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

Great. Good morning, everyone. Thanks for joining us here for day 2 of our UBS Technology Conference here in Scottsdale. My name is Maneesh Nisargand. I am part of the technology investment banking team here at UBS. And I am very excited to have the management team of Evolv Technologies. With us here today, Peter George, the CEO; and Mark Donohue, the CFO. Thank you, guys, both for joining us today.

Pleasure to be here.

Nice to be here.

Excellent. And just for the audience, we're going pretty mobile this year. So there are QR codes on your tables. If you do have questions, feel free to just click, scan the code, you can ask a question. It will pop up to me here in the app, and we'll handle those that way.

So great. Why don't we, just to give some of the folks who don't quite know the Evolv story as well, give them a little background and spend some time on the platform and some of the key problems you guys are solving for your clients?

Sure. And we'll tag team this a little bit. So good morning, everybody. So we have been in business for 10 years now. And the first 5 or 6 of those years, we raised about $100 million. Our largest investor was Bill Gates, he still is, to solve the problem of how do you keep weapons out of venues. And after the first 5 years, we came out with a first product called Edge, which allowed people to walk through a system without divesting of your normal metal and walking at the pace of life and walking right into a venue. And that was happening one at a time. It wasn't until about 4 years ago when we came out with the second-generation product called Express, that's our flagship product, that everything changed for us. And that is to say, we were able to build a system that's 10 feet wide, has no roof. We create a magnetic field around the system. And it allows approximately 4,000 people an hour to walk into a stadium, into a performing arts venue, into a school, into a hospital without divesting of their normal metal, so their phone, their Yeti cups, their keys. And unless they have a weapon on them, they get to walk in at the pace of life. And it's been game-changing now given the fact we have a gun violence epidemic in America. There are 400 million guns, more guns than people here, and keeping weapons out of places is really important, creating safer zones for people and it's something we've been doing now. And we're the world leader in AI weapons detection, a category we created.

Great, great. As you've evolved some of these products, no pun intended, I suppose, but as we put some of these products out there, there's been more focus around some of the analytics that come along with that. You have your predictive analytics suite that seems to be gaining a lot of traction in the market. So would love to get a sense of how that data you collect from the screening devices is being used by security team members or others at the venue, the enterprises themselves. Would love to see how that kind of connects together.

Sure. So think about us as being in a digital transformation for companies in their entryway, so walking into a venue and keeping weapons out. But also because we're a digital platform, we can do lots of things. And so one of those things is we can -- we have a product called Insights, which we -- during a stadium, we can count the number of people that arrive, what their arrival rates are, when they come, what the detection rates are, for example. That's fantastic for staffing. It allows people to get in a venue a lot quicker because we make lines, if not go away shorter, they get into a venue quicker. In some of our large stadiums, they use that data. And within an hour of people being in their seats, they can have a complete situational awareness of in a big stadium, all 82,000 people, where they came in, what time they arrive, what they were carrying with them, what their detection rate was, and we can create a dashboard for them so they can see that. A lot of our NFL customers -- and today, we have over 40 professional sporting teams, MLB, NFL, MLS and NHL, now using our technology. At the end of the entry into a football game, our customers can send that insight, that data, for example, to the NFL so they can see how many people came into the stadium, what their security posture are like. So that data is really important. Everybody knows data is the new oil. Having that data to both monetize the venue inside but also understand the security posture is super important.

Got it. Excellent. And you mentioned a little bit the ability to sort of reduce staffing levels right at a venue. How have you found the interaction with sort of the human element of screening, whether it's wanding, pat-downs? Do they find that your services have become pretty complementary? Do they tend to replace some of those? How has that, sort of that combination, been working in times where they use both or multiple methods?

