Evolv Technologies Holdings, Inc. (NASDAQ:EVLV) Q3 2022 Results Earnings Conference Call November 9, 2022 4:30 PM ET
Company Participants
Brian Norris – Vice President of Finance and Investor Relations
Peter George – Chief Executive Officer
Mark Donohue – Chief Financial Officer
Conference Call Participants
Michael Latimore – Northland Capital Markets
Alexander Schwartz – Stifel
Operator
Hello and welcome to the Evolv Technologies Third Quarter Earnings Results Conference Call. At this time, all participants are in listen-only mode. Later, we will have a question-and-answer session and instructions for queuing up will be provided for you at that time. [Operator Instructions]. And as a reminder, this conference call is being recorded.
I would now like to turn the call over to your host Mr. Brian Norris, Vice President of Finance and Investor Relations. Please go ahead.
Brian Norris
Thank you, John. And good afternoon, everyone, and welcome to our 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 third quarter results and our business outlook for 2022. This press release is available on major news outlets as well as on 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, including, but not limited to, statements regarding future operations, growth and financial results, our potential for growth and ability to gain new customers, demand for our products and offerings, and 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 ended December 31, 2021, filed with the SEC on March 28, 2022 and as updated in other documents filed with or furnished to the SEC from time to time.
Our forward-looking statements made today represent our views as of November 9, 2022. Although we believe the expectations reflected in these statements are reasonable, we cannot guarantee that future results, performance or the events and circumstances reflected in our forward-looking statements will be achieved or will occur. 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, which we believe provide an additional insight for investors. 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 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.
As a reminder, as of January 1, 2023, we will no longer be disclosing 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.
Remaining performance obligation, or RPO, reflects the difference between contract value and revenue recognized to date for contracted units regardless of installation status.
Before I turn the call over to Peter, let me briefly bring to your attention a few upcoming investor events. On Tuesday, November 29, we will be at the Credit Suisse Technology Conference in Scottsdale, and on Wednesday, December 15, we will be at the Imperial Capital Conference in New York. We will also be hosting a variety of other live and virtual investor events throughout the quarter. We are also working on plans to host our first ever Analyst Day in 2023. More details to come on that. For more information on our IR plans, please contact me at bnorris@evolvtechnology.com.
With that, I’ll turn the call over to Peter. Peter?
Peter George
Thank you, Brian. And thanks everyone for joining us today. We’re pleased to be reporting record third quarter results, which reflect our accelerating momentum and scale. We’re encouraged by our performance, which was highlighted by record growth in revenues, ARR and RPO as well as our strong market penetration. These results and our outlook position us well to deliver first year results above our previous guidance.
Revenue in the third quarter was $16.5 million, up 96% year-over-year and 82% sequentially, which we believe reflects strong demand in our core markets and continuing momentum with our channel partners.
We acquired 92 new customers in the quarter or about one every day, and installed approximately 550 new subscriptions of Evolv Express in the quarter or about six every day all quarter long.
To highlight the scale and leverage in our business model, consider that our revenues grew 10 times faster than our operating expenses on a sequential basis. We are on pace to deliver revenue growth of at least 100% in 2022, with ARR growth of at least 150%. While we’re still in the planning stages for 2023, our preliminary models are focused on delivering another doubling of ARR in 2023.
At the core of this industry-leading growth are several key trends that I’d like to take a few moments to discuss. First is escalating gun violence. We all see the daily reports of mass casualty events in what should be considered weapons-free zones – schools, hospitals, warehouses, and houses of worship. These are the places where we gathered to learn, to work, play, and to live. But it’s in these very same places where we expect to see yet another year of tragic gun violence. In fact, there have already been two mass shootings met every day of the year here in 2022.
Our customers turn to Evolv Express and its powerful sensor technology, advanced AI based algorithms, cloud enabled connectivity and comprehensive data insights to reduce the threat of these mass casualty events at their venues. This includes a customer, like a tier one automaker, that experienced a gun-related incident at one of its manufacturing facilities earlier this year. The plant was immediately closed at great opportunity cost until Evolv Express was deployed.
