Ladies and gentlemen, thank you for standing by and welcome to the Evolv Technologies Second Quarter Earnings Call. At this time, all participants are in listen-only mode. Later, we will have a question-and-answer session and instruction for queuing up will be provided for you at that time.

[Operator Instructions] And as a reminder, this conference is being recorded. At this time, I'd like to turn the conference call over to our host, Senior Vice President of Finance & Investor Relations for Evolv Technologies, Brian Norris. Please go ahead sir..

Thank you, John, and good afternoon, everyone and 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. This 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 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934, and the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 that relate to our 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, uncertainties, and assumptions, some of which are beyond our control.

Actual events or financial results may differ materially from these forward-looking statements because of a number of risks and uncertainties, including, without limitation, the risk factors set forth under the caption Risk Factors in our annual report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 4th, 2023, as updated in other documents filed with or furnished to the SEC from time-to-time.

Our forward-looking statements made today represent our views as of August 10, 2023. Although we believe 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 provide additional insights for investors.

These measures should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. Reconciliations between non-GAAP measures and the most directly comparable GAAP measures can be found in our press release issued today.

Please note that our definition of these measures may differ from similarly titled metrics presented by other companies.

We will be discussing key metrics such as, annual recurring revenue or ARR, remaining performance obligation or RPO, deployment activity and total number of subscriptions, each of which we believe is helpful to investors in understanding the progress we're making as a business.

For investors that may have missed our Analyst Day on May 25, 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 will also be hosting a variety of other live and virtual events.

For more information, please contact me at bnorris@evolvtechnology.com. With that, I'll turn the call over to Peter.

Peter?.

Thank you, Brian, and thanks, 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, ARR, RPO, subscriptions, gross margins and profitability.

Based on the strength of these results, the strong demand drivers we are 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 ARPUs 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 multiyear subscriptions of Evolv Express. We now have nearly 3,400 units deployed.

Based on our strong subscription growth in the first half of the year and our pipeline for the second half, we think it's likely that we will end the year with close to 4,500 subscriptions compared to our early estimates of 4,000.

Our robust growth in customers and subscriptions continue 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 1.9 million visitors screened a day, up from 900,000 visitors in the second quarter of last year. We have now screened over 750 million visitors and are on pace to reach 1 billion within visitors screened before the end of the year.

Our customers use Evolv Express to detect over 179,000 weapons in the first half of 2023, which is more than we were tagged our customers all of last year. More scanning and detection data means our systems get smarter and more accurate over time.

We grew ARR 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 ARR 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 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% sequentially.

Our solutions are now being used to screen about 250,000 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, the San Antonio Independent School District in Texas, the Northwest India [ph] Lighthouse Charter Schools, Nova Southeastern University in Florida, the Westminster Public School in Colorado, the Providence St.

Mel School in Chicago, the NASH County Public Schools in North Carolina and the Jackson Public Schools in Mississippi. We continue to exceed our early leadership position in the health care market, which includes over 6,000 hospitals and where over 70% and of workplace violence takes place.

We added0 another 15 new health care customers in the second quarter, including the ChristianaCare 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 health care business in Q2. We are now screening over 300,000 hospital visitors every single day compared to just 20,000 a year ago. Professional sports remained a high-visibility vertical for us.

Some of our most recent wins in the market include Mercedes-Benz arena in Berlin, Germany, and our 12th National Football League franchise to 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 screened close to 20 million fans across professional sports in the second quarter, a nearly 3x 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.

About 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 Securitas, Stone Security, Allied University, ICU technologies and many others. We're pleased to host the first ever Evolv Technology Partner Summit in the second quarter.

The collaboration event was attended by over 100 executives and sales and 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 increased adoption of our subscription model about 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 Evolv Express 6.0. 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, 6.0 is designed to extend our detection capabilities, with respect to smaller bladed weapons. Interestingly, knife tagging by our customers was up 39% sequentially and 25% year-over-year in the second quarter.

This surge, in bladed weapon tagging is significantly faster than our growth in subscriptions and in new customers. Another important breakthrough with 6.0 is that it enables our customers to reconfigure more easily evolve Express units, which our customers say is important in tight lobby spaces like schools and in hospitals.

