Q4 2022 Evolv Technologies Holdings Inc Earnings Call
Speaker 2: To the evolved technologies fourth quarter earnings call at this time all participants are in a listen-only mode Later, we will conduct a question-and-answer session if you wish to queue up for questions today Please press 1 followed by 0 on your device
Speaker 2: As a reminder, this conference is being recorded.
Speaker 2: I would now like to turn the conference over to our host, Brian Norris, Senior Vice President of Finance and Investor Relations. Please go ahead. Thank you, Grace, and good afternoon, everyone. Welcome to the call. I'm joined here today by Peter George, our President and Chief Executive Officer, and Mark Donohue, our Chief Financial Officer.
Speaker 2: This afternoon after the market closed, we issued a press release announcing our fourth quarter results and our business outlook for 2023.
Speaker 2: This press release, along with an accompanying slide presentation, is available on the IR section of our website.
Speaker 2: During today's call, we will be making 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.
Speaker 2: that relate to our current expectations and views of future events, including, but not limited to, statements regarding our future operations.
Speaker 2: 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.
Speaker 2: 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...
Speaker 2: 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, files at the SEC on March 28, 2021.
Speaker 2: and has updated other documents, including our quarterly reports on Form 10Q.
Speaker 2: All files were furnished with the FCC from time to time.
Speaker 2: The forward-looking statements made today represent our views as of March 1, 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.
Speaker 2: Except as may be required by applicable law, we disclaim any obligation to update them to reflect future events or circumstances.
Speaker 2: 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. between non-GAAP measures and the most directly comparable to GAAP.
Speaker 2: the Meaning Performance Obligation or RPO, Deployment Activity, and Total Number of Subscriptions, each of which we believe are helpful to investors in understanding the progress we're making as a business.
Speaker 2: Before I turn the call over to Peter.
Speaker 2: Let me briefly highlight here on slide three that we will again be hosting a variety of live and virtual investor events throughout the quarter. We will be hosting events with Callan, Stiefel, Cana Fitzgerald and Northland Capital. And we are also excited to announce that we will be hosting the first ever Evolved Technology Analyst Day at 10 a.m.
Speaker 2: your calendars for Thursday, May 25th. For more information about our IR plans, please contact me at bnorris at evolvedtechnology.com.
Speaker 2: With that, I'd like to turn the call over to Peter. Peter?
Speaker 2: Thanks Brian and thanks everyone for joining us today.
Speaker 2: We're pleased to be reporting strong fourth quarter results, which capped a historic year for the company.
Speaker 2: Our results were highlighted by record growth in new customers, revenues, ARR, and RPO.
Speaker 2: We have a lot of exciting news to share with you today, but before we do that, let me take a moment here on slide five to remind everyone of our mission, which is to democratize security, making venues, facilities, and people everywhere more secure.
Speaker 2: We're focused on making the world a safer place and more enjoyable place to live, to work, to learn, and to play.
Speaker 2: As we prepare to commemorate our 10th anniversary as a company later this year, I can tell you categorically that the mission our founders laid out in 2013 is timeless and yes intact.
Speaker 2: We are a mission-driven company made up of mission-driven people, as we are the human security company.
Speaker 3: Moving to slide six.
Speaker 3: Revenue in the fourth quarter was $20.9 million, up 217% year-over-year and 26% sequentially.
Speaker 3: For the year, revenue was $55.2 million, up 136% year over year. Our growth continues to reflect strong customer acquisition activity and the continued expansion of our subscription base.
Speaker 3: We welcomed over 100 new customers in the fourth quarter and nearly 300 in the year.
Speaker 3: We activated 575 new multi-year subscriptions of Evolve Express in the fourth quarter alone, and nearly 1,600 in all of 2022.
Speaker 3: Further, we grew ARR from 13 million at the end of 2021 to 34 million at the end of 2022, reflecting growth of over 160%.
Speaker 3: We anticipate ARR to again double in 2023, which combined with expanded gross margins and prudent expense management should enable us to reduce our adjusted EBITDA losses by as much as 20% in 2023.
Speaker 3: while reducing our cash usage by about $20 million.
Speaker 3: We expect to end the year with about $170 million in cash. Mark will share more thoughts on our outlook in a few moments.
Speaker 3: Moving to slide seven, we're seeing several interesting dimensions of our leadership emerging. One positive indicator is bookings activity.