Next, we’re seeing a clear acceleration in our business. Over the last six months, we’ve seen a significant increase in market exposure and awareness, pipeline build, transaction volume, linearity and ASPs. Perhaps that is best measured by our bookings, which increased by 105% sequentially. We had seven transactions of at least $1 million in the third quarter compared to five in the third quarter of last year. And we had our first single transaction of greater than $5 million.
Our pipeline has grown significantly, with a coverage ratio of more than 3 times our operating goals. These measures reinforced the momentum in the business.
Next, we’re seeing an acceleration in our customer acquisition activities. We added 92 new customers in the quarter, up from our previous record of 53, which we delivered in the prior quarter. We now have over 400 customers across our key vertical markets. Our customer acquisition activity continues to separate us from others in the market.
Keep in mind that our new customer count is a conservative view because one new customer could mean 20 or more school buildings in one new district or five hospitals within one new health care system.
Another trend we are seeing is expanding deployments. Customers are building on the success of their initial Evolv Express deployment and are expanding to other venues and locations.
Our largest transaction in Q3 was the 90-plus unit expansion order for the Charlotte-Mecklenburg School District in North Carolina, as they accelerated their move beyond the District High Schools and into the middle schools. Within just nine months, that district has gone from being a qualified lead to our single largest education customer, with over 160 Evolv Express units deployed across dozens of buildings. And remember, we consider Charlotte-Mecklenburg school district as one customer in our customer count.
The combination of our accelerating customer deployments and the overall growth in gun ownership are driving the collection of an unprecedented amount of visitor data across our customer base.
With our advanced AI-based algorithms, we’re able to leverage this data and, over time, improve our detection accuracy, which we believe makes our customers venues safer than ever before.
We screened more than 100 million people in the third quarter alone, or more than 1 million per day compared to 53 million people in the third quarter of last year. We just surpassed 425 million visitors screened, second only to the TSA in North America. What’s more, we detected over 52,000 concealed weapons in the third quarter, including more than 30,000 guns and more than 22,000 knives at the entrances of our customers’ venues.
Another trend we’re seeing is the growing momentum with our channel partners, which helps us extend our reach into certain geographies or vertical markets. We’re seeing broad activity across our dozens of authorized channel partners, including several strategic global partners, such as Johnson Controls, the newly formed Securitas Technology, and Motorola Solutions.
We’ve been clear about our plan to efficiently scale the company by leveraging the demand environment with our partners. We continue to see evidence of our progress here, as over 70% of our sales activity in the third quarter came from our channel partners.
One final trend to highlight is the direct result of our growth strategy targeted at key geographic markets in the United States. We are starting to become the AI-enabled weapons protection security screening provider that venue visitors in key geographies are coming to expect. We’re quickly becoming the standard for visitors in markets like Pittsburgh, Nashville, New York, and Atlanta where the desire for weapons-free zones is beginning to emerge.
In Pittsburgh, we secure the homes of the Pittsburgh Steelers and the Pittsburgh Pirates, as well as the Pittsburgh Cultural Trust. In Nashville, we secure the homes of the Tennessee Titans, the Grand Ole Opry, the Nashville Soccer Club, and now the Nashville Predators, our first entry into the NHL.
This trend is becoming a force multiplier for other verticals in these geographic markets, most notably schools and hospitals around these iconic venues. This is what we mean by democratizing security, becoming ubiquitous and making it available to everyone who wants it. We believe we can continue to replicate the model of becoming the de facto standard in other markets.
The market for AI-based weapons detection is one of the largest and fastest growing markets across the technology space. And we’re well positioned as its leader. It’s a $20 billion market across 10 key verticals with an estimated 700,000 entrances, which we refer to as digital thresholds. We are the market leader with over 1,600 units deployed, representing a penetration rate today of less than 1%, and we’re just getting started.
In time, we may look back at 2022 as an inflection point in our growth trajectory. We are focused on leveraging our first mover advantage to capture the market and effectively scale the business.