Yes. Well, first of all, everyone should know that there's no perfect prevention. And I spent 20 years in cyber, Mark was in cyber as well. Everybody in both physical and cybersecurity know, there's no perfect anything, right? But if you put together technology, people and process, you can dramatically increase the security posture. So our system, Express, is a tool that helps venues keep weapons out. But it also is really important that, that tool is manned. So it typically requires about 3 people per system or 4 people per system to process the 4,000 people. And having the right ConOp, having the right people there and using the tool increases your security posture even though there's no perfect prevention. And then add layered security to that, so we're in one doorway and we can do a lot. So AI and technology is not going to take the place of people. But if you use technology and a good ConOp and train your people well, you can do a really good job of keeping weapons out of places. Just as it talks to labor, oftentimes when we go into a large stadium, think about a football stadium, I'll use Mercedes-Benz Stadium in Atlanta as an example. They had 150 metal detectors, 3 guards per metal detector. So on game day, to get 82,000 people in that stadium, they had about 450 guards. We were able to take 150 metal detectors down to 25 systems. And you can imagine the guard count went from 450 to 150. So huge labor savings for them. We created a frictionless experience and touchless experience for the fans. Mercedes-Benz was able to monetize that inside. And then they not only were able to save money with labor but also redeploy some of those security people inside the venue for other kinds of threats.

That makes sense. And you did touch on AI throughout this conversation, but would love to hear a little bit more about the Cortex platform, sort of how that's been rolling out, how customers are thinking about that and how that sort of integrates with your current solutions. Would love to just get a little overview there.

Yes. So our flagship product is called Express. It comes in dual-lane versions or single-lane versions, indoors and outdoors, depending on who the customer is. We are focused as a company on verticals that include stadiums, schools, education, hospitals, performing arts venues, theme park. Think about places where people gather lots of people and need to get in very, very quickly. We do a really, really, really good job there. As it relates to artificial intelligence, we create a magnetic field around our system. And as people are walking through, again, without divesting of any metal that they have. If they're carrying a weapon, we use our sensors to identify the objects, and we use artificial intelligence signatures to identify is it a threat or not. Is it a gun or a firearm or a phone? And we can do that instantaneously. And that's how we can quickly determine if somebody has a weapon or not. Most people going into venues are not carrying a weapon. So why treat everyone like they have one? So we basically flipped the model, right? A metal detector says, prove to me you don't have a gun to come into the stadium. And we say, come on in and we're going to use technology to find the needle in the haystack, which is to say, to find the weapon that's coming in that shouldn't be.

And we heard a little bit in the last earnings call, maybe the last 2 now, about the new platform Extend, right, which is basically detecting brandish weapons. How did that come about? Was that sort of a customer-driven type of product? Is that something you guys internally were thinking about? How did that sort of come to be?

Yes. It's a great question. So the use case for our company and for Express was finding concealed weapons. So as you cross over, we call our digital threshold and you have a concealed weapon on you, we can find that. But oftentimes, if somebody has a brandish weapon and they're approaching the building, boy, you can gain a lot of time if you identify somebody that has a weapon. So we knew it was going to really be important if we were going to extend the perimeter a little bit. If somebody were going to come into a parking lot and they were going to have a brandish weapon, we wanted to see it. So we're OEM-ing a product that allows for brandish weapons detection. So about 100 feet from where the entryway is, if somebody has a weapon in an aggressive position or a brandish position, we can use computer vision to identify is it a gun or not. And if it's a gun, send an alert to the person standing at our tablet as they're approaching the building. And if you can gain 20 or 30 seconds by doing that, you obviously -- that time is precious if you have a mass shooter coming in with a weapon, and it's really important. So we knew it was an important capability that our customers are asking us for. Concealed weapons is great, but how about brandish weapons? And we can now do that as well and offer that as a solution to our customers.

Got it. That's helpful. And Mark, I feel like I've been neglecting you over there. So maybe we'll turn to the next question over to you. But the distributor model that was kind of -- that kind of came up on the earnings call and has been talked about more recently seems to be a pretty big focus. So would love to get a sense of what the early returns on that have been. Has that affected growth profile, margin profiles? Or how are you thinking about that as potentially sort of the new go-forward model, at least for the hardware in some respect?