Customers can now change the system's physical configuration and the software will 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, 6.0 is available to our customers 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 drop off the sensor platform, but we can efficiently deliver more value and features to our customers over the four-year subscription contracts with software enhancements. Turning to two important 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 Ricoh, one of the largest service delivery organizations in the world.

Our new support and service partnership expands our customer service program by leveraging Ricoh's 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 Ricoh 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, Ricoh technicians located throughout the United States.

We believe this will provide faster enablement of resources to customers for break/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 1 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.

Columbia Technology, which has been our long-time contract manufacturer, is now an authorized distributor of Evolv Express.

Simply put, customers that prefer to purchase the hardware component of Evolv's Express can now do so by placing an order with one of the -- one of our approved reseller partners which in-turn will place a hardware order for Evolv Express directly with Columbia Tech under, a separate reseller agreement.

So customers don't have to turn to Evolv, to purchase the hardware component of their Evolv Express System. 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 Evolv 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, Evolv Express 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 Ricoh are two important steps, in supporting our long-range plans to cost effectively develop into a $1 billion ARR 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, ARR and RPO. We again delivered strong growth in both the new customer acquisition and in 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 and which is focused on doubling our ARR, 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, higher ARPUs, and the rapid growth of revenue-generating subscriptions. Annual recurring revenue, or ARR, at June 30, 2023, 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 3,386 at the end of Q2 2023 compared to 1,147 on at the end of Q2 2022.

This was the primary driver to the strong growth in recurring revenues. Remaining performance obligation, or RPO, as of June 30th, 2023, 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 improved gross profit and gross margin primarily reflects strong customer demand for our pure subscription offering.

Investors will note that our gross profit in the second quarter of 2023 and 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 CT distribution model.

We expect gross margins to continue to expand as demand for our CT distributor model accelerates and we continue to shift the vast majority of the business to recurring revenue streams.

Adjusted operating expenses, which excludes stock-based compensation, loss on impairment of equipment, and certain other one-time expenses, were $23.7 million compared 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 headcount 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 presale professionals.

We reduced our adjusted operating loss, which excludes stock-based compensation, non-cash charges, and other one-time 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, a 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. The primarily driven by our net loss, certain changes in working capital in addition 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. First, 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 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 or much more likely to be delivered under our pure subscription pricing model and become a lease fixed asset. That's also a big driver for the sequential increase in property net in Q2.

I want to close with a few comments on our updated thinking for 2023. 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 equity coming in the second half of the year.

We all continue to believe that our newly expanded partnership with Columbia Technology will be a slight headwind to ARR growth, because 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.

Without 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 million to $75 million in 2023 and compared to our earlier guidance of between $60 million to $65 million.

We expect to end 2023 with ARR of between $70 million to $72 million compared to our previous guidance of $67 million to $71 million and compared to $34 million at the end of 2022. Again, this upwardly revised outlook reflects the ARR headwind we are modeling due to the expanded CT 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 pure subscription pricing model and the resulting forecast decrease in product revenue as well as expanding ARPUs for Evolv Express. Based on the strength of our revenue outlook and our improving gross profit expectations, we are raising our profitability outlook.

Specifically, we now expect adjusted EBITDA to range between negative $52 million and $56 million compared to our previous forecast of negative $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. Perfect. Folks, as we're 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 could, please..

[Operator Instructions] We're going to go first to Hugh Cunningham with TD Cowen. Go ahead, please..

Question, guys, congratulations on a very strong quarter, very impressive. And particularly on your foresight, regarding moving to the subscription-only model and the 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 and this may be a little bit out there, but in terms of timing. But I think there's some international markets where that sort of capability is in more demand than here.

And then finally, are there any -- is there anything that's happening on the regulatory side that you've heard related to requiring more protections in schools and so on – schools and other sort of sensitive places like that? Thank you..

Yes. Thank you, Hugh very much. So let me start with the first one. I think you asked about the industrial warehouses.

As you know, we verticalized our company and focused on the high verticals like education, like professional sports and like healthcare, we're starting to see industrial warehouses is the next big vertical for the company, so we're winning some of those industrial warehouse deals. They're very sizable particularly post-COVID.

