Evolv Technologies Holdings, Inc. (NASDAQ:EVLV) Q2 2022 Earnings Conference Call August 10, 2022 4:30 PM ET
Company Participants
Brian Norris – Vice President of Finance & Investor Relations
Peter George – Chief Executive Officer
Mark Donohue – Chief Financial Officer
Conference Call Participants
Operator
Ladies and gentlemen, thank you for standing by. Welcome to the Evolv Technologies Second Quarter Earnings Results. [Operator Instructions] As a reminder, today’s call is being recorded.
With that, I’ll turn the call over to Brian Norris, Vice President of Finance and Investor Relations. Please go ahead.
Brian Norris
Thank you, John, and good afternoon, everyone, and welcome to today’s call. I’m joined here today by Peter George, our President and Chief Executive Officer; and Mark Donohue, our Chief Financial Officer.
This afternoon, after the market closed, we issued a press release announcing our second quarter results and our business outlook for 2022. This press release is available on major news outlets as well as the IR section of our website.
During today’s call, we will make forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 and the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 that relate to our current expectations and views of future events, included, including rather, but not limited to, statements regarding our ability to meet our business outlook. All forward-looking statements are subject to material risks, uncertainties and assumptions, some of which are beyond our control. Actual events or financial results may differ materially from these forward-looking statements because of a number of risks and uncertainties, including, without limitation, the risk factors set forth under the caption Risk Factors in our annual report on Form 10-K for the year-end December 31, 2021, filed with the SEC on March 28, 2022, and in other documents filed with or furnished to the SEC from time to time. Our forward-looking statements represent our views as of August 10, 2022. Although we believe the expectations reflected in these statements are reasonable, we cannot guarantee them. Except as may be required by applicable law, we disclaim any obligation to update them to reflect future events or circumstances.
Our commentary today will also include non-GAAP financial measures, including adjusted gross profit, adjusted gross margin, adjusted operating expenses, adjusted EBITDA, adjusted operating income or loss and adjusted earnings and earnings per share, which we believe provide additional insight for investors in evaluating ongoing operating results and trends. These measures should not be considered in isolation from or as a substitute for financial information prepared in accordance with generally accepted accounting principles. Reconciliations between GAAP and non-GAAP metrics for our reported results can be found in our press release issued today. Please note that our definition of these measures may differ from similarly titled metrics presented by other companies.
Please be advised that as of January 1, 2023, we no longer plan to disclose total contract value of orders booked, a measure we stopped guiding on several quarters ago because we no longer believe it’s consistently indicative of the company’s prospects. We encourage investors to continue to focus on key metrics such as annual recurring revenue, remaining performance obligation, deployment activity and total number of subscriptions, which we believe are more indicative of the company’s prospects.
With that, I’ll turn the call over to Peter. Peter?
Peter George
Thanks, Brian, and thank you, everyone, for joining us today. We’re pleased to be reporting strong second quarter results, which are indicative of the growing momentum and visibility we’re seeing throughout the business. We’re encouraged by our year-to-date performance and based on the strong demand drivers in our business are optimistic in our outlook for a strong second half of 2022.
We have a lot of exciting news to share with you. But before we start, I want to take a moment to formally introduce Mark Donohue, who joined us on June 1 as our Chief Financial Officer. I know Mark is a familiar face to many of you as he has held leadership roles at several publicly traded technology companies. Mark brings over 2 decades of executive leadership experience with a strong background in subscription-based businesses. He joins us from Vestmark, a leading provider of SaaS-based portfolio management and trading tools, where he served as I for the last 4 years. Before that, Mark served in several senior roles on the finance team of Rapid7, a leading provider of cybersecurity analytics and automation. He also spent 7 years at Cisco, in various executive roles for the Mobility Business Group, any he held senior finance roles at Starent Networks, a leading provider of infrastructure solutions for mobile operators. Mark has helped build and shape several category-leading technology companies across SaaS, cybersecurity and networking. And I know his experience and leadership will be particularly important to our continued growth. We’re fortunate to have him on board. Welcome, Mark.
Mark Donohue
Thank you, Peter. I’m excited to join the team, and I look forward to working with all the members of the investment community, many of whom, as you mentioned, I’ve worked with before. I joined Evolv, first and foremost, because of the deep connection I have with its vision and mission. Unfortunately, we live in an era of escalating violence and that reality impacts not only my family, friends and colleagues, but people in all walks of life. Evolv’s next-generation AI technology delivers a practical and affordable approach to helping solve the challenge of making everyone safer and more to use in their daily lives.