Speaker 3: which increased 27% sequentially and 222% year over year.
Speaker 3: Other powerful measures include we had 14 transactions of at least a million dollars of PCV in the fourth quarter compared to three in the fourth quarter last year.
Speaker 3: We grew our install base of evolved express descriptions from 703 at the end of 2021 to 2,267 at the end of 2022, reflecting growth of 222% year over year.
Speaker 3: We further expanded our reach and now have Evolve Express Units deployed in 45 U.S. states as well as Puerto Rico.
Speaker 3: Finally, in perhaps the best time that our value proposition is resonating in the C-suite of major enterprises, we're pleased to announce that Evolve Express is now installed at three of the Fortune 20 and eight of the Fortune 100 companies.
Speaker 3: We believe that our results continue to reflect several major trends.
Speaker 3: The first is the unfortunate and tragic trend in escalating gun violence in the United States.
Speaker 3: which is reflected here on slide 8. According to recently released reports from the Gun Violence Archive,
Speaker 3: There were 648 mass shootings in 2022.
Speaker 3: This is over twice as many mass shootings as occurred annually just a decade ago.
Speaker 3: This is the mission we were born to undertake.
Speaker 3: to democratize security and make venues and people safer and more secure.
Speaker 3: We're doing this one customer at a time.
Speaker 3: One venue at a time, and one entryway at a time.
Speaker 3: As you can see here on slide 9, we screen close to 115 million visitors in the fourth quarter.
Speaker 3: During 2022, we screened over 350 million visitors, which is equivalent to the full population of the United States. It's also more than twice the number of visitors we screened in 2021.
Speaker 3: We have now screened over a half a billion visitors and expect to surpass 1 billion visitors screened by the end of 2023 as the momentum of our customer base and deployments accelerates.
Speaker 3: In terms of making a fundamental difference in visitor security, our customers used Evolve Express to tag over 176,000 weapons in 2022, including 93,000 guns and 83,000 knives.
Speaker 3: In the fourth quarter alone, they tagged nearly 70,000 weapons, including 36,000 guns and 33,000 knives.
Speaker 3: That's an average of 400 guns every single day.
Speaker 3: Turning to slide 10, another significant development is our growing technical advantage in the market.
Speaker 3: Building on our already strong technical lead in the fourth quarter, we released several new major advancements.
Speaker 3: First, we've expanded our API library extending integration from Evolve Express to various security endpoints such as video management systems, video analytics, infinite management systems, and mass notification systems.
Speaker 3: Next, we release several new data extract APIs, which allows customers to ingest, evolve insights, security screening, and ingress data into their existing data infrastructure.
Speaker 3: And finally, we launched our new Evolved Insights dashboard, which enables our customers to better understand security staff screening performance.
Speaker 3: Because our customers are on long-term subscription contracts with us, they can easily take advantage of these breakthrough capabilities as they are released over time to our powerful cloud-based environment. More venue operators are turning to us to power their digital thresholds.
Speaker 3: We are digitally transforming security with critical capabilities, not only in weapons detection, but in adjacent areas such as crowd assessment, mass notification, and people flow analytics.
Speaker 3: These capabilities enable us to continually raise the bar of innovation and bring better and better products to the market.
Speaker 3: And in time, we believe this will enable us to optimize average revenue per unit, or ARPU, and maximize renewal rates as and when customers reach the end of their initial subscription direction.
Speaker 3: With better data and better products, we're able to deliver a superior value proposition to the market.
Speaker 3: We're able to classify threats based on a unique, large, and rapidly growing data set that makes it possible with our advanced algorithms to improve detection accuracy over time, which we believe makes our customers' venues safer than ever before.
Speaker 3: Joining us for slide 11.
Speaker 3: We believe that our highly differentiated new customer acquisition efforts provide a first mover advantage due to the strong network effect dynamics of our market.
Speaker 3: We are proud to partner with over 500 customers across our key vertical markets to create safer zones for them and their visitors, employees, students and YES fans.
Speaker 3: As highlighted here on slide 12, our strong new customer acquisition activity continued in Q4.
Speaker 3: We added 106 new customers in the quarter, up from our previous record of 92 in third quarter.
Speaker 3: Our measure is arguably a conservative view because for us, one customer could mean a dozen or more buildings in one new school district or a new healthcare system.
