Description

EVLV

What does Evolv do?

Evolv Technologies specializes in AI-powered solutions for physical security and threat detection. Their products utilize advanced artificial intelligence algorithms and sensor technology to enhance security screening processes in high-traffic environments such as schools, stadiums, hospitals and other public venues.

The Company’s flagship product is Evolv Express, a system designed for fast and efficient screening of individuals entering a venue or facility. It employs a combination of sensors and cameras, to scan people for threats such as weapons or explosives without the need for physical pat-downs or metal detectors.

Evolv's technology is aimed at improving both the speed and accuracy of security screening, allowing organizations to maintain a higher level of security while minimizing disruptions to the flow of people entering their premises. Their use of AI and automation is anchored in the belief that the less reliant security needs to be on the “human element”, where errors can occur, the better for accuracy, convenience and removal of bias. By leveraging a continuously improving feedback loop via software updates, their products can analyze data in real-time to quickly identify potential threats and alert security personnel, enabling them to take appropriate action swiftly.

Due to its much higher throughput and pinpoint accuracy, Evolv isn’t merely displacing legacy metal detectors. Most of the company’s growth is coming from public spaces that have never had any weapons detection in place before.

To give you a sense of what the product looks like, here's a recent picture that I took at our local hospital in State of Connecticut:

Meanwhile, here is a picture that I took at White Plains Airport (HPN) on a recent flight:

And, just sent to me within the last 24 hours is this picture of the Evolv product in Cannes, France at the big global advertising conference:

So, how does Evolv compare to traditional options?

From our perspective, Evolv Technologies offers several advantages over traditional metal detectors:

1. Non-Intrusive Screening: Evolv's systems utilize sensors and algorithms to conduct non-intrusive screening of individuals. Unlike metal detectors, which require people to remove metal objects and may necessitate physical pat-downs, Evolv's technology allows individuals to pass through screening checkpoints more quickly, where they can keep their bags and purses on them.

2. Faster Throughput: Evolv's screening process is faster compared to metal detectors. It can process a high volume of people quickly, reducing wait times and congestion at entry points. This is especially beneficial for venues with large crowds, such as stadiums and airports, where efficiency is crucial. It has led to as much as 35% higher concession sales  in stadiums and safely getting kids into their seats at schools. Even in cases where secondary screening is required, because of Evolv’s proprietary and unique approach in “boxing” the area in question, a secondary search is targeted at specific areas only and hence can be much quicker than a full wand or pat-down. This feature is also a big reason why NYC is looking to put Evolv in subways (more on that later).

3. Detection of Non-Metallic Objects/threats: While metal detectors primarily detect metal objects, Evolv's technology can also detect a wider range of threats, including non-metallic items such as explosives, firearms, etc.

4. Real-Time Threat Detection: Evolv's systems analyze data in real-time to detect potential threats as individuals pass through screening checkpoints. In contrast, metal detectors may only trigger an alarm when metallic objects are detected, requiring further manual inspection to determine the nature of the threat.

5. Enhanced User Experience: By offering a faster, non-intrusive screening process, Evolv's technology improves the overall user experience for individuals entering a venue.

Overall, Evolv Technologies' advanced threat detection solutions offer a more efficient, effective, and comprehensive approach to security screening compared to traditional metal detectors, making them a preferred choice for enhancing security in various high-traffic environments.

Large TAM: optimal end markets

Sadly, there is an undisputed gun violence epidemic in the US.

Source: Evolve Investor Presentation summary chart

Whether it's a small K-12 school or a large university campus, Evolv's technology can be deployed effectively to enhance security measures and mitigate the risk of school shootings.

Overall, by leveraging Evolv Technologies' advanced threat detection solutions, schools can bolster their security infrastructure, create safer learning environments, and provide peace of mind to students, parents, and staff in the face of the ongoing threat of school shootings.

Evolv continues to expand and add many blue chip customers including:

Evolv Technologies' solutions can significantly enhance safety at stadiums and other public gatherings by providing advanced threat detection capabilities and streamlining security processes. Here’s how we think about EVLV’s advantages:

1. Efficient Screening Process: Stadiums and large public gatherings often face challenges with long wait times and congestion at entry points due to security checks. Evolv's technology enables fast and efficient screening of individuals without the need for physical pat-downs or extensive bag searches. This helps to reduce queues, minimize delays, and improve the overall flow of people entering the venue.