We expect to end the year with over 2000 units deployed, to double that in 2023, and reach 10,000 units deployed in 2025. We have a lot of work to do to get there, but we’re confident that we have the talent, the technology, the strategy, the capital, and the momentum to capture the market opportunity.
We’re exceptionally well positioned in the major vertical markets, the earliest adopters of our technology, and which constitute the greatest market opportunity in 2023. Specifically, education, health care, and professional sports.
The education market is exceptionally large, with nearly 130,000 schools across the nation, serving the needs of 56 million students every single day. About half of those schools are middle schools and high schools where the threat of gun violence is the highest.
Most of these schools have no real weapons detection solution at all, despite the availability of legacy metal detectors for the last 100 years. These solutions have been widely evaluated and dismissed for a variety of reasons that we all know. Nearly 95% of all public schools in the United States do not have a metal detector, yet over 90% have security cameras. So, clearly, there’s a demand for security and safety in schools. But to date, no viable solution for weapons detection until Evolv.
We believe there’s a fundamental need for student safety at rural, urban, suburban, charter and private schools across the nation. This need is driving growing demand by students, parents, teachers, administrators and communities for advanced safety solutions, and we’re meeting that demand.
Just a year ago, we had a handful of customers in the education market. Today, more than 200 schools across the nation have Evolv Express. We are now in six of the top 100 school districts in the country, five of which we added in the third quarter of 2022. We’ve made a lot of progress over the last year, and we’re just getting started.
There are nearly 15,000 school districts in the United States. We estimate that just the 200 largest could drive demand for 25,000 Evolv Express units. We believe students and teachers have a right to safety in the classroom. We’ll continue our focus on empowering safer learning at schools as this is that the center of our mission and purpose as a company, and we’re well intentioned to deliver on it.
Another major market for Evolv continues to be health care, as a growing number of the nation’s 6,000 hospitals are making investments to enhance patient and staff safety. Over 70% of workplace violence in the US involves health care workers and major health care unions have raised violence in the workplace as a top issue, specifically calling out the low levels of security at health care facilities.
A recent survey by the American College of Emergency Physicians found that two-thirds of ER physicians have been assaulted in the past year alone. And many hospitals are seeing growing turnover by staff seeking a safer environment. This is another market which long ago could have deployed metal detectors, but chose not to due to various limitations. Like education, this is a huge market where we’ve gained traction and momentum.
A year ago, we had a very light presence in health care. Today, we’re deployed at 70 hospitals across the United States. We added over a dozen new health care customers in the third quarter, including University Hospital in Newark, New Jersey, which receives on average over 200 emergency room visits every day; the Regional One Health Network and acute care Regional Hospital in the Mid-South and Southern Ohio Medical Center.
In hospitals, our health care workers, who have also been our first responders during COVID, deserve to come to work every day free from weapons, and we’re focused on helping them achieve that.
One more market to highlight is professional sports. Evolv Express is transforming the guests experience at stadiums and ballparks all over the country. We enable fans to enjoy a faster, more convenient and more secure screening experience. Long waits and entry lines are all but eliminated, helping to reduce anxiety for guests and staff alike.
We now have screened fans of 23 major league sports teams across the NFL, MLS, MLB, and NHL. New customers in the third quarter included SoFi Stadium, home of the LA Chargers and LA Rams, as well as First Energy Stadium, which is home to the Cleveland Browns; and Acrisure Stadium, home of the Pittsburgh Steelers. We also secured the Pittsburgh Pirates in Major League Baseball as well as Bridgestone Arena, which is home to the Nashville Predators.
We expect that these three markets – education, healthcare and professional sports – along with warehouses and tourist sites will be central to our expansion plans in 2023.
I spend lots of time in the field listening to our customers’ customers, including parents, students, factory workers, theater patrons and sporting fans. And I know that they’re relying on us and our solutions more than ever before to help make their schools, hospitals, and favorite venues safer. This is our mission, and we intend to fulfill it as we are the human security company.
