Evolv (EVLV) Q3 2025 Earnings Call Transcript

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DATE

Thursday, November 13, 2025 at 4:30 p.m. ET

CALL PARTICIPANTS

• President and Chief Executive Officer — John Kedzierski
• Chief Financial Officer — George Chris Kutsor
• Head of Investor Relations — Brian Norris

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TAKEAWAYS

• Revenue -- $42.9 million, representing 57% growth year over year, driven by new customer acquisition, expanded deployments, and large one-time product revenue including the company's biggest-ever contract.
• Annual Recurring Revenue (ARR) -- $117.2 million, up 25% year over year and 6% sequentially from Q2 2025.
• Deployed Unit Growth -- Approximately 30% year-over-year increase in total units, attributed primarily to both direct purchase and subscription deployments.
• Mix Shift -- 57% of unit activity from purchases versus 41% in the prior year, reflecting the transition from a distribution fulfillment to a direct model and resulting in higher immediate revenue but lower ARR for those transactions.
• Booked-to-Deploy Unit Ratio -- Highest in company history, increasing overall contract visibility and backlog.
• Adjusted Gross Margin -- 51%, down from 64% in Q3 2024, due to direct purchase mix, subscale Expedite manufacturing, and $3 million in one-time inventory and service costs.
• Adjusted Operating Expenses -- $24.8 million, a slight decline from $25.2 million year over year, demonstrating cost control amidst higher growth.
• Adjusted EBITDA -- $5.1 million, producing a 12% margin and marking a fourth consecutive quarter of positive adjusted EBITDA.
• Cash Position -- $56 million in cash, cash equivalents, and marketable securities, up $19 million sequentially from the end of Q2 2025, mainly due to a new credit facility, improved collections, and tighter inventory management.
• Remaining Performance Obligation (RPO) -- Approximately $299 million at quarter-end, up from $275 million at June 30, 2025, and $269 million at September 30, 2024.
• Expedite Product Momentum -- 12 new Expedite customers added, mainly in schools; 11 of these also acquired Express, reflecting a high attachment rate.
• Major Contract Impact -- The Gwinnett County Public Schools deal contributed $3 million revenue in Q3 and is expected to add over $5 million for the full year, mostly as one-time product revenue.
• 2025 Revenue Outlook -- Raised to $142 million-$145 million (37%-40% growth), up from previous guidance of $132 million-$135 million; normalized revenue growth estimated at 30% excluding one-time items.
• 2025 Adjusted Gross Margin Guidance -- Expected between 52%-54% as direct purchase mix reduces gross margin in the near term but increases longer-term profit dollars.
• 2025 Adjusted EBITDA Margin Guidance -- Full-year margin projected in the high single digits, improved from mid single digits previously.
• 2026 Revenue and ARR Guidance -- Modeled revenue of $160 million-$165 million; ARR expected to grow at least 20%, outpacing total revenue growth due to a greater shift to full subscription model.
• Strategic Partnership -- New manufacturing partnership with Plexus aims to expand global production capacity, support future growth, and improve cost structure.
• Software Releases -- Launched Evolve Express 9.0, Expedite 1.2, MyEvolve portal, and Evolve Insights 6.0, enhancing product performance and unified security operations.

SUMMARY

Management confirmed a shift in distribution and pricing models is deferring $5 million-$10 million of revenue from 2026 into long-term recurring streams, signaling higher future ARR and RPO. Over 60 new customers joined in the quarter, boosting active subscriptions and demonstrating a high attachment rate between Expedite and Express solutions across multiple verticals. The company highlighted a fourth consecutive quarter of positive adjusted EBITDA and improved margin guidance even as gross margin compressed due to product and model mix.

• President and Chief Executive Officer Kedzierski said, "we now capture 100% of the average revenue per unit or ARPU," as a result of largely completing the move away from the legacy distribution fulfillment model.
• The leadership team explicitly indicated 2026 will be "an inflection point" as ARR growth accelerates above total revenue growth.
• CFO Kutsor stated, "IP licenses are no longer a driver to revenue growth starting here in Q4," clarifying that certain one-time benefits will not recur.
• More than 50% of bookings came from existing customers, reflecting material expansion activity within the customer base.
• The RPO figure rose 8% sequentially, driven by Gen 2 upgrades and new four-year subscription commitments.
• Hospitals, entertainment venues, and educational institutions were named as key drivers of vertical expansion and higher order value.

