Q2 2023 Evolv Technologies Holdings Inc Earnings Call
Yeah.
Yeah.
Ladies and gentlemen, thank you for standing by and welcome to the ball technologies second quarter earnings call at this time all participants.
We are in a 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 during the call. Please press Star then zero on your phone's keypad and as a reminder, this conference call is being recorded.
At this time I would love to turn the conference call over to your host senior Vice President of Finance and Investor Relations for you both technologies, Brian Norris. Please go ahead.
Thank you John and good afternoon, everyone and welcome to the call for <unk>.
And here today by Peter George Our President and Chief Executive Officer.
And Mark Donohue, our Chief Financial Officer.
Afternoon. After the market closed we issued a press release announcing our second quarter results and our updated business outlook for 2023.
This press release is available on the IR section of our website.
Please note that during today's call we will make forward looking statements within the meaning of section 27, a of the Securities Act of 1933.
Section 21 E of the Securities Exchange Act of $19 34, and the Safe Harbor provisions of the private Securities Litigation Reform Act of 1995, there relate to our current expectations and views of 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 and uncertainties and assumptions some of which are beyond our control actual events or financial results may differ materially from those forward looking statements because of a number of risks and uncertainties, including weather.
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 4th 2023 is updated and 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 August 10, 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 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.
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 be differ may differ from similarly, titled metrics presented by other companies.
We will be discussing key metrics such as in our recurring revenue are a R. R.
Remaining performance obligation or RP O.
[noise] deployment activity in total number of subscriptions each of which we believe is helpful to investors in understanding the progress, we're making as a business.
For investors that May have missed our analyst day on May 25th. Please note that all the replay information for that event is available on the IR section of our website under the section entitled presentations.
One last item before I turn things over to Peter we have a very active IR schedule here in the second half of the year highlighted by the Deutsche Bank Technology Conference in August .
And the UBS Credit Suisse Technology Conference in November .
We'll also be hosting a variety of other live and virtual events for more information. Please contact me at be Norris at a ball technology dot com with that.
I will turn the call over to Peter Peter.
Thank you, Brian and thanks to everyone for joining us today.
I'm going to spend a few minutes on our results for the second quarter as well as the key trends that we believe are driving those results and then spend a few minutes, providing an update on several important positive operational developments in the business.
Mark will then walk through our financial results and our outlook for the remainder of the year.
During the second quarter, we delivered strong results across every key measure of the business including revenue.
Our R. R. P O subscriptions gross margins and profitability.
Based on the strength of these results the strong demand drivers, we're seeing in our key end markets and the confidence we have in our outlook for the remainder of the year. We are again, raising our guidance for 2023.
Revenue in the second quarter was $19 8 million up 119% year over year.
Our growth continues to reflect strong customer acquisition activity, expanding our pools and deal sizes and overall growth in the number of active subscriptions.
We welcomed over 70, new customers in the second quarter and activated 600, new multi year subscriptions of evolve express.
We now have nearly 3400 units deployed.
Based on our strong subscription growth in the first half of the year and our pipeline for the second half we think its likely that we will end the year with closer to 4500 subscriptions compared to our early estimates of 4000.
Our robust growth in customers and subscriptions continued to drive accelerated visitor screening activity during the quarter.
We screened over 170 million visitors in the second quarter more than double our screening activity in the year ago period, We're now averaging nearly one 9 million visitors screen a day up from 900000 visitors in the second quarter of last year.
We have now screened over 750 million visitors and are on pace to reach 1 billion with a b visitor's screen before the end of the year.
Our customers use the Bob expressed that detect over 179000 weapons in the first half of 2023, which.
Which is more than we were tagged our customers all of last year.
<unk> scanning and detection data means our systems get smarter and more accurate over time.
We grew a RR from $42 million at the end of Q1 to $54 million at the end of Q2, reflecting growth of about 30% sequentially.
And 160% year over year again, fueled by increased subscriptions and the accelerating shift to reoccurring revenue.
