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

Good morning, everybody. Thanks for joining the second day of TD Cowen's TMT Conference. We are delighted to kick it off with the management team of Evolv. We are joined by John Kedzierski, President and CEO; Chris Kutsor, CFO; and we also have Brian Norris, SVP of Finance, Treasury and IR with us here in the room. We'll kick it off with a brief video, and we'll take it from there. [Presentation]

Thank you so much for that. John, do you want to kick it off just with a few comments before we start with the...

Yes, just a few comments. Hopefully, the video provides good context for what it is that Evolv does. My name is John Kedzierski, I'm the President, CEO. I've been leading Evolv for approximately 6 months. I joined in mid-December. What I would point out about Evolv technology, and you saw it in the video here, the company created a new market opportunity. Weapons detection has been around for a long time. You've been to an airport, maybe you flew here, via an airport. And you've seen what the legacy paradigm looks like, you've seen the size of that operation, the physical footprint that it occupies, the friction it creates in terms of the line that you occupy. What Evolv does is very, very different, by using AI, as you saw, to differentiate threats from most benign -- many benign items. But it also allowed people that never could deploy the previous security paradigm to do so because it takes a lot less physical footprint, a lot less staff, introduces a dramatically less friction into the problem. Many of our customers did not do weapons detection of any kind prior to Evolv because that prior security paradigm just physically wasn't practical to put in front of a school or at the entrance of hospital ER, as people walk into a theater or to a museum or a place of worship. So I think it's very important to note that it's a new market category and a new market opportunity that the company has created. We differentiate by the throughput by not having people required to be divesting all of their items out of their pockets, by the fact that the solution is a cloud SaaS solution and it's managed from a web portal or your mobile app, you're able to get data about how many visitors you had into your facility, how many you stopped for a secondary screening as you saw in the video, how many real threats that you occupy it, if you want to turn the system on or off or upgrade the software, it's a full cloud ecosystem that we have. And now we've introduced the latest version of the product, which is bringing that same kind of paradigm of changing how security works into bag screening with the expedite autonomous x-ray bag scanner designed from the ground up for AI. There's no screen on it. There's no place for an operator to sit and manually advance a belt. It's our own proprietary data set to train the AI model to look for x-ray images of threats and the speed and throughput were designed in conjunction with that. As you saw in the video, the bag will be waiting for you in the other side. It goes through it just a little bit faster than walking speed, and you have to build a machine from the ground up to go do that, and it's integrated to the same ecosystem. So the same cloud portal that we have, mobile apps, the tablet that you saw, the security operator operating, they see images from expedite in the same way, telling them which bag to go look like -- look at. What does that translate into as a business? We're a subscription business. Every unit that we sell generates subscription, and we do that in 2 different ways. Full subscription, the customer owns nothing. They subscribe to essentially weapons detection as a service or purchase subscription as we call it, where they buy the hardware and then subscribe to the software, the portal, the service within it. In all cases, it's a 48-month noncancelable subscription. In terms of business results, what does that mean? We had our Q1 earnings call just a week ago, we provided a guide of 20% to 25% revenue growth for the year, and we communicated that 78% of that guide was already in our existing ARR as of January 1, a very predictable business that you would expect from a company that has such a large proportion of their business inside subscription revenue. We've also taken actions around profitability. In January of this year, we took significant changes into restructuring the company, focusing our R&D on the core products that you saw in the video and just looking for opportunities to be more efficient. We did a reduction in force to impacted 14% of the employees when we did that. And that resulted in our second consecutive quarter in a row, Q1 of 2025, of positive adjusted EBITDA, and we feel really good about continuing that path and guided positive adjusted EBITDA for the entire year. Lastly, a lot of new leadership across the organization. I came in, in December. Since then, we have a new General Counsel, a new Chief Revenue Officer, new Chief Accounting Officer, new Head of Marketing, new VP of Supply Chain, and Chris, our new CFO, joined a month ago, so very top-down new leadership across the company. Thanks for giving the opportunity to get that over.

