Good afternoon and welcome to the Evolv Technologies third-quarter earnings results conference call. All participants are in listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to introduce you to your host for today's call, Brian Norris, Senior Vice President of Finance and Investor Relations for Evolv Technologies. Please go ahead, sir.
Thank you, and good afternoon. Welcome to today's call. I am joined by John Kedzierski, our President and CEO, and Chris Kutsor, our Chief Financial Officer. Earlier today, we issued a press release detailing our third-quarter results and updated 2026 outlook. The release is available in the investor relations section of our website, and it has been furnished to the SEC. To help investors better understand the underlying trends in our business, we have also posted an investor presentation that provides additional detail on key business trends and themes discussed today. During today's call, we will be making forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements reflect our current expectations regarding our business strategy, growth opportunities, customer activity, strategic partnerships, product demand, and financial 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 due to a number of factors, including those described under the caption Risk Factors in our annual report on Form 10-K for the year ended December 31, 2025, filed with the SEC on March 10, 2026, and our quarterly report for the quarter ended September 30, 2026, on Form 10-Q, filed with the SEC earlier today. The forward-looking statements made today represent our views as of November 10, 2026. Although we believe that the expectations reflected in these statements are reasonable, we cannot guarantee that future results, performance, or the events and circumstances reflected therein 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 that we believe provide additional insights for investors. These measures should not be considered in isolation from or as a substitute for financial information prepared in accordance with GAAP. Non-GAAP measures discussed today include adjusted gross profit and margin, adjusted operating expenses and operating income, Adjusted EBITDA and Adjusted EBITDA margin, adjusted earnings and adjusted earnings per diluted share, and free cash flow and free cash flow margin. Reconciliations to the most directly comparable GAAP measures are included in today's press release, and our definitions may differ from similarly titled measures used by other companies. We are unable to provide a reconciliation of forward-looking non-GAAP measures, including Adjusted EBITDA and Adjusted EBITDA margin, to the most directly comparable GAAP measures without unreasonable effort.
In addition, we will be discussing annual recurring revenue, or ARR, remaining performance obligation, or RPO, net revenue retention, or NRR, and net unit retention, or NUR, which we believe provide useful insights into the business. We define ARR as the sum of subscription revenue and the recurring service revenue related to purchased subscriptions for the final month of the quarter, all multiplied by 12. RPO represents estimated revenues expected to be recognized in the future, which are related to performance obligations that are unsatisfied or partially satisfied as of the end of the reporting period. We define NRR as recurring revenue in the last month of the quarter divided by recurring revenue from the year-ago month for that same customer base, inclusive of churn and expansions.
We define net unit retention as total units in the last month of the quarter divided by the same measure in the year-ago month for the same customer base, inclusive of churn and expansions. Finally, we define free cash flow as cash flow from operations less CapEx and capitalized R&D. Free cash flow margin is free cash flow divided by revenue. Before I turn things over to John, I would like to briefly highlight some of our investor outreach plans for the remainder of the year.
We plan to be at three institutional investor conferences, including the Craig-Hallum Alpha Select Conference next week, the UBS Global Technology and AI Conference in December, and the Northland Capital Conference later in December. As always, we welcome the opportunity to engage with both existing and prospective shareholders. If you would like additional information, please feel free to contact me at bnorris@evolvtechnology.com. With that, I would like to turn the call over to John.
Good afternoon, and thank you for joining us. We continue to make meaningful progress building a scalable, high-growth business with increasingly consistent and predictable performance. Our third-quarter results represent another step forward. We remain in the early stages of a very large market opportunity. Across the markets we serve today, we estimate more than 700,000 doorways could be addressed by our solutions. With approximately 10,000 units deployed today, our penetration remains below 5%, leaving significant runway ahead. Underpinning that opportunity is a differentiated technology platform purpose-built for physical security. Evolv is not simply a software application that can be replicated with AI tools. Our proprietary sensor hardware, software, AI models trained on proprietary data, and services work together as an integrated solution that we believe serves as a unique solutions moat. Advances in AI help us improve detection capabilities and performance over time.
Through our long-term subscription model, we are able to deliver ongoing product enhancements to customers while building a growing base of recurring and contracted revenue. With that context, let me share some thoughts on our third-quarter results. Revenue in the third quarter was a record $47.3 million, up 10% year-over-year, driven by new customer wins and expansion within our existing customer base. That growth comes on top of 57% revenue growth in Q3 2025, which was buoyed by the largest contract in our history and created an unusually difficult year-over-year comparison. ARR increased 20% year-over-year, while recurring revenue reached a record $32.5 million, or approximately 69% of total revenue.