INDUSTRY GLOSSARY

• ARPU: Average Revenue Per Unit, representing the total contract revenue divided by the number of deployed units.
• Expedite: Evolv’s autonomous AI-powered bag screening product, sold primarily on a four-year subscription basis and intended as a companion to Express deployments.
• RPO: Remaining Performance Obligation, the contractual value of committed, but undelivered, future revenue under active customer agreements.

Full Conference Call Transcript

Brian Norris: Thank you, Megan, and good afternoon. Welcome to today's call. I'm joined by John Kedzierski, our President and CEO, and George Chris Kutsor, our CFO. Earlier today, after market close, we issued a press release detailing our third quarter 2025 results and full-year outlook. The release is filed with the SEC and available on the Investor Relations section of our website, where you will also find a supplementary slide highlighting the benefits of our transition to our direct distribution model, which we'll reference during the call. During today's call, we will make forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1990.

These statements 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, 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 12/31/2024 filed with the SEC on 04/28/2025 and our quarterly report on Form 10-Q for the three months ended 09/30/2025 filed with the SEC earlier today. The forward-looking statements made today represent our views as of 11/13/2025. Although we believe the expectations reflected in these statements are reasonable, we cannot guarantee that future results, performance, or the events and circumstances reflected therein, 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 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. These measures include adjusted gross profit, adjusted gross margin, adjusted operating expenses, adjusted operating income, adjusted EBITDA, and adjusted EBITDA margin, adjusted earnings, and adjusted earnings per diluted share. Reconciliations between these 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 operating metrics such as annual recurring revenue or ARR, remaining performance obligation or RPO, both of which we believe are helpful to investors in understanding the progress we are making as a business. One last item. We have an active IR schedule coming up, including the Craig Hallum Alpha Select Conference next week in New York, and two events in December, UBS Technology Conference in Scottsdale and the Northland Conference, which is being held virtually. We will also be on the road this quarter at several financial centers across the country.

For more information, please contact me at bnorris@evolvetechnology.com. With that, I'd like to turn the call over to John. Thank you, Brian. And thanks to everyone for joining us today.

John Kedzierski: Our results throughout the year demonstrate meaningful progress toward greater consistency and stability across the organization. We're moving closer to our goal of building a scalable, high-growth business with predictable performance. Our focus remains on disciplined execution, and an unwavering commitment to our customers' success. Our Q3 results reflect the latest steps on that journey. Revenue was $42.9 million, up 57% year over year, driven by strong new customer acquisition and expanded deployments within existing customers as well as higher one-time product revenue associated with certain customer wins, including the largest customer contract in the company's history. We have also benefited from the completion of certain short-term subscription contracts, including the premier international soccer tournament we supported over the summer.

Chris will get into more detail on revenue in a few minutes. Our overall visibility continued to strengthen, with Q3 marking the strongest booked-to-deploy unit ratio in the company's history. Thanks to the changes we have been sharing with investors and our go-to-market model, we expect 2026 to be an inflection point where Evolv's ARR growth will outpace revenue growth. Let me explain that encouraging trend a bit further, which we introduced to investors on our prior call. While we are delighted with 57% year-over-year revenue growth, it is important to note that our deployed unit count grew by about 30% year over year, which we believe provides a more normalized view of the fundamentals of the business.

The gap between revenue growth and unit growth is primarily based on two factors. First, it reflects the trailing impact of our legacy distribution fulfillment model, which results in a higher proportion of the total contract value taken in the immediate period, lower ARR, and lower total contract revenue as compared to direct purchase fulfillment. The second factor driving the delta between revenue growth and unit growth is a higher proportion of purchase versus subscription sales, or our mix. Specifically, compared to 41% in the year-ago period, units purchased by our customers represented 57% of unit activity in Q3. By transitioning away from our legacy distribution model, we now capture 100% of the average revenue per unit or ARPU.

