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spk01: Good afternoon and welcome to the Evolve second quarter 2021 conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. As a reminder, this conference is being recorded. I would like to now turn the conference over to our host, Vice President of Investor Relations of Evolve Technology, Mr. Brian Norris. Please go ahead.
spk03: Thank you and good afternoon, everyone, and welcome to the call. I'm joined here today by Peter George, our Chief Executive Officer, and Peter Faubert, our Chief Financial Officer. This afternoon, after the market closed, we issued a press release announcing our second quarter results and our business outlook for 2021. This release is available on all major news outlets as well as on the IR section of our website. During today's call, we will make forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934, and the safe harbor provisions of the U.S. Private Security Litigation Reform Act of 1995 that relate to our current expectations and views of future events. All forward-looking statements are subject to material risks, uncertainties, and assumptions, some of which are beyond our control. Actual events or financial results may differ materially from those forward-looking statements as a result of a number of risks and uncertainties, including, without limitation, the risk factors included in our proxy statement and prospectus and updated in our Form 8-K, filed with the SEC on June 28, 2021, and July 22, 2021, respectively, as well as other periodic filings with the SEC. The forward-looking statements made today represent our views as of August 16, 2021. Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee the future results, levels of activity, performance in events and circumstances reflected in the forward-looking statements will be achieved or will occur. Except as required by applicable law, we disclaim any obligation to update them to reflect future events or circumstances. A replay of today's call will be available for two weeks by dialing 1-866-207-1041 Or international callers can call 1-402-970-0847 and using access code 573-7477. Or by accessing the webcast replay on the company's investor relations website at http://ir.evolvetechnology.com. Before I hand the call over to Peter, I'd like to state that we plan to operate an active investor relations program. and look forward to engaging with the Wall Street community as a public company. We welcome the opportunity to attend conferences, non-deal roadshows, and other IR events, and we will use our earnings call each quarter as a platform to share the details of upcoming events, which we will also post on our IR website. To learn more about our IR outreach plans, please feel free to contact me at bnorris at evolvedtechnology.com. With that, I'll turn the call over to our CEO, Peter George. Peter? Peter George Thanks, Brian.
spk02: Good afternoon, everyone, and thank you for joining us today. I'm Peter George, CEO of Evolve Technology, the human security company. We are delighted to be here today, hosting our first earnings conference call as a public company following our launch into the public markets on July 19th. We appreciate the support from our existing shareholders and the confidence our new investors have expressed by joining us on what we believe will be a great journey ahead. We're pleased to be reporting strong second quarter results. Two of the KPIs that we consider to be key measures of our progress are revenue and TCV, or total contract value of orders booked. We delivered record results in both metrics in Q2 and are off to a strong start in Q3. Revenue was $4.5 million in the second quarter, up 590% year-over-year. TCV was $10.9 million in the second quarter, up 361% year-over-year. In a few moments, Peter Probert, our CFO, will share more information about our results and our outlook for 2021. Since this is our first earnings release conference call, I'm going to take a few moments to introduce Evolve Technology. The company was founded in 2013 by threat detection and analytics experts Mike Ellenbogen and Anil Chakara, who were motivated by the then-recent tragedies at Sandy Hook Elementary School and the Boston Marathon. In the wake of escalating gun violence, we recognize the need for a better way to ensure the physical security of large gatherings of people, whether it was at a ball game, a theme park, a concert, a school, a church, or even an office building. Historically, if these venues had any type of physical security device, it was an outdated metal detector which subjected visitors to a prison or airport-like security experience. we had a vision for a new and disruptive way to protect the public from mass casualty events while improving their visitor experience. A platform powered by advanced AI technology and sensors and delivered to customers via a subscription model. With a team of some of the industry's foremost experts in both physical and cybersecurity and the support and guidance of our investors like Bill Gates, Jeff Bishop Finback Investment Partners, DCVC, General Catalyst, Lux Capital, Motorola Solutions, SignWave Ventures, and Stanley Ventures, we invested tens of millions of dollars in R&D, and the result today is Evolve Express, the industry's leading AI-based weapons detection security screening platform. Our offering is now deployed to customers across all types and industries. Our flagship product, the Vault Express, is fundamentally different than any other solution in the market today. First of all, it's more than 10 times faster than traditional metal detectors and can screen 3,600 people per hour. Using AI and dozens and dozens of sensors, it can discriminate between a weapon, like a firearm, and a personal item, like a phone, in under 250 milliseconds, and that's incredibly hard to do. Our AI machine learning models are becoming more sophisticated every day. We believe our technology and big data mode is widening every day with every customer and every visitor screen. And again, because of software, we can add new threat detection features like elevated body temperature to detect COVID-19, and other updates to our platform in real time and deliver those enhancements to our customers through our multi-cloud environment. The real validation of our technology is, of course, in customer adoption, which continued to accelerate in the second quarter