Importantly, the pricing changes we made last year are having the intended effect of less one-time product revenue and more recurring revenue for the same contract value when customers purchase our equipment, and as a result, ARR is now growing faster than revenue. Chris Kutsor will get into the details of the financial impact shortly. Our net revenue retention was a strong 108% in the third quarter, reflecting continued success renewing and expanding existing customer relationships. Our business operations continued to perform well, with an Adjusted EBITDA margin of 10% and positive free cash flow of $3.2 million in the quarter. Finally, remaining performance obligation was up 4% sequentially and 12% year-over-year to $325.8 million, reflecting strong end market demand, continued multi-product adoption, and strong renewal upgrades to our Gen 2 Express platform.
Our RPO provides visibility into future revenue and reinforces one of the key strengths of our model, a large and expanding base of contracted revenue expected to be recognized over the coming years. Our RPO represents more than 1.7 x our full-year revenue outlook, underscoring the visibility and durability embedded in our model. Beyond the numbers, Evolv is making a meaningful impact in the communities we serve. We now screen more than 5 million people every day and have screened more than 5 billion visitors since deploying Evolv Express. Since the beginning of 2021, our customers have tagged more than 2.2 million weapons. That impact becomes very real when our technology helps identify a potential threat. Recently, our customers identified firearms being brought into three different high schools in Maryland, Georgia, and Texas.
These incidents underscore the very real problem our customers are working to solve and our responsibility to continue innovating on their behalf. Education remains an important part of that mission. Evolv Express is deployed in 28 of the 100 largest U.S. school districts and over 1,900 school buildings, screening nearly 1 million visitors every day. In Q3, we added more than a dozen customers across K-12 and higher education, with adoption across Gen 2 Express, eXpedite, and Gen 1 Express. We continued to see strong demand across healthcare, adding several new customers, including Bellin Health, TidalHealth, St. John's Riverside Hospital, and Southwest Healthcare, part of Universal Health Services. Healthcare represented 23% of units booked in the quarter, up from 18% over the last 12 months.
Today, our technology can be found in more than 800 hospital buildings, including all 10 of the top 10 healthcare networks, 16 of the top 20, and 61 of the top 100. We are also seeing a supportive regulatory backdrop, including in California, where new standards requiring weapons detection screening at specified hospital entrances are required to be adopted by March of 2027. In sports and live entertainment, we continue to expand our presence at major venues, adding new customers, including Climate Pledge Arena, Prudential Center, and PPG Paints Arena. We also continue to make inroads at the collegiate level, with key wins at the University of Tennessee and the University of Memphis, while deepening relationships with existing customers through renewals and upgrades at SoFi Stadium and the Hollywood Park Campus, Mercedes-Benz Stadium, Acrisure Stadium, and Bridgestone Arena.
We also continued to see momentum in the workplace, adding three additional Fortune 500 companies during the quarter. Today, we serve as the weapons screening partner for more than 40 Fortune 500 companies. Innovation remains central to how we create value for customers, and eXpedite is a good example. We now have more than 115 eXpedite customers, representing approximately 9% of our customer base, up from 3% a year ago. In the third quarter, approximately 88% of new customers purchasing eXpedite also purchased Evolv Express. We're particularly excited about the value of Express and eXpedite working together. Early 2026 data from five school district customers using the products together showed that approximately 97% of students passed through Express without an alert, while approximately 98% of bags passed through eXpedite without an alert.
The combination of Evolv Express and eXpedite gives customers additional flexibility to tailor their people and bag screening operations to their needs, including the ability to screen bags separately and operate Express at higher sensitivity settings. That matters because fewer alerts can translate to fewer secondary screening events and lower staffing requirements, often a barrier to deploying screening at scale. We believe that combination can make screening more practical across a broader range of customers, entrances, and use cases. eXpedite 3.0 builds on that foundation.
Our eXpedite 3.0 software release gives operators greater context when a bag alerts by showing them where to search with a red box on the X-ray image. It also expands sensitivity options to enhance knife detection while reducing false alarms from common items like three-ring binders, and further integrates Express and eXpedite data through the MyEvolv portal. We remain very encouraged by the opportunity in front of us, and I think the progress we've made over the past two years provides important context for where we're headed.
