Good morning, everybody. My name is Shaul Eyal. I cover Evolv for TD Cowen. We are very happy to host Mark Donohue, CFO, Brian Norris-
Mm-hmm.
Senior Vice President, Finance and IR. We're gonna kick it off, excuse me, we're gonna kick it off with a short video clip.
We are.
Then we're gonna shift into a fireside chat. Thank you.
Inspiration is often a term used to describe the light bulb moment when an idea sparks in an entrepreneur's mind. But for Evolv Technology, our inspiration was born following some of America's darkest moments in recent history. It came in the wake of the Sandy Hook tragedy in December 2012, the 52 mass shootings in the 122 days that followed, and culminated with the Boston Marathon bombing on April 15th, 2013. These horrific events, some right here in our own backyard of Boston, crystallized the bigger need for technology that could address this growing and evolving epidemic.
In 2011 and 2012, we were actively searching for new technology that could transform an industry. We started Evolv with a vision to develop products to prevent these catastrophic headlines. It was time to out-innovate the bad guys, to apply technology to help keep people safe in public spaces. Our founding principle was balance. Any successful solution had to balance the detection of weapons being used to carry out these incidents, while allowing people to continue to live at the pace of life without creating new checkpoints everywhere they went.
Instead of forcing people to adapt to the needs of security, security needed to adapt to the needs of people. Instead of rigid immobility, we needed mobile flexibility. Instead of alarming on keys or phones, we needed to only catch the gun. Instead of figuring out how to react when a shooter entered the building, we needed to prevent the gun from ever entering the venue. It took us 6 years to develop and deploy a technology that could meet this need. In 2017, our first product, the Evolv Edge, launched. While it dramatically reduced the need for invasive security screening, it wasn't good enough. It had to be faster for people to go through, easier for security operators to use, and better at detecting a growing list of threats.
It was a step in the right direction, but we still weren't satisfied, so we kept innovating, experimenting, learning, and adapting. In September of 2019, we proudly launched Evolv Express. It uses the power of AI to instantly differentiate personal items from threats, making it easy for guards and frictionless for visitors. Since Express has been available, Evolv has screened hundreds of millions of people, helping to keep them safe in schools, workplaces, healthcare facilities, entertainment venues, houses of worship, and many other public places. Hundreds of customers have partnered with Evolv to create safer zones.
Sadly, the U.S. continues to see more mass shootings, and gun violence continues to rage. In the first 100 days this year, there have been 146 mass shootings, taking 202 lives, and over 5,200 additional lives were lost to gun violence. That's over 50 people a day. These staggering losses show our work is just getting started. 2023 marks our 10-year anniversary as a company, and our passion and our commitment have never been stronger. We at Evolv continue to drive forward, developing new products, building and deploying our technology, and spreading the word to help create safer zones for more people. We work tirelessly to keep students and educators, doctors and nurses, workers, sports fans, concert and museum goers, our neighbors, our friends, and loved ones safe and able to enjoy daily life without fear.
We proudly count Boston as our hometown and are especially honored to know we help protect venues right here in our own community. We are Boston Strong.
Evolv's mission has never been more important as we look to the future. A world free from the constant threat of violence is not only possible, it's our collective right as human beings. We need to be safer, to feel less anxious, and to go about our daily lives without the fear many feel. Changing the world is difficult. Changing the way we approach security isn't. It's time to make security actually work for people instead of making people work for their own security. We are Evolv, the human security company. Thank you.
Hopefully, that tells the story-
Yeah
... in a brief and crisp way, but you really understand the value of the problem that we're trying to solve-
Yeah
... and how we're doing it uniquely in the marketplace.
I think it-
Thank you.
... it sends a message in an unequivocal, loud, and clear way. So, gents, thank you so much for joining us this morning. I wanna go back to first quarter results-
Mm-hmm
... which in a way brought a mix of some positive and negative data points, and maybe start talking about the healthy renewal rates that you've actually...
