SoundThinking, Inc.

And welcome to ShotSpotter's third quarter 2020 earnings conference call. My name is Ailee, and I'll be your operator for today's call. Joining us are ShotSpotter's CEO, Ralph Clark, and interim CFO, Mary Hintjes. Please note that certain information discussed on the call today will include forward-looking statements about future events and ShotSpotter's business strategy and future financial and operating performance. These forward-looking statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict and may cause the actual results to differ materially from those stated or implied by those statements. Certain of these risks and assumptions are discussed in ShotSpotter's SEC filings, including its registration statement on Form S-1. These forward-looking statements reflect management's beliefs, estimates, and predictions as of the date of this live broadcast, November 9, 2020, and ShotSpotter undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this call. Finally, I would like to remind everyone that this call will be recorded and made available for replay via a link available in the Investor Relations section of the company's website at ir.shotspotter.com. Now, I would like to turn the call over to ShotSpotter's CEO, Ralph Clark. Sir, please proceed.

Good afternoon and thanks for joining us today. I hope everyone on the call is doing well. Before we start, I just want to let you all know that Alan is doing well. I'm speaking to him regularly and I'm happy to report that his recuperation is progressing steadily. I also want to take a moment to thank many of you that have reached out with positive thoughts and prayers for Alan. He appreciates it and so do all of us here at the company. In the meantime, we're very grateful to have an experienced interim CFO taking up the reins during Allen's lead. Mary Hinches is an accomplished finance professional who has been a successful CFO at Yapstone Incorporated, CBS Interactive, and PayPal. She's come up to speed very quickly and is guiding the outstanding G&A organization that we have built until Allen's eventual return. Welcome aboard, Mary. As usual, I'll give you an overview of the third quarter operations and a sense of how we see the year end shaping up. Then Mary will go into a bit more financial detail before we take your questions. Financially, the third quarter was very successful as we continue to rebuild momentum after the pandemic lockdown that started toward the end of Q1. We reported quarterly revenues of $11.4 million, up 14% from $10 million a year ago. a net income of $566,000, or $0.05 per share, versus $446,004 per share in the third quarter of 2019. Adjusted EBITDA increased 44% to $3.3 million this quarter, compared to $2.3 million in Q3 a year ago, again demonstrating the leverage in our model. In addition to these strong financial results, We're also quite excited to announce that we have entered into a definitive agreement to acquire Leeds, LLC, the developer of Crime Center, a leading investigative case management system. I'll discuss our strategic rationale and the market opportunity we believe this opens up for our business later in my prepared remarks. Operationally, however, we did experience some headwinds in our ability to get boots on the ground for our gunshot detection deployments. I want to stress that these delays were driven by local pandemic response and the social unrest that many of our police department customers were facing that required their focused attention. Our teams are fully resourced and ready to drive deployments as opportunities present themselves. As a result, our go-live cadence of three square miles this quarter was below our expectations. In addition, we recognize the attrition of six square miles due to customer budget pressures netting a total of minus three square miles this quarter. That attrition included the loss of Piscataway, New Jersey and a reduction of coverage in Brockton, Massachusetts. Cumulatively, this quarter's mileage loss combined with the minimal attrition we recognize in Q1 and zero attrition in Q2 totals to less than $500,000 revenue attrition year-to-date would offset with net price increases on some renewals. As we've previously stated, we are ahead of plan in mitigating attrition and are now targeting a revenue impact for 2020 to be well below our previous estimate of approximately $2 million. We are very pleased at exit Q3 with a very healthy number of new customer captures and existing customer expansion projects in process, totaling over 50 square miles. These include seven square miles recently taken live in October and November, representing two new cities, Fort Lauderdale and Cleveland. We believe that we'll be able to take another 18 to 23 square miles live before year-end, totaling at least 25 square miles per Q4. The combination of New City Go Lives and expansions of existing deployments underscores the attractiveness of ShotSpot or Flex, especially during challenging times like these with increased gun violence. Police chiefs routinely describe our services, quote, critical, essential, and something our department cannot do without, end quote. Once an agency experiences the impact that they can have in responding to gun crime and building community trust using our technology and our recommended best practices, we become indispensable. It is no surprise that the value proposition and customer success experience that we deliver has catapulted us into the world-class category of Net Promoter Score, NPS, with a 70% attainment this year, up from 53% last year. This is remarkable, and it uniquely positions