2. Non-Intrusive Security Measures: Traditional security methods such as metal detectors can be intrusive and disruptive to the fan experience. Evolv's systems offer non-intrusive screening using AI-powered sensors and algorithms, allowing attendees to pass through security checkpoints quickly and with minimal inconvenience.

3. Real-Time Threat Detection: Evolv's solutions analyze data in real-time to detect potential threats, including weapons and explosives, as individuals enter the venue. If a threat is identified, security personnel can be alerted immediately, enabling them to respond swiftly and mitigate any potential risks to public safety.

4. Scalability and Adaptability: Evolv's technology is scalable and can be tailored to the specific needs of different venues and events, whether it's a small concert or a major sporting event. The system can be easily deployed and integrated into existing security infrastructure, providing a flexible solution that can adapt to changing security requirements. It is the only weapons detection product with open API’s allowing interoperability with AI-enabled video cameras, security gates, and other emerging perimeter technology.

5. Enhanced Situational Awareness: By providing security teams with real-time threat alerts and actionable intelligence, Evolv's technology enhances situational awareness and enables more effective security responses. This allows security personnel to quickly assess and address potential threats, helping to ensure the safety of attendees and staff.

6. Public Confidence/Improved Peace of Mind: By implementing advanced threat detection solutions from Evolv Technologies, stadiums and event organizers can demonstrate their commitment to safety and security, enhancing public confidence and providing peace of mind to attendees. This, in turn, can help to attract larger crowds and enhance the overall fan experience.

Interestingly, industrial warehouses and distribution centers have also emerged as a key growth area for the company. It turns out that many hourly employees carry weapons, which increase the odds of workplace shootings and mishaps. Screening these employees during shift changes is slow and expensive, as workers are on the clock while they wait to be cleared.

TAM and Unit Economics

Evolv has two recurring revenue business models, both of which operate four-year guaranteed contracts with annual up-front cash payments.

In the Pure Subscription (“Lease”) model a customer leases the hardware and software on a combined basis for a monthly fee ranging from $1,200 to $2,000 per month. Evolv retains ownership of the hardware in PP&E and incurs CapEx for the unit. Consequently, while cash gross margins in this model may be closer to 80%, the GAAP gross margin is closer to 65% due to depreciation. EVLV recovers its CapEx within the first two years of a four year contract.

In the Distribution model, introduced last year, a customer purchases the hardware up front and pays Evolv 1) a day 1 license fee when the unit is activated and 2) a recurring revenue fee for the AI software. Importantly, the hardware purchase is done via the distributor/contract manufacturer such that the low margin hardware gross profit (roughly sold at cost) does not flow through Evolv’s financials. Evolv only sees the software revenue. Prior to establishing this model, Evolv was selling hardware directly to customers which had a negative impact on GAAP financials thanks to the outsized impact of low gross margin hardware. With this Distribution model, GAAP gross margins are 75-80% and all sales are cash flow positive on Day 1. Customers pay less in this model, about $22-30k for the hardware up front and $10k-15k per year to EVLV for the recurring software.

Evolv’s unit economics based on the above are extremely attractive. They are somewhat obfuscated by the company’s rapid growth, as the unit economics in Year 1 of a Pure Subscription Deal aren’t nearly as attractive as Years 2-4. This was made worse in its first two years after coming public where the company was recognizing hardware revenues/COGS in its financials. However, going forward the growth in mix of the Distribution model will help to elucidate its favorable unit economics. Leased deals at 60%+ GAAP gross margins and Distribution deals at 75% gross margins. Already gross margins have rocketed from 3% in 2022 to 54% in Q1’24. The company expects to gross 60% this year.

We’ve spent some time analyzing the potential TAM, which we believe is material. In the world of good-better-best, in terms of pricing strategy, Evolv currently sits within the “best” category. As one can see from the summary of various customer calls, there are competitors that compete on price. We believe that Evolv is the best product but admit that their pricing reflects that product positioning.