We remain well positioned to more than double our <unk> in 2023.
This growth coupled with continued gross margin expansion and prudent expense management gives us confidence in our ability to deliver adjusted EBITDA ahead of our earlier targets Mark will share more thoughts about this and those results of our upwardly revised outlook in the moments.
<unk> ahead.
Our strong results continue to reflect several powerful growth trends.
We continue to see broad adoption of our AI based solutions with strong end market demand in education health care and professional sports the education market, which represents about 60% of our business in the second quarter grew by nearly 50%.
<unk>.
Our solutions are now being used to screen about 250000 students every single day.
A tenfold increase from just a year ago.
We added nearly three dozen new education customers in the second quarter.
We can now be found in 14 of the top 100 school districts in the country.
We're pleased to welcome the Prince William County School District in Virginia.
San Antonio Independent School District in Texas, The Northwest, India Lighthouse charter schools, Nova Southeastern University in Florida, The Westminster Public school in Colorado, The Providence, St Mel's School in Chicago, The Nash County public schools in North care.
The lineup and the Jackson public schools in Mississippi.
We continue to extend our early leadership position in the healthcare market, which includes over 6000 hospitals and where over 70% of workplace violence takes place.
We added another 15, new health care customers in the second quarter, including the Christiana care health system, which is comprised of three hospitals throughout the northern Delaware.
System.
Sanford health with operations throughout both North and South Dakota, and the singing River health system on the Mississippi Gulf Coast.
We saw a 50% sequential increase in activity in our healthcare business in Q2.
We are now screening over 300000 hospital visitors every single day compared to just 20000 a year ago.
Professional sports remains a high visibility vertical for us some of our most recent wins in the market include Mercedes Benz Arena in Berlin, Germany, and our 12 National Football League franchise, the Houston Texans.
We're proud to now partner with over 40 professional teams across the National Football League Major League Baseball the National Hockey League Major League soccer we.
We screen close to 20 million fans across professional sports in the second quarter, a nearly three X increase year over year.
We expect to be screening close to 1 million football fans on any given Sunday. This fall when the 2023 NFL season kicks off.
We continue to see accelerating momentum with our channel partners.
70% of our bookings activity in the second quarter came through the channel. We continue to work very effectively with dozens of channel partners, including Alliance technology, which is a particularly strong partner in the education vertical Johnson controls Motorola Stanley Securitize.
Stone security Allied University, ICU technologies, and many others were pleased to host the first ever evolve technology partner summit in the second quarter.
The collaboration event was attended by over 100 executives and sales and textile technical personnel from across our partner ecosystem and was a great opportunity to align on go to market strategies product innovation and technical training.
Another important trend that we saw throughout the second quarter was the increase adoption of our subscription model.
Out 75% of all unit bookings in the second quarter were via our pure subscription model that was directly correlated to the gross margin expansion we delivered in Q2.
Finally, we continue to see growing deal sizes in fact, our average deal size was up about 20% year over year.
Reflecting both higher selling prices per unit and an increase in the average number of units per deal.
I want to briefly highlight some important developments during the second quarter on the product innovation and partnership front.
First starting with product innovation.
We're absolutely delighted to announce the general availability of evolve expressed six startup.
This is the latest upgrade of our cortex AI software platform that we released in the second quarter. We believe it offers several key technical breakthroughs first.
We're now able to offer our customers a new higher sensitivity threat level, which provides enhanced detection of some smaller bladed weapons.
While we have long provided exceptional detection capabilities with guns and bombs and larger tactical knives sixth auto was designed to extend our detection capabilities with respect to smaller bladed weapons interestingly.
Interestingly knife tagging by our customers was up 39% sequentially and 215% year over year in the second quarter.
This surge in blade bladed weapon tagging is significantly faster than our growth in subscriptions and a new customers.
Another important breakthrough with <unk> is that it enables our customers to reconfigure more easily evolve express units.
Which our customers say is important and lobby spaces like schools and hospitals.
