Evolv Technologies Holdings, Inc.
Q4 2021 Earnings Call Transcript

Published: 14 Mar 2022

[Operator:]

Good afternoon, and welcome to the Evolv Technology Fourth Quarter Earnings Results Conference Call. As a reminder, ladies and gentlemen, this conference is being recorded. I would now like to introduce your host for today's call, Brian Norris, Vice President of Investor Relations for Evolv Technologies. Please go ahead, sir.

[Brian Norris:]

Thank you, Melisa, and good afternoon, everyone, and welcome to the call. I'm joined here today by Peter George, our Chief Executive Officer; and Mario Ramos, our Chief Financial Officer and Chief Risk Officer. This afternoon, after the market closed, we issued a press release announcing our fourth quarter results and our business outlook for 2022. This press release is available on major news outlets as well as on the IR section of our website. Please note that during this afternoon's call, we will be referring to an accompanying investor presentation, which can also be found on our Investor Relations website. As highlighted on Slide 2 of today's presentation, during today's call, we will make forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, 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 set forth from the caption Risk Factors and our prospectus filed with the SEC on September 3, 2021, and in other documents filed it or furnished to the SEC from time to time. Forward-looking statements made today represent our views as of March 14, 2022. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that future results, levels of activity, performance and events and circumstances reflected on those statements will be achieved when 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, including adjusted gross profit, adjusted gross margin and adjusted EBITDA, which we believe provide an additional insight for investors in evaluating ongoing operating results and trends. These measures should not be considered in isolation from or as a substitute for financial information prepared in accordance with generally accepted accounting principles. Reconciliations from GAAP to non-GAAP metrics for our reported results can be found in our press release issued today and in the accompanying investor presentation. Finally, to provide investors with incremental insight and transparency, today we will begin sharing 2 additional performance metrics typical of SaaS business, ARR and RPO. ARR, or Annual Recurring Revenue represents our subscription revenue as well as the recurring service revenue to leading to purchase subscriptions to normalized through a 1-year period. RPO or Remaining Performance Obligation reflects the difference between contract value and revenue recognized for installed units as of the end of the quarter. TCV and RPO should be independently of and not as a substitute for or forecast of revenue or deferred revenues. Please keep in mind, our definition of these measures may differ from similarly titled metrics presented like other components. With that, I'll turn the call over to Peter. Peter?

[Peter George:]