BACK OF THE ENVELOPE TAM ANALSYIS:

We believe that this is a reasonable case for potential TAM. The running estimate is about $3.5 billion and assumes lower end of current pricing and ZERO product extensions. For example, the Company is the front runner for a partnership with NYC for the preeminent subway system in the US and that is not included in this guestimate:

BALANCE SHEET

While the Company is losing money in the near-term, we believe that the balance sheet is quite adequate. As of the most recent quarter, the Company has $81M in cash equivalents with no debt. It’s worth noting that inventory builds over the past year grew to meet growth prospects and the longer sales cycle. The shift in the distribution model should relieve working capital pressure over the next year or so as PP&E should decrease over the next few quarters. The company finished its purchase commitment on the last of its Gen 1 units ahead of shift to a Gen 2 unit that will cost 35% less per unit to manufacturer. The Company claims that it will have a minimum cash level of $60M to $70M over the next year. Given GAAP margins should improve over 60% in FY25, and the company gets paid for a full year’s revenue up front in cash, we believe that that should result in better cash conversion.

VALUATION

Evolv has indicated that they intend to be EBITDA positive and free cash flow positive early next year. The Company has plenty of cash $81mm to get them to the profitability finish line. In addition, the company benefits from the favorable working capital dynamics enjoyed by most software companies; customers pay a year’s worth of revenue up front.

Against rapid ARR and gross profit growth, the company has delivered remarkable operating leverage. We are estimating $50 million in EBITDA for 2027. We can apply a conservative estimate to arrive at an estimated price target of $4.63 or so:

However, with gross margins of 70%+ next year, ARR growth of 30%+ (at least), customer retention of 95%+, four-year contracts (that are not seat based!) and achieving EBITDA and cash flow positive, EVLV is in the top tier of SaaS businesses. There is reason to believe that it should trade a premium, not a wide discount to the SaaS universe.

The company has targeted Q2 2025 for breakeven which should allow them to still have over $50mn of cash on the balance sheet at that time. With $100mn in annual recurring revenue slated for this year (implying 3x EV/ARR) and over 90% renewal rates in Q1 (non-renewals went out of business, otherwise renewals would have been 100%) and a Q1 win-rate of 79% vs 71% a year ago, we think business momentum is strong despite the uncertainty around the FTC probe. Once the probe goes away then the stock should begin to rerate. It’s not hard to see over $300mn in revenue within the next five years – 3x on that revenue (which should have at least 15% margins) gets us $900mn in enterprise value or ~$6.4 per share, 150% higher than today’s price.

EVLV BEAR CASE: IPVM, SEC and FTC

A consulting firm called IPVM has been very vocal in their attacks of EVLV and several competitors. IPVM claims to be the world’s authority on physical security technology and is widely quoted in various blogs. Their primary “beef” with EVLV appears to be that EVLV will not provide them free equipment for “evaluation” fearing that IPVM will release confidential details to hackers. It now appears that IPVM has written north of 130 articles critical of EVLV. Given that we have done enough customer calls to feel confident that Evolv a strong solution more than a problem, we won’t delve into specific details but it’s easy to review IPVM’s claims to decide for yourselves their credibility. We’d note that many security technologies companies refuse to give IPVM hardware, including recent unicorn Flock Safety (valued at $6bn with similar financials to Evolv!!!), and which now too is drawing IPVM’s ire.

We have spent significant time investigating IPVM’s claims and have yet to qualify something that changes our opinion or views on Evolv’s prospects.

With that said, IPVM has called out EVLV on several hyperbolic statements relative to marketing and that, in turn, has picked up the attention of the SEC and FTC.

To the extent that we believe that the IPVM thesis is false, we will provide a very simple google search:

We think this simple search is rather illustrative of the issue: #1 is disproven by #2 and #3! IPVM asserted in March that the Evolv would not be used at the NFL draft based on its singular work talking to someone at the NFL. It turned out that the city of Detroit, a large current Evolv customer, blanketed the entire perimeter of the draft with Evolv. IPVM did not issue a retraction. They have, however since, issued countless new critical articles.

Obviously, we’ve gone much deeper down the “rabbit hole” to become convinced about this opportunity (and encourage anyone considering investing to do so) but, overall, we believe the BEAR case comes down to this:

a)  is EVLV using the buzz of “AI”, exploiting the gun violence epidemic in the US to simply sell technology that does not work to naïve school boards, who are desperate “do something” about weapons in schools?

b) is EVLV just another money losing despac that will never be profitable?

c) A seemingly unbiased third-party research firm frequently attacks the company

d) FTC/SEC investigation is negative, where there is smoke, isn’t there usually fire?

