Q3 2022 Evolv Technologies Holdings Inc Earnings Call
And welcome to the evolve technologies third quarter earnings results Conference call.
At this time all participants are in listen only mode. Later, we will have a question and answer session and instructions for queuing up will be provided for you at that time should you require operator assistance press star zero on your phone's keypad and as a reminder, this conference call is being recorded I would now like to turn the call over to your host Mr. Brian Norris.
Vice President of Finance and Investor Relations. Please go ahead.
Thank you John and good afternoon, everyone and welcome to our 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 for 2022.
This press release is available on major news outlets as well as on the IR section of our website.
During today's call, we'll be making forward looking statements within the meaning of section 27, a of the Securities Act of 1933 section 21 E of the Securities and Exchange Act of $19 34, and the Safe Harbor provisions of the private Securities Litigation Reform Act of 1095 that relate to our current expectations and views.
Future events, including but not limited to statements regarding our future operations growth and 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, 2021 filed with the SEC on March 28 2022.
As updated and 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 nine 2022, 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 may be required by applicable law, we disclaim any obligation to update them to reflect future events or circumstances.
Our commentary today will also include non-GAAP financial measures, which we believe provided additional insight for investors. These measures should not be considered in isolation from or as a substitute for financial information prepared in accordance with generally accepted accounting principles reconciliation.
Between GAAP and non-GAAP metrics can be found in our press release issued today.
Please note that our definition of these measures may be differ from may differ from similarly, titled metrics presented by other companies.
As a reminder, as of January one 2023, we will no longer be disclosing total contract value of orders booked a measure we stopped guiding on several quarters ago, because we no longer believe it's consistently indicative of the company's prospects.
We encourage investors to continue to focus on key metrics such as annual recurring revenue remaining performance obligation deployment activity and total number of subscriptions, which we believe are more indicative of the companys prospects.
Remaining performance obligation or <unk> reflects the difference between contract value.
Revenue recognized to date for contracts contracted units regardless of installation steps.
Before I turn the call over to Peter Let me briefly bring to your attention a few upcoming investor events on Tuesday November 29th.
We will be at the credit Suisse Technology conference in Scottsdale, and on Wednesday December 15th we will be at the Imperial Capital Conference in New York.
We will also be hosting a variety of other live and virtual investor events throughout the quarter.
We're also working on plans to host our first ever analyst day in 2023.
More details to come on that.
For more information on our IR plans. Please contact me at B Norris and evolve technology Dot com with that I'll turn the call over to Peter Peter.
Thank you, Brian and thanks, everyone for joining us today.
We're pleased to be reporting record third quarter results, which reflect our accelerating momentum and scale.
We're encouraged by our performance, which was highlighted by record growth in revenues.
<unk> and <unk> as well as our strong market penetration.
These results and our outlook position us well to deliver first year results above our previous guidance.
Revenue in the third quarter was $16 5 million up 96% year over year, and 82% sequentially, which we believe reflects strong demand in our core markets and continuing momentum with our channel partners.
We acquired 92, new customers in the quarter or about one every day and installed approximately 550, new subscriptions of evolve express in the quarter or about six everyday all quarter long.
To highlight the scale and leverage in our business model consider that our revenues grew 10 times faster than our operating expenses on a sequential basis.
We are on pace to deliver revenue growth of at least 100% in 2022 with a growth of at least 150%.
While we're still in the planning stages for 2023, our preliminary models are focused on delivering another doubling of IRR in 2023.
At the core of this industry, leading growth are several key trends that I'd like to take a few moments to discuss.
First is escalating gun violence.
We all see the daily reports of mass casualty events, and what should be considered weapons free zones schools hospitals warehouses and houses of worship.
These are the places where we gathered to learn to work play and to live.
But it is in these very same places, where we expect to see yet another year of tragic gun violence.
In fact, there have already been to mass shootings.
Every day of the year here in 2022.
Our customers turn to evolve express and its powerful sensor technology advanced AI based algorithms cloud enabled connectivity and comprehensive data insights to reduce the threat of these mass casualty events at their venues.
