Evolv Technologies Holdings Inc

NASDAQ:EVLV

Earnings Call Analysis

Robust Revenue Growth and Margin Expansion

The company reported total revenue of $20.2 million, a 22% increase from the previous year. This growth is attributed to new customer acquisitions and a surge in revenue-generating subscriptions, with annual recurring revenue (ARR) rising by 129% to $65.8 million. Adjusted gross margin improved significantly to 57%, up from just 3% the previous year due to the successful adoption of a distributor model. While the adjusted EBITDA loss improved, the company still anticipates a negative $50 to $53 million for the full year, with revenue projected to be between $75 million to $77 million.

Expanding Reach and Solidifying Market Leadership

The company made notable strides in expanding its presence across professional sports in the United States, entering all five major leagues, including a recent entrance into the NBA. This visibility is now gathering over 20 million fans per quarter. These developments are a testament to their accelerating customer growth. Additionally, they've successfully leveraged channel partners, with 70% of sales coming from this network in the third quarter, showcasing efficient scaling activities.

Strategic Executive Appointments and Product Innovation

Highlighting their commitment to commercial growth, the company introduced Jay Muelhoefer as Chief Commercial Officer to support sales, marketing, and customer success, bringing valuable SaaS and AI expertise to the firm from roles at Kinaxis, IBM, and PTC. In product development, the introduction of Evolv Extend signals ingenuity, detecting brandished guns at a distance to preemptively improve venue safety. This investment in innovation and leadership is reflective of the company’s value on growth and customer satisfaction.

Financial Health and Revenue Growth

The company's financial health is showcased by a 22% year-over-year total revenue growth, reaching $20.2 million, and a surge in annual recurring revenue (ARR) by 129% year-over-year to $65.8 million. Recurring revenue experienced a leap to $14.4 million, illustrating the business’s successful transition to a recurring revenue model. The growth in expenses has been moderated, keeping pace with revenue growth, indicating careful cost management and strategic resource allocation.

Margin Expansion and Path to Profitability

The gross margin saw a significant jump from 3% last year to 57% this quarter, benefiting from the adoption of a distributor model which comprises nearly 30% of unit bookings. The shift toward a distributor model and the resulting margin expansion are strategically aligned with the company’s goals of reaching profitability. Adjusted EBITDA losses have shown improvement, indicating a decrease in operational losses and potential future cash flow positivity.

Future Outlook and Market Positioning

Looking ahead, the company projects confidence with a 2024 revenue target of approximately $115 million, indicating a year-over-year growth of about 50%. Arriving at an expected ARR of $108 to $112 million by the end of 2024, the company anticipates an adjusted gross margin around 60%, further stabilizing its financial position. Moreover, the lowered adjusted EBITDA loss projected for 2024, by at least 40%, aligns with this positive trajectory towards profitability in the first half of 2025.

Business Resilience Amidst Regulatory Inquiry

The company addressed the FTC inquiry, focusing on marketing claims without impacting the solid technological foundation or hindering its business operations. They remain steadfast in their mission and confident in their interactions with regulatory bodies, highlighting the continued robust demand for their products and services. The unwavering demand is especially evident from their growth in the healthcare sector and education, representing significant portions of revenue. Their response to the FTC inquiry embodies the company's resilience and commitment to their mission.

Earnings Call Transcript 2023-Q3

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to the Evolv Technologies Third Quarter Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded.I would now like to turn the conference over to your host, Brian Norris, Senior Vice President for Finance & Investor Relations for Evolv Technologies. Mr. Norris, please go ahead.