Over that period, revenue has grown from $104 million in 2024 to the $183 million midpoint of our 2026 guidance, an increase of approximately 76%. During that time, we've delivered positive Adjusted EBITDA every quarter, dramatically improved our capital structure, improved sales productivity and discount discipline, increased the recurring component of our customer contracts, and built a stronger renewal and expansion motion, all while maintaining a disciplined and thoughtful approach to how we invest and deploy capital. That progress gives us confidence in the long-term operating model we outlined at Investor Day in June, including our expectation for revenue to ramp and grow at a compound annual rate of approximately 25% through 2031.
We expect growth to build toward that longer-term rate as the investments we are making increasingly contribute to the business. There are several reasons for that confidence. First, we will meaningfully expand our sales capacity by adding frontline sellers. As we discussed at Investor Day, we are putting additional resources into sales and marketing, the growth engine of the business. New sellers take several quarters to reach full productivity, so we expect the contribution from these investments to build through 2027 and become increasingly meaningful in 2028 and beyond. Second, we are improving the performance characteristics our customers care about most, detecting more threats while generating fewer alerts. With the release of eXpedite 3.0 software and the anticipated release of Express 11.0, we believe we are making meaningful improvements in detection and alert rates.
We also plan to introduce new product tiers and are developing new form factors to address more entrances, use cases, and customers, which we believe can unlock additional portions of the approximately 700,000 doorway market opportunity we identified at Investor Day. Third, our renewal and expansion motion continues to strengthen. Net revenue retention was 108% as of September 30, 2026, and we believe there is an opportunity to drive NRR higher as we continue to strengthen renewals and increase upgrade and expansion activity across our installed base. Fourth, we are seeing encouraging ARPU trends and strong market acceptance of the pricing increases we implemented earlier this year. We believe those trends can continue as we increase the value we deliver to customers and expand those relationships over time. Finally, we believe eXpedite gives us another important way to expand our existing customer relationships.
With approximately 1,350 customers today, we see a significant opportunity to deploy Express and eXpedite together across different types of entrances. That creates a powerful net revenue retention expansion opportunity while also improving CAC efficiency by allowing us to sell more into existing customers. We expect to fund our growth through the gross profit generated by the business and our existing balance sheet. At the same time, we expect to deliver modest expansion in our Adjusted EBITDA margin in 2026 while continuing to prioritize top-line growth. As you think about 2027, there are two year-over-year dynamics that will affect reported revenue growth. First, the pricing changes I described earlier shift more of each purchase subscription contract from upfront product revenue into recurring revenue. We believe this creates a better long-term revenue mix, but it reduces the amount of revenue recognized upfront in 2027.
We estimate that the pricing changes will represent an approximately 3-4 percentage point headwind to revenue growth in 2027. Additionally, the first half of 2027 faces harder year-over-year comparisons to the first half of 2026, which benefited from a full six months of product revenue under our direct fulfillment model, as well as the shipment of a significant amount of product backlog. As a result, we expect reported growth to build through the year as these comparisons normalize, new sellers ramp, and our investments contribute more meaningfully. Importantly, we expect to deploy more units in 2027 than we will in 2026. We anticipate the incremental units from our investments to arrive in the second half of 2027, limiting the recurring revenue recognized within the year.
This informs our initial view of 2027 revenue growth, which we expect to be 20% or more, inclusive of the 3- to 4-point headwind from our prior pricing changes, which moved more of the contract value to recurring revenue that will be recognized over time. That also means we expect ARR growth to outpace revenue in 2027. In summary, we remain confident in the opportunity ahead. Demand remains strong. Our products continue to improve, so we're investing in expanding our portfolio and go-to-market capabilities to address more of the market. We remain confident in the five-year framework we laid out at Investor Day and look forward to providing more detail on our plans and 2027 outlook when we report our fourth-quarter results in February. With that, I'll turn it over to Chris to walk through our third quarter financial results and updated outlook in greater detail.
Thanks, John, and good afternoon, everyone. I'm going to review our third-quarter results in more detail and then share our updated outlook for 2026. Revenue in Q3 was $47.3 million, an increase of 10% year-over-year. This primarily reflected strong underlying demand for our solutions. I also remind investors that Q3 of 2025 was the first quarter of product revenue under direct fulfillment and included approximately $3 million of revenue from the largest contract in the company's history. Normalizing for that contract, along with the pricing changes that John covered, would result in approximately 18%-19% year-over-year growth in Q3 of 2026.
