Evolv Technologies Holdings, Inc. (NASDAQ:EVLV) is a leading provider of AI-based weapons detection solutions, revolutionizing the security screening industry. With a mission to democratize security and make the world a safer place, Evolv has established itself as a trailblazer in the field of touchless security screening.

Business Overview

Evolv's flagship product, Evolv Express, utilizes advanced sensors, artificial intelligence software, and cloud services to reliably detect guns, improvised explosives, and large knives while ignoring harmless items like phones and keys. This innovative approach not only enhances security at venues and facilities but also improves the visitor experience by making screening up to ten times faster than alternatives at up to 70% lower total cost.

The company's solutions have screened over 1.3 billion visitors worldwide since its inception, making it one of the most widely deployed advanced security screening systems globally, second only to the United States Transportation Security Administration (TSA). Evolv's customer base spans a diverse range of industries, including major sports stadiums and arenas, notable performing arts and entertainment venues, major tourist destinations and cultural attractions, hospitals, large industrial workplaces, schools, and prominent houses of worship.

Evolv offers its products primarily under a multi-year security-as-a-service subscription pricing model, which delivers ongoing value to customers, generates predictable revenue, and creates expansion and upsell opportunities. The company also provides a distributor licensing model, where customers can purchase the hardware directly from Evolv's manufacturing partner, Columbia Electrical Contractors, Inc., while Evolv still contracts directly with the customer to provide a multi-year security-as-a-service subscription.

Evolv operates in a growing market for AI-based weapons detection solutions, with a few substantial players competing in the space. The company believes it maintains a leadership position, with its extensive customer base and widespread deployment of Evolv Express units, which screen an average of 2.5 million visitors every day and detect over 500 firearms daily.

While the market has room for multiple players, Evolv continues to see customers select its products due to the superior detection capabilities, focus on end-user experience, integration into broader security infrastructure, and ongoing software upgrades. The company has also been securing more head-to-head wins and witnessing the revisitation of previously lost opportunities, as venues and facilities recognize the limitations of simpler, less-capable security screening solutions.

Evolv estimates that the total addressable market for its solutions is substantial, with significant growth potential across its key verticals, including education, healthcare, professional sports, and industrial warehouses. The company believes it is well-positioned to capitalize on the increasing demand for touchless, AI-powered security screening as venues and facilities continue to prioritize safety and the visitor experience.

Financials

Evolv's financial performance has been marked by a transition towards a more recurring revenue-driven business model. In the fiscal year ended December 31, 2023, the company reported annual revenue of $80.4 million, a decrease from the previous year's $92.3 million. This decline was primarily due to the company's strategic shift away from one-time product sales towards its subscription-based offerings, which now account for a larger portion of the revenue mix.

The company's annual net income for the fiscal year 2023 was -$106.3 million, compared to -$92.1 million in the prior year. This net loss reflects Evolv's continued investment in research and development, sales and marketing, and general and administrative expenses as it focuses on driving long-term growth and market share expansion.

Evolv's annual operating cash flow for the fiscal year 2023 was -$9.8 million, while its annual free cash flow was -$82.5 million. The negative free cash flow was primarily due to the company's significant capital expenditures related to the deployment of its Evolv Express units under the subscription model.

Quarterly Performance

In the first quarter of 2024, Evolv reported revenue of $21.7 million, up 17% year-over-year. This growth was driven by new customer acquisitions, strong expansion from the company's installed customer base, continued traction with its channel partners, and the increasing adoption of its Evolv Express subscription offerings.

The company's annual recurring revenue (ARR) grew 96% year-over-year to $83 million as of the end of the first quarter of 2024. Notably, recurring revenue accounted for 89% of Evolv's total revenue in Q1 2024, compared to approximately 50% in the same period of the prior year.

Evolv's adjusted gross margin expanded to 61% in the first quarter of 2024, up from 26% in the same period of the previous year. This improvement was largely attributable to the company's transition towards its subscription-based business model and the related increase in recurring revenue.

Outlook

Evolv has provided updated guidance for the full year 2024, reflecting the impact of the regulatory inquiries and media coverage on its sales cycle. The company now expects to generate revenue of approximately $100 million for the year, representing growth of 25% compared to 2023. Additionally, Evolv anticipates exiting 2024 with ARR of around $100 million, reflecting year-over-year growth of 33%.

Despite the near-term challenges, Evolv remains committed to its long-term profitability goals. The company is reaffirming its estimate for adjusted full-year gross margin of approximately 60% and its belief that it can deliver improvements in full-year adjusted EBITDA of at least 40% in 2024. Furthermore, Evolv believes it is on track to achieve positive adjusted EBITDA in the first half of 2025.

Risks and Challenges

Evolv's business is subject to various regulatory and governmental inquiries, including investigations by the Federal Trade Commission (FTC) and the Securities and Exchange Commission (SEC). While the company is cooperating with these investigations, the regulatory overhang has resulted in lengthened sales cycles, as customers seek to satisfy additional due diligence requirements. Although Evolv's win rates have improved, the uncertainty surrounding the regulatory matters has made it more challenging to provide near-term forecasts.

Additionally, Evolv operates in a competitive landscape, and its ability to maintain its market-leading position and continue to innovate is crucial to its long-term success. The company must also navigate macroeconomic and market conditions, such as the impact of rising inflation and interest rates, supply chain disruptions, and the potential for a broader economic downturn, which could affect customer spending and demand for its products.

Conclusion

Evolv Technologies Holdings, Inc. is at the forefront of the AI-based weapons detection industry, transforming the security screening landscape with its innovative Evolv Express solution. Despite the near-term challenges posed by regulatory inquiries and macroeconomic factors, the company remains committed to its long-term growth and profitability goals, leveraging its strong market position, expanding customer base, and subscription-based business model.

As Evolv continues to invest in research and development, sales and marketing, and strategic partnerships, the company is well-positioned to capitalize on the growing demand for touchless, AI-powered security screening solutions that enhance safety and the visitor experience. Investors should closely monitor the company's progress in navigating the regulatory environment, executing on its sales and marketing strategies, and delivering on its financial and operational targets.