[Brian Norris, executive]

Thank you, Eric. And good afternoon, everyone, and welcome to today's call. I'm joined here today by Peter George, our President and Chief Executive Officer; and Mark Donohue, our Chief Financial Officer. This afternoon after the market closed, we issued a press release announcing our third quarter results and our business outlook. This press release is available 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 Private Securities Litigation Reform Act of 1995 that relate to our current expectations and views of future events including, but not limited to, statements regarding our future operations, growth in financial results, our potential for growth and ability to gain new customers, demand for our products and offerings and our ability to meet our business outlook.All forward-looking statements are subject to material risks, uncertainties and assumptions, some of which are beyond our control. Actual events or financial results may differ materially from these forward-looking statements because of a number of risks and uncertainties including, without limitation, the risk factors set forth under the caption Risk Factors in our annual report on Form 10-K for the year ended December 31, 2022 filed with the SEC on March 24, 2023 and as updated in our other documents filed with or furnished to the SEC from time to time. The forward-looking statements made today represent our views as of November 9, 2023. Although we believe that the expectations reflected in these statements are reasonable, we cannot guarantee that future results, performance or the events and circumstances reflected in our forward-looking statements will be achieved or will occur.Except as maybe required by applicable law, we disclaim any obligation to update them to reflect future events or circumstances. Please note that our commentary today will also include non-GAAP financial measures, which we believe provide additional insights for investors. These measures should not be considered in isolation from or as a substitute for financial information prepared in accordance with GAAP. Reconciliations between non-GAAP measures and the most directly comparable GAAP measures can be found in our press release issued today. Please note that our definition of these measures may differ from similarly titled metrics presented by other companies. We will be discussing key metrics such as annual recurring revenue or ARR, remaining performance obligation or RPO, deployment activity and total number of subscriptions; each of which we believe is helpful to investors in understanding the progress we are making as a business.Investors should note that today we are providing additional transparency to investors by presenting hardware license revenue on the face of our income statement. This is the new revenue stream that we receive upfront from Columbia Tech when our customers elect to purchase hardware under our new distributor model. We once again have an active IR outreach schedule planned for the fourth quarter highlighted by the UBS Credit Suisse Technology Conference, the Craig-Hallum Conference and the Northland Capital AI conference. For more information about these conferences or any of our IR outreach plans, please contact me at [e-mail] that, I'll turn the call over to Peter. Peter?

[Peter George, executive]