This shift increases recurring revenue over the four-year subscription term and delivers back to Evolv a higher level of cash per unit. To illustrate the differences between distribution and direct fulfillment, we've created a chart and posted it on our investor relations website. While we have largely completed the move away from a distribution fulfillment model and we have also repriced our solutions effective July 1 to emphasize software and ARR, it will take some time for our revenue recognition to match our new pricing. As a result, in Q3, we saw higher one-time product revenue related to the prior distribution model and associated revenue recognition treatment.

Over time, our revenue recognition will more closely match our pricing and the majority of our ARPU will be in ARR instead of one-time product revenue. In summary, the trailing effects of distribution fulfillment and a higher proportion of purchase units drove revenue to outpace unit and ARR growth, and why we believe 30% is a more meaningful measure of year-over-year growth. We finished the quarter with annual recurring revenue or ARR at $117.2 million, reflecting growth of 25% year over year. While our ARR growth trailed revenue growth in Q3, we expect this ratio to begin to flip in 2026 with faster ARR growth relative to total revenue growth as I mentioned.

We reported our fourth consecutive quarter of positive adjusted EBITDA with adjusted EBITDA margins of 12% in Q3 and are raising our year-end estimate for active subscriptions. We welcomed over 60 new customers in Q3, to between 16,100. This continues to represent a very small slice of the hundreds of thousands of entrances that advanced weapons detection can help protect. We continue to see a strong trend of customers proactively upgrading to our Gen 2 Express platform. These upgrades typically reset the subscription churn with fresh four-year commitments. Gen 2 upgrades also help drive a sequential 8% increase in RPO, which stood just shy of $300 million at the end of Q3.

Expedite, our new autonomous AI-powered bag screening solution, continues to gain strong traction since its Q4 2024 launch. In Q3 alone, we added 12 new customers, primarily in schools, where we are beginning to see one-for-one deployments of Expedite and Express to help streamline security by lowering alarm rates and enhancing the student experience. We believe the combination of Express plus Expedite provides an exceptional security experience in terms of threat detection capabilities and false alarm rates. Based on early deployment data, across education customers, 2% demonstrating strong promise in balancing detection with the goal of keeping false alarm rates low. Beyond the numbers, we are making a real difference in the communities we serve.

Every day we screen on average more than 3 million people. And since the launch of 3 billion visitors. Evolve Expedite, introduced just a few quarters ago, has already been used to screen more than 1 million bags. On average, our technology helps customers detect and tag 500 firearms daily. What does that look like in real life? In August, at a high school in Nashville, our system identified and helped intercept a loaded handgun at the door. In October, Evolve Express detected a loaded firearm in a student's backpack at a high school in Georgia. And just two weeks ago, our solution identified a concealed firearm during morning arrival at a high school in Atlanta.

These three examples provide a small glimpse into the impact we are having on education. In the third quarter, we added over a dozen new school districts across the US. These included two new districts in New Jersey, two in Michigan, two in California, and one each in Wisconsin, Tennessee, South Carolina, Nevada, Montana, Louisiana, Iowa, and Connecticut. In health care, we are driving meaningful change by helping hospitals elevate safety standards while minimizing the impact on patient and visitor experience. Our solutions are enabling smoother and faster entry while enhancing threat detection at critical access points. With growing demand across the sector, we are now screening hundreds of thousands of visitors daily in medical facilities nationwide.

A few recent wins in this market include WellSpan Health, UC Davis Health, and Seattle Children's Hospital. Shifting to sports and live entertainment, we expanded our presence in professional hockey with the Buffalo Sabres, who entered a multiyear subscription agreement to deploy nine Evolve Gen 2 systems at KeyBank Center. This deployment is part of a broader 2025 Arena upgrade initiative aimed at improving ingress and egress for fans. In collegiate athletics, University of North Carolina at Chapel Hill is deploying Evolve Express to enhance safety and streamline entry at its athletic venues.

In the world of professional football, Bank Of America Stadium, home to the Carolina Panthers and Charlotte Football Club, recently completed a long-term renewal upgrading to Gen 2 of Evolve Express. The venue now operates 19 systems and has added Evolve Expedite for enhanced bag screening and faster guest entry. Staying in professional football, our technology is now being deployed at nearly a dozen practice and training facilities league-wide. This initiative includes both Evolve Express and Evolve Expedite. We believe this is a strong endorsement of our ability to deliver a superior security experience for a variety of entry flows, covering fans, staff members, players, media, and VIP guests.