Speaker 3: For example, our single largest customer, the school district, now has over 160 Evolve Express units deployed across dozens of high schools and middle schools.
Speaker 3: We're excited to welcome dozens of iconic venues including View Boston, which sits high atop the Prudential Building here in the Back Bay.
Speaker 3: The Norton Museum of Art, located in West Palm Beach, Florida. The Honolulu Museum of Art in Hawaii.
Speaker 3: the Ocean Casino Resort in Atlantic City, the Seabreeze Amusement Park in New York, the International African American Museum in Charleston, South Carolina, and the Ronald Perlman Performing Arts Center in New York City, which is set to open later this year.
Speaker 3: As highlighted here on slide 13, our accelerating new customer activity coupled with expanding deployments among our existing customers is leading to significant growth in our install base of Evolve Express subscriptions.
Speaker 3: In the fourth quarter, we deployed a record 575 of all Express Units that are powered by long-term, four-year subscription contracts.
Speaker 3: We now have over 2,200 EVOLVE Xpress units deployed.
Speaker 3: Moving to slide 14, we have seen and expect to continue to see momentum with our channel partners, which helps us extend our reach to certain geographies and vertical markets.
Speaker 3: primarily in healthcare and education.
Speaker 3: Over 65% of our sales activity came from or through a channel partner in 2022.
Speaker 3: We expect to continue to see strong activity with Johnson Controls, the newly formed Securitas Technology, and Motorola Solutions, as well as dozens of other regional partners like Alliance Technology Group and Stone Security. These relationships will be central to our plans to scale over time.
Speaker 3: Turning to slide 15, we remain well positioned in the major vertical markets that have been among the earliest adopters of our technology, specifically education, healthcare, and professional sports. We remain well positioned in the major vertical markets that have been among the earliest adopters of our technology, specifically education, healthcare, and professional sports.
Speaker 3: The education market remains exceptionally large with nearly a hundred and thirty thousand schools across the nation, half of which are middle schools and high schools.
Speaker 3: Gun violence in schools remains a top issue for district leadership.
Speaker 3: school administrators, parents, teachers, and students.
Speaker 3: The tragic news is that 1,676 children
Speaker 3: under the age of 18 were killed by gun violence in 2022.
Speaker 3: That's five of our children every day.
Speaker 3: Unfortunately, that rate has increased here in 2023. The Center for Disease Control and Prevention reports that firearm-related injuries have now surpassed motor vehicle accidents and has become the leading cause of death among children.
Speaker 3: and adolescents. Add to this the number of children that sustain non-fatal injuries and the escalating anxiety levels among young people and the pain and emotional damage that is being created is likely to be felt for generations to come.
Speaker 3: We're on a mission to improve the safety of young people and for us that starts with students and their schools.
Speaker 3: This continues to be our number one in market.
Speaker 3: We partner with our customers to create safer zones in over 400 school buildings, up from 200 at the end of the third quarter.
Another measure of our progress in education is our penetration rate among the 100 largest school districts in the country, which now stands at 8.
We're pleased to welcome the Duval County School District in Florida, the Columbus School District in Ohio, the Johnston County School District in North Carolina, and the Buffalo Public School District, which is the second largest school district in all of New York.
Combined, these four customers are in the process of deploying 200 of all the express units. All told, the education vertical represented half of our business in the fourth quarter.
Turning to slide 16, another major market for Evolve continues to be healthcare.
which includes over 6,000 hospitals, and we're over 70% of workplace violence takes place.
Hospital administrators are making investments to enhance patient and safety, and we stand well positioned to fill this market need.
We added dozens of new healthcare customers in the fourth quarter, including the University of Illinois Hospital, Grandview Health in Pennsylvania, and the University of Illinois Health System in the fourth quarter.
Maritas Health, Western Maryland's largest health care provider, and Stony Brook University Hospital, Long Island's premier academic medical center.
We're pleased to report that we added another 25 hospitals in the fourth quarter and now serve nearly 100 hospital buildings across the country. That's up from just seven hospital buildings a year ago.
We're absolutely honored to be the trusted screening partner for these medical professionals and their patients.
One more market to highlight here on slide 17 is professional sports where we continue to transform the guest experience from millions of fans at stadiums and ball parts around the country.
We enable fans to enjoy a faster, more convenient, and more secure screening experience.