Customers can now change the systems physical configuration and the software we're automatically adapt to it.
So we're making it even easier for our customers to deploy our technology without sacrificing detection capability.
Like all our releases six though is available to our customer as an upgrade delivered to an ongoing subscription.
This is both an expectation and a benefit of being a SaaS company, we don't merely dropped off the sensor platform, but we can efficiently deliver more value and features to our customers over the four year subscription contract with software enhancements.
Turning to two important your partner developments.
I want to take a moment to update investors on our work with Ricoh and with Columbia technology.
We're delighted with our new partnership with repo one of the largest service delivery organizations in the world.
Our new support and service partnership expands our customer service program by leveraging <unk>, well established and comprehensive service advantage program.
We believe this will extend our own coverage and provide better faster service for our rapidly growing customer base.
The Rico partnership is designed to provide our customers with increased field service resources expanded technical support and an expedited part availability.
The partnership will provide an increased workforce of highly trained field engineers eventually, including about 250 Rico technicians located throughout the United States.
We believe this will provide faster enablement of resources to customers for brake fix and preventative maintenance services.
We're also now able to augment our own staff resources with third party technical engineers, who can provide meaningful first response level one technical support from the moment the first phone call comes in.
Finally in the coming months, we expect to expand the number of locations around the country, where parts are stored enabling even faster delivery.
Another important milestone for us in the second quarter was our expanded partnership with Columbia technology.
<unk> technology, which has been our long time contract manufacturer is now an authorized distributor of evolve express.
Simply put customers that prefer to purchase the hardware component of evolve express can now do so by placing an order with one of the one one of our approved reseller partners, which in turn will place a hardware order for evolve express directly with Columbia Tech under a separate reseller.
<unk>.
So customers don't have to turn to evolve to purchase the hardware component of their evolve express system concur.
Concurrently the approved reseller partner will place a second order with us for a long term software subscription contract, which will power the newly purchased evolve express.
The complete solution will be distributed by Columbia technology.
This is an important expansion of our strong partnership and is designed to make it even easier for our customers to procure and deploy evolve expressed directly from our manufacturer.
We believe this expanded partnership will ensure that we can fully support the contractual preferences of our customers, particularly those with grant resources or accustomed to working under a capex model.
We believe this expanded partnership with Columbia technology.
And our new partnership with Rico are two important steps and supporting our long range plans to cost effectively develop into a billion dollar business.
So before I turn things over to Mark Let me briefly summarize.
We're reporting solid second quarter results highlighted by strong growth in revenues.
And our PEO.
We again delivered strong growth in both in new customer acquisition, and then expanding deployments within our existing customer base.
We saw a significant improvement in gross margins, reflecting accelerated adoption of our pure subscription model.
We continue to see evidence of the leverage in our business model as revenue growth again outpaced operating expense growth.
We expect to execute well on our growth plans for 2023, which is focused on doubling our ALR and we believe that the strength of our balance sheet will enable us to reach cash breakeven without the need to raise 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 second quarter results in more detail and then walk through our upwardly revised business outlook for 2023.
As Peter mentioned total revenue was $19 8 million up 119% year over year.
Our revenue growth was again fueled by strong new customer acquisition activity.
<unk> and the rapid growth of revenue generating subscriptions.
Annual recurring revenue or <unk> at June 32023 was $54 3 million, reflecting growth of 160% year over year and 29% sequentially.
Total recurring revenue during the second quarter of 2023 was $11 7 million compared to $4 6 million in the second quarter of 2022, reflecting growth of 154% year over year.
Our total number of revenue generating subscriptions increased to 3386 at the end of Q2 2023 compared to 1100 47 at the end of Q2 2002.
This was the primary driver to the strong growth in recurring revenues.
Remaining performance obligation or RP O as of June 32023 was a record $198 3 million up 145% year over year and 23% sequentially.
Adjusted gross margin, which excludes stock based compensation was 38% in the second quarter of 2023 compared to 9% in the second quarter of last year and 27% in the first quarter of this year our.