I also joined Evolv because I see its subscription-based Security-as-a-Service business model as disruptive as the technology itself. I believe the company is extraordinarily well positioned in one of the fastest-growing areas across all of technology. The combination of Evolv products, market position, breadth of customer base, business model, domain expertise and strength of team position it well for the opportunity ahead. I look forward to leveraging my experience to help advance the company’s business strategies.
Peter George
Thanks, Mark. It’s great to have you on board. So now let’s turn to our record financial results, which continue to reflect the strong momentum building across the company. Key highlights include: first, we extended our leadership position with dozens of new customers who are creating weapons-free zones. We delivered important product innovations to the market, and we continue to gain meaningful traction with our key channel partners. We also surpassed 1,000 Evolv Express systems deployed and $100 million in cumulative bookings. These 2 milestones would not be possible without the trust of our customers and partners who rely on Evolv to digitally transform their physical security and the hard work and dedication of our employees, our Evolvrs, who come to work every day inspired to make the world safer for everyone.
Consider one of our health care customers, which is a major hospital system in the Southeastern region of the U.S. Since going live just 5 months ago with Evolv Express, we have successfully detected and stopped over 120 weapons from entering that facility. This included an emergency room visitor who was attempting to gain entry with a concealed subcompact semi-automatic AR-15 rifle and another 7 other weapons in his duffle bag. At Evolv, preventing a potential mass shooting, like the one thwarted at that hospital that day is exactly what we were born to do. And in many ways, we’re just getting started. We see a world where physical security is finally democratized, where it’s easy to deploy, easy to operate, affordable and present everywhere you go.
We’re a global leader with over 1,000 units deployed, but our vision is much bolder than that. We’ve identified more than 700,000 points of ingress in our core vertical markets that are candidate locations for our technology. Our goal over the next 5 years is to have over 20,000 of Evolv Express systems deployed globally, screening tens of millions of people every single day. This will accelerate our path to eventually reaching our aspirational milestone of $1 billion of annual recurring revenue. I believe we’re well positioned to execute on this long-term vision and build the most durable and enduring company in the history of physical security.
So how are we doing in the execution of that vision? Let me share with you a few key takeaways from the quarter. First, revenue was $9.1 million, up 94% year-over-year, primarily reflecting 3 drivers: very strong demand in our key vertical markets, including education and health care, an increase in purchased subscription deals and continuing momentum and expansion with our channel partners. We also delivered strong growth in annual recurring revenue and remaining performance obligation.
We added a record 53 new customers compared to 44% in the first quarter and 21 in the second quarter of last year as our new customer momentum continues to accelerate. We secured 97 new customers in the first half of this year compared to 84 in all of last year. Since many of our customers are securing multiple buildings or schools, our measure of customers is more conservative than the number of actual buildings we’re securing. As a result, we’re seeing positive trends regarding average transaction size or ASP. We’ve reported 4 transactions of at least $1 million of TCV compared to 0 in the second quarter of last year.
Moving on to our rich and unique data set. We just surpassed 350 million visitors screened, second only to the TSA in North America. We’re now screening more than 750,000 people every day. And as many as 1.25 million people a day on weekends. Just since the beginning of this year of 2022, we have stopped 57,000 weapons from entering our customers’ venue, including 30,000 guns and 27,000 knives. This is unprecedented in the AI-based weapons detection screening category. What’s more, every scan enriches our product capabilities and analytics increases the accuracy and efficacy of our product over time and underscores our technological lead in the market.
I’d like to spend a few minutes highlighting the customer and market traction we’re seeing, starting with the accelerating demand in education, health care and professional sports. Nearly 40% of our TCV came from the education vertical. Key new customers included the Noble Charter Schools, which operates 18 nonprofit charter public schools across Chicago, with over 12,000 students and Gilford County schools in North Carolina, one of the 50 largest school districts in the United States, serving more than 70,000 students. They are now in the process of deploying just over 40 of Evolv Express systems. A perfect example of how a single customer addition can be much more than a single Evolv Express deployment.
Our education market activity and order rate is accelerating as more school boards and school districts digitally transform their security operations, preparing for the upcoming school year and taking advantage of available funding pools. We’re seeing a couple of really interesting trends in the education market. We’re seeing more purchasing decisions being made not at the school or the talent level, but rather at the district wide level. We’re also seeing increased adoption of single lane configurations of Evolv Express, which fit more readily in the smaller entrances of schools, some of which are decades old.
To add some context here, more than 70% of the units we sold in Q2 were single ink configurations with the heaviest demand by far coming in schools. The health care market represented about 15% of our TCV, as an increasing number of hospitals and clinics are looking to enhance patient and safety for their staff. That’s not surprising when you consider that a recent U.S. Bureau of Labor Statistics reports that health care workers accounted for 73% of all nonfatal workplace violence.