This includes a customer like a tier one automaker that experienced a gun related incident at one of its manufacturing facilities earlier. This year. The plant was immediately closed at great opportunity costs until evolve express was deployed.
Next we're seeing a clear acceleration in our business.
Over the last six months, we've seen a significant increase in market exposure and awareness pipeline build.
<unk> volume.
Linearity and Asp's.
Perhaps.
That is best measured by our bookings, which increased by 105% sequentially.
We had seven transactions of at least $1 billion in the third quarter compared to five in the third quarter of last year.
And we had our first single transaction of greater than $5 million.
Our pipeline has grown significantly with a coverage ratio of more than three times, our operating goals.
These measures reinforced the momentum in the business.
Next.
We're seeing an acceleration in our customer acquisition activities.
We added 92, new customers in the quarter up from our previous record of 53, which we delivered in the prior quarter.
We now have over 400 customers across our key vertical markets, our customer acquisition activity continues to separate us from others in the market.
Keep in mind that our new customer count is a conservative view, because one new customer could mean 20 or more school buildings in one new district, where five hospitals within one new healthcare system.
Another trend, we're seeing is expanding deployments.
Customers, who are building on the success of their initial evolves express deployment and are expanding to other venues and locations.
Our largest transaction in Q3 was the 90 plus unit expansion order for the Charlotte Mecklenburg School District in North Carolina as they accelerated their move beyond the district high schools and into the Middle schools.
Within just nine months that district has gone from being a qualified lead to our single largest education customer with over 160 evolve express units deployed across dozens of buildings and remember we consider Charlotte Mecklenburg School District.
As one customer and our customer count.
The combination of our accelerating customer deployments and the overall growth and 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 than ever before.
We screened more than 100 million people in the third quarter alone.
We're in more than 1 million per day compared to 53 million people in the third quarter of last year.
We just surpassed 425 million visitors screen second only to the TSA in North America.
What's more we detected over 52000 concealed weapons in the third quarter, including more than 30000 guns and more than 22000 nines at the entrances of our customers' venues.
Another trend, we're seeing is the growing momentum with our channel partners, which helps us extend our reach into certain geographies or vertical markets.
We're seeing broad activity across our dozens of authorized channel partners, including several strategic global partners such as Johnson controls the newly formed secure adopt technology and Motorola solutions.
We've been clear about our plan to efficiently scale the company by leveraging the demand environment with 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.
One final trend to highlight is the direct result of our growth strategy targeted at key geographic markets in the United States.
We are starting to become the AI enabled weapons detection security screening provider that venue visitors in key geographies are coming to expect.
We're quickly becoming the standard for visitors and markets like Pittsburgh.
Yes, Phil New York, and Atlanta, with a desire for weapons free zones is beginning to emerge.
In Pittsburgh, we secured the homes of the Pittsburgh Steelers and the Pittsburgh Pirates as well as the Pittsburgh Cultural Trust.
In Nashville, we secure the homes of the Tennessee Titans, the Grand Ole Opry, the Nashville Soccer club and now the Nashville predators, our first entry into the NHL.
This trend is becoming a force multiplier for other verticals in this geographic markets, most notably schools and hospitals around these iconic venues.
This is what we mean by democratizing security, becoming ubiquitous and making it available to everyone who wants it.
We believe we can continue to replicate the model of becoming the de facto standard in other markets.
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.
It's a $20 billion market across 10 key verticals with an estimated 700000 entrances, which we referred to as digital thresholds.
We are the market leader with over 600 units deployed representing a penetration rate today of less than 1% and we're just getting started.
In time, we May look back at 2022, as an inflection point in our growth trajectory.
We are focused on leveraging our first mover advantage to capture the market and effectively scale the business.
We expect to end the year with over 2000 units deployed to.
Double that in 2023 and reached 10000 units deployed in 2025.
We have a lot of work to do to get there, but we're confident that we have the talent the technology the strategy the capital and the momentum to capture the market opportunity.
