Evolve Technology (EVLV) Q3 2025: 57% Revenue Surge Masks 25% ARR Pivot as Model Shifts to Recurring
Evolve Technology’s third quarter revealed headline revenue acceleration, but the underlying story is the company’s deliberate pivot from one-time product sales to a recurring revenue subscription model. This transition, while temporarily distorting top-line growth, aims to drive higher long-term ARR and margin leverage. Management raised full-year guidance but emphasized that normalized growth rates, excluding legacy model impacts, are more modest—signaling a strategic inflection for 2026 and beyond.
Summary
- Subscription Model Pivot: Evolve’s shift from distribution to direct fulfillment is accelerating ARR and recurring revenue focus.
- Normalized Growth Context: Headline revenue growth overstates true run-rate expansion due to one-time items and legacy contracts.
- 2026 Inflection Point: Management expects ARR growth to outpace total revenue, setting up a new phase of recurring-driven value.
Performance Analysis
Evolve Technology posted headline revenue growth of 57% year over year, propelled by new customer wins, expanded deployments, and the largest contract in company history. However, management emphasized that legacy distribution fulfillment and a high proportion of direct purchases inflated reported revenue, masking the more normalized 30% growth rate that better reflects underlying business momentum. The company’s annual recurring revenue (ARR) climbed 25% year over year, trailing reported revenue growth due to the accounting treatment of upfront sales versus multi-year subscriptions.
Adjusted gross margin contracted to 51% from 64% a year ago, reflecting the near-term cost headwinds of the new direct purchase model and subscale manufacturing costs for the Expedite product line. Despite this, Evolve delivered its fourth consecutive quarter of positive adjusted EBITDA, with a margin of 12%, supported by disciplined expense management and operating leverage. Remaining performance obligation (RPO) rose sequentially, indicating a growing backlog and future revenue visibility.
- Revenue Recognition Distortion: One-time product sales and legacy model effects are inflating reported growth rates in the short term.
- Gross Margin Headwinds: Direct purchase fulfillment and Expedite’s early manufacturing scale are compressing margins, but are expected to improve as volume ramps.
- Operating Leverage Emerging: Flat operating expenses versus strong top-line growth signal expanding scale efficiency.
While the reported numbers are strong, investors should focus on ARR and normalized growth rates as the best indicators of sustainable performance as Evolve completes its business model transition.
Executive Commentary
"We're moving closer to our goal of building a scalable, high-growth business with predictable performance... 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 Evolve's ARR growth will outpace revenue growth."
John Kaczorski, President and Chief Executive Officer
"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."
Chris Kutzer, Chief Financial Officer
Strategic Positioning
1. Direct Fulfillment Model Realignment
Evolve has nearly completed its transition from a legacy distributor-based fulfillment model to direct sales, capturing 100% of average revenue per unit (ARPU, average revenue per deployed system) and shifting revenue recognition toward recurring subscription streams. This move simplifies partner transactions and enables higher long-term ARR, even as it temporarily depresses gross margins and defers some revenue into future periods.
2. ARR and Subscription Emphasis
The company is repricing solutions to emphasize software and ARR, with new contracts increasingly structured as four-year subscriptions. Management signaled that 2026 will mark the first year where ARR growth outpaces total revenue growth, a critical milestone for SaaS (Software-as-a-Service, recurring cloud-based software delivery) business models. This should improve revenue predictability and customer lifetime value.
3. Product Innovation and Vertical Expansion
The Expedite autonomous bag screening solution is gaining traction, particularly in education, with strong cross-sell attachment to the core Express platform. Early data shows low alert rates, supporting customer adoption. Evolve is also expanding in healthcare, sports, and entertainment verticals, with notable wins at major hospitals and sports venues, demonstrating the platform’s versatility and growing market acceptance.
4. Operational Efficiency and Partnerships
To support scaling, Evolve announced a manufacturing partnership with Plexus, aiming to reduce costs and increase production capacity as demand grows. This partnership is expected to unlock cost synergies and support the ramp of both Express and Expedite product lines, especially as Expedite moves toward manufacturing scale.
5. Cost Discipline and Margin Management
Operating expenses remained flat year over year despite significant growth in units and ARR, reflecting management’s focus on cost discipline and operating leverage. The company is targeting high single-digit adjusted EBITDA margins for the full year, with modest expansion modeled for 2026 as the recurring revenue base grows.
Key Considerations
Evolve’s Q3 results highlight the complexity of interpreting growth in the midst of a business model transition. Investors should look beyond headline revenue and focus on recurring metrics and execution against the new direct fulfillment strategy.
Key Considerations:
- Revenue Quality Shift: The move to direct fulfillment and subscription pricing will defer $5-10 million of revenue in 2026, but will increase ARR and RPO for future periods.
- Recurring Revenue Inflection: ARR is set to become the primary growth driver, with management prioritizing long-term value over short-term revenue recognition.
- Gross Margin Recovery Path: Margin pressure from Expedite and direct fulfillment is expected to ease as manufacturing scales and product mix normalizes.
- Vertical Diversification: Customer mix remains balanced across education, healthcare, and sports, reducing reliance on any single end market.
Risks
Short-term gross margin compression and deferred revenue recognition may create volatility in reported results as the model shift plays out. Manufacturing scale-up for Expedite and execution of the Plexus partnership are required to realize cost improvements. Competitive pressure, especially as Evolve expands into new verticals, and any delays in customer adoption of the subscription model, could impact ARR growth targets and long-term profitability.
Forward Outlook
For Q4 and full-year 2025, Evolve guided to:
- Revenue of $142-145 million, reflecting 37-40% reported growth (normalized to ~30% excluding one-time items)
- Full-year adjusted EBITDA margin in the high single digits and positive cash flow in Q4
For full-year 2026, management projects:
- Revenue of $160-165 million, with ARR growth of at least 20% outpacing total revenue
Management emphasized that 2026 will be an inflection year, with unit deployments, ARPU stability, and ARR acceleration as the direct fulfillment and subscription model matures. Investors should expect less one-time revenue and more recurring streams, with improving margin trajectory as Expedite scales and Plexus integration ramps.
Takeaways
Evolve’s Q3 headline growth is less important than the successful execution of its pivot to a recurring revenue SaaS model. The company’s focus on ARR, cost discipline, and operational partnerships sets the stage for more predictable, high-quality growth.
- Business Model Transition: The shift to direct fulfillment and subscription contracts is transforming Evolve’s revenue mix, with ARR set to become the primary value driver.
- Margin and Leverage Opportunity: While gross margins are pressured in the near term, manufacturing scale and recurring revenue should drive margin recovery and operating leverage in 2026 and beyond.
- Execution Watchpoint: Investors should monitor the pace of ARR growth, gross margin recovery, and the impact of new verticals and partnerships on long-term profitability.
Conclusion
Evolve Technology’s Q3 results underscore a critical business model transformation. The company is deliberately trading short-term revenue and margin for long-term recurring value, positioning itself for more stable and scalable growth. Execution on ARR expansion and operational efficiency will be the key metrics to watch as the transition completes.
Industry Read-Through
Evolve’s model shift is emblematic of a broader trend among security technology and hardware providers moving toward software-driven, subscription-based revenue. Investors should expect near-term volatility in reported results for companies making this pivot, but long-term value creation as recurring revenue bases expand. The company’s experience with margin headwinds during manufacturing scale-up is a cautionary note for peers introducing new products. The strategic use of contract manufacturing partnerships, as seen with Plexus, highlights the importance of operational flexibility and cost management in scaling IoT SaaS businesses. Vertical diversification and customer expansion remain critical as competitive intensity rises in the physical security and smart access control markets.