New health care customers include Cincinnati-based Mercy Health, which we secured with our Party Stanley Security Solutions, New Jersey-based Capital Health and one of the largest nonprofit academic health care systems in the Deep South region of the U.S. The arenas and stadiums market represent about 15% of our TCV. New customers include the O2 arena in the U.K. and yet another major league baseball franchise. We’ve also recently extended our leadership position across the National Football League, where we already support the Tennessee Titans, the Atlanta Falcons and the New England Patriots, just to name a few.
Here in the third quarter, we won a competitive opportunity at FirstEnergy Stadium, home of the Cleveland Browns, where we’ve also been named the official fan screening provider. Finally, we experienced strong traction with the entertainment, warehouse government industries, which combined to represent just over 20% of our TCV. Key wins here included the Blumenthal Performing Art Center, the Tax Museum of Art and the City of Detroit. The win at the city of Detroit is fascinating example of a rapidly developing use case for our technology, and it’s also expanding our TAM in an unexpected way.
There’s a growing demand among government agencies as well as local law enforcement to secure not just buildings where people work, learn and play, but also in large gathering spaces where people live their everyday lives. The City of Detroit selected Evolv to support the creation of weapons-free zones for pedestrians across the city because, number one, we could offer a superior visitor experience. We could free up local law enforcement to provide security away from the points of ingress and because we could be integrated into the city’s security operations center.
We also deployed over the summer, just in time for the Ford Fireworks Display, which has been on hiatus for 2 years due to COVID pandemic. This celebration was held downtown with over 100,000 people in attendance in the main viewing areas. In past years, the event has been plagued with gun violence and many residents expressed fear for attending. The result of this summer’s event 0-gun violence.
We continue to see growing momentum internationally. For the second quarter in a row, we secured over $1 million of TCV outside of North America. Recent wins internationally include the AO Arena and the O2 Arena in the U.K. and Distrito T-Mobile, our first win in Puerto Rico.
The AO Arena, which is managed by ASM Global, welcomes over 1 million visitors each year and is one of the busiest venues in the world. We were deployed to enhance venue safety and security as well as improve the customer experience by making lines go away to offer a seamless and swift arrival into the venue. Given the positive experience at the AO Arena, the ASM Global has announced plans to further roll out Evolv Express at other venues across Europe.
Distrito T-Mobile is a major entertainment complex in Puerto Rico, which opened in August of 2021. It’s located in the Miramar section of San Juan and drew more than 1.7 million visitors in the first 6 months of operations. Our technology is allowing visitors to walk into their iconic complex safely and seamlessly without any delays at all at the entrance.
One of the most important elements of our long-term growth objectives is the leverage we’re getting from strategic channel partners like Motorola Solutions, Johnson Controls and Stanley Security Solutions, as well as our other growing number of regional partners who combine to extend our vertical and geographic reach efficiently and effectively.
The number of qualified partner-involved opportunities has never been higher. I am pleased to report that our partners contributed to over 50% to our order activity in the second quarter and nearly half of that came through Motorola Solutions with whom we have a strategic OEM partnership. We now have nearly 500 qualified opportunities in our pipeline with Motorola. We continue to make great progress on cross training, enablement, activation and certification of the Motorola teams.
So in summary, we are reporting strong second quarter results, highlighted by record revenues, ARR and RPO. We continue to see strong market momentum in education, fueled by newly available federal and state funding. We continue to extend our leadership position with a record number of new customers, strong product introductions and acceleration with our key channel partners. We remain well capitalized and believe that the strength of our balance sheet will enable us to reach cash flow breakeven without any additional capital. And finally, based on the strength of our first half results and the momentum in the business, we remain highly confident in our ability to deliver on our full year growth plans.
With that, let me turn things over to Mark, who will take you through the financial results and our outlook for the back half of 2022. Mark?
Mark Donohue
Thanks, Peter, and good afternoon, everyone. I’m going to review our results in more detail and then share some thoughts on how we’re thinking about the rest of the year. As Peter mentioned, revenue was $9.1 million, up 4% sequentially and 94% year-over-year. This growth was highlighted by a 33% sequential increase in subscription revenue, reflecting the growing emphasis we’re making on our pure subscription model.
We ended the second quarter with 1,147 contracted subscriptions, up 26% sequentially and 193% year-over-year. TCV was $22.1 million, up 15% sequentially and 111% year-over-year. ARR at the end of the second quarter was $20.9 million, reflecting growth of 25% sequentially and 181% year-over-year.