Thanks, Brian. And thanks, everybody, for joining us today. I'm going to spend a few minutes on our results for the third quarter, discuss the key trends we believe are driving those results and then spend a few minutes updating you on the progress we're making with several other important initiatives across the business. Mark will then walk through our financial results and our outlook for the remainder of the year as well as provide some insights into how we're thinking about next year. During the third quarter, we delivered strong results across every key measure of the business, including revenue, ARR, RPO, subscriptions and gross margin. Revenue in the third quarter was a record $20.2 million with reoccurring revenue of $14.3 million, up 131% year-over-year. Our growth continues to reflect strong new customer acquisition activity and an overall growth in the number of active subscriptions.We activated over 600 new multi-year subscriptions of Evolv Express in the third quarter and have now surpassed 4,000 units deployed. We expect to surpass 7,000 units deployed in 2024 and 12,000 units deployed in 2025. We remain focused on reaching 100,000 units deployed over the next decade. We welcomed 70 new customers in the third quarter including such iconic venues as the Nashville Symphony Center, the Philadelphia Zoo, the TGL Golf Arena, The Plaza Live, the Broadacres Open Air Marketplace, The Oneida Casinos and the iconic Red Rocks Amphitheatre in Colorado. We continue to see accelerated visitor security screening activity. In fact we screened over 200 million visitors in the third quarter alone, more than double our screening activity compared to a year-ago period. We are now averaging over 2.2 million visitors screened every day, up from 900,000 visitors in the second quarter of last year.We have officially surpassed the TSA in terms of average daily visitors screened. Furthermore, I'm pleased to report that we have just surpassed 1 billion visitors screened since the launch of Evolv Express. We're not aware of any other company in the world that is screening more people every day than Evolv Technologies. That new screening data becomes part of our unique screening data lake that helps our systems become smarter over time. This continues to extend our competitive advantage in the marketplace. We grew ARR from $54 million at the end of Q2 to $66 million at the end of Q3, reflecting growth of over 20% sequentially and nearly 130% year-over-year again fueled by increased subscriptions, strong new customer adoption and the accelerating shift to reoccurring revenue. Tonight, we are reaffirming the upwardly revised outlook for 2023 we issued just 4 weeks ago.Specifically, we remain on pace to deliver our ARR growth of at least 115% in 2023. While we're still in the planning stages for next year, our preliminary models are focused on delivering another very strong year in 2024 with expected ARR growth of about 50%. That would drive us to well over $100 million in ARR in 2024 with gross margins of about 60% and accelerating leverage from our investments. We believe this would put us in an excellent position to reach positive adjusted EBITDA in the first half of 2025 without the need of any additional capital. There are several drivers for our industry-leading growth, most importantly the pressing need for improved security. Every day we all see the reports of escalating gun violence in the very places that should be free of firearms; schools, hospitals, warehouses, stadiums and places of worship; but it's in these very same places where we expect yet another year of tragic gun violence.In fact in 2023, we've had 597 mass shootings so far this year including the recent tragedy in Lewiston, Maine, just 3 hours north of us here in Boston, which took the lives of 18 innocent people and wounded many more. To mitigate the risk of mass casualty incidents, our customers are increasingly turning to technology to help. Evolv Express leverages robust sensor technology, advanced AI-driven algorithms, cloud connected connectivity and extensive data analytics. We continue to see broad adoption of our solutions with particularly strong end market demand in education, health care and professional sports. The education market represented about 40% of our business in the third quarter. We added nearly 2 dozen new education customers in the third quarter, including the Wilkinsburg School District in Pennsylvania, the Rochester Institute of Technology, the Inwood Academy for leadership in New York City, The People for People Charter School in Philadelphia and the Muskegon Public Schools in Michigan.Evolv Express can now be found in 17 of the Top 100 school districts in the country and is being used in over 700 school buildings to screen about 325,000 students every single day. Nothing represents our mission more than keeping kids safe at school. We're expecting a strong quarter again in education here in Q4. We continue to extend our early leadership lead in the health care market, which is comprised of over 6,000 hospitals and where 70% of workplace violence takes place. We added over a dozen new health care customers in the third quarter including Parkland Health, one of the largest public hospital systems in the United States; Windsor Regional Health, which is the 15th largest hospital in Ontario and just down the 401 from Toronto; and the University of Missouri Health Care. For the second consecutive quarter, we saw 50% plus sequential growth in our health care business.Evolv Express is being used in 250 hospital buildings to screen over 400,000 hospital visitors every day compared to just 40,000 a year-ago. We are seeing growing returns in the investments we're making in the health care and expect the market to be one of our top verticals for quite some time. We delivered our strongest quarter ever in professional sports, which represented about 15% of our activity in the third quarter. We're proud to now partner with over 40 teams and stadiums across the National Football League, Major League Baseball, the National Hockey League and Major League Soccer. New additions during the third quarter included the Houston Texans of the NFL, the Minnesota Wild of the National Hockey League and the Football Club of Dallas in Major League Soccer.We also accelerated our entry into college sporting facilities highlighted by our win here at Boston College here in