Yeah
... observed. So anything you can share with us, will be-
Yeah. Well, I mean, let's start with your point on Q1. I mean, Q1 wasn't the quarter we were hoping for. We've got some regulatory overhang, we've got some slanted media coverage, a number of things, and even some sales execution matters that we're working through, that kind of put a little bit of a headwind on Q1, and we looked at the rest of the year there, too. But a lot of good things came out of Q1. We saw the healthcare market really kinda come and be pretty productive for us. We also saw the
... We also saw the industrial workplace area where people are starting to use our equipment to protect distribution centers and things of that nature in Q1 as well. But to your point on the renewals, we are a company that does 4-year contracts. We're still a young company, and it's just now that these contracts are coming up. We have about 200 of them this year that are coming up for renewal out of about almost 5,000 systems that are deployed at the company right now. We saw about 30 of them in Q1, and we only had two that didn't renew, and the two were related to actually a bankruptcy by that customer. So, you know, we've been pretty confident that the renewal rates will be in the 90% category.
We're watching that closely. We're talking to the customers for the rest of the year that are in renewal, and we feel pretty good about that motion. There's probably about another 175 this year and about 700 next year. So this will play out over time, but we believe that we've got a good pulse and a good feeling on our customer satisfaction to keep that rate high.
Understood.
Mm-hmm.
From where we sit, when we look at the long-term opportunity ahead of Evolv, it would appear that despite some, you know, short-term, say, you know, events or, you know, mishaps, that hasn't changed. When we think about the short term, we think about the SEC, the FTC processes. Can you talk to us to where we stand from a near-term perspective, and maybe again, about the longer-term opportunity that Evolv sees ahead?
Mm-hmm.
You know, let me take a shot at that one, if I would, Shaul.
Yeah.
So for, for the folks in the room that might be a little bit newer to the story, and we appreciate everyone coming today, there are two inquiries that are ongoing from US regulators. One is the Federal Trade Commission, or FTC, and the other is the SEC, the Securities and Exchange Commission. The, the normal cycle we have come to understand on an FTC review is about 12-18 months, and in the SEC, is generally a kind of a 6-24-month process.
While I think out of respect for the process and those regulators, we're not gonna comment on the specifics, I think what we would say is that there seems to be a lot of overlap between what those two regulating bodies are looking at, and much of that is around words and the way we describe our products, either to buyers of our technology or to investors. We are being as responsive as we possibly can be to their inquiries. We continue to cooperate and work with them. The FTC matter, just as a point of record, I said it was normally about a 12-18-month process. We're in month 13 or 14 at this point, so we're cautiously optimistic.
I would say that, while we didn't see it impacting our win rates in the quarter, and we can talk about that a little bit later, what we did see is that it probably drove an elongation of certain sales cycles. So for us, a sales cycle with a typical customer is generally about three months. We saw those move to about five months in Q1, and so lots of deals that we were working on in Q1 ended up pushing out just a little bit. In fact, some deals that we thought were gonna close late in Q1 ended up closing in Q2, and they were really around the additional due diligence that some of our prospects were asking for.
Now, we got them through that and still delivered about a 79% win rate in the quarter, up from 71% a year ago. So we're winning the deals. What's a little bit more challenging for us to understand, Shaul, and we're working on this, is what deals may we not be participating in for one reason or another, because of the potential regulatory overhang. Bottom line is, we're working as aggressively as we possibly can to put the matters behind us. We think that it's a short-term regulatory overhang. It doesn't in one, for one moment take away from the value that we're delivering to our customers. You know, folks, we're gonna find 500 weapons today, and we're gonna get up and do it again tomorrow. We are bringing great, we believe, great value to our customers.
We're gonna get through these regulatory issues, and the long-term investment thesis of this company is still very much intact and strong.
Yeah, I would point to what Brian said, too. You know, we're very open about the fact that about half of our business in Q1 and what looks to be happening in Q2 is coming from our existing customer base. They're, they're buying more of our-
Mm
... of our product. So, I think that when somebody has the product, they're using it, they understand its power, its efficacy, that continues to be something that they invest in.