We're exceptionally well positioned in the major vertical markets.
Then the earliest adopters of our technology, and which constitute the greatest market opportunity in 2023, specifically education.
<unk> care and professional sports.
The education market is exceptionally large with nearly a 130000 schools across the nation, serving the needs of 56 million students every single day.
About half of those schools are middle schools and high schools with a threat of gun violence.
Is the highest.
Most of these schools have no real weapons detection solution at all despite the availability of legacy metal detectors for the last 100 years.
These solutions have been widely evaluated and the Smith for a variety of reasons that we all know.
Nearly 95% of all public schools in the United States do not have a metal detector, yet over 90% have security cameras.
So clearly there is a demand for security and safety in schools, but to date no viable solution for weapons detection until evolve.
We believe there is a fundamental need for students safety at rural urban suburban charter and private schools across the nation.
This need is driving growing demand by students parents teachers administrators and communities for advanced safety solutions, and we're meeting that demand.
Just a year ago, we had a handful of customers in the education market.
Today more than 200 schools across the nation have evolved express.
We are now in six of the top 100 school districts in the country five of which we added in the third quarter of 2022.
We've made a lot of progress over the last year and we're just getting started.
There are nearly 15000 school districts in the United States, We estimate that just the 200 largest could drive demand for 25000 evolve express units.
We believe students and teachers have a right to safety in the classroom.
We will continue our focus on empowering safer learning at schools. As this is at the center of our mission and purpose as a company and we are well intentioned to deliver on it.
Another major market for evolve continues to be healthcare as a growing number of the nations 6000 hospitals are making investments to enhance patient and staff safety.
Over 70% of workplace violence in the U S involves healthcare workers and major healthcare unions have raised violence in the workplace as a comp issue.
Specifically, calling out the low levels of security and health care facilities. A recent survey by the American College of emergency physicians found that two thirds of ER physicians have been assaulted in the past year alone and many hospitals are seeing growing turnover.
<unk> staff seeking a safer environment.
This is another market, which long ago could have deployed metal detectors, but chose not to do to various limitations like education. This is a huge market, where we've gained traction and momentum.
A year ago, we had a very light presence in healthcare today were deployed 70 hospitals across the United States, we added over a dozen new healthcare customers in the third quarter, including University Hospital in Newark, New Jersey, which receives.
On average over 200 emergency room visits every day, the regional one health network and acute care regional hospital in the mid South in Southern Ohio Medical Center.
In hospitals or health care workers, who have also been our first responders during COVID-19 deserve to come to work everyday free from weapons, and we're focused on helping them achieve that.
One more market to highlight his professional sports evolve express is transforming the guest experience at stadiums and ballparks all over the country.
We enable fans to enjoy a faster more convenient and more secure screening experience.
Long waits in entry lines are all but eliminated helping to reducing xiety for guests and staff alike.
We now have screened fans of 'twenty three major league sports teams across the NFL MLS MLB and NHL.
New customers in the third quarter included Sulfides Stadium home of the La Chargers in La Rams as well as Firstenergy Stadium, which is home to the Cleveland Browns and accretion stadium home of the Pittsburgh Steelers. We also secured the Pittsburgh Pirates and major League baseball as.
Well as Bridgestone Arena, which is home to the Nashville predators.
We expect that these three markets education health care and professional sports along with warehouses and tourist sites will be central to our expansion plans in 2023.
I spend lots of time in the field listening to our customers' customers, including parents students factory workers theater patrons and sporting fans and I know that they're relying on us and our solutions more than ever before to help make their schools.
Hospitals and favorite venue safer. This is our mission and we intend to fulfill it as we are the humans security company.
So in summary, we're reporting strong third quarter results highlighted by record revenues.
Our and our PEO.
We continue to see strong market momentum and evidence of leverage in our business model.
We remain well capitalized and believe that the strength of our balance sheet will enable us to reach cash flow breakeven without any additional capital.
Based on the strength of our results and the momentum in the business. We are raising our outlook for 2022, and providing a peek into 2023, which is centered on again doubling R. R.