as the pandemic has forced venue operators to turn to innovative solutions to support the safe reopening of their facilities. We were already privileged to have many iconic customers like the Lincoln Center, Georgia Aquarium, the Space Needle, Six Flags, the Chicago Cubs, and Manchester City Football. We had a very strong new customer additions in the second quarter with key wins at Butler University, the Four Winds Casino, the Fox Theater, the Paramount Theater, the National World War II Museum, Major League Soccer's The Crew, and Brooklyn Bowl in Las Vegas. These are exciting wins, so why do they choose us? Time and time again, it's for one or more of three compelling reasons. First, we deliver dramatically improved security, which makes our customers' venues safer than ever, ever before. Second, we deliver a superior visitor experience, as our customers' customers can enter the venue without ever slowing down, without ever divesting of their personal items, and without forming a single file close contact line. In fact, they enter without breaking stride. And third, in our ability to deliver significant operational efficiencies that drives up to 70% cost savings for venue operators. we also reduced the physical footprint required by security operators, allowing our customers to reclaim space for visitor experiences and revenue-generating activities. The Columbus crew of Major League Soccer recently launched their new state-of-the-art stadium, Lower.com Field, and they're using Evolve to screen all of their entry points. The fan experience and safety were crucial elements to the design, of lower.com field, and the crew's goal was to provide a world-class experience for all fans to enter and move around the stadium safely. They were looking for the most technologically advanced partners to bring their vision for the stadium to life. Evolve was selected after running a competitive bake-off due to best-in-class technology and the speed with which fans can walk through screening. Not only is the stadium more secure and the experience friction-free for its fans, but the stadium is also driving more people to concessions faster, which in turn drives revenue-generating opportunities for the crew. Another example is the Paramount Theater in Oakland, California. Patron safety has always been the focus, but they struggle to identify systems or methods that could be access management processes effective and not slow or cumbersome. They are now deploying Evolve to help them achieve their goals of keeping unwanted risks out while making the ingress process smooth for patrons. When you consider the value that our customers are realizing, it's no surprise that the market opportunity for AI-based weapons detection screening is very large with a global TAM that we estimate to be $20 billion annually. This is a conservative, bottoms-up pan focused on 10 specific vertical markets, warehouse, distribution and manufacturing, performing arts and entertainment, tourist and cultural institutions, sporting, government, hospitality and casinos, hospitals, houses of worship, education, and finally, office buildings. These markets that we are in today where we have referenceable customers. And rather than include every venue in each of these verticals, we've limited our TAM estimate to only those venues having the optimal size to consider this type of technology in the near term. As a result, we've identified nearly 700,000 digital thresholds at over 400,000 prospect locations. We've assumed a $30,000 per year per site referring revenue opportunity at each of these thresholds, driving a $20 billion total available market. We're the leader in AI-based weapon screening market with 500 systems in service as of June 30, 2021. Yet we've identified about 700,000 digital threshold candidates. This represents a penetration rate today which would round to a zero in a market valued today at $20 billion. We are uniquely democratizing security in this market with an AI-based weapons detection platform delivered via a powerful SaaS model. Now you know why we're so looking forward to exploring this great opportunity ahead. We have a three-pronged growth to address this opportunity. The first, our Land and Expand initiative. It's focused on six key markets where we have presence today. Tourist sites, performing arts and entertainment, theme parks, industrial workplaces, municipal government, and finally, professional sports. We're going to build from these beachheads to capture what we believe today is 175 million annual reoccurring revenue opportunities. Second, we'll expand into adjacent vertical markets like education and hospitals and expand into core verticals and targeted international markets. We estimate these adjacent markets and international opportunities represent an incremental $300 million in annual reoccurring revenue potential. Third, we're going to focus on expanding to our channel partners. We are making good progress. In fact, today, we have 32 distributors in countries throughout Europe, Middle East, and Africa and Asia all authorized to sell our systems. We recently announced a strategic partnership with Motorola Solutions. This partnership is unique as Motorola will be reselling our Express platform with integrated value-added features under the Motorola Solutions logo. and offering a comprehensive premium security offering through their global sales force and their channel partners. We are encouraged by the promise of our combined solutions and look forward to the partnership's growth. We also plan to leverage the strength and reach of our other partners, such as Johnson Controls and Stanley Black & Decker, to fully capitalize on the international market expansion. We look forward to updating you on our progress on the channel and international front as we continue to explore those markets together. So, in summary, we are pleased with our strong start as a public company and the record results we delivered in Q2. We continue to see solid momentum in our key markets fueled by the growing recognition of the value we're able to deliver to our expanding roster of customers. We're encouraged by the strong start in Q3, which we believe positions us well to execute on our growth plans for 2021 and 2022. So, with that, let me turn it over to Peter Probert to review our financial results in more detail and our outlook for the balance of the year. Peter?