our backyard. We just deployed 16 Evolv Express systems to enhance safety for fans of the Eagles. We're pleased to announce our recent entry into the National Basketball Association where we are now supporting fans of 2 NBA teams, including the 2023 NBA champion Denver Nuggets and the Phoenix Suns with more teams expected to come shortly. With our entry into the NBA, we are now in all 5 major professional sports leagues here in the U.S. and are now screening over 20 million sports fans per quarter. We continue to see accelerated momentum with our channel partners. We've been clear about our plan to efficiently and effectively scale the company by leveraging demand through our partners.We continue to see evidence of our progress here as over 70% of our sales activity in the third quarter came from our channel partners, including Alliance Technology, Johnson Controls, Motorola, Stanley Securitas, Johnson Security, Allied Universal, ICU Technology and many, many others. Throughout the third quarter, we saw an accelerated adoption of our distributor model, which is an important trend as we continue to drive towards profitability. About 30% of all unit bookings in the third quarter were via our distributor model. As Mark will describe more fully, that shift was directly correlated to the gross margin expansion we delivered in Q3. Our new distributor model enables customers that prefer to purchase the hardware component of Evolv Express to do so through our contract manufacturer, Columbia Tech, while simultaneously placing a long-term software subscription contract with us.We believe this expanded partnership will enable us to fully support the procurement preferences of our customers, particularly those working with grant resources or accustomed to working under a CapEx model. I want to briefly highlight some other important developments during the third quarter. First, on the go-to-market front, we are absolutely delighted to welcome Jay Muelhoefer who recently joined us in the newly created role of Chief Commercial Officer. In this role, Jay will oversee all sales, marketing, alliances, channels and customer success efforts with the aim of expanding brand awareness, driving global revenue and enhancing customer experience. Jay has an extensive background in both domestic and international sales and marketing, SaaS, AI, big data and analytics. He most recently served as the Chief Marketing Officer at Kinaxis, a supply chain management applications provider.His previous experiences across privately held and publicly traded technology companies includes executive roles at Intralinks, IBM and PTC where he served as VP of Sales. He holds an MBA from Harvard Business School and multiple engineering degrees from MIT. He's based here in Waltham and I can tell you he's already making a big difference in our business. So we're thrilled to welcome Jay to the company. Switching gears to the product side. In Q3, we introduced a new product named Evolv Extend, which is designed to detect individuals with brandished guns as they approach a venue, expanding security well beyond the doorway. Evolv Extend pushes the perimeter out further and addresses the new threat vector, openly brandished firearms. As we've seen with incidents in Lewiston, Maine and Monterey Park, California, mass shooters may attempt to enter a facility with a gun brandished.Evolv Extend provides an opportunity to use video-based AI to identify this critical threat vector and create time to potentially prevent an incident. This innovation aims to provide crucial timely information to first reactors operating the Evolv Express system, enabling them to swiftly respond to visible guns. In a world where rapid response are vital in preventing gun violence, this technology becomes absolutely paramount. We partnered with Omnilert integrating their AI visual gun detection software, Omnilert Gun Detect, with Evolv Express. Using high resolution 4K cameras and AI, this system can identify brandished guns at distances up to 100 feet outside the building and can quickly transmit images and live video footage to security staff or first reactors for quick evaluation and yes, decision making.This early warning system empowers security operators to initiate appropriate actions at the threatened entrance and implement emergency procedures promptly, which in turn provides enhanced safety and security. During the quarter, we also introduced Express 7.0, our latest version of our AI-based detection algorithm and updated tablet software. These upgrades, which are available to all of our customers, are available through our cloud-based SaaS model and continue to set Evolv apart from others in the marketplace. Key advancements with 7.0 include a new tablet interface, which offers a simplified home screen, a more efficient identification of alerting individuals, improved alert resolution workflow and a more visually appealing and intuitive user interface.7.0 also offers an updated detection algorithm, which further enhances our ability to detect potential threats while simultaneously reducing the frequency of targeted nuisance alarms. The combination of our accelerating customer deployments and the overall growth in gun ownership are driving the collection of an unprecedented amount of visitor data across our customer base. With our advanced AI-based algorithms, we're able to leverage this data and over time improve our detection accuracy, which we believe makes our customers' venues safer. We are absolutely pleased to report that our customers used Evolv Express to tag nearly 300,000 guns and knives through the first 9 months of 2023. Q3 was another strong quarter for the business like every key measure that we can look at.We're focused at delivering a solid finish here in Q4 and getting off to a strong start in 2024. We're optimistic for our prospects moving forward and remain committed to our mission. The market for AI-based weapons detection is one of the largest and fastest growing markets across the technology space and we're well-positioned as its leader with over 4,000 units deployed representing a penetration rate today of less than 1% and we're just getting started. We're focused on leveraging our first-mover advantage to capture the market and effectively scale the business.With that, let me turn things over to Mark, who will take you through our financial results and our outlook. Mark?