So, in summary, we’re reporting strong third quarter results, highlighted by record revenues, ARR and RPO. We continue to see strong market momentum and evidence of leverage in our business model. 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.
Based on the strength of our results and the momentum in the business, we are raising our outlook for 2022 and providing a peek into 2023, which is centered on, again, doubling our ARR.
Finally, I’d like to thank our customers who put their trust in us. And I also want to thank all the talented, dedicated and devoted Evolv-ers who work tirelessly every day to make the world a safer place for everyone.
With that, let me turn things over to Mark who will take you through our financial results and our outlook. Mark?
Mark Donohue
Thanks, Peter. And good afternoon, everyone. I’m going to review our third quarter results in more detail, walk through our upwardly revised guidance for 2022 and share some thoughts on how we’re thinking about 2023.
As Peter mentioned, total revenue was $16.5 million, up 96% year-over-year and 82% sequentially. This growth was fueled by rapid acceleration in subscriptions, which drove subscription revenue growth of 125% year-over-year.
We ended the third quarter with 1,692 contracted subscriptions, up 198% year-over-year and 48% sequentially. We now expect to exit the year with over 2,000 active revenue generating subscriptions.
TCV was $45.4 million, up 167% year-over-year and 106% sequentially. We saw broad vertical market contribution with strength in education, health care and professional sports.
As a reminder, Q4 of 2022 is the last quarter we will be reporting TCV which, as we’ve stated previously, is not necessarily the best and most consistent indicator of our future growth.
ARR at September 30, 2022 is $28.7 million compared to $9.9 million at September 30, 2021, reflecting growth of 189% year-over-year and 38% sequentially.
Remaining performance obligation, or RPO, as of September 30, 2022 was a record $109 million, up 220% year-over-year and 35% sequentially.
Gross margin was impacted by greater product cost. As a reminder, we recognize all product costs related to the product sale in the period of the sale rather than over the associated subscription term, which is typically four years. As we’ve discussed previously, our overall gross margins do not yet reflect the overall business value we are delivering to customers, as we’re using two very different accounting treatments between our pure subscription sales and our hardware purchase subscription sales.
For context, we estimate that the gross margin associated with our RPO, much of which is associated with purchase-related transactions, is approximately 65%. All of those gross profit dollars will accrete to our income statement over the next four years.
Since August, we have been transitioning the pipeline and opportunities, which should drive a greater contribution from our subscription business model going forward. As we continue this shift, and we continue to engineer product costs down, we expect overall gross margins to continue to expand.
We delivered record subscription gross margin of 58% in the third quarter of 2022, up from 45% in the year-ago period.
Total non-GAAP operating expenses were $19.8 million. For context, our total revenues grew sequentially four times faster than our GAAP operating expenses and 10 times faster than non-GAAP operating expenses, which demonstrates the growing leverage in our business model.
We exited the quarter with 214 employees compared to 213 at June 30, 2022, so virtually unchanged sequentially.
Net loss was $18.6 million compared to net income of $20.8 million in the third quarter of last year. As a reminder, net income in the year-ago period was significantly impacted by one-time non-cash valuation benefits.
Adjusted loss, which excludes stock-based compensation, and other one-time items was
$18.6 million compared to $12.9 million in the third quarter of last year.
Adjusted EBITDA, which excludes stock-based compensation and other one-time items, was negative $18 million compared to negative $11.5 million in the third quarter of last year.
Turning to the balance sheet. We e ended the quarter with $218 in cash and cash equivalents, down about $24 million from the second quarter of 2022. This primarily reflects adjusted net loss of $18.6 million and increase in accounts receivable and cash used in support of our pure subscription business model.
I want to close with a few comments about how we’re thinking about the future, starting with the close of 2022. We’re encouraged by our year-to-date progress and the growing momentum we’re seeing across the business. We believe we’re well positioned to deliver results beyond our previously-issued growth plans. And as such, we’re raising our outlook for the year.
We now expect full-year revenue of between $46 million to $48 million compared to our previous guidance of $29 million to $31 million. This would reflect full-year revenue growth of approximately 100%.