us as a trusted partner with law enforcement agencies and their strategies to combat violent crimes. Moving beyond our core Flex product, we also saw encouraging progress with ShotSpotter Connect, formerly Missions, which continues to build momentum. We went live with two new customers in Q3 and now count a total of 10 Connect customers that are producing approximately $500,000 in annual recurring revenue. We continue to extend Connect's feature set to transform it into one of more of an everyday patrol management tool, that directs the deployment of limited patrol resources to be more impactful at deterring crime without over-policing or over-saturating disadvantaged neighborhoods. As a result, we have a strong and growing pipeline of Connect prospects. Connect makes a natural extension of our Flex client relationships, but it can also serve as a standalone solution for police departments that do not have Flex. We hope to expand Connect's market penetration to new prospects beyond our flex and install base in the upcoming year, and we believe we can double annual recurring revenue to over $1 million by the end of 2021. The growing interest in Connect underscores ShotSpotter's platform strategy because our experience has shown that our gunshot detection technology is only a part of how police departments handle violent gun-related crimes. Our goal is to become a trusted platform provider, not only of the tools to respond to incidents as they happen, but also the tools to prevent such crimes before they happen, and then be able to fully investigate and resolve such crimes after they occur. We took the first step toward building this platform-based suite of tools with our 2018 acquisition of the Hunts Lab technology assets that have become ShotSpotter Connect. Now, with the signing of a definitive agreement to acquire leads, we're adding the third element to our precision policing platform with their investigative case management solution branded as Crime Center. Crime Center has been driving investigative case management with a major metropolitan police department in the Northeast for the last five years and has transformed how their detectives track catalog and share evidence and data for ongoing investigation. The tool simplifies collaboration between teams, and communications across interdepartmental disciplines. It has digitally transformed a traditionally paper-based management system, and the results are impressive. Data solutions do work. Crime Center is expected to increase ShotSpotter's estimated total law enforcement addressable market in the U.S. by more than 45%, not including additional potential market expansion internationally. Every law enforcement agency is required to investigate, document, and empower the prosecution of alleged crimes, and we believe Crime Center does it in a new and better way. On a standalone basis, Crime Center opens up new selling opportunities to local police agencies that are beyond our typical targeted flex prospects. We also see it opening up large new business opportunities with state and federal agencies. Our job is to now leverage our relationships at key police departments and build market penetration for this new extension to ShotSpotter's platform. We intend to execute a go-to-market playbook initially focused on existing ShotSpotter Flex customers that are increasingly adopting the Crime Gun Intel Center or CGIC model that is focused on investigating shootings and shooters. With the addition of Crime Center to our product lineup of patrol management and gunshot detection solutions, ShotSpotter will offer the only complete end-to-end precision policing platform that enables data-driven prevention, response, and investigation and resolution of crime. We believe that our precision policing platform vision is exactly what those agencies are looking for today, the kind of intelligence-led, prevention-minded, community-focused policing that our platform enables isn't the future, it's the present. Gunshot detection helps police respond faster and gives citizens confidence that cops care about the safety of at-risk neighborhoods. Officers have accurate real-time data from us so they can go into each call with a greater situational awareness and confidence. And our patrol management solution lets departments identify hotspots early, allocate resources wisely, and reduce risk through preventative measures rather than oversaturated shows of force. And now with the addition of a post-incident case management product, we can now help law enforcement increase their case close rate, thereby protecting residents by taking offenders off the street and providing resolution to the victims of crime. Before I turn it over to Mary, let me conclude with how we're thinking about year-end 2020 and provide our thoughts about 2021. We're going into Q4 with positive operating momentum, and we're on track for a strong year-end finish. Given our visibility to recurring revenues and our strong renewal cadence, we are narrowing and slightly increasing our guidance to $44.5 to $45 million for 2020. The midpoint increases to $44.8 million. Any additional Q4 revenue attributed to leads post-closing would likely surpass the top end of our 2020 revenue guidance. For 2021, we're targeting revenues of 58 to $60 million, including approximately $10 million of projected revenue from leaves, putting the combined entity on a re-accelerated 30% plus year over year growth at the midpoint for 2021. Okay. Mary's ready to go into a little bit deeper into our results. So I'll look forward to taking your questions when she's done. Mary, over to you.

