SoundThinking, Inc.

Good afternoon and welcome to ShotSpotter's fourth quarter and full year 2020 earnings conference call. My name is Sachi and I will be your operator for today's call. Joining us are ShotSpotter's CEO Ralph Clark and CFO Alan Stewart. 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, February 25, 2021, 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, you may proceed.

Thank you for joining us this afternoon. I hope everyone on the call is doing well. I'm thrilled to have Alan back in the saddle as my partner and our chief financial officer. I want to personally thank Mary for her careful stewardship during Alan's absence. As usual, I'll do a brief review of Q4 results and discuss our agile response to what has been an eventful year. We'll then share our outlook and focus initiatives for 2021 and beyond before taking your questions. 2020 proved to be a challenging year for everyone. And our company and law enforcement agency stakeholder ecosystem was no exception. I'm extremely proud of how our company has been able to adapt and respond to those challenges throughout the year. We finished 2020 on a positive note, putting us on a solid start to a fast growth path for this year and beyond. We reported Q420 revenue of $12.6 million, including some modest contribution from a partial quarter of LEED's revenue. This represented 16% year-over-year growth from the $10.9 million of revenue we reported last year. During the quarter, we went live with ShotSpotter Respond, our acoustic gunshot detection service, formerly branded as FLEX, in five new cities, including marquee cities such as Cleveland and Fort Lauderdale, which represents our six and 14 cities deployed in Ohio and Florida, respectively. In addition, we expanded our footprint in a few cities, including New York City, St. Louis, and Bakersfield, California. We're entering 2021 with $46.3 million in annual recurring revenue in our core ShotSpotter business and are well positioned with a robust number of respond projects in our pipeline scheduled to go live in the first half of 2021, which we believe sets us up for strong growth in the second half of this year into 2022 next year. Among those projects are additional expansions in New York City and Columbus, Ohio, along with new city captures such as Mansfield, Ohio, which will be our seventh city in Ohio, Memphis, Tennessee, Detroit, and Harris County, Texas. We're very excited by our early foothold in Texas, where we're able to go live on our pilot project in Houston in December of 2020. Houston is already producing promising results with RESPOND, which we expect to formally document in an independent academic study supported by Chief Art Acevedo and Houston PD. In addition to the planned study in Houston, we are also supporting a separate academic research initiative that will study the efficacy of ShotSpot or Respond in a random sampling of agencies. Our goal is to build on a body of independent research that speaks to the impact of gunshot detection on positive public safety outcomes. We believe this can help accelerate our approach to the tipping point where gunshot detection is accepted as a standard of care solution. We have seen what we believe is the tipping point play out regionally in Ohio, where we have captured seven cities, four of them in the past 24 months. The acoustic gunshot detection as a standard of care narrative has reached the state capitol where Governor Mike DeWine has specifically called for acoustic gunshot detection as a part of his public safety budget. Our accelerated traction in Ohio started from the spark of one Net Promoter customer who demonstrated the value of acoustic gunshot detection in delivering measurable positive public safety outcomes. This validates our focus on our immersive and innovative customer success and onboarding process and our leveraging the power of Net Promoter. The return on investment we've realized in our customer success and onboarding initiatives is reflected with a world-class NPS score of 70 in 2020. This achievement builds upon the success we had the year prior and our continued focus on improving process and the customer experience and journey. Implementing, measuring, and sharing of institutional best practices is a game changer and speaks to the unique value our services provide. Our strong customer loyalty was further borne out in our ability to manage our GAAP revenue attrition to less than $500,000 annually. in 2020 despite the pandemic, municipal budget pressures, and recent calls to defund the police. We hear from our customers that our service is indispensable and mission critical. Strong word of mouth and positive referrals drive our customer creation cost at 51 cents per dollar of revenue. This puts us in an industry-leading position relative to other SaaS companies that have to spend well over a dollar for a dollar's worth of revenue. On a macro basis, the increased violent crime has been broadly reported by the press and very well documented by public safety associations such as PERF, the Police Executive Research Foundation, and IACP. Given our unique vantage