Our improved gross profit and gross margin primarily reflects strong customer customer demand for our pure subscription offering.
Investors will note that our gross profit in the second quarter of 2023 was greater than our gross profit in the preceding five quarters combined.
In the second quarter, nearly 75% of all units booked were via our peer subscription business model and approximately 10% of units were booked via our new expanded <unk> distribution model.
We expect gross margins to continue to expand as demand for our Cte distributor model accelerates and we continue to shift the vast majority of the business to recurring revenue streams.
Adjusted operating expenses, which exclude stock based compensation loss on impairment of equipment and certain other one time expenses were $23 7 million.
Paired to $18 5 million in the second quarter of last year and $22 2 million in the first quarter of this year.
The increases primarily reflect head count investments and revenue generating positions and in research and development.
Our growth in revenue continues to outpace operating expenses, which provides further evidence of the leverage in our business model.
We exited the quarter with 273 employees compared to 247 at March 31 2023.
Most of the hiring was within the sales organization, including additional sales executives customer support managers and technical pre sales professionals.
We reduced our adjusted operating loss, which excludes stock based compensation noncash charges and other onetime items to $16 1 million compared to $17 6 million in the second quarter of last year and $17 2 million in the first quarter of this year.
Adjusted EBITDA, which excludes stock based compensation and the other one time items improved to negative $13 8 million compared to negative $16 4 million in the second quarter of last year and $15 4 million in the first quarter of this year.
Turning to the balance sheet, we ended the quarter with $157 million in cash cash equivalents and restricted cash down about $25 million sequentially.
Primarily driven by our net loss certain changes in working capital and additions to fixed assets to support the pure subscription business.
We ended Q2 with inventory of about $5 million compared to $8 8 million at the end of Q1.
There are two dynamics driving this change.
The first is that due to our new distribution agreement certain finished goods now sit on the balance sheet of Columbia technology in their inventory for fulfillment of orders the.
The second is more of our finished goods sit in property plant and equipment as the accounting rules require us to account for them. There as they are now much more likely to be delivered under our peer subscription pricing model and become a least fixed asset.
That's also a big driver for the sequential increase in property and equipment in Q2.
I want to close with a few comments on our updated thinking for 2023 as.
As we shared with investors last quarter, we believe seasonality trends combined with ramping of channel enablement and the timing of certain hiring decisions will lead to a greater percentage of our book the unit activity coming in the second half of the year.
We also continue to believe that our newly expanded partnership with Columbia technology will be a slight headwind to AOR growth because of the recurring revenue associated with the hardware will no longer be on our books.
The reward for that of course is significantly higher gross margins over time for that part of the business.
With all that being said based on our strong performance in the first half of the current year indications are that we're seeing in the business we are raising our outlook.
We expect revenues of between 70% to $75 million in 2023 compared to our earlier guidance of between 60% to $65 million.
We expect to end 2023, with AOR of between $70 million to $72 million compared to our previous guidance of <unk> $67 million to $71 million and compared to $34 million at the end of 2022.
Again this upwardly revised outlook reflects the <unk> headwind, we are modeling due to the expanded <unk> partnership.
We continue to expect gross margins to improve throughout 2023 and are now modeling, 38% to 42% for the full year up from our prior outlook of 35% to 40%.
This reflects the benefits associated with the accelerated adoption of our peer subscription pricing model and the resulting forecasted decrease in product revenue as well as expanding our coos for evolve express.
Based on the strength of our revenue outlook and our improving improving gross profit expectations, we are raising our profitability outlook.
Specifically, we now expect adjusted EBITDA to range between negative, 52% and $56 million compared to our previous forecast of negative <unk> $53 million to $58 million.
Finally, we continue to expect to exit the year with net cash in the range of $110 million to $120 million.
We remain well capitalized and expect to reach cash breakeven in the first half of 2025 with between $75 million to $100 million in net cash.
So in summary, we had a solid quarter highlighted by strong revenue and gross profit.