These wins reinforce our ability to penetrate diverse markets and deliver trusted solutions that drive long-term growth. We welcome all our newest customers and take sacred the trust they have placed in us. We look forward to the challenge of earning their business every day. Shifting into business operations, we're excited to announce a new strategic partnership with Plexus, a collaboration that expands production capacity, global reach, and operational resiliency. Plexus is a global leader in design, manufacturing, and supply chain services that brings the infrastructure and expertise to support the next phase of our growth. With 26 facilities and more than 20,000 team members worldwide, they'll help deliver our technology to the places people gather every day.

I want to shift gears for a moment and share some exciting developments on the product development front. I'm pleased to share that we recently released the latest versions of our software: Evolve Express 9.0, Evolve Expedite 1.2, and MyEvolve portal and Evolve Insights 6.0. These updates reflect our ongoing commitment to improving performance and user experience for our customers now numbering over 1,000 globally. With this release, we've introduced several enhancements aimed at supporting security teams in their day-to-day operations. Among the highlights is a new integrated tablet interface which brings together the workflows of Express and Expedite into a single streamlined user interface.

We also released the integration of Expedite into the MyEvolve portal, enabling customers to see operational data for walkthrough and now bag screening in a single location. With these enhancements, we have strengthened the bundled customer ownership experience for Express plus Expedite. We've also expanded alert tagging and added sensitivity tuning, giving our customers more control in how they manage their security operation. These improvements are the results of listening closely to our customers and continuing to push the boundaries of what's possible in safety and efficiency. Through our subscription model, we're able to deliver these software capabilities seamlessly via the cloud, enabling innovation to reach the field without disruption.

With each release, we aim to raise the bar not just for ourselves, but also for the entire industry. Before I hand things over to Chris, I want to take a moment to share a bit of context around our outlook. We're seeing strong momentum in the business. Our backlog continues to grow, and we've got a healthy pipeline. For those reasons, we are raising our 2025 outlook. We now expect to grow revenue by about 37% to 40% in 2025 compared to our previous guidance of 27% to 30% growth. I would point out that our upwardly revised revenue forecast for the year of between $142 million to $145 million includes certain one-time benefits.

Brian Norris: In particular,

John Kedzierski: related to one-time revenue recognition from our legacy fulfillment and pricing models that I mentioned earlier. Excluding these short-term revenue items, we will be forecasting total revenue growth in 2025 of about 30% year over year. We continue to expect to deliver positive full-year adjusted EBITDA, with full-year margins in the high single digits. We remain committed to generating positive cash flow in Q4. Looking ahead to 2026, let me start with this fundamental principle. We're planning to add more units in 2026 than we did in 2025, with ARPU trends remaining stable. As a reminder, our 2025 results included the largest customer contract in the company's history, more than 250 units.

We plan to grow on top of that order. The changes in our distribution fulfillment model and pricing structure will allow us to capture 100% of contract ARPU, shift more of that ARPU from one-time revenue into ARR and RPO, and create an opportunity to maximize leverage in the business over time. We estimate that these subtle but powerful shifts of emphasizing ARR over short-term product revenue will defer about $5 million to $10 million of revenue in 2026 that we would otherwise have captured had we not changed our distribution and pricing structure. We expect that $5 million to $10 million to convert into long-term recurring revenue streams that will benefit future years.

We're currently modeling full-year 2026 revenue of between $160 million to $165 million. Importantly, we expect ARR to grow by at least 20%, outpacing total revenue growth in 2026, which is an important pivot for Evolv. This management team continues to prioritize ARR growth and other long-term value drivers. With that, I'll turn it over to Chris who will take you through our financial results and the details behind our outlook. Thanks, John. Good afternoon, everyone. I'm going to review our third quarter results in more detail and then walk through our updated guidance for the rest of the year as well as context on our early thoughts for next year.