As John discussed, we've made several pricing changes over the last 18 months, and as we have covered several times on prior investor calls and at our June Investor Day, for customers that want to own the asset, we intentionally lowered the hardware price and increased software and services by the same amount, leaving the total contract price unchanged, with the expected impact on revenue recognition starting primarily in Q3. To illustrate the impact, consider the model we shared at Investor Day that included a four-year purchase subscription contract of approximately $70,000. Under the new pricing, approximately $4,200 that previously would have been recognized upfront as one-time product revenue instead moves into ARR and is recognized over the entire contract term.
Applied to 1,300 purchased subscription units in the year, that represents approximately $5.5 million shifting from upfront product revenue into recurring revenue, which we estimate represents approximately a 3% headwind to our 2026 revenue growth rate. In short, the economics haven't changed, but the revenue mix has, which we believe is better for the long-term value of the business and makes ARR and RPO increasingly important measures of our performance. ARR at September 30, 2026, was $140.5 million, reflecting growth of 20% year-over-year. Growth in ARR was driven by strong new customer acquisition, expanding deployments within the installed base, and continued strength in renewal activity. Gross margin on a GAAP basis was 49.7% in the third quarter, consistent with the year-ago period.
By revenue stream, product gross margin was 8.7% compared with 13.9% in Q3 last year, primarily reflecting our new pricing model, which intentionally shifts a greater portion of contract value from upfront product revenue and into recurring revenue. While that shift reduces product gross margin in the near term, it shifts more revenue into RPO, with the associated gross profit recognized over the contract term, contributing to the expansion we are seeing in our recurring revenue margins. Subscription gross margin increased to 59.8% from 51.8%, while services gross margin increased to 72.6% from 70.1%. Adjusted gross margin was 50.8% compared with 50.6% a year ago.
Moving down the P&L, Q3 adjusted operating expenses, which exclude stock-based compensation, loss on impairment of equipment, and certain other one-time expenses, were $26.5 million compared to $24.8 million in the third quarter of last year, reflecting the continued investment in product innovation and go-to-market capacity, and strategic investments in IT systems and personnel to support scale and efficiency. Q3 Adjusted EBITDA, which excludes stock-based compensation and other one-time items, was $4.7 million compared to $5.1 million in the third quarter of last year. This resulted in an Adjusted EBITDA margin of 10% compared to 12% in the third quarter of last year. The year-over-year decline primarily reflected investments we are making to support growth, particularly in R&D and sales and marketing, as well as incremental spending on internal systems and controls associated with our ongoing SOX remediation efforts.
Remaining performance obligation, or RPO, was $325.8 million at the end of the third quarter, reflecting growth of 4% sequentially and 12% year-over-year, and $132 million of that RPO is expected to be recognized as revenue in the next 12 months. An important element of our path to higher profitability is the gross margin profile embedded in our remaining performance obligation, which we estimate to be approximately 66% gross margin, well above our current reported gross margin levels. The difference reflects our purchase subscription model: we recognize most hardware costs upfront and a significant portion of related software and services revenue in future periods. We believe the conversion of this revenue that is under contract will increasingly benefit our margin profile and represents an important source of earnings leverage as we scale. Turning to the balance sheet.
Cash, cash equivalents, marketable securities, and restricted cash increased approximately $3.5 million sequentially to $66.9 million. Cash flow from operations was $18 million in the third quarter, up $14.5 million from $3.5 million a year ago, driven by improved profitability, significantly stronger collections, and better inventory and working capital management. Turning to our 2026 outlook. As John highlighted, the fundamentals of our business remain strong, with robust customer demand, and the foundational changes we made to our business model are taking hold. With one quarter to go in the year, we are tightening our full-year 2026 outlook for revenue to $182 million-$185 million, compared to our prior guidance of $180 million-$185 million, representing a growth of approximately 25%-27% year-over-year.
We are reaffirming our estimate for year-end annual recurring revenue to approximately $148 million-$150 million, representing growth of approximately 23%-25% year-over-year. As we discussed at our Investor Day in June, we are continuing to invest in expanding our sales and marketing capabilities to increase our market presence, in R&D to accelerate innovation and further improve system performance, and in financial and operational infrastructure to support scale in an increasingly mature control environment. Even with these investments, we still expect full-year Adjusted EBITDA margins in the high single digits, compared with 7.6% in 2025. I want to take a moment to touch on 2027.