Finally, I'd like to thank our customers, who put their trust in us and I also want to thank all the talented dedicated and devoted evolve versus who work tirelessly every day to make the world a safer place for everyone.
With that let me turn things over to Mark who will take you through our financial results and our outlook.
Mark.
Thanks, Peter and good afternoon, everyone.
I am going to review, our third quarter results in more detail walked through our upwardly revised guidance for 2022 and share some thoughts on how we're thinking about 2023.
As Peter mentioned total revenue was $16 5 million up 96% year over year and 82% sequentially.
This growth was fueled by rapid acceleration and subscriptions, which drove subscription revenue growth of 125% year over year.
We ended the third quarter was <unk> hundred 92 contracted subscriptions up 198% year over year and 48% sequentially.
We now expect to exit the year with over 2000 active revenue generating subscriptions.
<unk> was 45 4 million up 167% year over year and 106% sequentially.
We saw broad vertical market contribution with strength in education healthcare and professional sports.
As a reminder, Q4 of 2022.
Last quarter to quarter, we will be reporting the PCV, which as we've stated previously is not necessarily the best and most consistent indicators of our future growth.
At September 32022 was $28 7 million compared to $9 9 million at September 32021, reflecting growth of 189% year over year and 38% sequentially.
Remaining performance obligation or <unk> as of September 32022.
Was a record $109 million up 2200, 20% year over year and 35% sequentially.
Yes.
Gross margin was impacted by greater product cost.
As a reminder, we recognized all product costs related to the product sale and the period of the sale rather than over the associated subscription term, which is typically four years as.
As we've discussed previously our overall gross margins do not yet reflect the overall business value we are delivering to customers.
As we are using two very different accounting treatments between our pure subscription sales in our hardware purchase subscription sales.
For context, we estimate that the gross margin associated with our IPO.
Each of which is associated with purchase related transactions is approximately 65%.
All of those gross profit dollars will accrete to our income statement over the next four years.
Since August we've been transitioning the pipeline and opportunities, which should drive a greater contribution from our subscription business model going forward.
As we continue this shift and we continue to engineer product costs down we expect overall gross margins to continue to expand.
We delivered record subscription gross margin of 58% in the third quarter of 2022 up from 45% in the year ago period.
Total non-GAAP operating expenses were $19 8 million.
For context, our total revenues grew sequentially four times faster than our GAAP operating expenses and 10 times faster than non-GAAP operating expenses, which demonstrates the growing leverage in our business model.
We exited the quarter with 214 employees compared to 213 at June 32022, so virtually unchanged sequentially.
Net loss was $18 6 million compared to net income of $20 8 million in the third quarter of last year.
As a reminder, net income in the year ago period was significantly impacted by onetime noncash valuation benefits.
Adjusted loss, which excludes stock based compensation and other one time items was $18 6 million compared to $12 9 million in the third quarter of last year.
Adjusted EBITDA, which excludes stock based compensation and other one time items was negative $18 million compared to negative $11 5 million in the third quarter of last year.
Turning to the balance sheet, we ended the quarter with $218 million in cash and cash equivalents down about $24 million from the second quarter of 2022.
This primarily reflects adjusted net loss of $18 6 million an increase in accounts receivable and cash used in support of a pure subscription business model.
I want to close with a few comments about how we're thinking about the future starting with the close of 2022.
We are encouraged by our year to date progress and the growing momentum we are seeing across the business.
We believe we are well positioned to deliver results beyond our previously issued growth plans and as such we are raising our outlook for the year.
We now expect full year revenue of between $46 million to $48 million compared to our previous guidance of $29 million to $31 million.
This would reflect full year revenue growth of approximately 100%.
We now expect to exit the year with.
<unk> of between 31% to $32 million compared to our previous guidance of $27 million to $28 million. This would reflect full year growth.
Of approximately 150%.
We expect modest gross margin expansion in the fourth quarter of 2022 subject to revenue mix.