Understood.
Yeah.
As we also think about the New York MTA chatter-
Mm. Mm-hmm
... that governed some crazy kind of stock reaction days over the course of the past few months.
Yeah.
What's the latest you can share with us?
You know, I think, obviously, Mayor Adams did something kind of publicly with us out there on the subways. We've been talking to New York City and the mayor's office for quite some time. I think initially, you know, we had some hesitation about the subway problem, because if you don't really actually work in partnership, it could be a challenging environment. You know, just putting a system down there with some of the electromechanical issues that go on between a subway and our system, if you don't really do it properly, I think those were concerns that we had, but we've been working very closely with the mayor's office.
We've been in partnership, finding the places where it works, and it's actually, in that partnership, found to be very effective. So, good things are going there. We are in what they call a 90-day, I think, comment period, right? So when they actually look at a new technology, there's a 90-day period that we're probably about halfway through, where we'll learn what's going on. Look, they like and appreciate the technology. We don't really know much more than that right now, but we're happy to be working closely with them.
Is that project or, you know-
Mm
... POC, proof of concept phase, is that something that you're doing as a standalone company, or are you part of a bigger consortium, maybe in a big IT integrator doing that, and you're like a third-party provider, or is it strictly, dealing with Evolv here?
No, it's an Evolv direct thing.
Direct.
Yeah, we're working directly with them, and we've been talking to them directly for a while, so there isn't a third party in the middle.
We're super excited about the opportunity. We are appropriate and balanced in what we think it can provide for us, not only this year and next year, and years to come, but what we're excited about is the prospect of maybe making the city just a little bit safer. I'll tell you that none of that opportunity is in our TAM that we've talked about publicly. Public transportation is not a part of our core TAM to date. I'll tell you that it's not part of our financial forecast that we've laid out with the Street either. So we'll continue to keep the Street and, of course, our friends here in the city, up to date on the possibility.
I'll also say that there's nothing, we don't think, extraordinarily unique about the opportunity here that couldn't translate to other metropolitan areas, right? We have a very close relationship, for example, with the City of Detroit, and, you know, we've done a lot of help with them more recently. They've had some major events in that city where they've deployed our technology, for some high-profile events. But above ground, or in this case, underground, we think we can help keep some of the metropolitan areas safe. And again, none of that is included in our, in our current forecast that we've shared with The Street.
Yeah.
Stay tuned on all that.
Yeah.
We're excited about it.
No, absolutely, and maybe what you touched on, on public transportation-
Mm-hmm
... not included, as, as you said, in your term, maybe a good opportunity, maybe to double-click on four of your, kind of your four or five leading verticals, as an example, education.
Sure.
Very, very healthy-
So-
... results coming out of it.
Mm-hmm. Look, we think we can help in any places that people gather, right? So when you think about all the places outside of airports and federal courthouses that we gather, think about schools, think about hospitals, think about places of worship, think about the movie theater, the amusement park, anywhere where people gather, where violence could erupt, those are places we wanna help keep safe. So let me give you a little bit of context. In the United States, there's over 100,000 schools. We're a leader in that market. We protect 850 schools today. That's quadruple over the last two years.
Some of that is event-driven, but other than that, it's, there's also a growing awareness of what this kind of technology can do in an academic environment, where people are trying to avoid prison-like environments that certain other competing technologies can provide, or, or trying to combat rising anxiety levels that a lot of school visitors unfortunately have today. Hospitals, healthcare would be another major opportunity for the company. There's about 7,000 hospitals in the U.S. We're a leader in that market with 300, okay, 300. What we're seeing in hospitals is we're starting to have systems discussion, not just the local hospital, but systems discussions. And if I go back to schools, we're not talking to schools anymore, we're talking to districts, so that, that, that conversation's changed. I would say in professional sports, we're probably best well-known, if you will.