As John mentioned, we remain encouraged by the outlook for the business, which includes revenue growth of 20% or more in 2027, despite the 3%-4% short-term headwind associated with the pricing changes that are driving more recurring revenue and less one-time product revenue. While our 2027 operating plan is not yet finalized, we remain confident in the long-term framework we laid out at Investor Day, including our expectation for revenue to grow at a compound annual rate of approximately 25% through 2031. We expect that revenue growth to build toward that longer-term rate over the next five years as the investments we are making increasingly contribute to the business. We also believe we have reached a point where ARR growth should sustainably outpace revenue growth as the recurring component of the business continues to expand, and we expect that dynamic to continue in 2027.
At the same time, we expect to continue the investment strategy I just outlined to support the long-term growth opportunity in front of us. Importantly, we are making these investments from a position of financial strength. The business has demonstrated its ability to generate positive Adjusted EBITDA and cash, and we expect to fund our growth investments from the gross profit generated by the business and our existing balance sheet. This gives us the flexibility to invest where we see attractive returns while remaining disciplined on profitability and cash generation. While our operating plan is still being finalized, we currently expect continued modest expansion in Adjusted EBITDA margins in 2027.
As we make our final investment decisions, we will continue to balance our focus on the significant growth opportunity in front of us with our commitment to profitable growth and disciplined capital allocation. We will provide a more complete outlook when we report our fourth-quarter results, at which point we will expect to have the benefit of a finalized operating plan. With that, I will turn it over to Brian for Q&A.
Thank you, Chris. Operator, at this time, we would like to open the call for Q&A. We ask our participants to limit themselves to one question and one follow-up.
We will now begin Q&A. For today's session, we will be utilizing the raised hand feature. If you would like to ask a question, simply click on the raised hand button at the bottom of your screen. Once you have been called on, please unmute yourself and begin to ask your question. Please limit yourself to one question and one follow-up before jumping back into the queue. Thank you very much. We will now pause a moment to assemble the queue. Okay, your first question comes from Jeremy Hamblin of Craig-Hallum Capital. Jeremy, please unmute your mic and ask your question.
Thanks, and congratulations on the momentum in the business. I thought I would start with just understanding, first, in Q3, your mix of subscription deals versus purchase deals. Then, as we look ahead to 2027, what do you anticipate that mix looks like as we move through next year? Is there going to be any seasonality, first half versus second half? But what color can you share with us on that?
Hey, Jeremy. Thanks for the question. I just wanted to clarify: you were asking about the mix in Q3, and I want to make sure I got it. Were you asking about how that trends to 2027? I want to make sure I got that right.
Right. I wanted to understand what the Q3 mix looks like, and then if you have some color on Q4, that would be great. But then, as we look at 2027, how do you expect that mix to play out given the pricing changes that have been made?
Yeah, thanks. If you looked at our deployments for the quarter in Q3, it was close to 50/50, which we have typically been guiding people on. In 2027, it is a little early for us to want to share. I think 50/50 is a good place to start, and as we get closer to actually guiding on 2027 in February, we will update you then.
Got it.
50/50 for Q3, to be very specific, is approximately what it was.
Understood. You are seeing that kind of normalization towards the long term that you would expect. I wanted to also ask about the ARR growth rate in Q3. As you look at your guidance for the year, it would imply, I think, about a 24% growth rate for the year, but you have been at kind of this steady ARR growth rate now for the last three quarters of around 20%. Can you just walk us through that acceleration? Obviously, you have talked about that example deal of the $70,000 and kind of the $4,200 of upfront revs that are being traded to ARR. Is there more detail you can share with us?
Yes, Jeremy. We actually posted an investor slide deck on our investor relations site to specifically talk about this. We have made pricing changes. Those were made last year, in July of last year, and, as we just discussed in our prepared remarks, we have moved more value to ARR. Those take a while to materialize in our results, and we are there now, which is why you see ARR at 20% growth in Q3 compared to 10% revenue growth. We see that accelerating from here as we close out the year. For a specific magnitude of that impact, as compared to 2025, we now have, on that $70,000 illustrative ARPU that we shared at our Investor Day, we take $8,000 less of one-time product revenue, which means $8,000 goes into ARR. Mind you, the ARR is most typically recognized over four years.