We now expect to exit the year with ARR of between $31 million to $32 million compared to our previous guidance of $27 million to $28 million. This will reflect full-year growth in ARR of approximately 150%. We expect modest gross margin expansion in the fourth quarter of 2022, subject to revenue mix.
Finally, we expect to end the year with approximately $220 million to $230 million in cash, which is slightly higher than our ending Q3 balances and consistent with our previous guidance.
There are a few core assumptions here that I want to walk through. First, our cash forecast assumes a fourth quarter operating loss of about $18 million to $20 million, consistent with our earlier forecasts. It also assumes we realize a $10 million returning benefit from the investments we’ve been making in the way of supply chain deposits. All year long, we’ve been sharing with investors the details of the investments we’ve been making to shore up our supply chain and prioritized product availability and how we expect those investments to come back to us by year-end, and that’s exactly how it’s playing out.
As we mentioned on each of the three previous earnings calls, we continue to assume that we will be successful in implementing a third-party financing program to support our rapidly growing pure subscription pricing model. That initiative is progressing well with a highly regarded bank and we are currently modeling a cash benefit of at least $20 million here in Q4.
Going forward, we expect the program will enable us to offset any cash used to support hardware purchases for our pure subscription model. This allows us to effectively operate a capital free hardware enabled subscription as a service offering.
Finally, coincident with the financing program, we intend to extinguish the final $10 million of long term debt that is still on our balance sheet as a holdover from our pre IPO days. So, a lot of puts and takes there. But the net of it is that we remain confident in our forecast for a year-end cash position of at least $220 million, which is consistent with our earlier guidance.
Turning to 2023. We remain encouraged by the growth opportunity we see ahead and our strengthening pipeline activity. As Peter described, there’s been an acceleration in the market and in our business over the last six months. Our demand drivers remain strong. While we’re developing our final plans for next year, we wanted to share some high level perspective on how we’re thinking about 2023.
As I mentioned earlier, we expect to end 2022 with more than 2,000 active subscriptions. We project that could double to 4,000 in 2023. We continue to expect that that growth will be most pronounced in education, health care, and professional sports.
We’re currently modeling full-year revenues next year of between $55 million and 60 million, reflecting growth of about 25% year-over-year. This assumes a meaningful transition to our pure subscription model, effective January 1 2023.
As a reminder, much of our revenue in 2022 was related to our purchase model, which requires us to accelerate the hardware revenue recognition and 100% of the related product costs. That has historically disguised the full term gross profit of our customer transactions. Our plan is to minimize these types of transactions going forward.
Using the same purchase the pure subscription revenue mix in 2022 that we’re currently estimating for 2023, our total revenues would have been approximately $30 million compared to the $46 million to $48 million we are now forecasting. So, our goal of delivering $55 million to $60 million in revenue in 2023 would have reflected growth of approximately 100% rather than 25%.
Further, if we did not make the subsequent subscription transition in 2023, then our purchase to pure subscription revenue mix in 2023 was consistent with what we are currently estimating for 2022. Our outlook for total revenues in 2023 would have been more in the range of approximately $85 million to $95 million, reflecting growth of approximately 100%.
To that end, 2023 becomes a bit of an odd comp year, but we believe that the transition to more subscription sets up for high quality, high margin and highly predictable revenue growth going forward.
We believe we can exit 2023 with ARR of between $65 million to $70 million compared to $31 million to $32 million at the year-end 2022, reflecting growth of more than 100% year-over-year.
Our current models for 2023 comp gross margins of at least 30%, which reflects the benefits associated with the across-the-board price increases that we’re implementing effective January 1 and an overall improvement in product subscription mix.
While we have not finalized our hiring plans for 2023, we expect to continue to moderate expense growth and leverage the investments we made over the last two years. Of the hiring that we will do in 2023, I expect more than half of the headcount additions to be customer facing, revenue generating roles.
As I described a minute ago, the implementation of the third-party financing program will be important in the support of our subscription growth plans. We now expect that any cash we invest in our pure subscription model going forward to be effectively offset by our new third-party financing program.