As John mentioned, revenue was $42.9 million in Q3, an increase of 57% year over year. This was fueled by strong new customer growth and expanding deployments across our customer base. It also includes a few items that, while positive, aren't expected to recur at the same scale every quarter as John mentioned. Let me unpack those a bit further. First, our new contract with Gwinnett County Public Schools, the largest in Evolv's history, contributed approximately $3 million in revenue in Q3 primarily as one-time product revenue. Second, Q3 included a very high proportion of direct purchase method deployments compared to our legacy distribution motion, which brings more immediate revenue recognition and less ARR, which John covered already.

The nearly $3 million of product revenue recognized for Gwinnett County this past quarter is an example of that effect. We also recognized approximately $3 million in IP license and other one-time revenue in Q3 primarily tied to our legacy distribution subscription model. Finally, we had roughly $1.5 million in short-term subscription revenue or rentals. These short-term subscriptions are valuable and remain part of our strategy, but they tend to be episodic in nature. When adjusting for these specific items,

George Chris Kutsor: you get a more normalized view of Q3 revenue closer to $35 million to $36 million, which would reflect growth of about 30% year over year. Annual recurring revenue or ARR at September 30 was $117.2 million, reflecting growth of 25% year over year and 6% sequentially. Remaining performance obligation or RPO was approximately $299 million at the end of the third quarter compared to approximately $275 million at the end of the second quarter and $269 million at the end of Q3 last year. Adjusted gross margin was 51% in Q3 compared to 64% in the same period last year. There are three drivers here worth diving into a little bit deeper.

First, as discussed on our last call, the shift from distribution fulfillment to direct purchase fulfillment creates a near-term gross margin headwind. But it also brings higher gross profit dollars over the term of the contract, along with higher revenue, higher ARR, higher RPO, and cash compared to the legacy distribution model. With the business now delivering a consistent track record of positive adjusted EBITDA, that's an important long-term trade-off we are pleased to make. Second, we saw the impact of several large education contracts that included significant volumes of our newest product, Expedite. Expedite is still operating at subscale manufacturing cost. We expect Expedite cost to improve in 2026, which we expect to positively impact future gross margins.

And finally, we recognized approximately $3 million of one-time costs related to inventory and service adjustments. Moving down the P&L, adjusted operating expenses, which exclude stock-based compensation, loss on impairment of equipment, and certain other one-time expenses, were $24.8 million compared to $25.2 million in the third quarter of last year. This modest year-over-year decline in contrast to strong year-over-year growth in units deployed, total revenue, and ARR growth reflects the actions we've taken since the start of the year to reduce spend and improve the profitability of the business. We believe it is also an excellent indicator of the leverage we believe is central to our business model.

Adjusted EBITDA, which excludes stock-based compensation and other one-time items, was a positive $5.1 million in '25 compared to a loss of $3 million in the third quarter of last year. This resulted in adjusted EBITDA margin of 12% in 2025. Turning to the balance sheet, cash, cash equivalents, and marketable securities increased $19 million sequentially to $56 million, up from $37 million at the end of Q2 2025. This primarily reflected proceeds from the new credit facility that we completed in July along with tighter inventory management and stronger overall collection activity. I'm going to provide some additional details to our updated 2025 outlook that John mentioned a few minutes ago.

We now expect total revenue to grow by 37% to 40% in 2025, to be between $142 million and $145 million this year. This is up from our prior guidance, which called for revenue between $132 million and $135 million. A few things we'd encourage investors to consider for context in our '25 revenue estimate. First, as I mentioned in my earlier commentary, the largest deal in the company's history contributed about $3 million to Q3 revenue, and we expect it to contribute more than $5 million for the full year due to higher upfront revenue recognition related to the residual effects of our legacy distribution fulfillment model.

Second, IP license and other revenue was about $3 million in Q3, and we're expecting that to be about $10 million for the full year. That one-time revenue stream is primarily tied to our legacy distribution fulfillment model, which has been phased out. Investors should assume that IP licenses are no longer a driver to revenue growth starting here in Q4. Third, short-term subscription contracts contributed about $1.5 million to revenue in Q3, and we are expecting that to be about $2 million for the full year. Those opportunities are generally one-time in nature, so it is not something that we plan around.

