get, and we want to create a market moat to match the tech moat that we have today.

Got it. And when you hire, when you bring new salespeople, where are you guys bringing them from? Is it...

What industries?

Yes. Hardware, security, software?

Yes. 3 places. Cybersecurity because there's so many similarities between cyber and physical security. They just totally get it. So that's one area. Physical security, but from the VMS world, the Vigilance and Milestones and Titans of the world. Those guys get the physical security world. And then believe it or not, the third category is law enforcement. We -- about 1/3 of our salespeople were former police officers. In fact, the one here in New York was an NYPD cop, and he's a really good sales guy because he understands who we're selling to. He has the secret handshake. He believes in the mission, and they work like crazy. So those are the 3 kind of categories of people that we get. And a lot of people ask me, "Is it hard to find really good people in today's workforce because there's a war for talent?" And the answer is it's always hard to find great people, but we feel like we have the deck stacked in our favor because of our mission. The people that come to the company are attracted to the opportunity because our business is growing and it's an exciting place to be, but also it's an important place to be. And people like to come here and not only do well but do good, too. And this is one of the places that you can do well and do good. So we're able to get software developers and people in the company that we would normally be able to get because of the mission.

Got it. Plenty of cash on the balance sheet, uncertain economic potential. What's the current thinking along these lines? So we got a business to grow without a doubt, but still plenty of cash. So...

Yes. Well, we have plenty of cash, but we want to be good stewards of that cash. So moderating our expense is really going to be important to make sure we're paying attention to that. We're fully capitalized right now, which we feel really good about. And we want to make sure that we have both equity and capital to someday make some acquisitions that we think we could add to the platform and capture more ARPU from our customers. So making sure that we preserve our capital is important, too.

Got it. Questions from the audience? Jeff?

Partners have potentially -- for you have the ability to automate -- lockdown, [indiscernible] the need or all the doors in the place get a larger back?

Yes. So it's a great question, and this is so thematic right now given what's going on in the world. A lot of people ask me the question after what happened in Uvalde, would we have stopped that, right? The answer is when somebody goes through our system and they have a concealed weapon or an open-carry weapon, we're going to find it. Period. We won't miss it. But to put in really good security, you need 3 things: you need technology, you need a process, and then you need people manning it. And all 3 of those systems need to work together in concert. What we're telling schools today, when they ask me and our team, would you have stopped what happened in Texas, we would have said, "We're an important piece of a security puzzle that includes 3 phases. The first phase is shrink the attack surface, minimize the number of entryways, and make sure those doorways have locks and doors." That's number one; number two, "Make sure you have technology in there and security guards in case somebody comes through with a weapon." And then finally, "Make sure you can connect to the video surveillance systems." Most schools have video in their hallways and in the outdoor campus. So if somebody comes and think about what happened in Texas, they arrive on campus with an open-carry long gun and they're outside, like in cyber, pushing the perimeter out and identifying that threat well before they get to the school is really important because you can lock the doors, lock the systems and prepare the school for this intruder. And the integration of all those things are really important. Because we're a digital platform and we have an open API, we can connect to all those things. But the ecosystem of companies are still forming to make that a repeatable and standard thing in every school in the country. So there's work to be done there, but the technology is available to do it.

Question [indiscernible] number of different other solutions [indiscernible].

Well, first of all, we recommend that our systems are manned. They don't have to be...

Just [indiscernible].

Yes. You bought up a company that has a unique set of integrated solutions that when they're stitched together, including having [ SOCs and NOCs ] to watch what's going on in the campus, they can do some things around security that very few companies in the world can. So they're a perfect company. Particularly with their position with police radios and body cameras, they can have -- if something happens in a school, the same siren goes in the police radio when they're there. That whole kind of stitched-together solution is really, really compelling from companies like that. And we're one part of the solution, but they deliver all of it, stitch it together, their channel partners. It's really important. And a lot of the work that we're doing in schools is happening with that partner, by the way.

[indiscernible].

Yes. The one designation we have is the Safety Act designation, which comes from the Department of Homeland Security. And there's insurance associated with -- if it's deemed a terrorist attack, then there's financial retribution there, but no insurance companies haven't done that yet. I'm expecting like in cybersecurity that there's going to be a security available for things like this very, very soon.

We got to wrap it up. We can maybe take the question outside. Peter, thank you so much. Thank you, everybody.

Thank you, everyone. Thanks, Shaul.