Thanks, Brian, and thank you, everyone, for joining us today. We're pleased to share the highlights of our fourth quarter and full year results as well as our strategy and goals for 2022. But before we do that, let me take a moment here on Slide 4 to remind every one of our mission, which is to democratize security, making venues, facilities and people everywhere, more secure and making the world a safer and more enjoyable place to work, learn and play. Moving to Slide 5. There are powerful secular growth trends that continue to drive the need to digitally transform facility safety and the visitor experience. The current accelerating trends in firearms ownership, pandemic awareness and anxiety are converging and driving increasing focus, visitor safety and the visitor experience. We know the public is demanding a better way to gather again. They do want to visit venues again, but they want to do it safely, safe from the threat of gun violence and safe from health risk like COVID. They want to have a frictionless and touchless venue experience and they want that experience to be personal, informed and smart. Moving to Slide 6. I believe today's imperative an urgent need is to make everyone and everywhere safer. It's our shared belief that the pandemic has forever changed the way we live, how we work and where we play, that the world has become a more unpredictable and scary place. And that with that, people have an elevated sense of anxiety about gathering again and that's not going to change anytime soon. We know that gun violence in the United States is at historic highs as evidenced by close to 700 mass shootings in 2021. I personally spend lots of time in the field listening to our customers. And I'm sure about one thing, they're relying on us, on Evolv, our solutions to help make their venues safer and their visitors happier. This is a moment, a unique moment as venues and companies are making the architectural shift from analog to digital and Evolv is leading the digital transformation of physical security. As you know, Evolv developed the first and only AI-based weapons detection platform that prevents threats from entering places they shouldn't while preserving the visitor experience as people walk right in at the pace of life. Through our SaaS-based subscription model and unprecedented data set, we can finally democratize security and make it available to anyone who needs it. This is our mission at Evolv, and why I feel so strongly about our business today and about our future tomorrow as the human security company. The results we are reporting today reflect that intersection of our mission and our imperative to meet the moment we now have. Moving to Slide 7. Our fourth quarter results were highlighted by strong new customer acquisition, the introduction of demand-driven product innovations and acceleration with our channel partners. We reported total revenue of $6.8 million in the fourth quarter, up 236% year-over-year and full year revenue of $23.7 million, up 395% over 2020. As Mario will describe in his remarks, we had an adjusted in revenue recognition in the fourth quarter of 2021 as we determined that our SaaS offerings have now taken on a greater portion of our offerings overall value delivered to our customers. This, in turn, requires us to ascribe more value to our subscription revenue. We believe this is a positive transition for a growing SaaS business like ours. Despite this change, we still reported by the news for the year that were beyond the top end of our guidance range, while adding greater visibility into our expected forward revenues. We added 84 new customers in 2021, which was 7x the number of our new customers added in 2020. We define subscriptions or deployed units as active revenue generated of Evolv Express under contract. We grew subscriptions from 214 to over 700 in 2021, reflecting growth of 229% year-over-year. We had no subscription churn in the fourth quarter and have not had any renewal up to yet. Finally, Total Contract of Orders booked or TCV was $17.9 million in the fourth quarter, up 201% year-over-year and was $53.8 million in 2021, up 148% year-over-year. Turning to Slide 8. We were honored to welcome more than 2 dozen enterprises to our customer base in the fourth quarter. While others in the security screening market cite a number of pilots or RFP activity, we're grateful to have added 84 new customers in 2021 to bring our customer base to over 200 at the end of the year. Our pace of new customer acquisition accelerated throughout the year. In the fourth quarter, we again saw a broad diversification of our customer acquisition activity. As you can see on this slide, some of our newest customers include DHL, Birmingham Race Course Casino, Champagne Schools, Fall River Public Schools, Florida Theater performing Arts Center, the Fox theater in Atlanta, the Jalaz Center, the Monterey Bay Aquarium, the North Shore Hospital, the Van West performing Art Center and the Woodruff Arts Center. 20% of our TCV came from professional sports vertical as we secured another NFL franchise, our fifth pro football team as well as another MLB team, our fifth professional baseball franchise. We now have 15% of the NFL and nearly 20% of the MLB are now Evolv Express customers. We also landed an important opportunity by winning the Capital One Arena in Washington, D.C. Nearly 15% of our TCV in the fourth quarter came through K-12 education market where we closed 6 transactions. We unfortunately saw acceleration in that market immediately following the school shooting in Oxford, Michigan. 10% of our TCV in the fourth quarter came from tourist sites, including the Monterey Bay Aquarium and some of the most iconic venues in the United States. We saw important contributions from the health care market, which includes hospitals and clinics and represented about 10% of our fourth quarter TCV. We also saw continued growth in the hotel and casino market which represents about 10% of our fourth quarter TCV. 3 other vertical markets each contributed about 10% to TCV in the quarter, including performing art centers, convention centers and factory warehouses. Let's turn to Slide 9 to update you on our go-to-market efforts, which consists of a direct quota-carrying sales force as well as a growing network of channel partners that help extend our reach in certain geographies or vertical markets. We've been clear about our intentions to scale the company with and through partners in an approach we refer to as channel centric. Our goal at the beginning of 2021 was to secure 15% of our TCV with partners. We ended up doubling that to 30%, strong evidence of both customer demand and partner engagement. 45% of our fourth quarter TCV involved the partner, and we're now starting to see transactions closed with channel partners without any involvement at all from us. We are seeing broad activity across 3 dozen authorized channel partners and several strategic global partners in Johnson Controls, Stanley Black & Decker, and of course, Motorola Solutions, where incidentally, the number of qualified opportunities in our pipeline more than doubled in the fourth quarter to over 500 prospects. Turning to Slide 10 highlights the growing separation that we're creating between Evolv Technology and the rest of the competitive market. There are several unique elements of the Evolv story, which are highlighted here on the left side of the slide. We are currently commercially screening more than 20,000 people every hour or on average about 500,000 people every day. That volume is important when you consider that we're collecting more than 1.5 million data points for each of these visitors. Said another way, we're collecting about 750 billion security data points every single day across more than 200 venues in more than a dozen vertical markets. Simply put, we've created what we believe to be the single largest data lake in the security screening industry. As a result, our customers turn to us to power their digital thresholds. We're digitally transforming security by and with critical capabilities in such areas as weapons detection, crowd assessment, mass notification and people analytics. These capabilities enable us to continually raise the bar of innovation and bring better and better products to the market. And in time, we believe this will enable us to optimize Average Revenue Per Unit or ARPU and maximize renewal rates as and when customers reach the end of their initial SaaS contracts. By having more data and better products, we believe we're able to deliver a superior value proposition to the market. We're able to buy brands based on this unique, large and rapidly growing data set that makes it possible with our advanced algorithms to improve detection accuracy over time. We believe this enables Evolv to deliver an improved security posture, which makes our customers venue safer than ever before. In addition, we also 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 ever forming a single file, close contact line. We strive to deliver significant operational efficiencies that drives up to 70% cost savings for venue operators. Finally, we're able to provide venue operators with a higher level of valuable data, which are delivered automatically and available on demand via Evolv Insights, our analytics platform to our customers to make better security decisions before, during and after events. Before I turn things over to Mario, I want to turn to Slide 11 to share some thoughts as to some of the near-term and longer-term drivers of our business, which we believe position us well to fulfill our mission of democratizing security for all. Several of the near-term drivers of the business include the reopening of facilities, and that's happening right now. Facility operators are looking for a new and safer way of welcoming visitors back and certainly Evolv Express does just that. We will look to balance this demand with the impact that COVID has had and likely will continue to have on both our supply chain as well as our ability to access customers' premises to install booked units. Other near-term drivers are expected increases in quota-carrying sales executives, the increase in quotas for 2022 and the price book increases we have implemented to gain full value for our subscription offering, while also offsetting the impact that increasing inflation has had across nearly every industry. Another driver is our channel-centric strategy, which continues to show growing momentum. We're expecting channel partners to be involved in as much as 40% of all opportunities in 2022, up from 30% in 2021. Switching to some of the long-term drivers of the business. First and foremost, the secular demands for strong public safety is more important than ever. Unfortunately, trends in gun islands are escalating, not abating. Second, we see a significant long-term opportunity for both with existing and new channel partners. We are making great progress and still, there's much more to do. We expect to benefit from ancillary revenue streams with analytics and digital tools, which we expect will drive average ARPU higher over time while also enhancing renewal opportunities. Finally, we anticipate new potential products that can drive deeper penetration of large untapped TAM segments. With that, let me turn this over to Mario, who will take you through our financial results, key trends and our outlook for 2022. Mario?