That's right, yes. So we've always gone to market in 2 ways. We either allow the company to -- our end customers to buy the hardware and then do a software subscription with us, so they actually own the asset. Or they can do a pure subscription as we call it, and they can effectively lease the whole entire system, so both the hardware and the software. The -- some of the issues we were having around gross margins was actually selling that hardware through our books. So we went down a path of actually having a distributor, our distributor or our contract manufacturer, actually go up the value chain and become a distributor of our hardware. They were already building it, they already had the inventory. So they're just playing another role here. That's allowed us to put ourselves in a much more enviable gross margin position. Last year, we printed 3% gross margins. As of last quarter, in 3 quarters, we're now a 58% gross margin company, on our way to 60%-plus. So it's been a game changer in terms of actually SaaS-ifying the model that was always SaaS, but we just weren't able to print it to The Street. And so we've seen a lot of success with that. We really -- Q3 was the beginning of it. We did about 30% of our orders through that motion. When we do a pure subscription, meaning that we lease both the hardware and the software, we're -- that's about a 60% margin situation. When the customer buys the hardware and leases the software from us, that's about an 80% margin situation. And we see those 2 different business models being about 50-50 for us going in -- depending on the verticals that we're selling to. That's putting us in a position to have 60%-plus gross margins and the confidence that we were going into next year. So it's had a real impact on our cash flows, our company in the margin profile of the SaaS company we are.

Great. That's helpful. And that change in gross margin is clearly a step change and very exciting. So curious to see how that keeps playing out over the next few quarters. Another thing that we were noticing was the large suite of third-party integrations you guys have with mass notification systems and all those sorts of things. Maybe kind of walk through the model of that, how you're thinking about building more partnerships to sort of use your data and your insights, sort of feed the rest of the ecosystem and how the thinking is going there.

Yes. I can start, and maybe Peter has some thoughts, too. But look, we have an open API to our system. So there's a lot of different video-based companies that integrate with our systems today. So we have APIs into those, and we have partnerships with those folks. So we build a system or an ecosystem that works soup to nuts. We're also now moving though more into the digital side of the equation. Like Peter said, we're just one step in a layered security approach with our flagship product, Express. So our point is actually to find a ways to go outside the digital threshold and inside the building to try to find more and more things we can do to kind of drive safety for that organization. One product is not going to make a place safe. It will make it safer, but it won't make it safe. So adding lots of other products to the equation will help. And we've recently brought on a digital products team, and that team is actually helping us think through some of the options there. And there's a few things in our innovation center right now that are pretty interesting.

Yes. And just to add to that, because we have an open API and we're a digital platform, we can connect to all the infrastructure that's already there. So if they're using computer vision or video or mass notification, where there's access control capability, we can connect to it. We envision a day, it's not today, but we envision a day where the world of physical security and cybersecurity come together. Today, I would say that there is a Venn diagram and there's a little bit of overlap but not a lot. But those worlds are coming together. So couldn't you envision a day if you wanted to have better security where you could push the perimeter out and as somebody drives to the stadium, instead of waiting for them to come to the door to know if they're going to be a threat or not, what if by the time they get out of their car in the parking lot, you could run their license plate and know if they're a good guy or a bad guy while they're way out in the parking lot before they get close to a place where they could do harm to people. So having that situational awareness, pushing the perimeter out, what if you could consume threat intelligence and understand is that person on a BOLO list or a watch list or is it a VIP and their family? You could create an experience for that person, if they're a VIP, which is completely different, than an experience if there's somebody that you don't want in the stadium. And those worlds are coming together in a place that we think in the not-too-distant future, those integrations are going to create experiences, VIP-like experiences for people that want to come to and through a stadium. We know who you are. We know what you bought the last time you were here. We can create a frictionless experience. And if you're somebody that shouldn't be there, you're banned from the stadium. We're going to know that early and not have any compensation. So those worlds are coming together. And we want to be in the forefront as a digital platform to help with that integration.

For sure, for sure on that. The opportunities there are pretty exciting. I would love to explore that a little more in just a bit. But before we get there, just would love to get a sense from you, whether it's Peter or Mark, on -- the thing that strikes us sometimes about your customers is they seem to be somewhat fragmented in terms of the individual stadium, the schools, the hospitals. How have you found that affecting the sales cycle? Do you feel like it's a fairly sort of structured process when you're going through kind of trying to sell to each of these? Are you getting some of that inbound? It just seems like that fragmentation can add some time to what you're doing, but curious how you sort of navigate that kind of sales cycle and process.

