Earnings Call: Q2 2021

Aug 16, 2021

Good afternoon, and welcome to the EVOLVE Second Quarter 2021 Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. As a reminder, this conference is being recorded. I would like to now turn the conference over to our host, Vice President of Investor Relations of EVOLVE Technology, Mr. Brian Norris. Please go ahead. Thank you and good afternoon everyone and welcome to the call. I'm joined here today by Peter Georges, our Chief Executive Officer and Peter Faubert, our Chief Financial Officer. This afternoon after the market closed, we issued a press release announcing our 2nd quarter results and our business outlook for 2021. This release is available on all 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 U. S. Private Securities Litigation Reform Act of 1995 that relate to our current expectations and views of future events. 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 those forward looking statements as a result of a number of risks and uncertainties, including without limitation, the risk factors included in our proxy statement and prospectus and updated in our Form 8 ks filed with the SEC on June 28, 2021 and July 22, 2021 respectively as well as other periodic filings with the SEC. The forward looking statements made today represent our views as of August 16, 2021. Although we believe the expectations reflected in the forward looking statements are reasonable, We cannot guarantee the future results, levels of activity, performance and events and circumstances reflected in the forward looking statements, which will be achieved or will occur. Except as required by applicable law, we disclaim any obligation to update them to reflect future events or circumstances. A replay of today's call will be available for 2 weeks by dialing 1-eight sixty six-two zero seven-one zero four one or international callers can call 1-four zero two-nine seven zero zero eight four seven and using access code 573 74,277 or by accessing the webcast replay on the company's Investor Relations website at http slash ir.avaltechnology.com. Before I hand the call over to Peter, I'd like to state that we plan to operate an active Investor Relations program and look forward to engaging with the Wall Street community as a public company. We welcome the opportunity to attend conferences, non deal roadshows and other IR events and we will use our earnings call each quarter as a platform to share the details of upcoming events, which we will also post on our IR website. To learn more about our IR outreach plans, please feel free to contact me at vnorrisevaultechnology.com. With that, I'll turn the call over to our CEO, Peter George. Peter? Thanks, Brian. Good afternoon, everyone, and thank you for joining us today. I'm Peter George, CEO of Evolve Technology, the human security company. We are delighted to be here today, hosting our first earnings conference call as a public company following our launch into the public markets on July 19. We appreciate the support from our existing shareholders and the confidence our new investors have expressed by joining us on what we believe will be a great journey ahead. We're pleased to be reporting strong second quarter results. 2 of the KPIs that we consider to be key measures of our progress are revenue and TCV or total contract value of orders booked. We delivered record results in both metrics in Q2 and are off to a strong start in Q3. Revenue was $4,500,000 in the second quarter, up 5 90% year over year. TCV was $10,900,000 in the 2nd quarter, up 3 61% year over year. In a few moments, Peter Probert, our CFO will share more information about our results and our outlook for 2021. Since this is our first earnings release conference call, I'm going to take a few moments to introduce Evolv's technology. The company was founded in 2013 by threat detection and analytics experts, Mike Ellenbogen and Anil Chikara, who were motivated by the then recent tragedies at Sandy Hook Elementary School and the Boston Marathon. In the wake of escalating gun violence, we recognized the need for a better way to ensure the physical security of large gatherings of people whether it was at a ballgame, a theme park, a concert, a school, a church or even an office building. Historically, if these venues had any type of physical security device, it was an outdated metal detector, which subjected visitors to a prison or airport like security experience. We had a vision for a new and destructive way to protect the public from mass casualty event, while improving their visitor experience, a platform powered by advanced AI technology and sensors and delivered to customers via a subscription model. With the team of some of the industry's foremost experts in both physical and cybersecurity and the support and guidance of our investors like Bill Gates, Jeff Bischaud, FinTech Investment Partners, DCBC, General Catalyst, Lux Capital, Motorola Solutions, Sineway Ventures and Stanley Ventures, we invested tens of 1,000,000 of dollars in R and D and the result today is Evolv Express, the industry's leading AI based weapons detection security screening platform. Our offering is now deployed to customers across all types of conditions and industries. Our flagship product, the Bubba Express, is