[Mario Ramos:]

Thank you. As Peter mentioned, we continue to benefit from strong secular growth trends. Highlighted on Slide 13, revenue in 2021 was $23.7 million, up 395% year-over-year. This reflected strong customer adoption. Revenues pro forma for a change in our revenue recognition assumptions would have been $25 million. This reflects the impact of the adjustment we had in the fourth quarter of 2021 to our stand-alone selling price assumption. That change is a result of the recent rollout of the newest Evolv Express platform and the advancements in the Evolv Cortex AI software. This change means that for accounting purposes based on ASC 606, a greater percentage of the value of our customer contracts is allocated to software versus hardware. This impacts the manner and timing of our revenue recognition for accounting purposes. Though I want to be clear, there have not been any changes to the way we market and sell our products. Have this change in revenue recognition not been made, our revenue in 2021 would have been $25 million instead of the $23.7 million we actually reported. We have included a table with more information in the appendix. We reported total recurring revenue, which reflects both subscription revenue and the recurring portion of the service revenue of $9.8 million in 2021, reflecting growth of 180% over 2020. We're also highlighting here annual recurring revenue, or ARR, which represents monthly subscription revenue and the recurring service revenue related to purchase subscriptions normalized to a 1-year period. ARR at December 31, 2021, grew to $12.9 million, up 220% over December 31, 2020. TCV, or Total Contract Value of orders booked was $53.8 million, reflecting growth of 148% year-over-year. TCV will convert to revenue as we install Evolv Express at customer sites. We no longer plan to guide to TCV, which we believe is not the most useful indicator for performance because it does not consider the growing importance of installation activity. Finally, we disclosed remaining performance obligation, or RPO, which reflects the difference between contract value and revenue that has already been recognized for units that have been deployed as of the end of the quarter. RPO at the end of the fourth quarter of 2021 was $40.2 million, up 200% year-over-year. Investors should expect us to regularly report on ARR and RPO, which are indicative of the progress we continue to make. Flipping to Slide 14. We're sharing the additions, which is subscriptions deployed as well as ending number of subscriptions deployed. In time, we would expect to add churn and renewal activity. However, we have not experienced any churn given our contracts are 4 years in length. As you can see here, we added 136 additions in the quarter and ended the year with 703 subscription deployments. In addition, we ended the year with approximately 128 units in installation backlog. These represent valid purchase orders, which have been included into TCV but no subscription and service revenue has yet been recognized since the deployment has not yet been completed. It is important to point out that Omicron-related restrictions either among our customers or among our personnel impacted our ability to install units in the fourth quarter of 2021. As we move to Slide 15, a Here's a deeper look at the trends in ARR and RPO. As you can see here on the left, ARR was up 220% year-over-year in 2021. This continues to reflect the strong new customer adoption we are seeing as well as the expanding deployments we continue to see across our customer base. On the right, you see which again reflects the difference between contract value and revenue already recognized for installed units as of the end of the quarter. RPO grew 200% year-over-year to $40.2 million. Also highlighted on the chart on the right is the value of the backlog, which is the value of units that are fully under contract but are yet to be deployed. As you can see, we had another $10.6 million of contracted revenue associated with units that had not yet been installed as of December 31, 2021. So in total, about $50.8 million of RPO plus backlog. Turning to Slide 16. I want to briefly discuss our financial highlights. As previously discussed, total revenue was $6.8 million in the fourth quarter, up 236% year-over-year. For the full year, total revenue was $23.7 million, up 395% over 2020. We reported gross margin of 4% in the fourth quarter and 28% for the full year, broken down as follows