Which coupled with the strengthening leading indicators for the business gives us confidence to raise our outlook for the remainder of the year.
With that I'll turn the call back over to Brian .
Thanks Mark.
Terrific folks as we are waiting to open up the Q&A session I just want to remind investors that we have several major conferences going on in the back half of the year, including the Deutsche Bank Technology Conference. The Northland Securities Conference The Craig Hallum Conference and the UBS Credit Credit Suisse Technology Conference John We're ready for our first question if we can.
Please.
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And once again for questions or comments that will be one zero, where they go first to Hugh Cunningham.
With TD Cowen go ahead. Please.
My question guys.
Congratulations on a very strong quarter very impressive.
And particularly on your foresight regarding.
Moving to the subscription only model.
Any impact on your margins. So I got two quick questions. The first is.
Any updates on the industrial workplace opportunity.
And then secondly on this new capability for smaller blades.
Maybe a little bit out there, but in terms of timing, but I think there is some international markets, where that sort of capability is is in more demand.
Then here and then finally are there any.
Is there anything that's happening on the regulatory side.
That you've heard.
Related to requiring <unk>.
More protections in schools and so on.
Schools and other other sort of sensitive places like that thank you.
Thank you Hugh.
So let me start with the first one I think you asked about the industrial warehouses.
As you know, we Verticalizing, our company and focused on the high verticals like education likes professional sports and like healthcare, we're starting to see.
Industrial warehouses as the next big vertical for the company. So we're winning some of those industrial warehouse deals. They are very sizable, particularly post COVID-19 think about those companies that are delivering things.
All over the World really quickly so we had a couple of wins in.
In Q2 in that area and I think Youll see us go higher on industrial vertical warehouse expert like we've done in those other verticals and.
That will be a big part of what our product mix will look like in those verticals next year. So still early days, but we see that potentially rivaling, where we are with education in schools today it could be that big in fact, it's almost the bigger.
So thats one in terms of smaller blades, we've always said because we're using machine learning models to train our systems that we're going to have the opportunity to.
Improve the accuracy and efficacy of our technology. So a six hour does that.
And as a result of focusing in on the use case, we have which is mass casual piece, we have a long and storied background and identifying guns and.
In fact, we've stated that we find about 450 guns a day today.
But through that process, we've also been able to.
Be more reliable with with smaller bladed weapon. So we're happy about that it's a new setting on the system Coke setting G and we expect some of our customers to really take advantage of that and then finally in terms of regulatory we're still seeing funds like the <unk> funds the cops.
<unk>.
For schools to.
Make security safety important in fact, I was just in Kentucky, where they use essar funds to buy four systems. We also donated two more systems to give them all to make sure that they had systems in their doorway. So we can continue to see them using cops Vanessa funding, we don't know of any new funding coming down.
But when it starts coming down we're going to certainly work with our customers to make sure that they can take advantage of it.
Thank you Peter just one thing that occurred to me while you were speaking.
In in some fields AI is now the hot buzzword, but you guys have been talking about AI.
Sort of a critical part of the intelligence of your system for some time.
And Im wondering.
Has your view of the potential impact of AI, our generative AI.
Change the way you think about the add on opportunities or the adjacencies that are available to <unk> to.
To evolve.
Alright, well. Thank you for recognizing that we have been talking about how AI is so fundamental to our cortex AI platform for a long long time. So thank you for recognizing that we just didn't adopt that to be in Vogue, it's been central to who we are as a platform.
I think I know, who you're at the analyst meeting, we introduced Parag Bosch, who we just brought in a few months ago to head our digital products or organization.
And parag is already working on some really exciting digital product. If you remember his background with Tesla and Google and Stubhub and Disney. So we've got a really great background in digital products, and we think that AI and digital products will be an important part of the next.
Generation products that we come out so look to that sometime in 2024 that youll see new products on the digital side that potentially will sit on the evolve platform that we'll be able to deploy to our customers and we can do more for them, which all of them want us to do that and most of it is in the field of both.