We added several new professional sports teams in the fourth quarter, including three major league baseball teams, the Minnesota Twins, the Philadelphia Phillies, and the Houston Astros. We also added another NHL team, the Tampa Bay Lightning, and our seventh major league soccer franchise, the Colorado Rapids.
We now screen millions of fans of nearly three dozen professional sporting teams across the NFL, MLS, MLB, and NHL.
We expect that these three markets, education, health care, and professional sports, along with warehouses and tourist attractions, will be central to our expansion plans in 2023.
So to summarize here on slide 19, we're reporting strong fourth quarter results highlighted by record revenues, ARR, and SRPO.
We're seeing growing market awareness and strong new customer acquisition activity.
We're continuing to see evidence of the leverage in our business model. We have an exciting growth plan for 2023, which is focused on again doubling our ARR. And we believe that we remain well-capitalized and believe that the strength of our balance and Australians are favored, our humanator is someone that will be affected by the pandemic.
will enable us to reach cash break even without any additional capital. 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'm going to review our fourth quarter results in more detail and walk through our thoughts on 2023. I will start here on slide 20.
As Peter mentioned, total revenue was $20.9 million, up 217% year-over-year and 26% sequentially.
This compares favorably to our previously issued guidance of 12 to 14 million.
Our revenue growth in the fourth quarter continued to be fueled by strong new customer acquisition activity.
continued hardware purchase activity and rapid acceleration and subscriptions.
TCB was 57.6 million, up 222% year-over-year and 27% sequentially.
We saw broad vertical market contribution with strength in education, healthcare and professional sports.
Moving to slide 21, ARR at December 31, 2022 was $34.1 million, compared to $12.9 million at December 31, 2021, reflecting growth of 164% year-over-year and 19% sequentially.
This compares favorably to our previous guidance of $31 to $32 million.
Remaining performance obligation, or RPO, as of December 31, 2022, was a record 144.6 million, compared to 51.4 million at December 31, 2021, up 181% year-over-year.
32% sequentially. Flipping to slide 2022, adjusted gross margin which excludes stock-based compensation was 1% in the fourth quarter of 2022 compared to negative 9% in the fourth quarter of last year.
As a reminder, we recognize all the product costs related to product sales in the period of the sale rather than over the associated subscription term, which is typically four years.
As we've discussed previously, our gross margins do not yet reflect the overall business value we are delivering to customers as we're using two very different accounting treatments between our pure subscription sales and our hardware purchase subscription sales.
As a reminder, since August of last year, we have been transitioning more of the pipeline and opportunities to a pure subscription structure.
As we continue this shift and we continue to engineer product costs down, we expect overall gross margins to continue to expand. Adjusted operating expenses, which exclude stock-based compensation, loss on impairments of lease equipment, and certain other one-time expenses, will flat sequentially at $19.7 million.
compared to $19.8 million in the third quarter of 2022, and $15.7 million in the fourth quarter of last year.
The increase year-over-year primarily reflects headcount growth across the business, particularly in revenue generating positions and in research and development.
We exited the quarter with 225 employees compared to 214 employees at September 30, 2022.
For context, we added approximately 12 employees in the back half of 2022, primarily in sales and support.
We expect to continue to moderate head count growth in 2023.
Net loss was $28.1 million compared to net income of $4.8 million in the fourth quarter of last year.
As a reminder, net income in the year-ago period was significantly impacted by one-time, non-cash valuation benefits.
Adjusted loss, which excludes stock-based compensation, non-cash charges and other one-time items was $18.1 million compared to $16.3 million in the fourth quarter of last year.
Adjusted EBITDA, which excludes stock-based compensation and other one-time items, was negative $17.8 million compared to negative $15.2 million in the fourth quarter of last year. This loss was slightly higher than anticipated due to a higher blend of purchase subscription versus peer subscription sales.
Turning to the balance sheet, we ended the quarter with $230 million in cash and cash equivalents, an increase of $11 million sequentially.
Let me take a moment to walk through the major elements of our change in cash from the third quarter.
First, we had a net loss of $28.1 million in Q4, which resulted in a net use of cash from operating activities of about $5.3 million.
We used about $3.9 million for the purchase of property, plant, and equipment, primarily for express units deployed at our customers.
We used $9 million to extinguish the final piece of long-term debt, which was a holdover from our pre-IPO days.
All of this was more than offset by a 30 million dollar drawdown we completed under our new non-dilutive financing program implemented in the fourth quarter with Silicon Valley Bank.