point of engaging with over 110 cities with over 750 miles of coverage, we're able to alert on 234,000 gunshot activations in 2020 and have measured the material increase of gun violence from 2019. This uptick in violent crime is not unique to large urban cities, but it's also experienced in medium and small cities. We believe this broad experience has been a material contributor to our recent success in penetrating the large and untapped tier four and tier five market vertical. In the past year, we've added six cities in this segment. which was consistent with our expectations prior to the pandemic in late 2019 when we launched a focused sales and marketing program to develop this segment. Smaller agency adoption is demonstrating the compelling need and viability of our gunshot detection services in this large and significantly underpenetrated market. We have a number of additional Tier 4 and Tier 5 pending projects and a large and growing sales pipeline. Our goal is to make every single deployed department a net promoter and a proof point in applying precision policing technologies, even at smaller, less well-resourced agencies. A great example of our work in this segment is our partnership with the city of Kankakee, Illinois, which has a population of 26,000. Kankakee PD reported a 50% reduction in the response time to shot spotter alerts, enabling increased evidence recovery and witness interviews. In January, Kankakee PD made arrests or identified suspects in four out of the six shot spotter alerts they responded to. In one specific case, the police credited the precise real-time shot spotter alert combined with the quick action of the responding officer in saving the life of a gunshot victim. These powerful results speak for themselves and are generating interest from similarly situated agencies considering adding gunshot detection to their crime-fighting toolkits. And while we've been able to successfully overcome the headwinds of the COVID-19 domestically, our international deal progression has been a bit more challenging. Unfortunately, the top three focus areas for us outside of the United States, South Africa, Brazil, and Mexico, have been among the most severely ravaged by the COVID-19 pandemic. We've seen material public safety budget cuts, reallocation of federal resources, and political mindshare pivot to the response to the spread and mutation of the virus. And while gun violence continues to be a pressing issue, it has taken on a lower priority in these countries for the time being. We continue to be present in those markets in order to maintain our key relationships and protect the pipeline that we've built, with the expectation that converting that pipeline into bookings is more likely to happen over the medium term versus the short term. I am pleased to report that we've made good progress on integrating leads into ShotSpot. We see an attractive growth opportunity in offering a cloud-based investigative case management solution. Every law enforcement agency has the duty and mandate to document and investigate alleged crimes in order to hold perpetrators accountable and provide resolution for victims. Unfortunately, the options to do this in a digitized and automated way are generally lacking. We believe LEADS had developed the most complete investigative case management solution that has been proven to be effective with one of the leading law enforcement agencies in the country. We're working on some refinements and integrations to make it an attractive option to small, medium, as well as large agencies before launching it in early Q3. We're already generating $6.7 million of annual recurring revenue from the licensing and support contracts from the legacy deployment of the Leeds investigative case management solution. Any commercial sales that will be launched and branded as ShotSpotter Investigate will be incremental. ShotSpotter Investigate, in combination with ShotSpotter Respond and ShotSpotter Connect, unlocks a compelling new value proposition with which we can target an entirely new set of law enforcement agencies. We now have a complete precision policing platform that provides more efficient and effective ways to respond to, investigate, and prevent crime beyond gunshot detection. We believe this integrated, data-driven platform can make an outside impact on the way policing gets done without over-policing and underserving communities, thereby building community trust and legitimacy, which is the real MVP in delivering sustainable public safety outcomes. We're maintaining and reaffirming our previous revenue guidance of $58 to $60 million this year for the combined ShotSpot or Leeds business. If we're able to manage attrition loss lower than our current estimate of 3% to 4% and or we get an earlier recovery on the international front, we believe we can come in on the high side of our guidance. At the midpoint of our current 2021 guidance, our revenue growth would be 29% year over year from 2020. Okay, Alan's ready to go a little bit deeper into our results. I'll look forward to taking your questions when he's done. Alan, over to you.