You have an $8,000 per-unit trade for a one-time product revenue for $2,000 in the year of recognized subscription and recurring revenue. In Q3, about 50% of our business was purchased. That $8,000 trade from 2025, as we look forward to 2027, is only part of that purchase business. Take all of that is what we guided that next year, we see that as a 3%-4% headwind on one-time product revenue, and why we are confident that recurring revenue, ARR specifically, will outpace overall revenue growth.
Jeremy, just a bit more color too, to John's point. While that $8,000 comes out of one-time product revenue and into future recurring revenue, John mentioned that it's about $2,000 in ARR because it is split among the four years, but the entire $8,000 goes into our RPO, of course, by definition. The other thing I will point out is that it is a trade we like because, of course, the business becomes more predictable and has more recurring revenue.
It is really important to note that, when that contract is up for renewal down the road, it is now at a higher rate for the customer for that recurring business, for that SaaS that we are providing. That is an important driver at renewal for us to get a higher ARPU at that time. That is going to compound as we move forward into the future, and that is obviously one of the great values that we are unlocking here.
Understood. That is helpful. Last one before I hop out of the queue. Just in terms of new customers, right, so you added, I think, 51 new customers in the quarter. Can you give us a sense of what portion of your new customers are deploying both Express and eXpedite initially, and how that compares versus maybe where you were a year ago?
Jeremy, we are very excited about eXpedite and the continued adoption of that product, and we are really thrilled about eXpedite 3.0, which is a software release that all of our eXpedite customers will get, further enhancing the capabilities of the product and bringing features they have been really asking for, like identifying what caused the alert with a red box on the image. In terms of the attachment rate, we see a very high attachment rate of eXpedite to Express sales.
Overall, about 9% of our total installed base, customer base, I am sorry, has deployed eXpedite at this point, which in the timeframe that it has been available, we are really thrilled about. As we look into 2027, we see further opportunities to enhance the penetration of eXpedite into the market, in particular at the time of renewal, and we are looking at how we can make those really attractive renewal and upgrade offers for our customers.
Your next question comes from Mike Latimore of Northland Capital Markets. Mike, please unmute your mic and ask your question.
Great. Yeah, thanks. Nice quarter. In terms of the bookings in the quarter, what percent of the units came from the base versus new customers? And then what's a kind of ballpark for the number of units by year-end , do you think?
It was about 60/40. 60% of our overall business came from existing customers. You asked about year-end units?
Yeah, subscription counter. Yep. Mm-hmm.
Yeah, so if you look at our total install base, no change from being comfortably over 10,000, which we said before.
Okay. How do you think about you are moving more revenue into recurring? I mean, how do you think SG says true to the audio. AThe audio bout the just kind of the growth in RPO? What does that kind of need to trend towards to kind of hit your goals?
Yeah, well, I would not give a specific number. We talked about all the drivers that are happening. You should expect that to continue to be healthy from here because of everything we have been talking about , moving more into recurring. Our mix will ultimately impact that in any given quarter or year, which we talked about a few minutes ago.
Of course, and then contract length will also. So those are some variables of one of the reasons we would not want to give a point specifics. But yeah, we are thrilled with the rate of RPO growth, the moves that we are making to increase the long-term value of the business as we build toward the five-year plan that we deployed at Investor Day. More RPO, more ARR, drives more recurring revenue that we are going to recognize. It provides more predictability in the business as we look forward, a higher base as we look into future years, and, as Chris mentioned, increases the lifetime value of these customers, and we are thrilled with how that is working.
All right, great. Thank you.
Just a reminder, if you'd like to ask a question, simply click on the raise hand button at the bottom of your screen. Our next question comes from Eric Martinuzzi from Lake Street Capital Markets. Eric, if you can, please unmute your mic and ask your question.
Yes, curious to know a little bit more about the sales capacity investments that you're making. I know you can press out in several different directions, whether it's direct or channel or marketing spend, but can you prioritize those for us?
Yes. We are encouraged by what we're seeing in the market and adoption of our products, and we think it's the right time to continue to invest in our sales and marketing capacity because we can reach more customers, but also the opportunities that we see in cross-sell with existing customers and renewing existing customers to continue to drive that and ARR up.
In terms of where we're putting that, it's across the board in our markets inside North America, which is the strength of our business. As we've commented previously, we see an opportunity internationally as well, and we're going to make investments in those markets. The international opportunity is an investment for the future because that also has to come as part and parcel with product and regulatory clearances. But most importantly, the majority of that investment is frontline sellers. It's individual sellers that are going out to customers and communicating what Evolv can do for them.