spk06: Peter Probert Thanks, Peter, and good afternoon, everyone. Today, I'll cover our financial results for the second quarter and the outlook for the balance of the year. Let me take a moment to review our business model and revenue drivers. We generate revenue from subscription arrangements and from the sale of products, inclusive of maintenance and support. Customers generally enter into 48-month non-cancelable subscription contracts. These security-as-a-service, or SaaS, contracts require low upfront costs by the customer, as subscription fees generally range between $2,000 and $3,000 a month. We bill our customers annually in advance, which allows us to recover our costs very quickly. Our subscription arrangements combine the hardware and software into a single 48-month contract, and we amortize the total contract value on a gradual basis over the 48 months. Sometimes our customers elect to purchase the hardware up front, and then enter into a 48-month subscription agreement for the software. In that case, we recognize the hardware revenue and incur the related costs at the time of activation, and then have a continuing subscription arrangement for the software over the term of the contract, which is also 48 months and non-cancelable. In this model, we have lower gross margin on the product revenue related to the hardware in the first year, followed by very high margin approaching 90% for the remainder of the subscription. With that as context, I'll review our second quarter results. Total revenue was $4.5 million, up 590% year-over-year, reflecting strong new customer additions across our core vertical markets. Product revenue was approximately $2.5 million compared to $17,000 in the second quarter of last year, reflecting strong new customer growth and expanded cohorts of customers who chose to purchase the hardware up front. We may occasionally see more customer purchases of the Evolve Express up front, which may bring more one-time revenue to the P&L in any given quarter. This would result in an impact on the gross margin. In that scenario, we incur the associated direct hardware costs one time at the activation rather than amortizing those costs over the four-year term. Subscription revenue was $1.5 million, up 209% year-over-year, primarily reflecting the strong new customer additions and growth of systems and services. Service revenue, which primarily consists of professional services and training, was approximately $500,000, up 263% year-over-year, reflecting an increase in volume of installations. The total contract value of orders booked, or TCV, was $10.9 million in the second quarter, up 361% year-over-year, again reflecting strong new customer additions. Gross margin was 25.2 percent, reflecting the expanded cohort of customers that selected the purchase model in the second quarter of 2021. This was partially offset by a reduction in material costs. We believe that we are well-positioned to continue to drive gross margin expansion through the second half of 2021, from engineering investment into our product to incorporate lower-cost components. In addition, we expect to gain further leverage from our supply chain due to our rampant production of units and increased purchasing volumes. We believe we remain well-positioned to drive gross margins to the 70% to 75% range as we exit 2021 and into 2022. Total operating expenses were $7.4 million in the second quarter, up 44% year over year. The primary driver of the increase was due to headcount additions across the company, most notably in revenue generating sales, as well as technical talent for our engineering team. In addition, we saw an increase in marketing investment for certain programs and initiatives, as well as expenses related to the public offering. We exited the second quarter with approximately 125 employees, compared to approximately 50 employees at March 31, 2021. Our loss of operations was $6.3 million in the second quarter, compared to $5 million during the second quarter of last year. Finally, our net loss was $22.4 million, or 72 cents per share, compared to $5.1 million, or 22 cents per share, in the year-ago period. Now turning to the balance sheet, we ended the quarter with $10 million in cash and cash equivalents, compared to $4.7 million at December 31st, 2020. Subsequent to quarter end, our combination with New Hold Investment Corp. was completed, which brought the company total gross proceeds of $385 million. I'll close with a few comments on how we're thinking about the remainder of the year. I'll remind you that these are forward-looking statements, and they represent our views only as of today. Our current expectations for revenue range from $20 to $21 million in 2021, which would result in growth of about 375% year over year. As I mentioned, we had a higher-than-normal level of purchase activity in Q2 that drove sequential revenue growth a little faster than we might otherwise have seen. We expect that this may moderate a bit in Q3, but we're still, of course, modeling sequential growth in both the third and fourth quarters of 2021. Further, we expect total contract value, or TCV, to range from $53 to $55 million in 2021, with much of that coming from the key verticals that Peter discussed earlier. Finally, we expect our net loss per share on a GAAP basis to be in the range of 75 to 80 percent based on approximately 84 million of weighted average shares outstanding. So, in summary, we're pleased with our strong second quarter results. We feel good about our plans for the back half of the year. We expect to provide preliminary thoughts on 2022 during our third quarter earnings release and conference call in early November. And with that, I'll turn the call back over to Brian.