Thank you, Ralph. And good afternoon, everyone. I fervently wish Alan a speedy recovery. And at the same time, I'm very excited to join Ralph and the ShotSpotter team. ShotSpotter's mission of preventing and reducing gun violence and leveraging data to make communities, campuses, and facilities safer is such a worthy one. I'm really pleased to be a part of this effort. So let me get started. First, I will highlight this quarter's results. And then I will provide some financial details on the acquisition of leads, which we announced today. Overall, we're pleased with the financial strength of the quarter. Despite the slow deployment of additional miles, we achieved record revenue, as well as solid net income and adjusted EBITDA. Adjusted EBITDA growth in Q3 was particularly strong at 44%. We accomplished all of this, as Ralph mentioned, with COVID-19 still impacting our business, and social unrest continuing to distract our public safety customers. These headwinds exacerbated the normal lumpiness in go-live miles that we've mentioned in the past. During Q3, we went live with just three new miles, which included small deployments in Albuquerque, North Chicago, Nelson Mandela Bay, and Secure Campuses. This was offset by Piscataway, New Jersey not renewing three miles and Brockton, Massachusetts shrinking their footprint from five to two miles. Both cities pointed to budget reductions as the reason for the change. We were pleased, however, that we could work with Brockton to reduce rather than cancel their deployment. So we ended the quarter down three miles. Since the end of Q3, we have deployed seven miles. which are part of 50 miles and projects that are at varying levels of readiness to go live. We anticipate being able to deploy an additional 18 to 23 miles in the fourth quarter for a total of at least 25 miles in Q4. We're very pleased that the programs we implemented to reinforce our value proposition and maximize renewals appear to be paying off. Despite the added pressure on municipal budgets, We expect to end the year with attrition of approximately 1% down from the 5% we estimated last quarter. Let me provide more details on the quarter. Then I will share some thoughts around the balance of the year and provide a high level look at our expectations for 2021, as well as provide some thoughts on the financial impact of the LEEDS acquisition. Third quarter revenues were slightly ahead of expectations at 11.4 million. a 14% increase over the 10 million in the third quarter of 2019. Although we had a net reduction in miles in the quarter, revenue increased as our deployed miles are up year over year from 696 in Q3 of 2019 to 758 at the end of Q3 2020. Gross profit for the third quarter of 2020 was 6.4 million or 57% of revenue. versus 6 million or 60% of revenue for the prior year period. Growth profit was impacted by two items. First, when Piscataway didn't renew, we had to write off the related equipment. Second, we had a backlog of regular maintenance work that was delayed when COVID-19 restrictions made travel impossible. As a result, we had to use more expensive resources to catch up. Without these costs, we estimate that gross margin would have been approximately 60%. We expect our maintenance efforts to continue in Q4, but to a lesser extent. We saw significant improvement in adjusted EBITDA through the third quarter, which was 3.3 million, a 44% increase from the 2.3 million in the third quarter of 2019. As a reminder, adjusted EBITDA is calculated by taking our GAAP net income and adding back interest, taxes, depreciation, amortization, and stock-based compensation. Now turning to expenses. Our operating expenses for the third quarter were 5.8 million or 51% of revenue versus 5.6 million or 56% of revenue in the third quarter of 2019. We continue to gain operating leverage across the business. In addition, With operations slowed, we did benefit from lower travel expenses as compared to the prior period. Breaking down our expenses, sales and marketing expenses for the third quarter were 2.4 million, or 21% of total revenue, versus 2.4 million, or 24% of total revenue for the prior year period. Our sales and marketing teams continued to focus on building the sales pipeline and expanding our