Increasing their security posture, but also continuing this frictionless experience that's unique to our value proposition.
Thanks, Peter and congrats again on the very strong quarter.
Thanks, a lot here I appreciate it.
Next question please.
Well go now to Mike Latimore from Northland Capital markets. Please go ahead.
Great. Thanks, very much yeah awesome quarter.
Yes.
75% of business coming through peer subscription I guess.
I believe it's a little bit higher than you were planning the pipeline suggests that it stays at that level or are you going to Bruce.
Yeah. Thanks for the question Mike.
We don't expect it to stay I think at that level just on the pure subscription side, we had really kind of pivoted there somewhat temporary temporarily as we were working through the <unk>.
The different models related to C T.
As you know C. T is still a subscription side to it just doesn't have the hardware component in it but going forward I think we kind of stick to what we said at analyst day. It will take some time, but we still believe that that our business will probably be about half and half half peer subscription and half.
Columbia Tech distribution model.
Going into next year that'll that'll start to kind of come in in Q3, and Q4 of this year as.
As we said on the call only about about 10%.
Of what we booked in the second quarter actually came from Colombia attack, but but we're in a great place in terms of that enablement across our resellers. So we expect that to go up.
Quite a bit but look at the end of the day, we're trying to be agnostic to our customers.
Somebody with capital sunlight to use operating expense were really just trying to simplify it.
We're really just looking at our verticals in the way they typically act and how they how they perform over the next year, plus and coming up to that 50 50 model.
Yes.
Makes sense.
How many of your how many of your big resellers or what percent of your bigger resellers are certified to sell under this new purchase subscription model now.
Yes, it's a good question.
We have.
We have a portion of them, it's not a it's not a huge portion thats, where most of it's coming from I would say that seven set where 70% of the volume.
Some of our.
The city of where our channel is coming from it's probably activated at this point.
It'll be it'll be some of the largest ones to start and then we're going to move into.
We'll probably have another model for smaller resellers overtime.
Yes.
Okay and just last.
The pipeline coverage.
How is the pipeline looking relative to your goals is it in line better than average for this time of year.
Yes, we continue to be very very focused on all the metrics around pipeline development the quality of it the size of.
The pipe, we get we get demand generation, both from marketing from our channel that registered deals themselves. We have a very robust process. There and also through our sales guys to reference customers. So those three components components all increase our pipeline.
And right now our metrics are if we have a three X the pipe going into the next quarter given the quality that we continue to scrub we feel very very confident we'll be able to make the forward quarters and right now it's looking like we have three or four <unk>. So we're feeling good about where we are as it relates to pipeline development, but you know as we.
To grow we got to get better and better at that and we added about 10, new salespeople in the last quarter, they will be bringing pipeline with them as well. So we're going to continue to hire salespeople behind the revenue curve, but stay very focused on developing the pipeline and increasing both the quality and the close rate there right.
Now, we're feeling very good about where we are.
Alright, great. Thanks, Congrats again.
Thanks, Mike Thanks, Mike.
And we'll go next now to Chad Bennett with Craig Hallum Go ahead. Please.
Thanks for taking my questions I'll reiterate a phenomenal quarter.
For you guys good job on the execution and getting product.
To your customers so.
Just wanted to ask maybe Peter or Mark just on seasonality in the second half obviously last year.
You had very strong seasonality in the second half and I believe.
That's when education really started kicking in for you guys.
And I don't know if there's really any seasonality in education right now because the demand so robust.
In terms of the buying season and be in the June quarter in <unk>.
Schools trying to get these things in place before they open the doors in the September quarter, So just kind of any.
Magnitude of seasonality in the second half and I mean, I can't imagine there is really any negative seasonality you are seeing in the education market as you look into <unk>.
December March quarter any color there.
Chad This is mark.
Yes, thanks for the question and for the and for the nice comments.
In terms of seasonality I think the way we're thinking about it right now as we're going through this transition with the Columbia Tech model is that we expect our unit bookings to be higher in the second half of the year than they were in the first half.