Thank you. Thank you for joining us. That was kind of a great opening remarks. As we think about it from a customer's perspective, who is the buyer of Evolv solutions? We cover cybersecurity companies where you have the CSO, so you have the VP of Procurement. When it comes to Evolv from a customer, who's kind of procuring your product?

So our largest verticals are sports and entertainment and many of you might have walked through the product that as you go to as a fan to your favorite sports team. Education in terms of us being providing a help in reducing gun violence inside schools. Health care has been an increasing market for us. I know there are several hospitals here in New York City that if you go to, you'd see our product as you enter the building. In terms of who the buyer it is -- that can vary, but it can be offering a security director.

Understood. Maybe double-clicking on 1Q results. Can you talk to us about the primary contributor to revenue growth? And how sustainable you see that? I understand, you said that 78% kind of provides you with great visibility, but maybe what's underlining that good growth that we have seen?

For some color on that, 50% of our sales in Q1 came from existing customers, expanding their fleet and just mechanically, as you think about our business, what really matters in driving long-term growth and the opportunity for long-term leverage in terms of profitability is the total subscriber base that we have. With that high proportion of recurring revenue, it's about adding subscriptions and continuing to stack that, and that's the majority of the growth that you see coming into a quarter. And then as you see us adding new subscriptions, you'll see those come online and continue to stack ARR in subsequent periods.

How do we think about the TAM, the long-term TAM opportunity that you're seeing out there should be vast.

We're very excited about a very large market opportunity. If you're walking through a public entry way, such as going into this facility, we see that all of that as a market opportunity. And where we are today is extremely early innings of that. We've had success in sports and entertainment and in health care and in education, as I mentioned, but I'll put some dimensions around that. We're in 1% of school buildings in the United States. We're in single-digit percentages in health care. We're very proud of the penetration that we've had in professional sports. And if you go see your favorite team there's a good chance you've walked through our product. But beyond professional sports, we're just touching all of the venues that are out there across colleges, theaters, the Tier 2 venues that you might have gone to at a concert, municipal-owned facilities, the opportunity is vast.

And it's worth remembering, part of the reason is Evolv sort of created this new paradigm that John alluded to earlier in his comments, of frictionless, high throughput flow of people into a school, into office building that you can't do, you simply can't do with traditional x-ray screening that we're all used to at the airport for the bags or the metal detectors that we walk through single file 1 at a time in an airport, that just doesn't work to bring hundreds of kids into school within a 20-minute period or to fill a facility. So that's why the new technology, the new products that we're bringing to market here in the past couple of years are opening up entirely new markets for this sort of security.

Gross margins have showed consistent performance despite some product headwinds as your model continues to migrate your subscription-driven one. Can you at line to us this kind of underlying solid performance?

Around gross margin specifically?

Yes.

Yes. So part of it was the move and maturity of the business from our Gen 1 product to our Gen 2 product that lowered our manufacturing cost and just comes with efficiency built into our second generation. The other part is you'll see us continue to have -- we talked about 60% or so gross margins in our print. We talked about a couple of hundred basis points of headwinds in our gross margins, that's dependent on mix. So again, what we really provide is security as a service and that ARR over 4 years, that recurring revenue over 4 years is really what we're delivering. The product that we have is getting more efficient, but the mix of how our customers procure from us can have a small effect on that gross margin in any 1 period, which is why we highlighted 200 to 300 basis points of headwinds later in the year. And that, again, just has to do with how our customers procure. To make it really simple, they can buy a pure 4-year subscription that includes the hardware, it includes the software. And that's very good margin over the entire 48-month period. If they choose to purchase the product and they want to own the hardware outright because of a customer preference or what have you, they can do that, in which case, it will have a little bit more revenue in the current period and that hardware is all recognized upfront. So that will bring a little bit less of gross margin, a little bit less in that period, unless they do a different kind of procurement, which is their purchasing from our distributor. In that case, the hardware never goes through our books and is very efficient in terms of balance sheet. And we get a license fee from our contract manufacturer in that case, in which case, it's a slight good guy to gross margin. The point in saying all of that is you've heard us talk about those various ways of delivering our product to the field, customer demand often drives it, and that can have some variability in the very short term of gross margin. We just want to make sure investors understood that.