[Mark Donohue, executive]

Thanks, Peter, and good afternoon, everyone. I'm going to review our third quarter results in more detail and then walk through our business outlook for 2023 and share some thoughts on how we're thinking about 2024. As Peter mentioned, total revenue was $20.2 million, up 22% year-over-year. Our revenue growth was again fueled by strong new customer acquisition activity and the rapid growth of revenue generating subscriptions. Annual recurring revenue or ARR at September 30, 2023 was $65.8 million, reflecting growth of 129% year-over-year and 21% sequentially. Total recurring revenue during the third quarter of 2023 was $14.4 million compared to $6.2 million in the third quarter of 2022 reflecting growth of 131% year-over-year. Our total number of revenue generating subscriptions increased to 4,014 at the end of Q3 2023 compared to 1,692 at the end of Q3 2022. This was the primary driver of the strong growth in recurring revenues.Adjusted gross margin, which excludes stock-based compensation, was 57% in the third quarter of 2023 compared to 3% in the third quarter of last year and 38% in the second quarter of this year. Our improved gross profit and gross margin primarily reflects growing demand for our distributor model, which accounted for nearly 30% of all units booked in the third quarter. Adjusted operating expenses; which excludes stock-based compensation, loss on impairment of equipment and certain other onetime expenses; were $25.2 million compared to $19.8 million in the third quarter of last year and $23.7 million in the second quarter of this year. The increases primarily reflect headcount investments in revenue generating positions and in research and development. Our revenue growth continues to grow significantly faster than operating expenses.We exited the quarter with 281 employees compared to 273 at June 30, 2023 reflecting an increase of 8 FTEs sequentially. Adjusted EBITDA, which excludes stock-based compensation and the other onetime items, improved 38% year-over-year and 20% sequentially. It was negative $11.1 million in the third quarter compared to negative $18 million in the third quarter of last year and negative $13.8 million in the second quarter of this year. Turning to the balance sheet. We ended the quarter with $140 million in cash, cash equivalents, restricted cash and marketable securities; down about $16 million sequentially primarily driven by our net loss as well as fixed asset additions to support the pure subscription business. We continue to encourage investors to review property and equipment on the balance sheet, which is where the cash effectively sits that we invest in Evolv Express systems and future inventory for our pure subscription customers.Property and equipment has grown by nearly $50 million year-to-date as more of our business has transitioned to our pure subscription model. I want to close with a few comments about how we're thinking about the future starting with the close of 2023. In short, we believe we're well-positioned to deliver results in line with the upwardly revised growth plans we shared with investors on October 12. To that end, we are reaffirming the outlook for 2023 that we shared that day. We are expecting full year revenue of between $75 million to $77 million. We expect to exit the year with ARR of between $73 million to $75 million reflecting full year growth in ARR of approximately 115%. We expect adjusted full year gross margin to be between 43% to 45%. We also expect adjusted EBITDA to be between negative $50 million and negative $53 million.Finally, we expect to exit the year with cash, cash equivalents and marketable securities at the high end of our previously issued guidance of $110 million to $120 million. Turning to 2024, as Peter mentioned, we remain encouraged by the growth opportunity we see ahead. While we're still developing our final plans for next year, we want to share some high level perspectives on how we're thinking about 2024. We are currently modeling full year revenues of about $115 million in 2024 reflecting growth of about 50% year-over-year. We believe we can exit 2024 with ARR of between $108 million and $112 million reflecting growth of about 50% year-over-year. Our models call for adjusted gross margins of about 60% in 2024. While we have not yet finalized our hiring plans for 2024, we expect to continue to moderate expense growth and leverage our earlier investments.Of the hiring that we will do in 2024, I expect more than half of the headcount additions to be customer-facing, revenue-generating roles. Based on our current models for 2024, we expect to reduce our adjusted EBITDA loss by at least 40% in 2024. We believe we remain on track to get to positive adjusted EBITDA in the first half of 2025 and when we do, we expect to have cash, cash equivalents and marketable securities of between $75 million to $100 million. Again, we have more work to finalize our growth plans for 2024, but we wanted to share some of our latest thoughts with you.That's it for now. With that, I'll turn things back over to Brian.

[Brian Norris, executive]

Thanks, Mark. Eric, at this time, we'd like to open the call up for Q&A.