marketing efforts. Our sales programs had a direct impact on increasing retention and minimizing attrition, so we couldn't be more pleased with our investment. R&D expenses for the third quarter were 1.4 million, or 12% of total revenue, compared to 1.4 million, or 14% of total revenue for the prior year period. We continue to invest in increasing the functionality of our Connect platform, along with expanding our analysis capability as we evaluate applications for our data and forensic support and litigation. G&A expenses for the quarter were $2 million, or 18% of total revenue, compared to $1.8 million, or 18% of total revenue for the prior year period. Our gap net income for the third quarter was $566,000, or 5 cents per share, based on 11.4 million basic shares and 5 cents per share based on 11.7 million diluted weighted average shares outstanding. This compares to a GAAP net income of 446,000 or 4 cents per share based on 11.4 million basic shares and 4 cents per share based on 11.9 million diluted weighted average shares outstanding for the prior year period. In Q3, we ended the quarter with 758 miles lot with approximately 770 miles under contract. Deferred revenue at the end of the quarter was 20.7 million versus 22.4 million at the end of Q2 2020. We ended the quarter with 28.7 million in cash and cash equivalents versus 25.8 million at the end of Q2. In Q3, we did not repurchase any shares. and have $6.7 million remaining in the $15 million board-approved repurchase program we announced in May of 2019. We have no short or long-term debt outstanding. And as we discussed last quarter, in August 2020, we increased our available line of credit to $20 million to improve financial flexibility. Now turning to the LEEDS acquisition. Under the terms of the agreement, We will pay $17 million, with $15 million in cash and $2 million in shares of ShotSpotter common stock. In addition, there is a potential earn-out of up to $5 million over the next two years. The deal is expected to close in November and is subject to customary closing conditions. Leeds LLC will become wholly owned subsidiary of ShotSpotter. The company has been intentional in its efforts to extend ShotSpotter beyond acoustic gunshot detection to further enable precision policing. With the acquisition of leads, we add investigative case management software to the suite of ShotSpotter's law enforcement solutions. This means we will be the only complete end-to-end platform solution that enables data-driven prevention, response, and now investigation of crime, providing capabilities not available to law enforcement today. The acquisition of leads also opens up many new potential customer opportunities, which in turn expands our total addressable market. In the market in the United States alone, ShotSpotter's PAM grows by approximately $300 million as a result of the acquisition of leads. We anticipate that the acquisition will increase our top line growth. So let's turn to our outlook for Q4 and next year. We are narrowing our full year 2020 revenue outlook and now expect revenue in the range of 44.5 million to 45 million from our previous outlook of 43.5 million to 45.5 million, which results in a slight increase to the midpoint of the range. This revision reflects visibility into the timing of renewals and adding new miles in Q4. At the midpoint of our guidance, our revenue growth will be approximately 10% for the year. This guidance excludes the potential contribution from leads. Depending on the timing of the close, revenue generated by the acquisition of leads could allow us to exceed the high end of our range. In the fourth quarter, We expect expenses will increase nominally in absolute dollars, and we will again be profitable. Our current expectation is that revenue for the full year 2021 will be in the range of $58 million to $60 million, including $10 million in revenue from the acquisition of LEED. At the midpoint of our revenue guidance for both years, the combined business will grow at 32%. We expect to remain profitable in 2021 by taking advantage of the opportunities ahead of us, even as we continue investing in the build-out of our platform. Now, back to Ralph for some final thoughts, and then we'll be happy to take your questions.