Think about those companies that are delivering things all over the world really quickly. So we had a couple of wins in Q2 in that area. And I think you'll see us go higher in 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 and schools today. It could be that big. In fact, it's almost a bigger protocol. So that's 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 6.0 does that.

And as a result of focusing in on the use case we have, which is mass casualties, we have a long and story background in identifying guns. In fact, we stated that we find about 450 guns a day today. But through that process, we've also been able to be more reliable with smaller bladed weapon. So we're happy about that.

It's a new setting on the system called 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 ESR funds, the comps funds for schools to make security safety important. In fact, I was just in Kentucky, where they use ESR funds to buy four systems.

We also donated two more systems to give Evolv to make sure that they had systems in their doorway. So we continue to see them using comps and ESR 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, Pater. Just one thing that occurred to me while you were speaking. In some fields, AI is now the hot, the buzzword. But you guys have been talking about AI as sort of a critical part of the intelligence of your system for some time.

And I'm wondering, has your view of the potential impact of AI or generative AI change the way you think about the add-on opportunities or the adjacencies that are available to evolve?.

Right. 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 involved. It's been central to who we are as a platform.

And I think you -- I know here, your at the analyst meeting, we introduced Parag Vaish [ph], who we just bought in a few months ago to head our digital products organization. And Parag is already working on some really exciting digital products.

If you remember, his background with Tesla and Google and StubHub and Disney, so it's 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 you'll see new products on the digital side that potentially will sit on the Evolv 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, Hugh. Appreciate it..

Next question please?.

We'll go now to Mike Latimore from Northland Capital Markets. Please go ahead..

Great. Thanks, very much. Awesome quarter. The 75% of business coming through peer subscription, I guess, I believe it's a little bit higher than you were planning.

Does the pipeline suggest that it stays at that level or even improved?.

Yes. 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 temporarily as we were working through the different models to CT. As you know, CT is still a subscription side, too. 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 our business will probably be about half and half, half pure subscription and half Columbia Tech distribution model going into next year. That will start to come in, in Q3 and Q4 of this year.

As we said on the call, only about 10% of what we booked in the second quarter actually came from Columbia Tech, 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, some buy with capital, some like to use operating expense. We're really just trying to simplify it. We're really just looking at our verticals and the way they typically act and how they'll perform over the next year plus and coming up to that 50-50 model..

Yeah, yeah. Makes sense.

How many of your big resellers or what percent of your big resellers are certified to sell under this new purchase of [indiscernible]?.

Yeah, it's a good question. We have a portion of them. It's not a huge portion. It's where most of it's coming from. I would say that where 70% -- of where our channel is coming from is probably activated at this point.

It will 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 over time..

Great.

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 the year?.

Yeah. 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 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 all increase our pipeline. And right now, our metrics are, if we have a 3x, 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 3 or 4x.

So we're feeling good about where we are as it relates to pipeline development. But as we continue to grow, we got to get better and better at that. And we added about 10 new salespeople in the last quarter. They'll 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. And right now, we're feeling very good about where we are..

Great. Thanks. Congrats again..

Thanks, Mike..

Thanks, Mike..

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 want 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 is so robust, in terms of the buying season being the June quarter and 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's really any negative seasonality you're seeing in the education market as you look into like December or March quarter? Any color there?.

Chad, this is Mark. Yes, thanks for the question and for the nice comments. In terms of seasonality, I think the way we're thinking about it right now is 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 the guidance we gave, there could be construed a little bit of an ARR headwind just on how we've done in the first half of the year in terms of putting about $20 million in 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 ARR going forward. And remember, at the end of the day, it's very strong gross margins with those ARR impacts. And we feel pretty confident that we'll be an 80% ARR company and 20% license at the end of the day.

And as we said in the comments, some of that unit thinking is around our raise of the 4,000 to 4,500. Education is really important. It's a really important vertical for us. It's our largest vertical by far at this point. I'll remind you though that that back in Q3 of last year, education really became a player in the Q3 quarter.

It was a catalyst for the quarter. We're seeing growth, but 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 to Q3, and we were wondering if things to fundamentally change, would that tale of momentum continue.

And what we learned last year is that every quarter is a good quarter to keep kids safe. And superintendents were willing to, 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 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 CT, good color there also.