In light of these three factors, we estimate a more normalized revenue growth rate for 2025 would have been about 30% year-on-year growth compared to 2024. We expect 2025 adjusted gross margin to be in the range of 52% to 54%. Not due to ARPU compression or a change in competitive pressure, but because of the shift to direct purchase fulfillment. To reiterate my previous comment, the direct purchase fulfillment model is a headwind to gross margin in the first year of a new contract.

But over the term of the subscription contract, it generates higher total gross profit dollars, higher revenue, higher cash, and ARR compared to the distribution fulfillment model and also makes us easier to do business with. With strong top-line growth and continued focus on expense management, we expect to deliver positive full-year adjusted EBITDA in 2025, with full-year adjusted EBITDA margins in the high single digits, compared to our previous guidance, which called for margins in the mid-single digits. We expect to be cash flow positive in 2025. Turning now to 2026.

As John mentioned, we remain encouraged by the changes we made this year, and we expect to see ARR growth begin to outpace revenue growth in the next year. While we are still developing our final plans, let me set some additional context to the 2026 outlook. The fundamentals of our business remain strong, with robust customer demand and a stable pricing environment. We expect to add more units in 2026 than we did in 2025, with ARPUs remaining relatively consistent and the trends that we've seen this year continuing. In other words, we expect continued unit growth and stable price.

That said, we expect recent shifts in our distribution fulfillment and pricing model will result in less one-time revenue but more ARR and RPO in 2026 compared to 2025. We encourage investors to refer to the presentation material posted on our IR website for a graphical view of the positive impact of pivoting to direct purchase. We also expect a higher percentage of new units in '26 to be full subscription compared to 2025, which will also lower the '26 growth rates but drive faster ARR growth.

We expect the changes we've made to our direct purchase pricing model, changes that maximize ARR by making the upfront hardware price lower commensurate with reduction in our manufacturing costs, will push at least $5 million to $10 million of revenue out of 2026 and into ARR and RPO. The higher ARR and associated recurring subscription value will also provide higher ARR rates when those contracts move to renewal discussions four years down the road. We believe all of these are smart changes for the business in the long term. We are currently modeling full-year revenues about $160 million to $165 million in 2026.

And, again, the important news here is that we expect to add more units in '26 than we did in '25, with ARPU trends remaining stable and ARR growing at a faster rate than total revenue. Specifically, we expect ARR to grow by at least 20% year over year. And to reiterate John's earlier comment, we believe 2026 will be an inflection point for the company as ARR begins to outpace revenue growth. We haven't finalized our investment plans, but we are committed to growing revenues faster than total expenses in 2026. And, therefore, are currently modeling modest expansion of adjusted EBITDA margins.

We will share more thoughts on how we're thinking about 2026 during our Q4 call in March, and in the meantime, we're focused on finishing a strong 2025. Before we open the call for Q&A, let me turn the call back over to John for a few closing remarks.

John Kedzierski: Thanks, Chris. We continue to be driven by our mission to make the world a safer place to live, learn, work, and play while building a leading IoT SaaS security business. We believe security is a necessity, not a luxury. We remain highly confident in our market position. We continue to move forward with purpose, guided by a clear strategy and an unwavering commitment to long-term value creation. We've been intentional and transparent about the adjustments we're making, whether refining our go-to-market and pricing model to maximize ARR and recurring revenue, forging new partnerships to enhance cost efficiency and reduce COGS, or evolving our organizational structure to ensure we optimize every investment across the business.

Each of these steps underscores our focus on building a scalable, high-growth business with predictable performance. Our strong Q3 results and the momentum we see across the organization reflect meaningful progress in all of these areas. While we're proud of these results, as I remind our team often, we will not be complacent. We are moving steadily toward our goal of creating a business that is both scalable and consistently high-performing. We deeply appreciate the partnership of both our customers and our investors in the continued confidence they place in us and, more importantly, in the mission we are pursuing.

Brian Norris: Thank you, John. At this time, we'd like to open the call up for Q&A. Again, we ask participants to limit themselves to one question and one follow-up.