Finally, we expect to end the year with approximately 220 to 230 million in cash, which is slightly higher than our ending Q3 balances and consistent with our previous guidance.
There are a few core assumptions here that I want to walk through it.
First our cash forecast assumes a fourth quarter operating loss of about $18 million to $20 million consistent with our earlier forecast.
It also assumes we realized a $10 million returning benefit from the investments we've been making in the way of supply chain deposits all year long, we've been sharing with investors. The details of the investments we've been making to shore up our supply chain.
<unk> product availability and how we expect those investments to come back to us by year end and that's exactly how it's playing out.
As we mentioned on each of the three previous earnings calls we continue to assume that we will be successful in implementing a third party financing program to support our rapidly growing pure subscription pricing model.
That initiative is progressing well with a highly regarded bank and we are currently modeling a cash benefit of at least $20 million here in Q4.
Going forward, we expect the program will enable us to offset any cash use to support hardware purchases for a pure subscription model.
This allows us to effectively operate our capital free hardware enabled subscription as a service offering.
Finally, coincident with the financing program.
Intend to extinguish the final $10 million of long term debt that is still on our balance sheet as a holdover from our pre IPO days.
So a lot of puts and takes there but the net of it is that we remain confident in our forecast for our year end cash position of at least $220 million, which is consistent with our earlier guidance.
Turning to 2023, we remain encouraged by the growth opportunities, we see ahead and our strengthening pipeline activity asps.
As Peter described there's been an acceleration in the market and in our business over the last six months.
Our demand drivers remained strong while we are developing our final plans for next year, we wanted to share some high level perspective on how we're thinking about 2023.
As I mentioned earlier, we expect to end 2022 with more than 2000 active subscriptions.
We project that could double to 4000 in 2023.
We continue to expect that that growth will be most pronounced in education health care and professional sports.
We are currently modeling full year revenues next year of between $55 and $60 million, reflecting growth of about 25% year over year.
Sure.
This assumes a meaningful transition to a pure subscription model effective January one 2023.
As a reminder, much of our revenue in 2022 was related to a purchase model, which requires us to accelerate the hardware revenue recognition at a 100% of the related product costs.
That is historically the sky's the full term gross profit of our customer transactions.
Our plan is to minimize these types of transactions going forward.
Using the same purchase the pure subscription revenue mix in 2022 that we're currently estimating for 2023.
Our total revenues would have been approximately $30 million compared to the $46 million to $48 million were now forecasting.
So our goal of delivering $55 million to $60 million in revenue in 2023.
What it reflected growth of approximately a 100% rather than 25%.
Further if we did not make the subscription subscription transition in 2023, and our purchase to pure subscription revenue mix in 2023 was consistent with what we are currently estimating for 2022.
Our outlook for total revenues in 2023 would have been more in the range of approximately $85 million to $95 million.
Reflecting growth of approximately 100%.
To that end 2023 becomes a bit of an odd comp year, but we believe that the transition to more some more subscription sets up for high quality high margin and highly predictable revenue growth going forward.
We believe we can exit 2023 with AI.
Of between $65 million to $70 million compared to 31% to $32 million at the year end 'twenty to.
Reflecting growth of more than 100% year over year.
Our current models for 2023 call for gross margins of at least 30%, which reflects the benefits associated with the across the board price increases that were implementing effective January one and an overall improvement in product subscription mix.
While we have not financed finalized our hiring plans for 2023, we expect to continue to moderate expense growth and leverage the investments we made over the last two years.
Of the hiring that we will do in 2023, I expect more than half of the head count additions to be customer facing revenue generating roles.
As I described a minute ago the implementation of the third party financing program will be important in the support of our subscription growth plans.
We now expect that any cash we invest in a pure subscription model going forward to be effectively offset by our new third party financing program.
We expect that our cash usage will now be more closely aligned to our operating cash usage plans.
To that end, we are modeling a significant reduction in our full year operating cash burn compared to 2022.
We reiterate our previous comments and we believe we are fully capitalized.