There's about 135 professional sporting facilities here in the U.S. We're in about 25 or 30% of those now, so across the NFL, across MLB, across Major League Soccer and in hockey and so forth. We have relationships with the local teams that we're helping keep those fans safe. And while that's a small market, it's an important market because it's highly visible, and the economic buyers of our kind of technology for other markets go to their local sporting events, and by the way, that's exactly how our single largest customer came to be, the Charlotte-Mecklenburg School District, who's now deployed 160 units.
The chief operating officer of that school district was a season ticket holder for an NFL franchise in his backyard and walked through one Sunday, said, "What just happened?" So that's an example of us leveraging a high-profile vertical like sports. But I think you're gonna see us in industrial workplaces, so think about the distribution facility down the street from your house. Think about any type of, you know, distribution facility, if you will, or, or warehouse. There's 10,000 of those here in the United States. We're a leader in that market. We have less than a hundred a hundred, customers in that space. But think about the Fortune 500 companies, for example.
So I guess the takeaway I wanna make sure people have here, and I haven't even talked about houses of worship or amusement parks and all that, where we're also playing, think about us being a tool as part of a layered security for anywhere where people meet en masse, and that's in every every part of all of our lives, and we think we can help make all those places safer, and for the most part, there's nothing there. Metal detector technology's been around for 70 years. If you wanted to deploy a metal detector to your local church or amusement park, you could've done that at any point in the last 70 years. There's a reason that hasn't happened, and there's a whole new way of doing that and solving that problem.
That's AI-based weapons detection, and that's what we think we can deliver uniquely in the market.
Yeah.
I think that to just what Brian, I think, was talking about, too, is this system idea, right? This idea of a layered security approach, right? We're not just at the doorway, we now have a visual gun detect product. You'll see us probably deploy another product towards the end of this year. It's the combination of those products together, working in concert, that are gonna make an environment a lot safer. So that system approach, systemic platform approach, however people kind of interpret that, that's what we're looking to really provide.
One of the questions that we often receive is, who is the buyer?
Mm-hmm
within the organic, within the customer base?
Yep. I mean, it's generally the sophisticated security buyers, and their levels of sophistication, obviously, are different depending on the vertical. Those that have, you know, are protecting theme parks or sporting venues or have been doing this for a long time, obviously, have a high, you know, a lot more knowledge. But I, I'll also say that the security levels at schools, people have as much knowledge there in a lot of cases, too. And so we're selling to the buyers there that really understand how to protect physical environments.
Mm-hmm. Understood.
Yeah.
When we think about the competitive landscape-
Mm
you operate in, and from what we see, I think it's fair to say sort of huge competitive environment.
Mm-hmm
kind of handful of names.
Yep. Mm-hmm.
I would imagine that that come at those, you know, POCs. Anything new, anything has changed, or are we looking at it the right way?
On the competition side?
On the competition.
I think, you know, the only... There's really no change. It's just, I think, the competitive pressures are maybe rising a little bit with some of the tools out there. What we're mostly competing with are analog solutions, things that detect metal, right? We are a more advanced solution. We're an AI-based product that is actually looking at a field and identifying objects that we put back through signatures in the system, right? So we're actually looking at all the objects as people walk through, but we're only identifying the ones that we consider to be harmful, and we err on the side of caution on that.
Question from the audience before we proceed. He, go ahead.
So two questions.
Yeah. Mm-hmm.
First, you talked about the sophistication of buyers.
Mm-hmm.
Could you also talk about the evaluation process that your typical buyer goes through?
Mm-hmm. Mm-hmm.
I'm gonna add on to that for you, Mark-
Sure
Columbia Tech and how that's going?
Yeah. Mm-hmm.
And then, Brian, I wanted to ask you about what are you hearing about demand for the adjacent add-ons-
Sure
solution, add-on solution. You just talked about the platform-
Yep
and the system, and I know you had something in Vegas for IDs, and you used to have the temperature checking, so that area.