If you look at if you look at the guidance, we gave there could be construed a little bit of a headwind.
Just on just on how we've done in the first half of the year in terms of putting about $20 million and that up but it's just a reminder, that we're still going through this Columbia Tech process, we're trying to understand the impact on it and how that will drive <unk> going forward and remember that at the end of the day, it's very strong.
Margins with those <unk> impacts and we feel pretty confident that we'll be at 80% <unk> company.
And 20% license at the end of the day and as we said in the comments.
Some of that unit that unit thinking is around.
Our raise of the 4000.
To 4500.
<unk> is really important it's a really important vertical for us, it's our largest vertical by far at the <unk>.
At this point I'll remind you, though that that backing back in Q3 of last year education really became a player in the Q3 quarter. It was it was a catalyst for the quarter.
We're seeing growth, but it's not a zero to it's not a zero to 100 at this point in a quarter like it was last year.
The one thing I would add to that and just echo everything Mark said, but what we did learn in the second half of last year is that.
The elevation, we thought that maybe education was going to be just the Q3 and we were wondering if things so fundamentally changed with that tail of momentum continue and what we learned last year is that every quarter is a good quarter to keep kids safe and superintendents, we're willing to do.
Not only place orders, but have us go up and stand up schools over the weekend during a holiday break to keep their kids safe. So it's not just the summer a thing anymore. It's like if they can get the technology and get support from the board to put in systems, then they'll put them in as soon as they can get them because they want their kids to.
Be safe so we learn that which is why we're having an elevated run rate in education that goes beyond just Q3 during the summer before school.
Got it no I appreciate that color and then maybe just a follow up on <unk>.
<unk>.
Good color there also but just in terms of.
Direct purchase units that were kind of already in process are in backlog.
Did we eat through a bunch of that in this quarter and in <unk>.
As much as we can obviously dictate.
Kind of.
Second half direct units the vast majority of them go through.
CET or do we still have to kind of eat through more of that backlog.
It's a great question Chad I appreciate it look I think our revenue was was was heightened I think by the amount of purchase activity that we did and this is the legacy purchase activity, we'll rerun the hardware through our own books, we did.
We did about 80% of what we expected to do in the entire year and the FERC in the first and the first half of the year, it's actually more than we anticipated and it was because there is demand for the purchase model, we were still enabling cte in certain pockets of it but.
But we've got that enablement at the at the right point now so we expect.
We expect scant usage of the old purchasing legacy model in the back half of the year like we said before it will still happen from time to time, depending on certain situations, but we expect the majority the vast majority.
Nearly all to go through the <unk> model.
Got it nearly all in the second half Okay, and then maybe one last one for me just in terms of.
Sure.
I think it's your next generation product to out early next year and with the cost savings I think 30% cost savings associated with that kind of gave you up can we get an update on where you are there and if those cost savings are still on track. Thanks.
Yeah, Chad we're tracking to the to the plan that we put in place we feel we feel good about it.
We're working on different prototypes and things of that nature at this point.
We are we are confident in the cost reductions and I think 30%.
And it could be even a little bit better than that as the right with the right Zip code to be in right now.
So no change.
Yes.
Thanks, Jeff.
Yes.
Next we'll go to Brett Knoblauch with Cantor Fitzgerald go ahead. Please.
Hi, guys. Thanks for taking my question and congrats.
That's on a very strong quarter.
I guess I was just hoping.
If you guys could help maybe quantify the magnitude of the E. R. R.
Headwind, where we're seeing from the <unk> transition in the back half.
What would your kind of numeric had been excluding Cta to think anything or any any color for us on that.
Yeah.
It's hard to get into real specifics, but I think if you think about.
When we go through the <unk> model, we probably get two thirds of the IRR that we would typically get in a subscription transaction. So I I don't think we'll hit the 50% Mark anytime soon in Q3, and Q4, I think we'll be somewhere somewhere in the middle of Kelly.