The stock has been impacted by the lack of new updates on FTC/SEC investigations. As mentioned, EVLV has had ongoing inquiry from the FTC in ’23 with the focus on the company’s marketing practices and claims. In February 2024, the Company then received a subpoena from the SEC focused on marketing that is similar to the prior request of the FTC.

We note that  Axon Enterprises (of Taser and body cam fame) experienced similar inquiries in the not too distant past. We believe that, eventually, when these things are resolved, the stock will re-rate. Obviously, timing on government related issues is anyone’s guess.

Importantly, the Company guided down last quarter, blaming an elongated sales cycle, at least partially due to noise around the regulatory overhang. While this isn’t a positive, their stated win rate of 79% and recent commentary suggest improvement in Q2.  And, in our view, the guidance is now de-risked. Finally, we’d note that nearly half of Evolv’s revenue in recent quarters come from existing customers expanding their deployments, quite a far cry from the idea that 1) they have been misled by marketing, 2) are buying out of fear, 3) the technology doesn’t work. Follow the dollars.

SUMMARY OF VARIOUS COMMENTARY FROM CUSTOMERS, PROSPECTIVE CUSTOMERS, LEGAL SCHOLARS, ETC. WE HAD CHATGPT PROVIDE US A SUMMARY OF SOME LENGTHY CALLS:

We spoke with a former FTC lawyer to educate us on potential outcomes with EVLV. The timeline and resolution of the FTC case are obviously uncertain. It depends on factors like the availability of scientific evidence and the negotiation process between the FTC and Evolv. These kinds of negotiations in FTC cases typically take several weeks or months. Potential outcomes range from a settlement agreement to no action being taken against Evolv. If Evolv's marketing claims are found to be too aggressive or misleading, the company could face some legal consequences. But, more likely the FTC may negotiate a redress order requiring Evolv to pay refunds to customers and/or change the wording (this part has already been done!). The lack of widespread customer complaints could suggest that customers may not be dissatisfied with Evolv's products, which may have contributed to the case taking a long time.

A mid-sized private US based security services company leader selected Evolv Technology as their preferred solution to reduce queuing times and enhance security controls at events. He noted that Evolv's systems will be deployed at the upcoming Olympic Games, and they picked EVLV and are expanding its use with customers. He also noted that it is important that proper training and expertise is employed to effectively use EVLV accurately. Further, there is potential for deployment in Germany, Spain, and the Paris Olympics. Lastly, he believes that one EVLV advantage is that the level of customer interaction is appropriate, and it creates a respectful environment.

A prospective customer: A school technology leader at independent School District regarding their interest in replacing their current Wilson Metal Detectors with Evolv systems. Key points from the conversation include: The school district is interested in Evolv due to its ability to require fewer staff, allow backpacks to pass through quickly, and provide superior weapon detection capabilities. AI Camera Functionality: They are considering the AI camera feature for detecting brandished weapons. Decision-Making Process: The Director plans to arrange a tour of a school currently using Evolv and values feedback from other school officials to inform their decision. Impact of Summer: The summer period affects the buying process, and they plan to visit additional sites with EVLV.

Funding and Expansion: They intend to seek funding through security grants, which they believe will cover the cost of purchasing Evolv units. There are plans to expand the use of Evolv systems to middle schools in the future.

Budget and Approval: Budget considerations and the need for board approval for purchases over $100,000 were also discussed.

Overall, this school district is seriously considering Evolv as a replacement for their current security systems, with plans to secure funding and expand its use based on positive feedback and successful demonstrations.

A mid Atlantic high school Principal about their recent experience implementing Evolv:

The school initially made changes to its layout and start time, engaged with the community, and conducted staff training to facilitate the implementation of Evolv. The Principal expressed overall satisfaction with Evolv, noting its effectiveness in detecting various items, although it occasionally flags water bottles. They emphasized the system's importance in providing security in a violent community and reported a decrease in weapons being brought into the school. Future plans? The County plans to implement Evolv, and there is consideration of using AI camera systems for elementary schools.

The school also uses portable security systems at football games and discussed the potential for federal funding to help other districts implement similar systems.