Sure, yeah. Great. Let me start with the Columbia Tech situation, right? We've been building our product there for quite some time. We actually just built the last Gen 1 system and at the end of March. So what you'll see is that we actually built a lot of inventory coming out of Q4 and into Q1 because we were actually pulling the lines down on the hardware product that we're building. Right, and getting ready for our Gen 2 platform. Our Gen 2 platform, we have spent the past 2+ years really bringing the cost down on how to build that.
There's no two parts that are the same in this new product, but it is 95% plus the same product, the same—it's doing the same thing for the customer. We've added things like 3D cameras and a few other small bells and whistles to kind of future-proof it a bit, but we're really driving cost and serviceability. Our ability to service the product is a lot simpler with Gen 2. It's more modular when there's a problem with the system, and it's more hardened at this point, too, 'cause we've looked at a lot of quality matters. But if it does need servicing or it needs repair, it's a lot easier to repair than the Gen 1 system was.
So these are a lot of things we did just to drive the efficacy of our ability to really service the product going forward.
Then the question on the proof of concept or the buying process, is that-
Yeah.
It was, yeah-
Yeah
-evaluation by-
Okay.
Yeah, the buying process... Look, they look at various products. They're generally looking at all the options that are out there, and they're looking for demonstrations. We bring the demos to them oftentimes. We bring them to other sites, where other products are being used, and I think that they do that with similar competitive products as well. But generally, people buying our product are generally pretty sophisticated buyers. They understand what they're trying to solve for, and they're looking at the various products and how to do that.... Now we help educate them if there's any gaps there. We spend a lot of time on the education process with our customers. So I think that lends a little bit to just how long the sales cycle is.
It doesn't take three or four months to sell it to somebody because it's an overnight sale. It's a lot of concept of operations that we go through with them. It's a lot of how to use it, what's the best cases when, when, when someone's coming through for that particular location. There's a lot of effort that goes into it. We have a very big TS&S organization that probably exceeds 30 people that are out there working hand in hand with the customer before they deploy it, and they're educating them once it's deployed.
Mm-hmm.
It's a very, very in-depth process.
You know, we welcome the opportunity to compete.
Yeah
...compete technically, compete with market. I mean, there's a lot of things that make us very different in the marketplace. You know, we have a very large installed base with 750 or so customers. I'm not sure that anybody else in the space is disclosing customer counts. We have 5,000 of these units now deployed. We have the largest patent portfolio in the space. We have the largest technical workforce in the space between software engineers, hardware engineers, mechanical and electrical engineers. We've been at this for 11 years, and I can't underscore the customer piece. There's a race to win. We want to plant flags because of the viral effect, the network effect, both within geographies and verticals. You asked about the buyer of our technology. They all know each other in a vertical or in a geography.
So when we win the Atlanta Falcons, for example, that gives us an opportunity to win other places, like the Georgia Aquarium or so forth. But it, when we win the Atlanta Falcons, that also allows us the opportunity to compete at other NFL franchises 'cause they all know each other. So there's a real race for that, and it can't be lost, and that can't be... You can't just make it up. You either have that or you don't. I like where we sit there. And Mark's point about the build-up or the transition from Gen one to Gen two is an important one on our balance sheet. So I say that because we have intentionally delivered a higher level of inventory that you won't see continuing on in the back half of the year.
We have pre-built, by design, as we've prepared for this migration. And so, my sense is you will see CapEx, traditional CapEx, as you all are looking at it, will start to decline in the second half of the year. The large part of our CapEx, and I'm using air quotes for that, is really just us acquiring assets from a contract manufacturer to fulfill in subscription offerings to our customers, right? We buy an asset from a contract manufacturer. We deploy it. We retain title to that asset, and we deploy it for a customer. That shows up to you all as CapEx. I'm telling you the CapEx won't be anywhere near what you saw in the first half of the year, and happy to walk you through any and all of that. You'd asked the question, Hugh, with regard to the system approach.
Mm-hmm.