We expect that our cash usage will now be more closely aligned to our operating cash usage plans. To that end, we are modeling a significant reduction in our full-year operating cash burn compared to 2022. We reiterate our previous comments, and we believe we are fully capitalized.
So, in summary, we are pleased with our strong third quarter results. We’re excited about our plans for the fourth quarter and 2023. And with that, I’ll turn the call back over to Brian.
Brian Norris
Thank you, Mark. John, at this time, I’d like to open the call up for Q&A. Again, we’re going to ask participants to limit themselves to one question and one follow-up.
Question-and-Answer Session
Operator
[Operator Instructions]. We’ll start with Shaul Eyal with Cowen.
Unidentified Participant
It’s Tiwa [ph] on for Shaul. And congratulations on a very strong quarter. My question has to do with this very strong product performance. And we’ve seen this now, I think, three quarters in a row where your customers seem to be showing a preference for buying the product rather than a pure subscription. Is there something driving that? And I know you’ve discussed what you expect next year. But do you expect the customer motivation to change next year?
Peter George
So the answer is yes. And here’s how we’re going to get them to change. We went into this year with having two ways to get our product, a purchase subscription and a full subscription. In every case, the customer is getting a subscription from us. We had a phenomenal quarter, as you could tell, particularly in education. And because we didn’t have a bias, most of our education customers said, we’d like to buy the hardware and we’ll get the subscription. We believe that they’re going to want to buy subscription only next year. So we won’t be offering the ability to buy the product, but only get our system through a subscription model. And we’re very, very confident that, if not all, most of our education customers will be really happy with that. So that subscription only offering is going to allow us to pivot hard into the subscription model. And we’re excited about what that’s going to do to our gross margins, our subscription RPO, all the metrics in the SaaS world that we care about.
Mark Donohue
I’ll just add to what Peter said there as well. That’s exactly why we’re, given the Street and the investors’ view, of our remaining performance obligation, which came in at about $109 million, up from $81 million last quarter. And the gross margin of that RPO is about 65% excluding overhead. So, I think that what we’re trying to show you is that the strength of the business and the strength of the deals that we are doing is very strong. It’s just the recording of them at this stage has been a little bit – put some pressure on margins. Knowing that we need to put our best foot forward and print the margins at a higher level, we’re moving to full subscription.
Unidentified Participant
For my follow-up, could you talk about – during your discussions with your customers, has that been changing – a lot of the companies we cover are talking about elongated sales cycles and more scrutiny for larger deals as a result of the macro. So, are you seeing anything like that? And are you seeing any sort of change in the competitive environment? Are you seeing different companies [indiscernible] and so on?
Peter George
I’ll start with the second question. So, we haven’t really seen a change in the competitive landscape at all. To date, about 80% of our deals are uncontested. And the ones that are contested, meaning there’s competitors there, think about faster metal detector technology, repackaged old legacy technologies, so the competitive landscape hasn’t changed very much.
In terms of the sales cycle, the physical security market can be an events-driven business. And we’re feeling that our sales cycle actually shrink and go from 120 days to 90 days. There were deals in Q3 that were in-quarter deals, meaning we found an opportunity and turn that into a deployed customer in quarter. So, we’re actually seeing an acceleration and a contraction of the sales cycle and an acceleration in the sales cycle because safety is so important, and particularly in education. What could be more important than keeping our kids safe to go to school every day. And now parents and superintendents and schools are making a decision that was once – get it done in the summer before school is now turning into a pipeline full of education customers saying we want to keep our kids safe as soon as we can. So, we have a very robust pipeline of schools across the country that want to keep their kids safe. And we’re really pleased about helping our superintendents do that.
Unidentified Participant
Congratulations again.
Operator
Our next question comes from Mike Latimore with Northland Capital Markets.
Michael Latimore
Phenomenal results, guys. That was great. I think you might have set a record on Wall Street for the number of 100% metrics, by the way?
Peter George
We did say 100 a lot, didn’t we?