So in summary, we are pleased with our strong third quarter results. We're excited about our plans for the fourth quarter in 2023, and with that I'll turn the call back over to Brian .
Thank you Mark.
John at this time, we'd like 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.
Ladies and gentlemen, if you'd like to ask a question. Please press one then zero on your phone's keypad.
If you are on a speaker phone, we do ask that you. Please pick up the handset before pressing the numbers once again to queue up for questions Press one zero at this time please.
And we will start with Shaw aisle with Cowen. Your line is open. Please go ahead.
Hey, guys two one for Sheryl. Thank you for taking the question.
Congratulations on a very strong quarter.
Thank you my question has to do with this very strong product performance and we've seen this now I think three quarters in a row.
Where.
Your customers seem to be showing a preference for buying.
The product.
Rather than a pure subscription is there something driving that and I know you've discussed what you expect next year, but do you expect the customer motivation to change next year.
Yes.
So the answer is yes, and here's how we're going to get them to change.
We went into this year with having two ways.
Get our products are purchased subscription and a full subscription in every case the customer is getting a subscription from us.
We had a phenomenal quarter as you could tell particularly in education and because we didn't have a bias.
Most of our education customers said, we'd like to buy the hardware and we will get the subscription.
We believe that they're going to want to buy subscription only next year, so we won't be offering.
Our ability to buy the product, but only get our system through a subscription model and we're very very confident that if not all most of our education customers will be really happy with that so that.
Subscription only offering is going to allow us to pivot hard into the subscription model.
And we're excited about what that's going to do to our gross margins our subscription our PL all the metrics in the SaaS world that we care about.
And I'll just add to what Peter said, there as well that's.
That's exactly why we're given.
Given the street and the investors a view of our.
Meaning performance obligation, which came in at about $109 million up from $81 million last quarter and the gross margin of that RPM.
Is about 65% excluding overhead so so I think that what we're trying to show you is that the strength in that business and the strength of the deals that we are doing is very strong. It's just the recording of them at this stage.
Has been a little bit some put some pressure on margins knowing that we need to to put our best foot forward and printer margins.
At a higher level, we're moving to a full subscription.
Very helpful. Thank you and also for my follow up could you talk about during your discussions with your customers has that.
<unk> been changing a lot of the companies we cover are talking about elongated.
This sales cycle.
More scrutiny for larger deals as a result of the macro so are you seeing anything like that and are you seeing any sort of change in the competitive environment are you seeing different different companies at bay costs and so on.
I'll start with the second question. So we haven't really see it seeing the change in the competitive landscape at all.
To date about 80% of our deals are uncontested and the ones that are contested meaning there is competitors there think about faster metal detector technology repackaged old legacy technology. So the competitive landscape Hasnt hasnt changed very much in terms of the sales.
Cycle.
The physical security market can be an events driven business and.
We're feeling that our sales cycle actually shrink.
And go from 120 days to 90 days there were deals in Q3 and I think.
In Q3 that were in quarter deals, meaning we found an opportunity and turn that into a deployed customer in quarter.
So we're actually seeing an acceleration and a contraction of the sales cycle and an acceleration in the sales cycle.
Because safety is so important and particularly in education, what could be more important than keeping our kids safe to go to school everyday and now.
Parents, and superintendents and schools are making a decision that was once.
Get it done in the summer before school is now turning into a pipeline full of education customers, saying, we want to keep our kids safe as soon as we can.
We have a very robust pipeline of schools across the country that want to keep their kids safe and we're really pleased about helping our superintendents do that.
Thanks, guys and congratulations again.
Thank you. Thank you. Thank you.
Thanks.
Please.
Our next question comes from Mike Latimore with Northland Capital markets. Please go ahead.
Yes. Thank you, yes phenomenal phenomenal results guys that was great.
I think you might have set a record on wall Street for the number of 100% metrics otherwise.
We did say 100 megawatts.
Well it was their tobacco.
So.
Yes, that's a great great results and outlook.
I guess on the.
You mentioned a price increase.