An SVP of Facility and Campus Operations at large, West Coast Stadium group expressed high satisfaction with the Evolv security system, noting that it has exceeded expectations by increasing revenue and effectively identifying individuals carrying weapons. Key points from the conversation include. The leader is very pleased with Evolv's performance and is interested in further integrating the system into their campus for enhanced security. He highlighted the inconspicuous nature of Evolv's systems in public spaces and their financial benefits. He also noted Evolv's higher detection rate and adaptability compared to OpenGate. Faster seating into the stadium results in more concession sales pregame.

Overall, the feedback underscores the effectiveness and financial benefits of the Evolv security system, with plans for further integration and potential adoption by more stadiums.

A Director of Operations at a large global company focused on sports venue and convention management discussed various aspects of security technology in the weapons detectors space. Key points from the conversation include: The Director provided pricing examples for the Evolv system, highlighting its higher throughput but also significantly higher ongoing costs compared to traditional metal detectors. It’s better but costs more! The setup can be complex and software needs updates. Comparison with Other Models: The Garrett, OPENGATE, and Evolv models were compared in terms of setup and take down time, infrastructure changes, and potential usage in various Global buildings. He spoke about the effectiveness of Evolv and OPENGATE systems, highlighting the psychological deterrent factor of old-style magnetometers and suggesting limitations in what can be detected. Evolv is better but definitely more expensive. Would like Evolve to be cheaper.

The General Manager of another large global venue management company explained the decision to choose OPENGATE over Evolv for security measures was primarily driven by cost considerations. Key points from the conversation include: Although admittedly Evolv offers more functionality and a more visible deterrent, the cost difference was not sufficient to justify switching from OPENGATE. Their take is that OPENGATE underwent a software update to improve sensitivity, and secondary screening with OPENGATE was not a major issue. The false positive rate was manageable, but pacing and throughput were areas of concern. Overall, over the next three to five years, there is expected to be a higher adoption rate of these technologies in NCAA facilities. Smaller colleges and universities may opt for used equipment or legacy detectors due to budget constraints. This GM estimates that around 65% of remaining schools would choose CEIA (owner of OPENGATE), while 35% would choose Evolv. The choice between Evolv and OPENGATE really depends on the specific security needs of each venue. The GM compared the situation to choosing between different car brands or smartphone operating systems (Apple vs Android). Apple is likely better but costs more. Overall, the conversation highlighted the cost-driven decision for them to choose OPENGATE, the potential for future adoption of Evolv, and the various factors influencing the choice of security technology in different venues and institutions.

A former Superintendent at a mid-sized School District who has extensive experience in public education. Key points include: the importance of remaining vigilant for safety concerns and explained the decision-making process for software and technology purchases in the school district. A couple of years ago, there was a surge in guns detected on campus, prompting the need for additional safety measures. This former Superintendent discussed the existing safety protocols in place at the school district. The primary decision to choose Evolv over other AI gun detection platforms was explained, with the former Superintendent citing factors such as cost and the need for integration with the current camera system. They considered a competitor called ZeroEyes but found Evolv to be superior. Privacy concerns and the potential for changing technology solutions in the future were also discussed.

The Athletic Director at a Boston area college discussed their experience with managing home events and overseeing facilities and operations. They mentioned the institution's aversion to implementing metal detection but expressed their desire to implement the Evolv system, which they found to be less invasive and require fewer staff. They highlighted the system's effectiveness in improving gate throughput and catching items that were previously getting through security. They also mentioned the prompt and efficient service provided by Evolv in addressing any issues that arise. The administration is considering expanding its use to non-athletic gathering situations and the IT department has thoroughly evaluated the system for data security. Generally, very positive.

A Midwest Manager for a Security company about their experience with Evolv:  the manager has been working with Evolv for over a year and a half and sells complementary turnstiles that work well with Evolv's system. They have not encountered any competition with their product and have seen a lot of success with Evolv. The manager also discussed their experience with a previous competitor, Xtract One/Patriot One, and noted issues with spacing and detecting laptops. When asked about the functionality of the Evolv system, the possibility of using facial recognition, and the sales process, the manager explained that the system is ideally placed before the turnstiles, and if it detects a threat, a guard can direct the person to a secondary screening area. The turnstile can either lock or remain open until the guard approves the person's entry. The manager also mentioned that some customers lease the equipment while others buy it outright.