Operator: We will now begin Q&A. For today's session, we'll be utilizing the raise hand feature. If you'd like to ask a question, simply click on the raise hand button at the bottom of your screen. Once you've been called on, please unmute yourself and ask your question. Please limit to one question and one follow-up before jumping back in the queue. Thank you. We'll now pause a moment to assemble the queue. Our first question will come from Jeremy Scott Hamblin with Craig Hallum. Please unmute your line and ask your question.

Jeremy Scott Hamblin: Thank you, and congratulations on the very strong results. Just want to come back to the kind of the call-outs of some of the one-time items here. Understand certainly for who the short-term contracts, the million and a half, of why you would exclude that and understand kind of the front revenue recognition of some of those deals that are going through distributor. But in terms of thinking about, you know, the build overall, you do have, you know, the largest increase you've seen in recurring revenues as well as the largest increase you've had in RPO and quarter.

So just help me understand in terms of the large contract, you know, how the revenue recognition overall on that will play out, on a go-forward basis as an example.

John Kedzierski: Jeremy. I'll start, and Chris can address any of the specifics he might, you know, have. So as we communicated in the prepared remarks, we just shared one of the impacts of the legacy distribution model is more upfront revenue. We have largely moved away from that, and the majority of our purchase subscriptions were executed through our direct, you know, fulfillment. But there'll be a tail of effect about how we take revenue on those deals over time. That will normalize and result in a new pricing that we've already put in place months ago in July first. As Chris mentioned, we'll ultimately recognize about $5 million of that order.

It's a very significant proportion of the total order that we'll take in the first two quarters of a forty-eight-month deal. Again, we expect that to adjust to the overall longer forty-eight-month revenue recognition as we get into 2026.

Jeremy Scott Hamblin: Jeremy, just a bit more context to that. This effect is only relevant for purchase or purchase subscription orders doesn't have the effect for full subscription orders. And the effect is due to the hardware pricing that it's part of the mix of the contract that we do in a purchase subscription order. So for about half of our business, this is the effect. And the impact, as John was talking about, ties back to, you know, GAAP accounting, ASC 606 that requires us to take that amount of upfront revenue in the way that's reflected in our remarks. So that gives you the perspective as to why it's happening, and the proportion of our business that it happens to.

Jeremy Scott Hamblin: Understood. That's helpful. Doug, tails nicely, though, into, you know, I wanted to ask about the new strategic contract manufacturer agreement you've entered into. Know, in terms of how if how you expect that to change, what your baseline cost is for, you know, Gen 2 or, you know, potentially, three machines. On a go-forward basis. You know, can you give us a sense for whether or not you expect that to reduce the manufacturing cost for the, you know, machines I'm sorry. For the express machines, and whether or not they're also gonna be manufacturing expedite and what that might do for the ramp of that business as well.

John Kedzierski: Thanks, Jeremy. We're pleased and looking forward to the partnership with Plexus. We just executed that agreement. We're focused on onboarding them, get them to start manufacturing our product, which will be focused on through the 2026. Over time, we look forward to a larger scale and the potential of cost synergies that will come and the ability to be able to leverage their entire footprint.

Jeremy Scott Hamblin: You should expect our full portfolio to eventually be available at Plexus as well. You would expect, we're doing it thoughtfully and carefully.

Jeremy Scott Hamblin: Understood. And then just one more quick one before I hop out of the queue. In terms of the expedite bag scanner product, what is the rough attachment rate that you're getting with that on sales of express machines, and how does that vary or getting more success with that let's say, in the education vertical or in the stadium versus a couple of your other verticals?

Brian Norris: We're very pleased with the progress of Expedite. As we had shared in the prior quarter, a very significant portion of that large we had education order was expedite. In Q3, 12 new additions of expedite customers. To answer your question directly, 11 of those also acquired Express. That's a trend that we're really excited about. We have seen deployments across education, sports entertainment, and health care.

Jeremy Scott Hamblin: Thanks so much for taking my questions. Best wishes.

George Chris Kutsor: Thanks, Jeremy.

Operator: Our next question will come from Eric Martinuzzi. Your line is open. Please ask your question. Eric Martinuzzi with Lake Street Capital Markets. Your line is open. Please ask your question.

Eric Martinuzzi: Yep. So you talked about the number of units growing in '25 versus '24. Is that are we talking aggregate units, so express plus expedite in 2025 is greater than '24, and the same thing, '26 versus '25. Are we talking the express units only?