[Brian Norris:]

Thank you, Mario. At this time, we'd like to open the call up for Q&A.

[Operator:]

And we'll first go to the line of Shaul Eyal with Cowen.

[Shaul Eyal:]

Thank you. So just to recap, what would have been the potential revenue guide, but for fiscal '22, but for the accounting adjustment that you're taking the company through?

[Mario Ramos:]

Yes, '22, we didn't talk about an adjusted number in '22, what we said is if all of '21 had been -- had used the same SSP assumption that we used in the fourth quarter for the entirety of of 2021, our guidance would have been a revenue growth of 58%. So if you look in the appendix of the earnings deck, you can see the lower revenue number that we're talking about of $19.7 million for 2021. We didn't provide what 2022 would have been under the old assumption.

[Shaul Eyal:]

Got it. Got it. And as we think about fiscal '22 when the investment that you're putting into the company. I know typically, maybe you're not guiding towards headcount, but how should we be thinking about fiscal '22 ending from a headcount perspective give or take with some sort of a range?

[Peter George:]

We hired about 100 people in 2021. So we had a big investment in people and infrastructure during the year that we went public. Our plan for 2022 is to add about 70 to 75 more heads. So we should be close to 200 people, 250 people before -- as we exit 2022.

[Operator:]

We'll go to Mike Latimore with Northland Capital Markets.

[Mike Latimore:]

The diversity of bookings look great this quarter. I guess in terms of the -- just the sales environment, what are you seeing from a sales cycle standpoint, are things moving quickly, slowing relative to 6 months ago?

[Peter George:]

Yes. So I think the last time we spoke, we said that our sales cycle is contracting to about 90 days. It's still there. Two things changed for us in Q4 and in the beginning of Q1. In Q4, Omicron showed up in the middle of December. We moved from being -- having most everybody in the office to being fully remote again, and unfortunately, so did our customers. So our customers were back home. And we saw a slowdown a little bit in TCV, but mostly in the ability to deploy systems. So the sales cycle didn't change, but our customers went home and it was hard to reach them. And of course, when they got their facilities down, we couldn't install system. So we ended up deploying 136 systems in Q4, but we left about 100 systems in backlog in TCV exiting the year. So we had pretty robust bookings. It's just we couldn't get them installed. So that's one thing. The second thing we did in Q4, and this really talks to the sales cycle. We mentioned we had a significant investment in the channel in Q4, and they represented a significant portion of our business. That slowed down our sales cycle by about 30 days because we don't have direct control of the channel like we do when we work directly. So we're now planning as we go forward through that experience. We're planning on making sure instead of having 3x the pipeline to make our plan, we want to have 4x the pipeline, and we want to make sure we have an extra month to plan for because of the channel engagement part of the business. Having said that, you started out by talking about diversification we had a great quarter in K-12, in health care, in municipalities, places we weren't traditionally in and the channel helped us open up those markets. So -- it was the big investments to make in Q4, we know it's going to pay big dividends in 2022.

[Mike Latimore:]

And I guess in a lot of those markets you just mentioned you're not really replacing a metal detector, you're kind of going in greenfield?

[Peter George:]

You bet. And so as you know, a $20 billion TAM, $18 billion is greenfield and all of these markets or places, there traditionally isn't metal detector. So 90% of our deals continue to be uncontested. When we have to compete there, it's normally a metal detector company, and we like our win rate when we have to compete with them.

[Mike Latimore:]

Yes, yes. And then just on the accounting change, does that relate to just the purchase subscription model or the purchase subscription and product-only model?

[Peter George:]

So right. So the purchase subscription where we're selling equipment upfront to a client is the one that gets impacted by that.