The System Manager of Investigations for Children’s Hospital in Atlanta explains that they installed the Evolv weapon detection system at their ER entrances due to the limitations of handheld weapon detection wands and traditional metal detectors. The Evolv system has been successful in catching more weapons than the previous methods, with 147 guns found in the first three weeks of September! The manager also discusses the false positives generated by the system, particularly with strollers, but they have learned to handle it by having parents carry them separately. The cost of the system was $530,000 for the equipment, software subscription, and installation, with a first-year subscription for the software and a three-year service agreement. The ongoing software agreement for Evolv was not a “hard sell” for the hospital, and other hospital systems in Metro Atlanta are looking at it. The System Manager praises Evolv's quick delivery and positive customer service experience.

A conversation a System Director of Emergency Management & Communications for a New York based hospital system: the System Director explains that they have done demos of the Evolve product and have pricing for it but have not implemented it yet due to the upfront cost and recurring subscriptions. They are open to the possibility of a lighter, cheaper version of Evolve coming down the line, and the System Director notes that while there have been offers of rebates, the recurring year-over-year cost is the big issue. Relative to a discussion of the efficacy of Evolve, and the System Director reports that, anecdotally, the product has been effective in detecting weapons and has not produced any meaningful false positives or false negatives. However, the high cost of the product is also a concern the potential customer.

A Director of Security at a Stadium about their experience implementing Evolv machines for security screening: the Director explained that they had previously used walk-through metal detectors and considered OPENGATE, but were convinced of the value of Evolv when they realized it could help dissipate crowds and prevent harm from explosives. They found the machines to be durable and easy to fix, but noted that the cost can be a limiting factor for some of their other venues. They also discussed potential improvements in portability and wirelessness, as well as the possibility of integrating ticketing and facial recognition technology in the future. It is possible to do so but this brings up privacy issues.

The Director of Operations at a large amusements company praised Evolv Technologies. The technology is seamless and efficient, leading to a significant reduction in wait times and false positives. The Director of Operations suggests that sports venues and concerts would be perfect applications for the product due to the high volume of people. The product is safer than the old-style metal detectors as it reduces complacency and catches more items. They have recovered 40 to 50 knives on an average attendance day and occasionally catch guns, but it is usually off-duty law enforcement officers who are unaware of the department's policy, as opposed to worrisome threats.

Overall, and I believe it comes through with this sample of conversations, we believe that Evolv has the best technology but isn’t the cheapest option on the market. Cheaper options aren’t as good as Evolv but when organizations are faced with tight budget constraints, OPENGATE often wins under those circumstances.

REFUTING THE BEARS:

We believe that 40% of NFL and MLB teams, major school districts, etc are extremely  sophisticated buyers. We also note that several NBA teams have recently become customers, despite all controversy about product shortcomings and the FTC investigation.

NYC SUBWAY:

NYC Mayor Eric Adams publicly spoke about EVLV in recent press conference and it’s worth watching the video and his comments:

https://www.youtube.com/watch?v=jwTRqA3Ag5Q

We believe that a potential product, developed for NYC, is NOT in the current estimates!

CONCLUSION: 

We believe that the company is at an inflection point. The stock is down 50% for the year. However, we believe it's an important product and see several positive catalysts.

Catalyst

1. We believe that the Company can "beat" the (lowered/conservative) estimates. 

2. Sooner than later, there should be a resolution to FTC and/or SEC issues. We believe that these issues are preventing several funds that are interested in owning the stock. Once resolved, we believe the stock will re-rate quickly.

3. We speculate that the Company has continued to add customers at a decent clip during the current quarter. We obviously don't know the timing and specifics but we suspect some material wins will emerge and continue to confirm our thesis.

4. NYC subway win - Although the CEO admits that a subway system isn't the optimal use case for the current product, the opportunity to work with NYC fell into their lap as the Mayor and other influential leaders actually used Evolv's products in various locations around the City. They were impressed and came to EVLV. We believe that a pilot ensued with other competitors considered, but we believe that NYC is most focused on EVLV's technology. We think there is a reasonable chance that this NYC partnership results in a new product line that could be the "gold standard" for subway security. If achieved, this will not be in the current estimates and could be an exciting product that could be used in other venues.