Sure. So let's both tackle this one. I'll take a first cut at it, and Mark will take a second. So first of all, the use case is exactly the same, right? How do you keep weapons out of places? How do you create safer zones so people can gather together and know that there's not a weapon there? So that's number one. The people that we call on in every case that you just mentioned, Maneesh, is an experienced security person, right? The Head of Security at a stadium, at a school, at a hospital, at a theme park is typically somebody that has been in security for a while, oftentimes retired law enforcement. They know about weapons. They're really, really smart about weapons. So we're able to have a very good dialogue with them. So that's number one. Number two is we organize ourselves as a company to focus on those key verticals. So we have school specialists in education that understands security and education and anxiety. We have a health care specialist. So we also have organized ourselves to go into these different accounts and understand the customers of our customers so we can do a really good job with security. I would say, in general, our sales cycle is approximately 90 days, which isn't that long. Oftentimes, this is an experiential sale. So if one stadium has our system, it will bring another stadium by. And the way people go into a stadium is typically the same. And if Head of Security can see it in another stadium, it's a proxy for how it's going to be for them. So that's about 90 days. I would say the longer sales cycles are in education because these are public bids, they -- school boards have to approve it. The sales cycle there is a little bit longer, maybe 5 or 6 months. But we're focused there, not on schools but on districts. So often the size of the deals are quite big because the superintendent who wants to keep the kids safe in his district, it's all kids and all schools, so it -- they're big districts. Mark?

I'll just build on what Peter said. Each of these verticals is nuanced in their own way. The 3 that we've actually found to be the most nuanced are education, health care and sports, right? We can -- we use our general sales kind of motion for many of the other verticals out there, and that works quite well. But the ones that are most nuanced, we actually have overlay teams, teams of 3, 4 or 5 people that are specialists in those areas, specialists in the education market. They know how to talk to superintendents, to town boards. They understand the town meeting process, things of that nature, experts and -- experts in the field of health care and how hospitals and emergency rooms have to react to things differently. And then sports, right? Sports -- professional sports, and even college sports, have a lot of different approaches to how they do things. There's a lot of marketing discussions. There's a lot of asset discussions that go on in those verticals. They're all a little bit different, and we have specialists at each one of them and has really served us very well.

Great. And then going back to your point about sort of the digital experience that you could give a VIP at some type of venue. How do you think about the other potential adjacencies? I mean that sounds like a great one where it's less about the safety issue but more about tailored special experiences. How are you guys are thinking about that type of adjacency, maybe some other ones that could be good extensions of your product and technology?

Yes. Again, if you think about somebody coming to a stadium, think about the Disney experience going to see your favorite football game or go to a concert, which is from the moment you arrive, if we know who you are, we can create an experience for you that's unique to you based on your previous time here. What did you eat? What door did you come in? What did you buy at swag store? That data -- we said data is the new oil. That data can help inform how we create a frictionless and touchless experience so the VIPs -- the new proxy now to come together and gather is I want to come, I want people to know me, I want to be able to go, not stand in a line, enjoy the experience and then leave. And with data and adjacencies to what's in the swag store, how people are going to buy things, I think you can create an experience that's completely touchless and VIP-like, like they were going to their favorite theme park. So there's lots of areas around security and weapons detection that we think as a digital platform is going to be really important to connect to.

And then related to that, when you think about sort of the next 2 to 3 years of planning for the business, how are you thinking about balancing growth opportunities, operational improvements, if you think there are any to make, and then even things like capital structure optimization and other things? Would just love to get a sense of how you're sort of thinking about that menu of priorities over the next couple of years.

Yes. I think the first thing to think about is we have been a very innovative company, right? We have something that has really changed the fabric of how this gets done at venues going forward. We had a lot of engineering investment, a lot of time to get to that point. We went public through a SPAC. So we're actually trying to kind of grow up in the public eye as well. But I think that what we're really focused on right now is really refining and honing in on the go-to-market motion for what's very much a greenfield opportunity for us. We're actually allowing security at environments in places that never could actually rationalize it before. And that's a game changer to a lot of this market. We see ourselves as playing in about $18 billion TAM of what's a $20 billion TAM. We're not really focused on airports. We're not focused on the prison and court systems. We are focused on professional sports. And those are the only real areas where there's a mandate to have venue protection. Everyone else is opting in. They're making that decision because they want to be safer. And we're providing them, I would say, a much more human way of doing it. Putting a metal detector -- a traditional metal detector at a school is not as inviting as a system like ours is, and it's really changing the landscape.