spk03: Thank you, Peter. At this time, I'd like to turn the call back over to AT&T to open the call up for Q&A. Again, we're going to ask participants to limit themselves to one question and one follow-up.
spk01: Thank you. Ladies and gentlemen, if you wish to ask a question, please press 1, then 0. If you're using a speakerphone, please pick up the handset before pressing the numbers. Once again, if you wish to ask a question, please press 1, then 0 now. And our first question comes from the line of Shaul Eyal. Your line is open. Please go ahead.
spk07: Thank you. Good afternoon, gentlemen. Congrats on your first quarter as a public entity. Peter, Peter Job or Peter Fulbert, as we look at your quarterly 11 million of TCV, in the context of your Motorola partnership and Stanley as well. Can you provide us with some color around what level of this TCV is associated with the two partners and investors in that regard?
spk02: Hey Shaul, this is Peter. Nice to hear from you. Thanks for your good question. You may remember in the last analyst call, this year we expect 30% of our sales to come through the channel and then 70% will come direct. And then later on in the out years, we expect that to change. In fact, reverse, 70% through the channel and 30% direct. So we have a very channel friendly and channel first go to market strategy. And this year we'll exit that way. I'm not going to talk specifically about Stanley or Motorola as it contributed to Q2. I will tell you, though, that we've had a very, very active channel activation and enablement program going on for the last couple of months, making sure that both companies understand our value proposition, and we have a big pipeline of opportunities to go after today. And as we explained in our partner strategy, We have a deal registration process in the company, and when we look at those deal registrations, there's a lot of pipeline today coming from the channel, and we feel very good about meeting or exceeding that revenue mix exiting 2021.
spk07: Understood. This is great, Carter. Thank you for that. And maybe... Any supply chain constraints you could be seeing since the second quarter ended? You know, the Delta variant numbers are actually escalating. It would appear at current times that there's no impact, but just want to see how you guys think about it. Thank you.
spk06: Hey, Charles. This is Peter Flaubert. We are seeing, obviously, you know, supply chain pressure similar to everybody else right now. The way we're combating that is we're identifying long lead time items. We're working with our vendors to make sure we're placing orders for those raw materials that are long lead time, and we're buying way in advance. So we're using our capital to make investments in raw materials where we see problems coming down the pipe, and we're keeping those raw materials in inventory to make sure we're able to hit our deliverables to customers, at least for the next you know, I'd say four quarters and beyond.
spk01: Thank you. And once again, ladies and gentlemen, if you wish to ask a question, please press 1, then 0. Press 1, then 0 to ask a question. And our next question comes from the line of Mike Lattimore. Your line is open. Please go ahead.
spk05: Excellent. Thanks. Yeah, congratulations on the quarter. Great to hear you guys on an earnings call. You know, you have several target verticals here, I guess. Are any of the target verticals performing, you know, a little bit better or a little bit worse than what you were thinking at the start of the year?