The drawdown was equal to all of the cash we had previously deployed in the preceding seven quarters to support our peer subscription model business.
Going forward, we expect the program will enable us to effectively offset any cash used to support hardware assets for our pure subscription model.
I want to close with a few comments about how we're thinking about 2023, which is highlighted here on slide 23. For context, we are beginning to recognize seasonality trends in our business, and believe a greater percentage of our activity will come in the second half of the year, like we saw in 2022.
We expect revenues of between $55 to $60 million in 2023. This assumes a meaningful transition to our PERS subscription model effective January 1, 2023.
As a reminder, in 2022, almost 60% of our revenue and about 65% of our unit bookings was related to our pure subscription model.
which requires us to accelerate the hardware revenue recognition in 100% of the related product costs.
These dynamics have historically disguised the full-term gross profit of our customer transactions.
Our plan is to minimize these types of transactions going forward. That said, we're looking at innovative ways that venue operators could own Evolve Express Units without placing the typical timing-related burden on our gross margins. More to come on that once we explore further.
Using the same purchase subscription to pure subscription revenue mix in 2022 that we are currently estimating for 2023, our total revenues would have been approximately $30 million, rather than the $55 million we delivered last year.
So, our goal of delivering $55 to $60 million in revenue in 2023 would have reflected growth of approximately 90% rather than what appears to be about 10% growth.
Further, we did not make the subscription transition in 2023 and our purchase to peer subscription revenue mix in 2023 was consistent with what we had in 22. Our outlook for total revenues in 23 would have been more in the range of about $115 to $120 million. The appropriate supply chain for pharmaceuticals would be the South Florida
reflecting growth of over 100%. The net effect is that 2023 becomes a bit of an odd comp year, but we believe that the transition to more subscription sets up for high quality, high margin, and highly predictable revenue growth going forward. We expect to end 2023 with ARR of between six and eight months.
This reflects the benefits associated with the across-the-board price increases we implemented effective January 1st and an overall improvement in product subscription mix. We will continue to carefully manage expense growth and leverage the investments we made over the last two years.
Of the hiring that we intend to do this year, we expect more than half to be customer-facing, revenue-generating roles.
We expect to reduce our adjusted EBITDA losses in 2023 by about 20% year-over-year to approximately 55 million.
Finally, we expect to exit the year with cash in the range of $165 to $175 million.
With our new non-dilutive financing program in place, investors should expect that our cash usage will be closely aligned to our adjusted EBITDA. So in summary, we had a strong fourth quarter which capped a historic year of growth for the company.
We expect to invest appropriately in the business where we see opportunities and remain excited about our long-term prospects. And with that, I'll turn the call back over to Brian . Thank you, Mark. At this time, I would like to turn the call back over to our friends at AT&T to open up the call for Q&A.
Again, we're going to ask participants to limit themselves to one question and one follow-up.
Thank you. Ladies and gentlemen, if you wish to ask a question, please press 1, then 0 on your telephone keypad. You may withdraw your question at any time by repeating the 1 0 command. If you are using a speakerphone, please pick up the handset before pressing the numbers. If you are using a speakerphone, please press 1, then 0 on your telephone keypad. If you
Once again, if you have a question, you may press 1 then 0 at this time. We'll go to the line of Mike Lattimore with Northland Capital. Please go ahead.
Thanks. Good afternoon. Thanks, everyone. Good afternoon.
Super results there. I mean the bookings growth of over 200% is
Very impressive and the...
number of seven-figure deals, you know really stands out as well to me here, but congrats on the year in quarter.
I believe in 2022.
And how are you thinking about that as a percent of bookings this year? Mike this is Mark Donahue. You know we're moving, we're really trying to shift the business, our hardware enabled SaaS business to subscription. So I would expect that...
the subscription side of our business will be a pretty heavy number. We made comments in the script about starting to move away from selling hardware. But no matter what, whether the hardware is rented through us or bought through a third party in the future, we'll always be recognizing that subscription. So I would expect the subscription line to start to grow substantially.
and move towards 80% plus of our business going forward. Yep. Got it. And then on the, you know, the last quarter you talked about kind of redesigning the hardware. Can you just kind of give a little bit of update on that in terms of timing and...