Thank you for that. Thank you for this clarification. You mentioned visibility, John, without a doubt, seemed to improve 78%, 80% of bookings already covered, booked. What's driving that? And also, how should we be thinking about new bookings in 2025? And in line or exceeding the levels we had seen in 2024, maybe a good opportunity also to talk about your long-term targets here?

Yes. So in terms of what's driving it, as I mentioned, it's new customer acquisition as well as existing customers expanding, and we love the signs from existing customers expanding because those are people who have used our products sometimes for years at this point and are doubling down on their commitment. And remember, when they're doing that, they're adding 4 years, 48 months to the contract term that they have. So in Q1, it was half and half. New customers, existing customers expanding. In terms of subscription adds, that's the long-term value of the business is that total ARR base that we have, we expect to add at least as many as we added in 2024, which is a great outcome that informs our guide because of the compounding nature of ARR on these long-term contracts.

And then I'll update the long term. You asked about long term and how we think about it. John and I are both relatively new. I've been here about a month. John has been here about 6 months. But as we've looked at the business and we think about how we outlook this year and a little bit beyond, we wanted to take a step back and say, well, what do we think this business is capable of. The last time Evolv had updated the market in terms of long-term operating model was about 2 years ago. It's just outdated. And 2 years ago, prior management had put out expectations of long-term adjusted EBITDA in the 10% to 15% range. We're not ready to update that specifically, but John and I are both comfortable saying that is now old and stale. And we think there's opportunity to increase operating leverage from here and have something that's higher than what that was before in terms of adjusted EBITDA expectations. And we will share more details at an Analyst Day, Investor Day coming up later this year, early next year. But we wanted to remove that from people thinking, "Hey, is that as good as this business can get?" Absolutely not. This business is capable of more and we'll share more later this year.

Thank you for that, Chris. How does legislation -- new legislation impacts your business near term and longer term?

Are you referring to the legislation in California?

At California. You mentioned that on the call.

Yes. So there was legislation in California that is mandating. I think that's the right word, health care institutions to have automated weapon screening, just bear with me on the exact details, inside facilities. I look at that as an overall a tailwind into the business in general, specifically inside the health care sector, where we've seen good activity for quite some time now against 1 of those top 3 verticals that I mentioned and legislation like that, providing more focus on the need for more patient and worker safety inside health care institutions. If you really dig into it, you can get pretty shocked in terms of some of the violence that exists inside hospitals. So we -- overall see that as good and providing that kind of focus is good. In terms of the specific opportunity in California. We'll have to see over time and what funding is behind that mandate and so forth.

When looking at your improved fiscal '25 guidance, have you baked into -- have you baked any tariffs, any potential macro slow down? And the reason I bring it up is over the course of the past few days, some of the companies reporting companies on our end, have indicated a little bit of a spending pause in April that pretty much -- not the pause, but pretty much opened or disappeared in May, and we're kind of back to more of a normalized spending pattern. So just curious, I know the quarter hasn't ended yet. The month hasn't ended yet, but just curious as to what you have seen thus far?

I'll start, John, maybe you can pick up a bit. Our tariff exposure is very, very low, low single-digit exposure to anything coming from China specifically, which of course, has the most tariff risk that would be in it. Our product is manufactured and assembled here in the U.S. with other components from Canada and Mexico being a significant contributor. So we have low exposure on tariffs. So we can come back to that and double-click a bit more, if you want. But the other thing that's baked into our guide, but I want to make sure everybody understands is a $2 million investment in our business, if you think of back office operations. And some of that is just maturing the company, that it's ready to sort of take that next step. It's certainly going to help with some of our controls and material weaknesses that we've more than flagged and I've talked about before, that is part of maturing as a business. But what comes with that is automation, efficiency and benefits to the business that you would expect with an investment to do any way longer term. So that is also factored in. But John, do you want to say anything else about our tariff exposure or the part of that...