I guess can you talk a little bit about just the magnitude of that and then I assume contracts are still.
Four years.
Yes, I'll take that one Mike.
Yes. So we are we're planning to do a price increase as of January one.
We've already worked through that and we've started to talk to our partner network.
And as well as do some some work with.
<unk>.
Our sales force on it.
The reason for it is I think we're just seeing strength in the demand for.
For our product.
We're entering a time where inflation.
Has been high.
And so we're going to we're going to continue to kind of.
How to drive value through the price increases.
And I'll just to your question about four years that Hasnt changed at all.
These will be four year contracts.
Most of our all of our customers when they choose to deploy.
I'll sign up for 48 months.
Yes, great.
Then can you talk a little bit about the process to lower the Cogs of your systems.
What are the key milestones here and how long will that take.
What's the percent change over time.
Yes, we have we have a project that's been ongoing this year and continues into next year to really.
Really reconfigure the product it doesn't change.
Dramatically what the product does that we obviously are putting some improvements through but it is really about.
It's taking printed circuit boards, and making it more efficient moving the numbers down.
Finding different ways to kind of put parts together and whatnot.
And a little more economical way, so I think that going into next year.
We're looking probably at somewhere around about.
A 40 to.
40% bomb reduction once we go into it now that wont really hit until the 2024 timeframe. So when we talked about our guidance next year of 30% gross margins.
We really won't see that in 2023, and we expect the benefit from that to come in 2024.
Well just to make sure. We're speaking the same language here, we will see 30% gross margins in 2023, but the benefit is only coming from the move to subscription only discount discipline with our sales force.
And.
The next the year after will bring the cost down and those 30% gross margins should be you should see another step function improvement.
And our gross margins.
Okay that makes sense okay.
Great Congrats again.
Okay. Thanks, Thanks, Mike Thanks, Mike.
Yes.
Once again for questions. Please press one zero, we're going now to Alex Sharp's with Stifel Go ahead. Please.
Hi, Good evening. This is Alex <unk> on for Brad Reback. Thanks for taking my question.
Curious if the strength youre seeing in schools and hospitals has anything to do with remaining COVID-19 money being spent before it is no longer available.
So.
The COVID-19 money that designated to Covid is was a $175 billion.
Grant from the federal government.
Of which only 25 billion was used for Covid.
There is a $150 billion of money sitting out there in the form of things like the extra funds that some of our school customers are tapping into those funds to use to.
To keep there.
Students safe. So yes. Those funds are there there is a 150 billion theyre getting pushed down to the states and we're helping our customers tap into those above and beyond that also our superintendents are going to.
Their boards and saying we want to raise taxes.
Slightly.
Through the tax base to come up with the funds for our systems and that's happening as well so getting the funding is not the biggest problem right now both because of what's available in the market and pushed down to the states the sense of urgency across North America to keep our kids safe based on the events that.
Continue to go on.
And then.
The funds that are available. So we don't see that changing anytime soon and if you add some of the secular tailwind.
That we've been experienced the last couple of years increased gun violence.
Lots of anxiety and polarization in the world.
We don't see that abating at all.
Thank you.
We have no additional questions in queue at this time.
Ladies and gentlemen, if you would like to ask a question. Once again. Please press one zero on you keep him.
One zero second time move you from the queue.
Okay terrific.
No further questions I'll turn the call back over to Peter joined our CEO will look thanks, everyone for joining.
Obviously, we're really pleased with how things are going here.
We had record results as everyone knows we're seeing tremendous operational leverage in our business now both by getting leverage through our channel and the go to market side, but also the processes and people.
We're getting tremendous leverage from.
We're excited about how this year is going to end up and believe that and very confident in whats ahead of us over the next couple of years. So thank you all for joining we'll be talking to some of you one on one.
Thank you for your support of the company. Thanks, everyone. We look forward to seeing as many of you as possible during the upcoming outreach period here in the fourth quarter again, multiple conferences and a lot of other IR activities and look for an analyst day coming up so look forward to.
To seeing all of you.
Thanks.
Alright.
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