Okay. With regard to the competitive landscape, you've highlighted three different areas about your competitive advantages. There's throughput, there's threat isolation, and there's data insights. Obviously, with the eXpedite 3.0, that's an example of a threat isolation advancement. What are you working on as far as throughput and data insights?
We're continuously working on improving the characteristics of the product that we believe may matter most to the customers and matter most to continued market penetration. eXpedite 3.0 is now out in the market. Customers can upgrade their systems, and they're doing so now. We are also working on Express 11.0, which is out with a reasonable size of cohort of customers in beta, with hundreds of thousands of people having walked through it at this point, and we're encouraged by the signs that we see there in terms of maintaining or improving detection performance while lowering the alert rate.
We think that is a critical function of these systems. It's the characteristic that customers focus on the most because it reduces the friction for people coming in, the visitor experience, and we believe it's the opportunity to lower the friction for staff. As I mentioned in my prepared remarks, staff and the burden of manning an entrance is very often one of the largest barriers to penetration of this category into the market. Simply put, if there's less alerts, there's less things for staff to deal with.
Eric, just in case it is not obvious, John talked about 11.0 on Express and 3.0 on eXpedite. Those are backward compatible. This is the value we provide with our recurring software and services platform. Whether it is Gen 2 or Gen 1 Express, these benefits go to our existing install base and new customers.
Got it. Thank you.
Your next question comes from the line of Shervin Zand from Ladenburg Thalmann. Shervin, please unmute your mic and ask your question.
Hey, guys. Thanks for taking my questions, and congrats on a nice quarter.
Thank you.
Just thinking about your guide and thinking about this kind of framework you've talked about for 2027 , with at least 20% growth, I know that I think international kind of lags behind where we are in the U.S. in terms of entryway security, but I think it's still a sizable opportunity. I want to know, within that growth, is kind of sort of like an international expansion plan or ramp-up included in that, or should we treat that as an essential upside to your framework? Thanks.
We are also very excited about the international opportunity. Safety and security is not totally a U.S. concern. We think it's a global concern, and we're encouraged by the early traction that we see. The comment that I made in terms of it being an investment for the future, I want to be clear. We're making that investment now, focused particularly on product and regulatory compliance. We are a hardware-attached SaaS business. That's a very important distinction. We love the fact that we're putting hardware on a company site and the real estate that we occupy, especially for the durability of the future of the business.
But that hardware also comes with a compliance requirement. eXpedite uses ionizing radiation. There are requirements for that. There are health and safety requirements that apply to Express. We have a cloud platform that gathers data that comes with privacy compliance, and we're at those investments right now. But that informs the comments that I made that we see international as a future growth opportunity. As far as the contemplation of our 2027 guide, it is a small contributor.
It's just the base is so much smaller to grow from to have a real impact on 2027 numbers. It's just such a scale difference. It was about 4% of our revenue in 2025, just to give you some perspective. It can grow wildly for us, and it'll have a little bit of effect early on, just to put it in perspective.
Got it. Then one quick one: it was obviously a sizable beat in terms of Adjusted EBITDA this quarter, and you're moving your guide up by $0.5 million at the midpoint. Just thinking about, obviously, that we're doing 10% last quarter, 10% this quarter. You're pricing it a step down in terms of margin. Is that just due to maybe certain risks in 4Q in terms of sales, or is it that step up in sales and marketing and R&D spend that you were talking about, that those investments you haven't necessarily made yet and you're planning to make in 4Q?
No, it's more about the run rate. If I understand your question, Shervin, just to be clear, were you comparing it to what would be Q4 of 2025, or were you comparing it sequentially?
Like this next quarter.
Q3 versus Q4? Yeah.
Yep.
There's not a dramatic step up in investments. It's a continuation of the investments, and it will matter based on the mix of the products that ship, and therefore the gross margin that comes with a purchase subscription versus a pure subscription. That's one of the main factors. Then you've got just a little bit of seasonality there of a Q3, Q4, but there's no underlying change to the business trends that were going on in Q3 that won't continue in Q4.
Got it. Thanks so much.
You bet. Welcome to the call, Shervin. Great to have you.
Thank you.
Thank you, everyone, for joining. This concludes today's call. You may now disconnect.