[Operator]

[Operator Instructions] We'll go with the line of Mike Latimore with Northland Capital Markets.

[Mike Latimore, analyst]

Congrats, the 1 billion number sounds pretty impressive. So I think at your Analyst Day, you talked about a long-term growth rate of 30% to 40%. The initial number you gave there for '25 was the unit growth of well over that number. Can you just kind of help provide a little more context around that?

[Mark Donohue, executive]

Mike, we can give you a little bit more context there. I mean what we're really looking at I think over the long term here is the transition to our distribution model, which is going to happen next year. So we talked about that at the May Analyst Call. The growth that we're giving next year is, I would say, at least 50%. That's sort of a starting point for us as we're thinking about the early parts of our annual operating plan, which we're still refining through the end of this year. Peter talked about 12,000 plus units in 2025, that's a number that we're pushing up above 20% from our prior comments there. So I think that's a good indicator of where we're going over that period of time.

[Mike Latimore, analyst]

Got it. And then the mix here, are you still thinking purchase subscription could be sort of 50% of new adds?

[Mark Donohue, executive]

Yes, we are. I think if we go into next year, there's 2 real components; there's pure subscription and there's distribution. We're moving away from the purchase model that we used to have where we actually ran some of the hardware sales through our books. We're now really driving that distribution model just in the third quarter alone. In the first quarter we really drove it, we did about 30% of our business that way. So we're on path to do the 50:50 going into next year. You'll probably see somewhere in the 40% zone in the fourth quarter to kind of get to that 35% that we talked about in the back half of the year. We probably will see some quarters where it's not 50:50. As we go through the year, I think we're really thinking about an annual number of 50:50. It's a little bit hard for us to tell exactly what's going to happen from a quarter-to-quarter basis.

[Mike Latimore, analyst]

Makes sense. Congrats on a great quarter.

[Operator]

Next we'll go to the line of Hugh Cunningham with TD Cowen.

[Hugh Cunningham, analyst]

Congratulations on a strong quarter especially the unit growth there and on the CT transition and for the 2024 guidance. Couple of quick things. First thing is on the product revenue line. Can you remind me, Mark, what in there in addition to what portion of that is direct sales? And then I think another piece of that is the add-ons that you guys sell like, I'm guessing the new product, the one you're partnering with for the brandished weapons, that's not going to be there because that's coming from your partner, but what else is in that number? And then the second part of that question is on the product line. So first thing is what's in there basically and then how fast do you expect it to come down?

[Mark Donohue, executive]

So the product line, Hugh, it really is a combination of a few things. It's really the piece parts that we sell, whether it'd be tablets or other parts of our business as well as the products that were sold through the old purchase model. We still have units that we sell from time to time including demos that you'll see go through that line. So think about the things going through that line as demos, accessories and our direct product sales overall. The Extend is likely to have nothing to do with that line, it's going to be a recurring revenue element in our business for the most part. I would say that we're going to continue to see a reduction in that product revenue line. We had booked quite a few units in the Q2 timeframe and a lot of those shift in Q3. So I expect that to continue to decline into Q4 because we're not booking as many in that area. We will see some next year, but I would say that the units for the entire year next year would be sub 200.

[Hugh Cunningham, analyst]

All right. And then, Peter, for you 2 quick ones. One, you talked in the past about the sort of verticalization of the go-to-market and the teams you're building. Can you talk about that? And then can you talk about the experience of your buyers? So when you go talking to a customer, who is the -- what's the experience of the person actually making the decision to purchase? What sort of due diligence do they do? Can you talk a little bit about that?

[Peter George, executive]

Sure. So in terms of verticals, 2 years ago as you know in 2022, we verticalized our sales organization and focused on education, sports, health care, distribution warehouses and we continue to do that. In 2023, we regionalized so we created 5 discrete regions that are operating with sales people of about 7 or 8 in each of those regions that carry quota and they're focused on the high risk verticals in their region. So those were really important organizational changes that are helping drive our growth in the company and we're going to continue to stay focused on that. As it relates to the buyer experience, most of our customers have security experts on staff. These are retired police officers, people in the secret service, military.They're steeped in understanding security and oftentimes when they come and see our product, they do their own testing. So we give them the information that we have around what our systems can detect, but they do their own testing as well. And they are just absolutely phenomenal and it's a trusted network of security professionals that all know each other and trust each other. On the school side, it's slightly different. There's not only CROs and superintendents, but there's a whole set of reseller partners that are subject matter experts that help schools understand their security posture as well. So our sales in experiential sale and most of our customers, in fact almost all of them, have subject matter experts testing the product themselves.