fundamentally different than any other solution in the market today. First of all, it's more than 10 times faster than traditional metal detectors and can screen 3,600 people per hour. Using AI and dozens and dozens of sensors, it can discriminate between a weapon like a firearm and a personal item like a phone in under 2 50 milliseconds and that's incredibly hard to do. Our AI machine learning models are becoming more every customer and every visitor screen. And again, because of software, we can add new threat detection features like elevated body temperature to detect COVID-nineteen and other updates to our platform in real time and deliver those enhancements to our customers through our multi cloud environment. The real validation of our technology is of course in customer adoption, which continue to accelerate in the Q2 as the pandemic has forced venue operators to turn to innovative solutions to support the safe reopening of their facilities. We were already privileged to have many iconic customers like the Lincoln Center, Georgia Aquarium, the Space Needle, 6 Flags, the Chicago Cubs and Manchester City Football. We've had a very strong new customer additions in the 2nd quarter with key wins at Butler University, the Four Winds Casino, the Fox Theater, the Paramount Theater, the National World War II Museum, Major League Soccer, the Group and Brooklyn Bowl in Las Vegas. These are exciting wins. So why do they choose us? Time and time again it's for 1 or more of 3 compelling reasons. First, we delivered dramatically improved security, which makes our customers' venues safer than ever, ever before. 2nd, we deliver a superior visitor experience as our customers' customers can enter the venue without ever slowing down, without ever divesting of their personal items and without forming a single file close contact line. In fact, they enter without breaking stride. And 3rd, in our ability to deliver significant operational efficiencies that drives up to 70% cost savings for venue operators. We also reduced the physical footprint required by security operators allowing our customers to reclaim space for visitor experiences and revenue generating activities. The Columbus crew of Major League Soccer recently launched their new state of the art stadium lower.comfield and they're using Evolve to screen all of their entry points. The van experience and safety were crucial elements to the design of lower.comfield and the crew's goal was to provide a world class experience for all fans to enter and move around the stadium safely. They were looking for the most technologically advanced partners to bring their vision for the stadium to life. Evolve was selected after running a competitive takeoff due to best in class technology and the speed with which fans can walk through screening. Not only is the stadium more secure and the experience friction free for its fans, but the stadium is also driving more people to concessions faster, which in turn drives revenue generating opportunities for the crew. Another example is the Paramount Theater in Oakland, California. Patron safety has always been the focus, but they struggle to identify systems or methods that could make access management process effective and not slower commerce. They are now deploying a ball to help them achieve their goals of keeping unwanted risk out while making the ingress process smooth for patrons. When you consider the value that our customers are realizing, it's no surprise that the market opportunity for AI based weapons detection screening is very large with a global TAM that we estimate to be $20,000,000,000 annually. This is a conservative bottoms up TAM focused on 10 specific vertical markets warehouse, distribution and manufacturing, performing arts and entertainment, tourist and cultural institutions, sporting, government, hospitality and casinos, hospitals, houses of worship, education and finally office building. These markets that we are in today where we have referenceable customers. And rather than include every venue in each of these verticals, we've limited our TAM estimate to only those venues having the optimal size to consider this type of technology in the near term. As a result, we've identified nearly 700,000 digital thresholds at over 400,000 prospect locations. We've assumed a $30,000 per year per site reoccurring revenue opportunity at each of these thresholds driving a $20,000,000,000 total available market. We're the leader in AI based weapon screening market with 500 systems in service as of June 30, 2021. Yet we've identified about 700,000 digital threshold candidates. This represents a penetration rate today, which would round to a 0 in a market valued today at 20,000,000,000 dollars We are uniquely democratizing security in this market with an AI based weapons detection platform delivered via a powerful SaaS model. Now you know why we're so looking forward to exploring this great opportunity ahead. We have a 3 pronged growth strategy to address this opportunity. The first, our land and expand initiative is focused on 6 key markets where we have presence today: Tourist sites, performing arts and entertainment, theme parks, industrial workplaces, municipal government and finally professional sports. We're going to build from these beachheads to capture what we believe today $175,000,000 annual reoccurring revenue opportunity. 