25% to 35% range of our business coming from Colombia Tech with about 65% of those transactions.
Being the IRR of the pure subscription number so that's sort of how that how we've built in and the headwinds so that's about it.
If a third of our units have had have a little bit less and you look at our guidance here.
<unk> you.
Probably be talking about.
$3 million to $5 million.
<unk>.
Got it no. Thank you.
And forgive me.
Harmony.
Education Billings and hospital the items that you guys are now in.
And it wasn't in our prepared remarks, but it was.
Approximately 650 school buildings at this point.
And hospitals were closing in on about 200 breath.
Perfect.
I guess, just maybe one more on on the guide.
I know you guys said it would be closer to 4500 units at the end of the year.
But I guess, if I do the math.
Call it.
1100 units you would add in the back half of the year, which is a little less than what you added in the back half of last year. So I guess.
What.
What should we be thinking there I mean I feel like every single quarter, you guys had grown units, especially on a year over year basis. So I guess why would that not continue in the back half or is there just some level of conservatism built into that deployment cadence.
Yes, I think it's about deployments right I mean, we book, we think about it in two ways. We book, we book that we booked the deals and then we've got a ship the deals.
I'd say that we're.
We're shipping things through <unk> were shipping things.
Out as they come in we don't have we don't have.
When we think about what's going to happen in Q3, and Q4 and it's mostly more of a Q4, we can't we can't be 100% sure exactly when a customer is going to want to install systems. So we may have backlog could be a little higher if they don't want them as soon as we'd like so we're trying to kind of we're kind of trying to thread the needle there a little bit.
Yes.
Understood. Thank you and congrats again guys.
Great. Thank you.
A good time for a couple more here John next question. Please.
<unk> two Alex sharp from Stifel go ahead. Please.
Good evening this is alec on for Brad Reback.
Following up on those comments there.
What type of capacity, assuming the customers want to do it do you have to install more than the 5% to 600 units per quarter, that's kind of been the level here for a little while.
Yeah, we're not we're not capacity constrained at this point, we're doing we're doing a great job from the supply chain perspective of building units in building inventory.
And so I think that we will.
<unk>.
Theres not theres, obviously, the ceiling exists only in the amount of and the amount of.
The parts that we have let's put it that way, but its but we have quite a.
We've quite of extra capacity.
Drive.
These systems out there at this time.
Great and then.
Looking at.
The second half do you guys expect December to be the strongest quarter for.
Customer had similar to last year or will the summer season outpace that do you think.
What was the you know look I don't I think we've been looking at seasonality as a <unk> thing.
Our business isn't isn't as a mature enough to know exactly which month things are happening and but.
We.
We have one.
Our pipeline.
<unk>.
We feel good about what's going to happen in Q3, and good about what's going to happen in Q4 right now.
But we don't have any more specifics on that at this time.
Awesome. Thanks, guys.
<unk>.
Terrific. Thank you.
John is there any other questions we get through the month and we have no additional callers in queue.
Okay, I'm going to turn things back over to Peter George for some closing remarks. Thanks, Brian look everyone. Thank you so much for taking the time to be with US today, we feel really good about.
Our earnings just now we had a strong Q2 as unit result.
We hit it out of the park with record revenue and <unk>, we had great customer acquisition, we've talked about the <unk> going up.
The size of the deals are going up those are all really good trends for the company, we feel particularly good about the gross margin expansion of course, the subscription had a lot to do with that but it is starting to reflect the health of the business, which we feel great about we're getting a lot of leverage in our model as the company Opex leverage.
We're seeing a lot of productivity for more of our salespeople than ever before we continue to feel great about doubling our IRR and we've made this pivot.
Ah from PCB in it.
Paying big dividends for the company and then finally as I mentioned and Mark reiterated we feel really good about being fully capitalized and knowing we can get to cash flow breakeven without any future capital. So feeling very good about the business. We appreciate everybody's support and we look forward to talking to you again in the next earnings release.
Thanks, everybody.
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