[Mario Ramos:]

And Mike, just to be super clear on this, this is us following gap. This is not about us changing rules. This is -- I mean this is us adhering to generally accepted accounting principles in the United States. And so what we are finding is that a greater percentage of our revenue is attributable to our SaaS offering, which is a great thing for a growing test business like ours. And so that's what you're seeing. This is a great thing long term.

[Operator:]

Next, we'll go to Brian Ruttenbur with Imperial Capital.

[Brian Ruttenbur:]

So I want to just clarify the guidance and how you're going to report going forward. Are you still going to have -- because you mentioned or have written $29 million to $31 million in total revenue and $27 million to $28 million of that is recurring. Are you still going to have product subscription and services revenue, is there all going to be subscription and then other category?

[Mario Ramos:]

So to be clear, Brian, it's not of that. The $27 million to $28 million annual recurring revenue is a stand-alone metric just taking annualized revenue for the last month of the year, times 12, right? So December, what we expect December subscription recurring revenue to be and annualizing that. So it's not one is the part of the other. The $29 million to $31 million represents the revenue we generate throughout the year from both product and subscription. We'll continue to do that. There is no change at this time.

[Brian Ruttenbur:]

Okay. That was obvious. I appreciate you pointing that out. And then you talk -- the second part of the question also on financials. You talked about the first half being weaker than the second half. Can we talk a little bit about seasonality? I think that you had an extremely strong third quarter. Is that how you see it as the peak in the third quarter and then maybe a little drop off in the fourth quarter?

[Mario Ramos:]

Yes. I think that's probably a fair statement. We're still very early on. Obviously, we're learning about seasonality. But just by the sheer number of off days in the fourth quarter and distractions by clients because of the holidays, I wouldn't be surprised if we have a similar pattern into this year.

[Brian Ruttenbur:]

Okay. And then in terms of the onetime charge that was related to the write-off of the -- I guess it's the first generation Evolv system, roughly $6 million. Is that correct?

[Mario Ramos:]

Not that big. It was $1.6 million.

[Brian Ruttenbur:]

$1.6 million.

[Mario Ramos:]

It's yes, it's basically -- they're the old generation units most of whom was based in the U.S. that we proactively swapped out for clients. Part of the reason we did that is because the new units allow clients to have greater functionality on our software platform. So -- but -- and we were able to extend contracts as well. So there was a benefit to the company, but short term, it meant that we had to write off those units.

[Brian Ruttenbur:]

Okay. Is there any other older units that could be written off in 2022? Or is this all cleaned out?

[Mario Ramos:]

This is cleaned out.

[Peter George:]

And Brian, you may remember that Edge product was our first generation product. It was millimeter wave, and it was a metered product, meaning you went through 1 at a time. Once we introduced Express, it was our second generation, everyone wanted to go to that. And so we've allowed them to do that. So we have no more write-offs with Edge anymore.

[Mario Ramos:]

Yes. And Brian, just to be clear, we do still have some of those units in the field. There are about 75 units, mostly international. But again, we don't expect to be writing them off, they'll continue to operate. The U.S. is a different decision because of our platform.

[Operator:]

And our last question is from Rob Galvin.

[Brian Norris:]

Rob, it's Brian Norris. You line is open, if you wanted to ask a question on the call.

[Rob Galvin:]

Can you guys hear me?

[Brian Norris:]

Yes, yes.

[Rob Galvin:]

Sorry, I think it was on mute. This is Rob Galvin on for Brad Reback. I'm just wondering if you expect to raise additional money or if you think that you can get to cash flow neutral with the -- cash flow neutral -- with the current model?

[Mario Ramos:]

Yes, we do expect to get cash flow neutral Rob, not only do we expect to do that with the current improvement acceleration of the business. But we have a lot of flexibility to raise additional capital or slow the cash burn like the third-party financing I talked about for some clients. We're really kind of at the early stage of evaluating that. Obviously, that might preserve cash for us to do even more things. But the bottom line is we don't expect to raise any additional capital.

[Brian Norris:]

Rob, any follow-up question? Or are you good?

[Rob Galvin:]

No, that was it.

[Brian Norris:]

Okay. Terrific. I'm going to turn it over to Peter George, our CEO for some closing remarks.

[Peter George:]

All right. We love -- we want to thank everyone for joining us today. We're really excited about our performance in 2021 and very enthusiastic about the future of the company. So thank you, everyone, for joining us. We look forward to the next earnings call. Thanks, everyone.

[Mario Ramos:]

Bye-bye.

[Operator:]

Thank you. Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Event Conferencing Service. You may now disconnect.