2nd, we'll expand into adjacent vertical markets like education and hospitals and expand into core verticals and targeted international markets. We estimate these adjacent markets and international opportunities represent an incremental $300,000,000 in annual reoccurring revenue potential. 3rd, we're going to focus on expanding through our channel partners. We are making good progress. In fact, today we have 32 distributors in countries throughout Europe, Middle East and Africa and Asia all authorized to sell our systems. We recently announced a strategic partnership with Motorola Solutions. This partnership is unique as Motorola will be reselling our Xpress platform with integrated value added features under the Motorola Solutions logo and offering a comprehensive premium security offering through their global sales force and their channel partners. We are encouraged by the promise of our combined solutions and look forward to the partnership's growth. We also plan to leverage the strength and reach of our other partners such as Johnson Controls and Stanley Black and Decker to fully capitalize on the international market expansion. We look forward to updating you on our progress on the channel and international front as we continue to explore those markets together. So in summary, we are pleased with our strong start as a public company and the record results we delivered in Q2. We continue to see solid momentum in our key markets fueled by the growing recognition of the value we're able to deliver to our expanding roster of customers. We're encouraged by the strong start in Q3, which we believe positions us well to execute on our growth plans for 2021 2022. So with that, let me turn it over to Peter Faubert to review our financial results in more detail and our outlook for the balance of the year. Peter? Thanks, Peter, and good afternoon, everyone. Today, I'll cover our financial results for the Q2 and the outlook for the balance of the year. Let me take a moment to review our business model and revenue drivers. We generate revenue from subscription arrangements and from the sale of products inclusive of maintenance and support. Customers generally enter into 48 month non cancelable subscription contracts. These security as a service or SaaS contracts require low upfront costs by the customer as subscription fees generally range between $2,000 $3,000 a month. We bill our customers annually in advance, which allows us to recover our costs very quickly. Our subscription arrangements combine the hardware and software into a single 48 month contract and we amortize the total contract value on a ratable basis over the 48 months. Sometimes our customers elect to purchase the hardware upfront and then enter into a 48 month subscription agreement for the software. In that case, we recognize the hardware revenue and incur the related costs at the time of activation and then have a continuing subscription arrangement for the software over the term of the contract, which is also 48 months and non cancelable. In this model, we have lower gross margin on the product revenue related to the hardware in the 1st year, followed by very high margin approaching 90% for the remainder of the subscription. With that as context, I'll review our 2nd quarter results. Total revenue was $4,500,000 up 5 90% year over year, reflecting strong new customer additions across our core vertical markets. Product revenue was approximately $2,500,000 compared to $17,000 in the Q2 of last year, reflecting strong new customer growth and expanded cohorts of customers who chose to purchase the hardware upfront. We may occasionally see more customer purchases of the Evolv Express upfront which may bring more one time revenue to the P and L in any given quarter. This would result in an impact on the gross margin. In that scenario, we incurred the associated direct hardware costs one time at the activation rather than amortizing those costs ratably over the 4 year term. Subscription revenue was $1,500,000 up 2 0 9% year over year, primarily reflecting the strong new customer additions and growth of systems and service. Service revenue, which primarily consists of professional services and training was approximately $500,000 up 2 63% year over year, reflecting an increase in volume of installations. The total contract value of orders booked or TCV was $10,900,000 in the 2nd quarter, up 3 61% year over year, again reflecting strong new customer additions. Gross margin was 25.2%, reflecting the expanded cohort of customers that selected the purchase model in the Q2 of 2021. This was partially offset by a reduction in material costs. We believe that we are well positioned to continue to drive gross margin expansion through the second half of twenty twenty one from engineering investment into our products to incorporate lower cost components. In addition, we expect to gain further leverage from our supply chain due to our ramp in production of units and increased purchasing volumes. We believe we remain well positioned to drive gross margins to the 70% to 75% range as we exit 2021 and into 2022. Total operating expenses were $7,400,000 in the 2nd quarter, up 44% year over