Remaining performance obligation, or RPO, was a record $66.2 million at the end of the second quarter, up 31% sequentially and 166% year-over-year. RPO reflects the difference between contract value and revenue that has already been recognized for units that have been deployed as of the end of the quarter. We estimate that the gross margin of our current RPO, excluding overhead, is approximately 65%, the benefit of which will accrete to our income statement over time. That does not include the renewal opportunity, which would strengthen that gross margin over time as well.
In addition to RPO, we had another $14.7 million of contracted revenue associated with units that had not yet been installed as of June 30, 2022. So in total, we had about $81 million of RPO plus contracted revenue in backlog at the end of the second quarter, representing growth of approximately 27% sequentially.
Gross margin was 6% compared to 16% in the second quarter of last year. As a reminder, our gross margins don’t currently reflect the overall business value as we’re using 2 very different accounting treatments between our pure subscription sales and our hardware purchased subscription sales.
In case of pure subscription sales, we’re yielding gross margins that align better to the long-term deal economics. Alternatively, with our hardware purchased subscription sales, we recognize the equipment revenue and equipment costs at the beginning of the subscription period in advance of the long-term software subscription benefit. This results in lower gross margins for hardware subscription sales earlier in the life cycle than is typical over the contract period. The combination of these very different accounting treatments has traditionally driven our reported gross margins lower than the value of the customer contracts are truly reflecting over time. Going forward, we expect to lead increasingly with our pure subscription offering, which aligns more closely to the SaaS nature of our business model.
The Q2 gross margins also reflected a higher mix of single lane systems we sold as we accelerated our presence in the education market and the higher contribution we saw from our channel partners.
Total non-GAAP operating expenses were $18.2 million compared to $19.4 million in the first quarter of 2022 and $6.6 million in the second quarter of last year. This sequential decline in OpEx reflects reductions in ongoing professional services and our continued company-wide focus on cost control.
We exited the quarter with 213 employees compared to 196 at March 31, 2022, reflecting a net add of 17 employees. Net loss was $25.7 million compared to $23 million in the second quarter of last year. Adjusted net loss, which excludes stock-based compensation and other onetime items, was $17.3 million compared to $9.1 million in the second quarter of last year. Adjusted EBITDA, which excludes stock-based compensation and other onetime items as well, was $16.4 million compared to $5.2 million in the second quarter of last year.
Turning to the balance sheet. We ended the quarter with $243 million in cash and cash equivalents, down about $28 million from the first quarter of 2022. This reflects adjusted net loss of $17 million as well as several other uses of cash in the period, which were timing related, and we expect will benefit us over the next several quarters.
The first was an investment we made in finished goods inventory as we continue to prioritize product availability. Our inventory balances increased 55% sequentially to $6 million at June 30, 2022, compared to $3.9 million at March 31, 2022. Another driver was the increase in prepaid deposit balances, primarily related to our contract manufacturing partner, again as we prioritize product availability and lock in hard-to-source components. Prepaid deposits increased by 32% sequentially to $17.7 million at June 30, 2022, from $13.5 million at March 31, 2022. Finally, we saw an uptick in accounts receivable due to the increase in sales as well as our pause in billing activity earlier in Q2 as we migrated to NetSuite for our new ERP system. Our AR balance increased by 42% sequentially to $12.2 million at June 30, 2022, from $8.6 million at March 30, 2022.
In total, these 3 drivers combined to consume approximately $10 million in cash in the second quarter of 2022. We consider all of this to be timing related and not we would consider run rate use of cash going forward.
As we shared last quarter, we continue to expect our quarterly cash losses to decrease in the second half of the year as we grow deployments and limited expenses. We are encouraged by our progress during the first half of the year. We believe we are well positioned to meet our full year growth plans and as such, are reaffirming our previous guidance, which calls for full year revenue of between $29 million to $31 million with the year exiting ARR to more than double to $27 million to $28 million. We expect to end the year with approximately $220 million to $230 million in cash, which reflects increased inventory buildup and deposits for materials to support our growth plans in 2023. It also assumes we’re successful in implementing third-party financing to support our rapidly growing pure subscription pricing model. We also expect to pay down our expanding long-term debt of approximately $10 million before the end of 2022.
So in summary, we’re pleased with our strong results of the second quarter. We’re excited about our plans for the back half of the year and the opportunity ahead in 2023.
And with that, I’ll turn the call back over to Brian.
Peter George
Thank you, Mark. At this time, I’d like to open the call up for Q&A. Again, we ask participants to limit themselves to one question and one follow-up. I’m going to turn the call back over to John.
Question-and-Answer Session
End of Q&A
Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.
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