Yes, you've hit it there, the key points, we assemble inside the U.S. Obviously, that labor content is not exposed. Of our bill of materials, 40% U.S., Canada, Mexico, the Canada, Mexico components are USMCA compliant, so not subject to tariffs. And then of what comes from outside North America, as Chris mentioned, China would be of the most concern since that looks the most volatile from a long-term geopolitical standpoint of what tariffs could potentially be. And on the flagship product, Express, which is the majority of the revenue you see in our guide were single-digit -- low single-digit percentages of components from China.

And even that is factored into the guidance, to be clear, but it's small.

Got it. And maybe just a comment about April, a little bit of April to pause, not relating to you guys than kind of more of a rationalized May spending patterns, anything that you have noticed or seen thus far?

No, nothing that I would comment on.

Right. Good. You mentioned expedite and maybe I want to take maybe a step back, Gen AI, AI, has been topic de jure over the course of the past 18, 24 months now. We have been hearing that almost every other presentation now. How does that impact your business? How would this Evolv look at kind of AI? How do you implement AI?

So we think about it in 2 different ways. There's AI within the product, and our product is built around AI, machine learning algorithms, how we manage data inside the product. That's what enables the difference in performance that you see and what's differentiating a weapon from a benign item, and we continue to invest there. And our data infrastructure inside the algorithm teams, we continuously improve. And by continuous I don't mean, we're releasing an improvement every single day. But we have many software releases even within a quarter. We've built really, a very -- infrastructure that I'm proud of in terms of the cloud SaaS infrastructure that runs our back ends that allows us to keep all the systems up to date in the field and push out constant software improvements that not only just do regular improvements to UI change but algorithm improvements in terms of detection performance as well. Customers can just literally pick a maintenance window to say, "Hey, if it's 1 in the morning, go ahead and update." As an example of that, our last software release was about a month ago, 85% of the fleet was up on that newest release within a couple of weeks, which for us longer term, provides the opportunity for operating leverage because we're not providing technical support for a release from 4 years ago, which was very common in the legacy on-prem paradigm, but it allows us to constantly improve our customers' performance. On the AI front from that, in AI, I view the battle as data and how much data that you have to train your models, to test your algorithms against the CI of these real-world data, this is what my simulated performance says. We have access to our customer's data. They own that data, but the data processor to it to improve our algorithms, both for Express and in expedite in both cases. And now that we've been in market for years, at the end of Q1, we had 6,600 units deployed. Over 2 million people walk through our system every single day. Over $2 billion have walked through since we deployed Express. We have access to all of that data to continue to improve our algorithms and we use it, and that's critical in AI. So that's around the product use of AI. Gen AI more generally, look at it as an opportunity to improve efficiencies of just manual tasks, things that are very tedious that you could automate and we're always considering those opportunities.

What's the competitive landscape like nowadays? It would appear that given the high barriers of entry with such technologies. You're not seeing any newcomers. Is it fair to assume it is mostly status quo over the cost of the path over the years?

In terms of the competitive dynamic that we see, we're in front of customers, it's largely the same. And what we deal with looks largely the same. It's important to know we're a premium product at a premium price tag, and we like that position in the market. But what that means from a buyer behavior standpoint, this is a show-me sale. Nobody is taking their credit card out and going on an e-commerce web page and ordering our product. They're going to kick tires. They're going to do a side-by-side bake-off with our competitors, and that's relatively common. You asked the question earlier about who the buyer is. Well, it's often a security director. Often, their background is law enforcement. This is pretty diligent. People who take their responsibilities very seriously, and they're going to require us to show it. So that's what that procurement process looks like and how competition would be engaged and largely dynamics, not the same. And if you look at who they are, say, broadly, they come from 2 places. You have legacy weapons detection manufacturers like some of the paradigms that you were used to at the airport that came into the market that the Evolv created and identified for everybody with a less friction solution. And then you have startups and that come in. In both cases, I look at that as reaffirmation of this market because of the opening comments that I mentioned, we're a new market. We're not selling to airports, and the traditional places jails and court houses that you would see weapons detection, we're selling to new greenfield opportunities and somebody else deciding to follow us and put their capital to work, to me, shows that others see the same opportunity that we do.