year. The primary driver of the increase was due to headcount additions across the company, most notably in revenue generating sales as well as technical talent for our engineering team. In addition, we saw an increase in marketing investment for certain programs and initiatives as well as expenses related to the public offering. We exited the 2nd quarter with approximately 125 employees compared to approximately 50 employees at March 31, 2021. Our loss from operations was $6,300,000 in the Q2 compared to $5,000,000 during the Q2 of last year. Finally, our net loss was $22,400,000 or $0.72 per share compared to $5,100,000 or $0.22 per share in the year ago period. Now turning to the balance sheet. We ended the quarter with $10,000,000 in cash and cash equivalents compared to $4,700,000 at December 31, 2020. Subsequent to quarter end, our combination with Newhold Investment Corp was completed, which brought the company total gross proceeds of $385,000,000 I'll close with a few comments on how we're thinking about the remainder of the year. I'll remind you that these are forward looking statements and they represent our views only as of today. Our current expectations for revenue range from $20,000,000 to $21,000,000 in 2021, which would result in growth of about 3.75 percent year over year. As I mentioned, we had higher than normal level of purchase activity in Q2 that drove sequential revenue growth a little faster than we might otherwise have seen. We expect that this may moderate a bit in Q3, but we're still of course modeling sequential growth in both the 3rd and 4th quarters of 2021. Further, we expect total contract value or TCV to range from $53,000,000 to $55,000,000 in 2021 with much of that coming from the key verticals that Peter discussed earlier. Finally, we expect our net loss per share on a GAAP basis to be in the range of 75% to 80% based on approximately 84,000,000 of weighted average shares outstanding. So in summary, we're pleased with our strong second quarter results. We feel good about our plans for the back half of the year. We expect to provide preliminary thoughts on 2022 during our Q3 earnings release and conference call in early November. And with that, I'll turn the call back over to Brian. Thank you, Peter. At this time, we'd like to turn the call back over to AT and T to open the call up for Q and A. Again, we're going to ask participants to limit themselves to one question and one follow-up. And our first question comes from the line of Shaul Eyal. Your line is open. Please go ahead. Thank you. Good afternoon, gentlemen. Congrats on your Q1 as a public entity. Peter, Peter Job or Peter Forbert. As we look at your quarterly $11,000,000 of TCV in the context of your Motorola partnership and Stanley as well, Can you provide us with some color around what level of this PCV is associated with the 2 partners and investors in that regard? Hey, Shaul, this is Peter. Nice to hear from you. Thanks for your good question. So you may remember in the last analyst call, this year we expect 30% of our sales to come through the channel and then 70% will come direct. And then later on in the out years, we expect that to change, in fact, reverse 70% through the channel and 30% direct. So we have a very channel friendly and channel first go to market strategy. And this year, we'll exit that way. I'm not going to talk specifically about STANLEY or Motorola as it contributed to Q2. I will tell you though that we've had a very, very active channel activation and enablement program going on for the last couple of months, making sure that both companies understand our value proposition and we have a big pipeline of opportunities to go after today. And as we explained in our partner strategy, we have a deal registration process in the company. And when we look at those deal registration, there's a lot of pipeline today coming from the channel, and we feel very good about meeting or exceeding that revenue mix exiting 2021. Understood. This is great color. Thank you for that. And maybe any supply chain constraints you could be seeing since the Q2 ended as the Delta variant numbers are actually escalating? It would appear at current times that there's no impact, but just want to see how you guys think about it? Thank you. Hey, Shaul. This is Peter Pover. We are seeing obviously supply chain pressure similar to everybody else right now. The way we're combating that is we're identifying long lead time items. We're working with our vendors to make sure we're placing orders for those raw materials that are long lead time and we're buying way in advance. So, we're using our capital to make investments in raw materials where we see problems coming down the pipe, and we're keeping those raw materials in inventory to make sure we're able to hit our deliverables to customers, at least for the next, I'd say, 4 quarters and beyond. Thank you. And our next question comes from the line of Mike Latimore. Your line is open. Please go ahead. Excellent. Thanks, Jack. Congratulations on the quarter. Great to hear you guys on an earnings call. So you have several target verticals here. I guess, are any of the target verticals performing a little bit better or a little bit worse than what you were thinking at the start of the year? Hey, Michael, it's