What kind of cost changes you might see there? To your hey, Mike, it's Peter. We're spending this year doing a cost reduction plan. We call it 2-O or next generation product. That will be available in early 2024. So that's on track. We have a lot of confidence that we'll be able to deliver that in earnest and at scale.
in the beginning of 2024, which it brings, it'll have very similar attributes and capabilities and features of our existing product, but will be cost-reduced, which should help our growth margins next year in a pretty significant way. So between the Moves to subscription this year, and then the cost-reduced next generation to global change.
We feel very, very good about our gross margin outlook in the next couple of years.
to the line of Shal Ayaal with TD Cowan, please go ahead.
Hey guys, this is Hugh Onfer-Shellow. Congrats on the strong quarter. Thank you.
First for Peter, you guys talked about, I think you said three of the four-chune, 28th of the four-chune, 100th.
You tell me is your...
Tell me, is your discussion...
Has it changed in light of the uncertain economy? Are the motivations changing? Because of the economy, is it just still being primarily or solely driven by the increasing number of mass shootings we're seeing?
Yeah, I think the combination of the anxiety and mass shootings that continue to be prevalent everywhere. You know, in the month of January , Q, there were 30 days in January and 48 mass shootings in the United States. In California alone.
in a six-day period or a 13-day period there were six mass shootings so it's becoming, you know...
people and that's encouraging them to make decisions with a vault to keep their employees or get their employees back to work in the office in a hybrid model or fully but know that when they come back to work they're going to be safe.
So workplace violence is a big issue and we can certainly help with our technology and
Okay, I wanted to squeeze in one for Mark about the gross margin embedded in the RPO, but Peter, back to you again, when you spoke a lot earlier about what seems to be a strategy for expanding data in and data out customers.
and integrating with other platforms. And this question is really about the sort of add-ins that we talked about earlier in your life cycle. I think we talked about ticketing and things like that. When you're having discussions with your customers, is there one particular application that a lot of them are interested in?
There are several that come up and a lot of the infrastructure actually is already there. So video management system, the VMS systems from the leading providers that are already there, they want us to connect to those.
access control systems, turnstiles, badge readers, they want us to connect to those systems.
video analytic systems for outdoor detection of weapons. As you know, we can find concealed weapons, but connecting to companies that are doing video analytics for gun detection so we can see somebody who's drawing a gun.
outside of a building is something that they wanted to connect to. So, in addition to biometrics and ticketing that we talked about before, there's a high desire to connect the security infrastructure to give companies and security people situation awareness.
that they just didn't have before. So those are the three or four areas that we're integrating with our key customers. Thanks, Peter. Great. In your question on RPO-HU, you know, for the quarter, we're at the 144.6 level. That represents,
the unbuild activity on both deployed and undeploied units over the next three plus years. Some of this is pure subscription and some of it is the back end software portion of hardware that we've already brought together. So when you look at the combination of those two things, we have analyzed that the margin sitting within that number are about 65% plus.
right now that will recognize over the next three years. Thank you, Mark. No problem. Thank you. Thank you. Next we'll go to the line of Brett Noblock with Cantor Fist Gerald. Please go ahead.
Hi guys, thanks for taking my question and congrats on the quarter and strong finish to the year. Can you just walk through me? I guess the sequential growth and subscription revenue, you know, given how strong AR growth was last quarter and this quarter as well, I would have thought you were just going to get a bit more flow through to subscriptions. So I guess can you just help me understand the dynamics there? Sure.
And Brett, welcome to the call. We appreciate it having you on board. You know, in terms of subscription revenue, quarter of a quarter, you know, we made an announcement to both our sales force and as well as to the customer base that we were moving to more full subscription.
beginning on January 1st. So we had a fair amount of activity in the pipeline that was still bent towards the purchase subscription model. So we executed on that quite a bit. The VA Q4 was actually bent to be more purchase subscription than it was.
remember is that a lot of what we booked in Q4 will not show up until Q1.
We, most of what we did incrementally in ARR from Q3 to Q4 is represented on what we shipped at the end of Q3 in the very beginnings of Q4. We tend to have more back and loaded quarters. We probably do about half our business in the first two months and the other half in the final month.
So that really kind of...
I would say if you look at kind of a blend of Q3 and Q4, that would give you a sense of where that is. But what we did in Q4 is a good indication of how the strength we may see in Q1.