Thank you, Ralph, and good afternoon, everyone. As Ralph mentioned, we went live on five new cities during the quarter and expanded coverage on several existing customers. For the fiscal year 2020, we went live on 13 gross and 10 net new cities, which culminated in 62 gross and 49 net new miles live for the year. It's also ended the year with 779 miles live, with approximately 813 miles under contract. As we expand our product portfolio to provide a broader suite of precision policing solutions, we intend to report on new respond miles deployed at the end of each year rather than each quarter. We will continue to highlight the new cities added each quarter. Our revenue retention rate for the year was still excellent at 107% compared to 111% for 2019. Our current customers and potential new ones continue to have budget challenges. In spite of that, our attrition for 2020 was quite low and represented just over 1% of revenues, which is significantly lower than we expected at the beginning of 2020 and indicative of the value of our solutions. We're still cautious regarding 2021, though, and are estimating for attrition of up to approximately 3% to 4%. Let me provide more details on the quarter and the full year. Fourth quarter revenues were $12.6 million, a 16% increase over the $10.9 million in the fourth quarter of 2019. Revenue increased as our deployed miles are up year over year, and we also recorded our first revenues from a LEEDS acquisition, although contributed for less than half the quarter. For the full year, revenue was $45.7 million, up over 12% from $40.8 million in 2019. Gross profit for the fourth quarter of 2020 was $7.5 million, or 59% of revenue, versus $6.8 million, or 62% of revenue for the prior year period. As expected, gross margin continues to be impacted as we work through our backlog of maintenance work. These efforts required using resources that are a bit more expensive as a result of COVID-19 restrictions. We believe these costs are now almost complete and expect gross margins to return to a more normalized level in the latter part of 2021. For the full year 2020, our gross profit also increased versus 2019. It was $27 million, or 59% of revenues, up 11% compared to $24.3 million, or 60% of revenues in 2019. Adjusted EBITDA for the fourth quarter, which we calculate by taking our gap net income and adding back interest, taxes, depreciation, amortization, stock-based compensation, and acquisition-related expenses, was $3.1 million, compared to $3.2 million in the fourth quarter of 2019. For the full year of 2020, adjusted EBITDA increased to $11.9 million, up 28% from $9.4 million in 2019. Both fourth quarter of 2020 and the entire year of 2020, adjusted EBITDA numbers include an add-back of approximately $630,000 for costs related to our leads acquisition. Now turning to expenses. Our operating expenses for the fourth quarter were $7.7 million or 61% of revenue versus $5.6 million or 51% of revenue in the fourth quarter of 2019. For the full year, operating expenses were $25.7 million or 56% of total revenue compared to $22.7 million or 56% of total revenue in 2019. Operating expense increases were primarily related to higher employee-related costs, as well as increased costs related to the league's acquisition. Breaking down our expenses. Sales and marketing expenses for the fourth quarter were $3.1 million, or 24% of total revenue, versus $2.5 million, or 23% of total revenue, for the prior year period. Our sales and marketing teams continue to build our sales pipelines and are also expanding our marketing efforts. Continued emphasis on retention and renewals directly contributed to our low attrition for the year, so we're pleased with the results of our investment in this area. As Ralph mentioned, our sales and marketing spend per dollar of newly annualized contract revenue remained very low at only 51 cents per dollar. R&D expenses for the fourth quarter were $1.5 million, or 12% of total revenue, compared to $1.3 million, or 12% of total revenue, for the prior year period. While we continue to invest in increasing the functionality of our products, we've been able to maintain expense control well. G&A expenses for the quarter were $3.1 million, or 25% of total revenue, compared to $1.7 million, or 16% of total revenue for the prior year period. The increase in G&A expenses were primarily related to our leads acquisition and an increase in personnel costs. Our gap net loss for the fourth quarter was $220,000, or a loss of 2 cents per share, based on 11.5 million basic and diluted shares outstanding. For fiscal year 2020, our gap net income was $1.2 million, or 11 cents per share, based on 11.4 million basic shares outstanding, and 10 cents per share, based on 11.7 million diluted weighted average shares outstanding. Our adjusted net income, which excludes acquisition costs related to the leads acquisition, was a positive $418,000 for the fourth quarter, or $0.04 per share on both a basic share and diluted share count basis. For the full year, our adjusted net income was $1.9 million, or $0.16 per share on both a basic and a diluted share count basis. In Q4, we ended the quarter with 779 miles live, with approximately 813 miles under contract. Deferred revenue at the end of the quarter was $24.6 million versus $20.6 million at the end of the third quarter of 2020. We ended the quarter with $16 million in cash and cash equivalents versus $28.7 million at the end of Q3. While we paid $15 million in cash for the LEEDS acquisition in November, we did not repurchase any shares during the quarter. We have no short or long-term debt outstanding. As we discussed last quarter, in August 2020, we did increase our available line of credit to $20 million to improve financial flexibility. Turning to our full-year 2021 outlook, there's no change to the $58 to $60 million that we discussed last quarter. We continue to expect leads will contribute approximately $10 million in revenue. We also expect that we will remain profitable during 2021. Now back to Ralph for some final thoughts, and then we'll be happy to take your questions.