John Kedzierski: The aggregate human units. The sum of express and expedite, which is consistent with how we've been discussing it this year.

Eric Martinuzzi: Okay. And then can you remind me the just the delta between the price of those two if someone were to purchase them outright? Maybe not the absolute dollar. We shared before the unit economics are similar.

John Kedzierski: As Chris commented, we expect the gross margins to be more similar over time. Today, expedite is a new product. Hasn't benefited from the multi-years of manufacturing scale that we built into Gen 2. So right now, it's a bit of a headwind on gross margin.

Brian Norris: And, Eric, reminder, that's also a four-year subscription go-to-market model for expedite as well.

Eric Martinuzzi: Got it.

Brian Norris: Thanks for taking my questions. Yeah. For sure.

Operator: Your next question will come from Shaul Eyal with TD Cowen. Your line is open. Please ask your question.

Shaul Eyal: Thank you. Good afternoon. Congrats on results and thanks for the color and transparency on the business and the outlook. As you guys shift away from distribution to direct fulfillment model, just curious what was the reaction of some of those channel partners involved?

John Kedzierski: It's very positive. Because one thing I wanna make sure we're very clear on. This had no impact on our channel. But the majority of our business as it has continues to transact from a channel. The change was, is how our channel partners get the product from us. In the past, the motion that we introduced in 2023, they would purchase it from a distributor. Now they purchase it directly from us, which means that we capture 100% of the ARPU. We did not see the portion that went through distribution. For a direct channel partner, reaction, we have simplified their buying process. They used to have to buy one solution to an end user, issuing two orders.

One to our distributor contract manufacturer for the hardware, and one to us for the subscription. So their process to do business with us is much simpler.

Shaul Eyal: Got it. Thank you. This is great. I appreciate it. And maybe the biggest contract that you discussed, those 250 units, you know, we're becoming greedy here. How many of these contracts are currently in the pipeline? I know they don't come too often, but I think we're beginning to see what the business is heading. As we start and think about twenty-six. And maybe even '27 down the road. Just curious. How many of those call it, you know, triple-digit transactions are out there?

John Kedzierski: We haven't provided specific, you know, outlooks or details on our pipeline. What I'll reiterate is that in the preliminary '26 guidance we just provided, planning to grow units over this year, which included that 250 unit work.

Shaul Eyal: Thank you so much. Good luck.

Brian Norris: Great. Thanks, Shaul. Thank you.

Operator: As a reminder, if you would like to ask a question, please use the raise hand feature at the bottom of your screen. Your next question will come from Michael Latimore with Northland Capital Markets. Your line is open. Please ask your question.

Aditya Dagaonkar: Hey. Hi. This is Aditya on behalf of Mike Latimore. Could you tell me what percentage of your bookings came from existing customers?

Brian Norris: For sure. This is Brian. This is it was well over 50%. Bit of that was slightly skewed in that one of the largest orders in the company's history was actually an order that started very briefly in Q2. So if I exclude that, it would be right around 50% on the quarter. It was higher because of that. So we're simply seeing very significant expansions from existing customers both express and now expedite as well.

Aditya Dagaonkar: Got it. And could you give some color among the new verticals? Are there any promising ones such as the warehouse or office?

John Kedzierski: Yeah. Our vertical mix overall has stayed consistent. As we've shared in the past, sports and entertainment, education, and health care, are our largest verticals. In Q2, we discussed a large Fortune 500 distribution customer that entered their fold, and we're thrilled for the potential in that area. And we're focused on growing our vertical presence everywhere, and we like the diversity and the mix that we have, but we see opportunities to continue to expand.

Aditya Dagaonkar: Alright. Got it. Thank you.

Operator: That was your last question. I'd now like to turn the call over to John for closing remarks.

Brian Norris: Actually, it's Brian. I'm just gonna close it out by, again, thanking everybody for joining us today. Again, we have a very active IR program during the quarter. Three conferences, multiple other visits to financial centers across the country. Forward to meeting as many folks as we can in the outreach period. Thanks so much, and have a wonderful Thanksgiving.

Operator: Thank you for joining. This concludes today's call. You may now disconnect.

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