Do we have questions from the audience at this stage? You.

Guys, welcome back on the street. Thank you for doing this. I have 2 questions. First, I guess I'll ask you, John, sort of from your strategic vision of what's possible for the company. You guys talked about the numbers. So the first thing is your penetration of your existing customers, I look at that as a full on confidence. But how do you look at the potential to expand -- and I think your penetration right now say, schools, as you said, it's pretty low, it's 1% and sports was like mid-single digits. Are you guys just focused -- you need to focus primarily on those low penetrated existing markets? Or do you have a strategy or plan to expand into other areas?

So I would say 2 things. One, the solution we provide is largely a horizontal solution. And what I mean by that, it is not vertical specific. The product that we put in front of the school is the exact same product that we put in front of a stadium, the same 1 that we would put at the entrance to an ER or a distribution warehouse. So it's a horizontal solution that scales across verticals very well and the value proposition in terms of the sales motion is largely the same, maybe some nuances across those verticals, which provides the opportunity for a platform for vertical expansion. That being said, myself, Chris, the leadership team believes in focus. We've created a new category. The customers that we have today, I would put in that first mover type category because we replaced nothing at the front door and to our customers who took the leap to go with us, 1% of school buildings, single-digit percentages of health care, enormous amounts of public entry ways in the United States and across the world. We are very driven on the mission, and that is to secure as many entry ways as possible. And with that amount of room to run in front of us, I don't think it's time to get distracted with doing something else.

And sort of a follow-up on that is, so does that signal a change to -- there was a sort of -- you were building vertical specialization. So you had a schools team that you were building. So is there a change in that strategy?

No. We still have -- our sales organization is geographic and vertical, so people that have lived in territories, we do have vertical specialists around those types of verticals of sports, entertainment, health care and education that help our sellers in terms of some of the nuances of how those customers procure.

Okay. And then Chris, you just sort of -- how does sort of the strategic -- your other strategic plan fit into your planning for cash? And then actually, I wanted to also sneak in here, what's the mix now between pure purchase and license, and I thought purchase was going away were I thought that were good.

No, what we said is we're seeing a little bit more demand recently for pure subscription procurement from us. And we like that because that's the highest level of ARR and resulting RPO when the entire 4 years includes both hardware and software. So that's what we said about the different procurement types. Your first question was on the -- I think our cash.

It was more about, I thought that the old model of purchasing and then doing the subscription, I thought people were moving away from that and more towards pure subscription or towards -- well perhaps I could ask it differently, what are you trying to incent your sales force to achieve in terms of bundle or hardware versus no hardware and sold upfront?

We incent our sales force on the highest total contract value, which blends itself well toward full subscription. But we keep both options open for customers. And the reason that's important to go do is different -- across the different verticals, people budget in different ways. So you have enterprises that are very focused on operating costs and trying to keep things in the operating costs and minimal capital outlay. Full subscription works very, very well for them, and it's a very attractive to us, and it's attractive to our sellers as well. But you also have customers who budget on a capital basis, they like more capital and amortize over time.

But you Still have the contract written to achieve the subscription revRAP regardless based on how you incent your sales force. And you can also say that you want the hardware and you're willing to give up the 10% or 15% hardware margins to make sure hardware is only fulfilled by the channel. You see it's very volitional to see that's why I don't- I'm not sure I follow.

We are very focused on maximizing ARR and taking actions across the organization, including within the sales team, how we structure them to maximize ARR and long-term RPO.

All right. Folks, we are out of time. John, Chris, thank you so much. Brian, thank you also for joining us.

Thanks for having.

Yes. Enjoy the rest of the day. Thank you.

Thank you.