[Operator]

[Operator Instructions] Our next question comes from the line of Chad Bennett.

[Chad Bennett, analyst]

Nice job again on the quarter, guys. I guess a couple of questions. First, Mark, can you give us an update on Express 2.0, the new system and hardware, kind of how we're progressing there on the cost savings there and timing wise of when we expect that to hit the market?

[Mark Donohue, executive]

No problem. So Express 2.0, that's really our cost-down effort on our Express flagship product. About 95% of the functionality we have in 1.0 will be the same in Express 2.0. We've added a few new things to it. But generally speaking, the whole purpose of 2.0 is to really to help with quality, to really think about how to service it in a more modular way and to really kind of take the learnings we had in 1.0 and kind of position them. It's the same software stack so there's no difference there. But in terms of the timing of it, I think we're expecting it to really kind of start to ship in earnest by the beginning -- maybe the end of Q2, but definitely by the beginning of Q3. That's the plan we're on. The cost-down efforts, we still see that being in the 30% to 35% range and we've kind of locked that in at this point. We're really just going through the final testing and points on the product there and we're now building pilot systems and everything like that. So we think that'll be a big push for us in the middle of next year. While I'm on that point, I think that cost-down effort is more of a 2H situation. So I think as we talked about our 60% gross margins, we'll see a greater benefit from that in the second half of the year.

[Peter George, executive]

Chad, this is Peter. I just wanted to reiterate something that Mark said, which is when we make improvements in our software around efficacy and accuracy, the cloud infrastructure we have, the data analytics; all the improvements that we can bring to our customers are happening on our platform today and will happen on our future sensor platforms in the future. 2.0 is one of those and we're going to get a cost-down benefit there. But the magic is really in the software and so all of our customers get the benefit of that no matter what sensor platform they're on.

[Chad Bennett, analyst]

And then maybe just a follow-up. Just in light of kind of recent events and attention around the company, it doesn't seem like there's been any abatement in demand and demand actually seems to be almost accelerating to some extent for you guys. Can you just talk about just kind of the demand environment that you're seeing out there? Obviously you've reiterated your upped guide for the year and gave us a great early look to '24. But just considering some of the noise out there, can you just speak to the demand and awareness of the product today?

[Peter George, executive]

Look, we haven't seen any abatement in demand at all and in fact when we did this results, we've seen an increase in our health care penetration. We grew health care by 50% year-on-year. We had a great quarter in sports. Education was about 40% of our business. So all the secular tailwinds that have been driving our company from our early days even before we went public continue in an unabated way. I mean to date there have been 597 mass shootings this year, which is 2 a day. There's lots of gun violence and a lot of anxiety in society. And people want to be safe wherever they go not just in venues, but when they're gathering with other people in bowling alleys, in bars, in places where people gather; and technology can help now create safe zones that people can gather together and know that nobody has a weapon. And we don't see that changing anytime soon and we certainly don't see any legislation on the horizon that will change that. So we're working really, really hard as a company to make sure that we enhance our product, our detection capability and that we can get as many systems in places to keep people safe and that's our primary mission and goal as a company.

[Brian Norris, executive]

Operator, I think, we have time for 1 more question.

[Operator]

And we'll go to the line of Brett Knoblauch with Cantor Fitzgerald.

[Brett Knoblauch, analyst]

I guess on the deployment guidance for '24 and '25. Is there any chance that you guys deploy a fewer amount of units in '24 than you do in '23 or you're I guess expected to do in 2023?