spk02: Hey, Michael, it's Peter. So, you know, you remember that we were focused on those six target verticals. I mentioned them in this earnings report. All of those are doing quite well, particularly casinos. We've done really, really well in casinos the last couple of quarters, and also professional sports are two verticals that are having a higher uptake, but the rest of all the other verticals are performing as expected. And I think we had mentioned earlier that we have a really talented marketing organization that I pulled in from the cybersecurity world, and they're using digital marketing and ABM marketing to reach out to those decision makers in those verticals and make sure that we're generating pipeline and demand and getting our value proposition out. So it's translating into the business both in pipeline but also in excavating the opportunities in the verticals we anticipated. Great.
spk05: And you gave an employee head count. I guess, can you talk a little bit about how many salespeople you have, how many you've hired, maybe plans for the year, and then how the sales cycle has kind of transpired this year?
spk02: Yeah, so let's start with the sales cycle. So we've seen our sales cycle contract from five months to three months, so 90 days. Right now in our plan, when we bring on a new salesperson, we don't expect them to be productive until the third quarter, But what we're seeing, that's being escalated and accelerated. So we've had a lot of new people, quota-carrying salespeople that joined in the first part of January or February actually made a contribution in Q2 and have a big pipeline for Q3. So that's going really well. Our plans are to continue to invest aggressively in people to cover the opportunity and capture the market of this year. In the first half of the year, we added about 60 new people to the company. A lot of those were quota-carrying salespeople, and our plan is to do the same now in the second half of 2021, again, leading with quota-carrying salespeople to make sure that we have enough quota on the street, but also the rest of the organization to deploy the technology and delight our customers so that we can continue to expand our existing customer base. We have an aggressive growth plan this year, and we're going to meet or beat that before we exit 2021.
spk01: Thank you. And once again, if you wish to ask a question, please press 1, then 0. Press 1, then 0 to ask a question. And our next question comes from the line of Brad Reback. Your line is open. Please go ahead.
spk04: Oh, great. Thanks very much. Can you guys maybe dig into a little bit what motivates a customer to buy the hardware up front versus just purchasing it over a multi-year subscription?
spk06: Hey, Brad, it's Peter Flaubert. That's a great question. We've actually seen a lot of our professional sports market customers opt for the purchase subscription, and obviously those are bigger deals. which is really driving the higher volume of purchase subscription. A lot of those guys have CapEx budget to spend, and they'd rather spend the cash up front and own the equipment. But as a reminder, that still comes with a four-year subscription. And as I noted in the remarks, you know, that four years of recurring revenue that we recognize from years two through four comes at a much higher margin because you've already taken the expense on the hardware in the first year.
spk04: That's great. And then one follow-up on the Salesforce side. What type of candidates are you looking for? Who's an ideal person to sell this solution?
spk02: A really successful experience enterprise sales executive with a great track record. And we're actually getting people from the cyber world and also from the VMS space, right? They know the physical security world. They know video analytics. So we've had three or four reps join us from that world. They have relationships already with the channel, and they're able to activate the channel and partner with them pretty quickly. We also, as you know, because we sell to people that oftentimes are formerly from the safety world, former police officers, Secret Service, and CIA, we're also finding that that when we find somebody like that, they have a built-in network. So they're normally coming from those three buckets, enterprise sales from cybersecurity, VMS, right, from the physical security world, and then people from the safety world in cities that have a tight connected tissue of safety people who are the decision makers for physical security.
spk03: Brad, did you have a follow-up question?
spk01: Thank you. And once again, ladies and gentlemen, if you wish to ask a question, please press 1, then 0. That's 1, then 0. And at this time, sir, we have no further questions.
spk03: Terrific. Really appreciate that. So that wraps up the Q&A session. Thank you for bearing with us as we work through a few technical things at the beginning of the call. Thank you very much. Appreciate that. We look forward to seeing as many of you as possible during the outreach period we're about to embark upon. So with that, let me turn the call back over to Peter George to close today's call.
spk02: Yeah, thanks, Brian. Again, thank you, everyone, for joining today. It's been a really exciting time here at Evolve. We believe we're well-positioned to capitalize on a large and unpenetrated market opportunity with Evolve Express. We're thrilled to be with you, and we appreciate your interest and support in the company. Good night, everyone.
spk01: Ladies and gentlemen, that does end your conference for today. Thank you for your participation and for using AT&T Event Conferencing Services. You may now disconnect.
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