Michael Latimore
Great results. You mentioned a price increase. I guess, can you talk a little bit about just the magnitude of that? And then I assume contracts are still four years?
Mark Donohue
I’ll take that one, Mike. We’re planning to do a price increase as of January 1. We’ve already worked through that. We’ve started to talk to our partner network and as well as do some work with our sales force on it. The reason for it is I think we’re just seeing strength and the demand for our product. We know we’re entering a time where inflation has been high. And so, we’re going to continue to kind of drive value through price increases.
Peter George
Just to your question about four years, that hasn’t changed at all. These will be four-year contracts. And most of our – all of our customers, when they choose to deploy Evolv, sign up for 48 months.
Michael Latimore
Can you talk a little bit about the process to lower the COGS of your systems? What are sort of the key milestones here? And how long will that take? And what’s the percent change over time?
Mark Donohue
We have a project that’s been ongoing this year, and continues into next year, to really reconfigure the product. It doesn’t change dramatically what the product does. We obviously are putting some improvements through. But it is really about taking printed circuit boards and making it more efficient, moving the numbers down, finding different ways to kind of put parts together and whatnot in a little more economical way. So, I think that, going into next year, we’re looking probably at somewhere around about a 40% BoM reduction once we go into it.
Now that won’t really hit until the 2024 timeframe. So, when we talked about our guidance next year of 30% gross margins, we really won’t see that in 2023. And we expect the benefit from that to come in 2024.
Peter George
Just to make sure we’re speaking the same language here, we will see 30% gross margins in 2023, but the benefit is only coming from the move to subscription-only, discount discipline with our sales force. And the year after, we’ll will bring the COGS down and those 30% gross margins, you should see another step function improvement in our gross margins. That makes sense.
Michael Latimore
Congrats again.
Operator
[Operator Instructions]. We’re going to Alex Schwartz with Stifel.
Alexander Schwartz
This is Alex Schwartz on for Brad Reback. I’m curious if the strength you’re seeing in schools and hospitals has anything to do with remaining COVID money being spent before it is no longer available?
Peter George
The COVID money that’s designated to COVID was $175 billion grant from the federal government, of which only $25 billion was used for COVID. So, there’s $150 billion of money sitting out there in the form of things like the ESRA funds that some of our school customers are tapping into those funds to use to keep their students safe. So, yes, those funds are there. There’s $150 billion. They’re getting pushed down to the states. And we’re helping our customers tap into those.
Above and beyond that, also, superintendents are going to their boards and saying, we want to raise taxes slightly through the tax base to come up with the funds for our systems. And that’s happening as well. So getting the funding is not the biggest problem right now, both because of what’s available in the market and pushed down to the states, the sense of urgency across North America to keep our kids safe based on the events that continue to go on, and then the funds that are available. So, we don’t see that changing anytime soon.
And if you add some of the secular tailwinds that we’ve experienced the last couple of years, increased gun violence, lots of anxiety and polarization in the world, we don’t see that abating at all.
Operator
We have no additional questions in queue at this time. [Operator Instructions].
Brian Norris
Okay, terrific. Well, if there are no further questions, we’ll turn the call back over to Peter George, our CEO.
Peter George
Yeah. Well, look, thanks, everyone, for joining. Obviously, we’re really pleased with how things are going here. We had record results, as everyone knows. We’re seeing tremendous operational leverage in our business now, both by getting leverage through our channel on the go-to-market side, but also the processes and people we’re getting tremendous leverage from. We’re excited about how this year is going to end up and believe and very confident in what’s ahead of us in the next couple of years.
So, thank you all for joining. We’ll be talking to some of you one on one. And thank you for your support of the company. Thanks, everyone.
Brian Norris
We look forward to seeing as many of you as possible during the upcoming outreach period here in the fourth quarter and, again, multiple conferences and a lot of other IR activities and an Analyst Day coming up. So, look forward to seeing all of you on the road. Thanks.
Operator
Ladies and gentlemen, that does conclude your conference call for today. Thank you for your participation and for using AT&T Event Conferencing. You may now disconnect.
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