[Peter George, executive]

No. No, that's not what we're expecting to do. Look, we're talking about 7,000 plus. We're really talking in 1,000 unit increments. I could see us close to 7,500 plus.

[Brian Norris, executive]

First, we're in the fall of 2023 talking about '24. So we're trying to give you our best view early on in the T-box here.

[Brett Knoblauch, analyst]

Understood. And then if I kind of look at ARR per unit deployed, it's kind of increased sequentially now for 3 straight quarters. How should we expect that to trend over the coming quarters? Is there any reason to believe whether that would go down or gyrate or how should we think about that trend?

[Mark Donohue, executive]

Look, I think we're going to see -- the distribution model this past quarter was about 30% of our business. I expect it to probably be close to 40% in the fourth quarter and reaching 50% by Q1 and probably holding steady there. So I think mathematically on an average basis, I think you will see our ARR number come down a little bit more and then stabilize as we go forward. That's just part and parcel to the model of actually moving to that distribution cycle where there's less ARR than we had in other models. Just remember too in the distribution model, we have a license revenue component that we didn't have before and that gets recognized immediately and brings in cash to the company quicker than it had before.

[Brett Knoblauch, analyst]

And that's not being included in ARR, correct?

[Mark Donohue, executive]

And that's not included in ARR. You really need to think about us going forward as being about an 80% ARR company and a 20% IP license company.

[Brian Norris, executive]

It's the expanded gross margins that will continue to deliver [indiscernible].

[Brett Knoblauch, analyst]

And then if I could just ask 1. I know when you guys preannounced, you also disclosed the FTC was investigating. I don't think you guys brought it up in the call, but just curious if you guys have any color on what they're looking at or to provide any clarity on the situation?

[Peter George, executive]

So we're not at liberty to talk too much about that, but we are working with the FTC on their inquiry around questions around our marketing and we're answering every question that they have. There's no question or challenge around our technology. We stand by that. It's really about marketing claims and we're very confident going forward that we'll end up at a really good place. We can't talk much about it. What we can say is it hasn't had any impact at all on our business. Our customers aren't talking about it. It's not getting in the way of anything and we're out serving our customers, living to the mission and keeping kids and people safe every day and that's what we're very, very focused on.

[Brian Norris, executive]

I'm going to turn the call over to Peter George for a few closing remarks.

[Peter George, executive]

Thanks, Brian. Well, thanks everybody who joined us today. We're really pleased with the results that we were able to take you through. We thank our customers and our partners, all of the dedicated Evolvers that work tirelessly every single day to make our systems better, more accurate and more secure to keep venues safe. We're really pleased with what we were able to talk about today in terms of our results. We had record revenues, record ARR, record RPO and record gross margins. And I just want to reiterate that we took year-on-year our gross margins from 3% to 57%. So huge benefit there. And as Mark talked about, there're some headwinds with our distributor in terms of the purchase subscription, but the benefit there comes in gross margins, which should get us to EBITDA positive sooner than we would have thought before.So some real goodness there as a company. We continue to see really great customer activity and acquisition. We had 70 new customers this quarter. I'll remind you our largest customer, Charlotte-Mecklenburg District Schools, has 180 systems but we count that as 1 customer. So we have an expanding ASP with our customers. We continue to innovate in the company. We're thrilled about the Extend product pushing the perimeter out, being able to gain time to prevent mass shootings from happening. Mark already mentioned our distribution bottle and how that's paying off particularly in gross margins. And then as we think about next year, right, the 50% ARR growth and then 50% revenue growth we're thrilled about.So we'll get to adjusted EBITDA positive, as we mentioned, in the first half of 2025 and we're excited about that. All that being said, while we take great pride in our achievements, it weighs heavily on us and our hearts to share tonight amidst the global conflicts and the escalating violence going on around the world. The unfortunate cycle of violence results in sorrow, loss and perpetuates further harm. At Evolv, we are resolute in our belief that the world triumphs over adversity by persisting in the pursuit of positive change. As Evolvers, we are relentlessly committed to making the world a safer place to live, to work, to learn and to play. Thanks, everybody.

[Operator]

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T conferencing service. You may now disconnect.