Great. And the -- as we're looking through kind of some of the guidance and targets that you had for the long term, one of the things that struck us was the EBITDA margin, that kind of 10% to 15% target. So what are your -- some of your initiatives and goals to try to take where you are now and then obviously bring to that long-term steady state? Is that a combination of the distributor model plus some other things? Would love to get a sense of how you sort of thought through that target?

Our long-term model is really based on being a SaaS company and getting to that Rule of 40-plus. And we're doing it piecemeal. It's all about scale. So the first order of events is to get ourselves into that high gross margin profile, that 60% to 70% zone for gross margins. We then have investments we've made in R&D. We have investments we're making in sales and marketing as well as G&A. Our G&A costs are pretty high because of the size and scale of our company right now. Being public is very expensive. We will grow into that. R&D is the next place where we will see, I think, us hit targets that will be about 15% to 20% of revenue. We will then look to hit a target in G&A of about 12%. And then we will continue to invest in sales to the 20 -- to the tune of 25% to 30% of revenue. But we are looking to buy top line growth, and that top line growth of 30% to 40% that we're expecting right now, even 50% next year, is what we gave guidance to. But our long-term view is 30% to 40%. It's something we want to deliver on because that's a big part of the Rule of 40. The Rule of 40 being top line growth plus EBITDA, getting to that 40-plus number puts you in a premium position -- in a premium multiple position for the investor community. So we think it's very important to deliver both that top line growth and that bottom line, and we are confident we have the efficiencies to get there.

Great. Just wanted to check quickly with the audience to see if there were any questions in the audience before we keep going. All right. Well, maybe just one last question. Would love to just to hear from both of you if there was anything that you think -- maybe the 1 or 2 things that you think the investor community maybe doesn't know quite as well about you, you'd love to just sort of leave them with about some of the -- where there's recent changes and those sorts of things that make you guys so unique.

Yes. Well, first of all, we haven't mentioned the word mission yet, and we need to. And it starts and ends for us with the mission of the company, which is to make people in places safer than ever before. The second amendment is a polarizing thing. But now there's technology that can actually help with this problem. And technology is helping with lots of problems from climate change to EV cars, lots of things. It can also help with keeping places safer than they've ever been before. So number one, our mission is really important. The second thing I'd say, and Mark will talk more about this, is this is early days for the company, right? We talked about the verticals we're going after. It's an $18 billion TAM of places that always wanted to be safe, but their only alternative was a metal detector. And we're completely disrupting that market. So it's early, early days for the company. We have a long, long way to go. We're the world leader today. And we're -- we believe that we're building an iconic company that's going to be generational because the problem is so important and so urgent, and now technology can help. And we feel honored to be in this position where we can make the world a little bit safer. And every one of our Evolv-ers that get up every day think about that. That's the thing we care most about with our customers.

Yes. I'll just add to that. We talked about the amount of units that we have out in the field today. And it's -- we exited the quarter with 4,000-plus. We actually believe in -- that there's probably 700,000-plus opportunities for us, digital thresholds that we could experience in that $18 billion TAM. So I think what you can gain from that method as we haven't even cracked 1% of the market yet. So we are at the very beginning stages of this. The response has been excellent. I'd say from a pure investor position, the thing that -- when I first came to the company about 18 months ago, we were asked a lot about is our cash position and our ability to actually get to where we want to based on our cash. And we feel very confident about that. During the SPAC process, we raised, probably after all the fees and everything, about $330 million. Exiting last quarter, we had $140 million. But we didn't burn all that. I would say there's a -- part of its burn and part of its use. We actually invest in our subscription business. And by the end of this year, you'll see us having invested in fixed assets of about $100 million on our books to actually drive that business. So to get to this point, we've really only burned about $100 million, and we're not going to burn nearly that much on our way to profitability. We fully expect we'll be somewhere north of $75 million by the time we hit profitability and start building cash again. So I think if there's any concern about our cash position or how that's transforming, we're happy to discuss it in more detail.

Excellent. Well, with that, just wanted to thank you both for joining us today. It's a great discussion, and already reserving your spot for next year. So hopefully, I'd be great to see you then. Thank you so much.

Thank you.

Thank you.