But just -- in terms of direct purchase units that were kind of already in process or in backlog, did we eat through a bunch of that in this quarter and as much as we can obviously dictate, kind of second half direct units, the vast majority of them go through CT 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 heightened, I think, by of purchase activity that we did. And this is the legacy purchase activity where we run the hardware through our own books. We did we did about 80% of what we expected to do in the entire year in 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 CT in certain pockets of it, but we've got that enablement at the right point now. So we expect -- we expect scan usage of the old purchase 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 vast majority nearly all to go through the CT model..

Got it. Nearly all in the second half. Okay. And then maybe one last one for me.

Just in terms of 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 give you -- can we get an update on kind of where you are there and if those cost savings are still on track? Thanks..

Yeah, Chad. We are tracking to the plan that we put in place. We feel good about it. We're working on different prototypes and things of that nature at this point. We are confident in the cost reductions. And I think 30%, and it could be even a little bit better than that is the right ZIP code to be in right now..

Okay. All right. Thanks. .

So, no change. Thanks, Chad..

Next, we'll go to Brett Knoblauch with Cantor Fitzgerald. Go ahead, please..

Hi, guys. Thanks for taking my questions and congrats on the very strong quarter.

I guess, I was just hoping, if you guys could help maybe quantify the magnitude of the ARR headwind we're seeing from the CT transition in the back half? Maybe what your kind of new ARR guide have been excluding CT, just like anything or any color for us on that?.

Yeah. I mean hard to get into real specifics, but I think if you think about -- when we go through the CT model, we probably get two-thirds of the ARR that we would typically get in a subscription transaction.

So 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, probably in the 25% to 35% range of our business coming from Columbia Tech with about 65% of those transactions being the ARR of the pure subscription number. So that's sort of how we've built in the headwind.

So it's about -- if a-third of our units have a little bit less and you look at our guidance, you'll probably be talking about $3 million to $5 million..

Got it. Thank you. And forgive me, if I may -- how many education buildings and hospital buildings that you guys are now in.

That wasn't in our prepared remarks, but it was approximately 650 school buildings at this point and hospitals were closing in on about 200 Bret..

Perfect. And I guess, just maybe one more on the guide. I know you guys said you would be closer to 4,500 units at the end of the year. But I guess if I do the math, that's, call it, 1,100 units you would have 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 have 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 services building to deployment cadence?.

Yes. I think it's about deployments, right? I mean we book -- we think about it in two ways. We booked the deals and then we got to ship the deals. I'd say that we're shipping things through city. We're shipping things out as they come in.

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 be 100% sure exactly when a customer is going to want to install systems. So we may -- backlog could be a little higher if they don't want them as soon as we'd like. So we're kind of trying to thread the needle there a little bit..

Understood. Thank you and congrats again, guys..

Great. Thank you. Got time for a couple more here. John, next question, please.

We're going to Alex Sharp from Stifel. Go ahead, please..

Good evening. This is Alec [ph] 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 500 to 600 units per quarter that's kind of been the level here for a little while?.

Yes. We're not capacity constrained at this point. We're doing a great job from the supply chain perspective of building units and building inventory -- and so I think that we -- there's not -- there's obviously -- the ceiling exists only in the amount of parts that we have. Let's put it that way.

But it's -- but we have quite an extra capacity to 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 add similar to last year, or will this summer season outpace that, do you think?.

Well, we -- look, I don't -- I think we've been looking at seasonality as a 1H and 2H thing. Our business hasn't mature enough to know exactly which month things are happening in. But we-- we have -- our pipeline is -- 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..

Perfect. Thank you, Alec.

John, are there any other questions we get through them all?.

We have no additional callers in queue..

Okay. And I'll turn things back over to Peter George for some closing remarks..

Yes. 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 -- results. We hit it out of the park with record revenue and ARR and RPO. We had great customer acquisition. We talked about the ARPU 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’s starting to reflect the health of the business, which we feel great about. We're getting a lot of leverage in our model, as a company, OpEx leverage.

We're seeing a lot of productivity from more of our salespeople than ever before. We continue to feel great about doubling our ARR, and we've made this pivot to ARR from TCV and it's 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 results. Thanks, everybody..

And ladies and gentlemen, that does conclude your conference call for today. We thank you for your participation and for using AT&T event conferencing. You may now disconnect..