I want to be super clear. Job one for our company is to protect the doorway of our venue operators. We have 5,000 of these units that do that every single day. We're finding 1,000 weapons every single day. 500 of those are firearms. A lot of those are people of not, you know, mal intent, but perhaps some, some are, right? We think we're making a difference there. That's job one. But that said, when we do that really well, we think we earn the opportunity to solve adjacent security issues for our customers. So a couple of examples for that might be, and Mark indicated a little bit about this, weapons outside the building or in the hallways of buildings through camera technology that we think that we can integrate into. We can find openly carried weapons.
Again, our principal offering today is looking for concealed weapons, right? But we can look, we can find open carried weapons in a parking lot, for example. 100 feet away from a school, for example, would make a huge difference if you could alert the appropriate personnel in a first reactor network, if you will, that there's a weapon coming towards the school and a brandish. We can do that. We and we do do that for today, and that's called Evolv's Visual Gun Detection Platform. It's part of the same solution. You mentioned thermal reading, which we can do. We can do elevated thermal reading. We think we can do it through integration, things like e-ticketing, right? Where when you go to a ballgame, there's two lines you're standing in, security and ticketing.
What if you could do that as one? These are all examples of us delivering greater value to our customers. What does it mean to shareholders? It means likely higher ARPU, right? It's all subscription. Everything we do is subscription, so it's higher ARPU. It's probably stickier as well, right? If we're doing one or two or three things for you, you're probably likely to continue down that, subscription, relationship with the customer. So we think it probably maximizes renewals, which, by the way, we're expecting are gonna be in the mid- to high 90s, like, the, or certainly well over 90%, and that's what we saw in Q1. So all of those things are things that we can do, but job one is finding weapons at the doorway to keep people safe in the places that we all gather.
Hugh, does that answer your question?
Yes.
Okay. All right. So think about people moving from Evolv Express, which is our core product, to buying Evolv. Buying Evolv Express to buying Evolv. We think we can do more things. Job one is the doorway, but we can do other things.
Mm-hmm.
Have you seen, have you seen some customers in a way saying, "You know, let me wait for next gen, Evolv," kind of, or?
No, no, not at all.
Not at all.
I mean, look, I wanna make that point clear, too, that the systems are really quite indifferent. Gen 1 and Gen 2 run on the same software, have generally the same capabilities. You know, I think we've put a few future items in to the system, but they're not getting anything less with Gen 1 versus Gen 2. Mm-hmm.
I think it's a pretty well-known fact.
Yeah
... that we are moving to the second generation, and I'll tell you, as we said on our last earnings call, our Q2 is off to a really solid start. We had our strongest month one to a quarter that we've had in almost two years. So we're not seeing any of that dynamic-
Yeah
... that you're describing.
Uh-
We only have a few more minutes here, a minute or so. Any final questions?
Yeah, any final questions from the audience? Any final thought from the management?
Oh, Hugh, go ahead.
Yeah, Mark?
Yes. Mm-hmm.
A while back, you had this arrangement with the bank that, so is that something you're basically financing the machines that-
Yeah, you know, it's, like, it, it's really interesting, Hugh. We have, if you look at our property, plant, and equipment right now, there's about $129 million in there. About $75 million of that is actually deployed units. Another $40 million of it is actually units that are undeployed. That's the inventory that we had to buy. Interestingly enough, we, our inventory sits in PP&E, not in inventory. It's just an accounting rule that if you expect it to become part of a subscription later on, that it goes there immediately once it's purchased.
You know, so we are, we are looking, like, now that our RPO is higher and our ARR is higher, and we have a lot more assets on the balance sheet, we're a much stronger organization than we were two years ago.
Mm-hmm.
I think you will see us probably look to, you know, lines of credit or other things like that, just to shore up the business going forward.
Mm-hmm. Mm-hmm.
Yeah.
Very well. With that, gentlemen-
Mm-hmm
... thank you so much-
Yeah.
Thank you
... for joining us-
Appreciate it
... at the time.