Peter. So you remember that we are focused on those 6 target verticals. I mentioned them in this earnings report. All of those are doing quite well, particularly casinos. We've done really, really well in casinos the last couple of quarters. And also professional sports are 2 verticals that are having a higher uptake, but the rest of all the other verticals are performing as expected. And I think we had mentioned earlier that we have a really talented marketing organization that I pulled in from the cybersecurity world. And they're using digital marketing and ABM marketing to reach out to those decision makers in those verticals and make sure that we're generating pipeline and demand and getting our value proposition out. So it's translating into the business both in pipeline but also in excavating the opportunities in the verticals we anticipated. Great. And you gave an employee headcount. I guess, can you talk a little bit about how many sales people you have? How many you've hired? Maybe plans for the year? And then how the sales cycle has kind of transpired this year? Yes. So let's start with the sales cycle. So we've seen our sales cycles contract from 5 months to 3 months, so 90 days. Right now in our plan when we bring on a new salesperson, we don't expect them to be productive until the Q3. But what we're seeing that being escalated and accelerated. So we've had a lot of new people, quota carrying sales people that joined in the 1st part of January or February actually made a contribution in Q2 and have a big pipeline for Q3. So that's going really well. Our plans are to continue to invest aggressively in people to cover the opportunity and capture the market of this year. In the first half of the year, we added about 60 new people to the company. A lot of those were quota carrying salespeople and our plan is to do the same now in the second half of twenty twenty one, again leading with quota carrying salespeople to make sure that we have enough quota on the street, but also the rest of the organization to deploy the technology and delight our customers so that we can continue to expand our existing customer base. So we have an aggressive growth plan this year and we're going to meet or beat that before we exit 2021. Thank you. And our next question comes from the line of Brad Weback. Your line is open. Please go ahead. Great. Thanks very much. Can you guys maybe dig into a little bit what motivates a customer to buy the hardware upfront versus just purchasing it over multiyear subscription? Hey, Brad, it's Peter Faubert. That's a great question. We've actually seen a lot of our professional sports market customers opt for the purchase subscription. And obviously, those are bigger deals, which is really driving the higher volume of purchase subscription. A lot of those guys have CapEx budget to spend and they'd rather spend the cash upfront and own the equipment. But, as a reminder, that still comes with a 4 year subscription. And as I noted in the remarks, that 4 years of recurring revenue that we recognize from years 2 through 4 comes at a much higher margin because you've already taken the expense on the hardware in the 1st year. That's great. And then, one follow-up on the Salesforce side. What type of candidates are you looking for? Who's an ideal person to sell this solution? A really successful experienced enterprise sales executive with a great track record, and we're actually getting people from the cyber world and also from the BMS space, right? They know the physical security world. They know video analytics. So we've had 3 or 4 reps join us from that world. They have relationships already with the channel and they're able to activate the channel and partner with them pretty quickly. We also, as you know, we because we sell to people that oftentimes are formally from the safety world, former police officers, Secret Service and CIA. We're also finding that when we find somebody like that, they have a built in network. So they're normally coming from those three buckets, enterprise sales from cybersecurity, BMS, right, from the physical security world and then people from the safety world in cities that have a tight connected tissue of safety people who are the decision makers for physical security. Fred, did you have a follow-up question? And at this time, sir, we have no further questions. Terrific. I really appreciate that. So that wraps up the Q and A session. Thank you for bearing with us as we work through a few technical things at the beginning of the call. Thank you very much. Appreciate that. We look forward to seeing as many of you as possible during the outreach period we're about to embark upon. So with that, let me turn the call back over to Peter George to close today's call. Yes. Thanks, Brian. Again, thank you everyone for joining today. It's been a really exciting time here at Evolve. We believe we're well positioned to capitalize on a large and unpenetrated market opportunity with EVOLVE Express. We're thrilled to be with you and we appreciate your interest and support in the company. Good night, everyone. Ladies and gentlemen, that does end your conference for today. Thank you for your participation and for using AT and T event conferencing services. You may now disconnect.