That's helpful. You mentioned a bit about seasonality. You guys are growing extremely fast and we're going to deployed, you know, it's seemingly not being impacted by seasonality as every quarter is a new record. So when we look at 2023, should we expect maybe you're going to deployed in the first Fast?
to be lower than what we've just seen in the last couple of quarters and then to pick up again in the back half of the year. Yes, so I think a couple of things to understand is that we're really starting to see verticals like K to 12 and health care become a very prevalent part of our business. Those two verticals together will likely be more than 50% of our business combined.
but you know actually getting past the goal line we think will be stronger in the second half than it is in the first half in totality.
Thank you guys really appreciate it. Thanks Brett.
Thank you and as a reminder if you wish to ask a question please press one then zero at this time Next we'll go to line up Brian Rootenberg with Imperial Capital. Please go ahead
Yeah, thank you very much. First of all, question on cash on the year and your fiscal 23 guidance. It's 165 to 175. Is that assuming any debt? Is that a net cash number? You ended the quarter just trying to understand your balance sheet where it is right now.
That number will be our cash figure. We'll obviously have a little bit more debt that comes on. We start to see, as we start to ship the subscription business, actually the pure subscription business, as we buy that asset, we'll take up more debt throughout the year.
We're probably heading in the range of another 10 to 20 million in debt, depending on how much volume comes through that purchasing methodology. The cash number we're showing you is the pure cash number, not the net cash number. So you could do the math on the balance sheet for that.
Okay, perfect. Thank you very much for that color. And then in terms of guidance, in terms of revenue.
Can you give us any, I know this has been asked a little bit, but it seems like a lot of growth is going to happen in subscription. Can you give us a little breakdown of your guidance between product revenue, subscription and service, because it looks like it's a very different mix than 2023 versus 2022? I think you're right to say that that mix will be quite different. Thank you.
I would say what will really happen in the early parts of the year. Let's say the first half of the year you'll see the product number continue to be relevant, especially in Q1, and then start to dissipate throughout the year. I don't think our product revenue will ever go to zero.
We'll always be selling some element of product through, but our focus, and like I think I said to one of the other gentlemen on the call, is to really push that subscription line. So going forward, we are either going to be selling pure subscription, which gets recognized in that pure subscription line of the three lines on the P&L.
or we're going to be selling the subscription that goes along with hardware that's likely to be purchased through a distributor which will also go through that line. So I think you do multiple times throughout the year. You should probably think about putting the subscription number up higher and higher as a percentage.
And I would say over the next 18 to 24 months, we're probably going to try to achieve 80% subscription during that period. OK, then as a follow up to that, just trying to model first quarter, should it look something similar to fourth quarter, or should we see a big drop in terms of product?
because product was much higher than I anticipated in that fourth quarter.
Yeah, I think product will continue to be a pretty prevalent number in Q1 mostly because we continued to take orders as we exited the year and we're continuing to deploy orders out of our backlog. So while I don't think the number will be quite as high, it will be a meaningful number in Q1 and start to really decline Q2 forward. Okay.
Very good. Thank you. And then also the services revenue then typically when you have high product revenue, you also have high services revenue. It should be also, is that a good logic or is there something I'm missing there? The services revenue, just remember that we took the hardware revenue as part of a deal and that happens one time. For all the hardware purchase orders that we've done...
which you're seeing the recurring nature of in the service line will continue to see that. We also have a little bit of revenue in the service line that happens due to installations and things of that nature. But again, as we go through this, I think what you'll start to see is that we'll move towards, I would say, the subscription line being about 80 percent.
and the services line being 15 to 20% with some points in product over the long term.
Great, thank you very much. Thank you. I have no further questions. In Q, we'll turn the call back over to Peter George for closing comments.
All right, thank you very much. Look, everyone, thanks so much for joining us. We had a historic year in 2022 capped by an amazing Q4 where we set records in revenue and ARR and RPO.
Because we have this amazing sensor platform, our growing awareness in major cities is making us ubiquitous in places. If you go to New York or Nashville or Atlanta or Chicago, you'll see us in ballpark, in museums, in schools and tourist sites. And that has a force multiplying effect when people experience.
going through the system, it's very helpful for us. So we're continuing to get awareness in the market that's really, really valuable. We're getting tremendous leverage in our business model. This year, in fact, we grew revenue twice as fast as we grew expenses. We're excited about 2023 and our growth plans to double ARR. And then finally, as we mentioned, our balance sheet were well capitalized.
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