SoundThinking, Inc.

Good afternoon, and welcome to ShotSpotter's first quarter 2021 earnings conference call. My name is Claudia, 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, May 11, 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 conference over to ShotSpotter CEO, Ralph Clark. Please go ahead, sir.

Thank you, and good afternoon, everyone, and thanks for joining us today. I hope everyone out there is doing well. It certainly has been a challenging 14 months for all of us. And while significant progress is being made in the fight against COVID, and it feels like things might be getting back to some form of normalcy, we recognize that is not the case everywhere. I would like to extend my well wishes to all of our families, friends, colleagues, and customers that have been impacted by COVID. As usual, I'll start with a quick overview of the quarter. and our operational outlook before Alan details the quarterly results. We will then take your questions. After a strong finish to year-end 2020, we have continued to build on our momentum with a fast start to 2021. We're very pleased with our first quarter results, which exceeded our expectations, both at the top and bottom line. We reported record revenues of $15 million, up 44% from Q1 of 2020, and had quarterly adjusted EBITDA of $3.3 million, up 53% year-over-year, once again demonstrating the unique operating leverage of our business. During the quarter, we went live in six new cities with ShotSpotter Respond, including Detroit, Memphis, Harris County, Texas, Pompano Beach, Florida, McKeesport, Pennsylvania, and Mansfield, Ohio. We also expanded our deployments in five cities, including New York City, St. Louis, Worcester, Savannah, and Wilmington, North Carolina. Mansfield and McKeesport are examples of our Tier 4 and Tier 5 go-to-market initiative. We're very pleased with the progress in this market vertical, where our pipeline not only continues to grow, but is also exhibiting shorter accelerated sales cycles. Even with the robust go-live activity in Q1, we still enter Q2 with a solid number of new city and expansion projects in the ShotSpotter Respond deployment pipeline that we expect to go live in the next 60 to 90 days. As travel restrictions have eased, these impending projects are keeping our project and customer success teams happily busy introducing new customers to the ShotSpotter value proposition and helping grow the positive community impact of ShotSpot or Respond deployments with existing clients that are expanding their footprint. It is exciting to vicariously experience the difference our technology is making in helping improve public safety outcomes and improve community engagement. Recently, Chief James Craig of Chicago PD held an impromptu press event 24 hours after going live with ShotSpot or Respond. He detailed a ShotSpot or Alert with no corresponding 911 call where his officers were dispatched. After immediate response and then follow-on investigation, including a court-issued search warrant based in part on the shot spotter alert, Detroit PD was successful in uncovering an illegal gun manufacturing site where several weapons and equipment used to make weapons were seized. When surveying the location post-incident, Detroit PD also discovered over 75 shell casings in the backyard of the subject house. indicating this home had been a neighborhood nuisance for months, again, without a single 911 call for service. It is only because of the shot spotter alert, which was probably the result of a test firing of a crime gun being sold, that Detroit PD was made aware of this public safety hazard. Detroit PD's successful intervention and shutting down of the criminal operation effectively eliminated a dangerous supply source of untraceable ghost crime guns. it is quite possible those guns could be responsible for terrorizing any number of neighborhoods in, around, and even beyond Detroit. Even more affirming to our mission is when we hear about the selfless heroics involved in officers getting to a shot spot or lurk where they find a gunshot wound victim and are able to apply life-saving trauma interventions directly or through scoop-and-go. Recently in Chicago, officers Ward and Gibbons were responding to a shot spotter alert and found a 13-year-old gunshot wound victim as a result of a drive-by shooting. With no time to waste, they scooped up the critically wounded child and transported him to the University of Chicago Medical Center within minutes. Their quick thinking and fast action likely saved the victim's life and certainly earned the gratitude of the child's mother who stated, quote, I am highly grateful for you guys. Thank you, that was a wonderful job, end quote. We're grateful as well. To be able to design and deploy technology that is making a difference and to be able to do work that matters is rewarding. God bless Officers Ward and Gibbons, who only recently joined the police department. Officer Ward stated she was motivated to become a police officer because she had a personal calling to help people and a desire to preserve life. These growing positive narratives against the backdrop of increased violent crime, and calls for law enforcement to address crime, but to do so in a more efficient, effective, and equitable fashion, is inspiring law enforcement agencies, small, medium, and large, across the nation, to engage with us as a proven solutions provider. With a rapidly improving municipal funding environment, fueled by federal stimulus, and soon to be earmarked provisions, We believe this provides us ample budgetary resources for agencies to procure and use our services and is providing a strong tailwind to our business. The stimulus dollars going in the cities from the federal government are having a measurable and beneficial impact on our business. In terms of new customers, we're seeing prospects that had been on the bubble evaluating shots fired decide to move forward quickly and through the sales funnel process. In another case, an existing customer who had publicly stated their intentions not to renew due to financial constraints did a 180-degree pivot and not only decided to renew but also expand their ShotSpot or Respond coverage. We are quite encouraged with our renewal retention efforts overall, including our ability to implement cost-of-living adjustments or COLA increases on a selected number of renewals this year. We believe we will come in well below our previous estimate of 3% to 4% gap revenue attrition, which ultimately increases our top-line revenue growth. International, however, is still presenting some short-term challenges to us, as our key focus areas in South Africa and Latin America have not been able to turn the corner completely on mitigating the impact of the virus pandemic. We continue to appropriately invest some of our time, talent, and treasure in those markets to protect the key relationships and pipeline we've built to date. Our goal is to be ready to engage commercially with those opportunities when it becomes practicable. ShotSpotter Connect, on the other hand, appears to be hitting its stride and is showing a very encouraging ramp to date within our existing ShotSpotter Respond installed base. The ShotSpotter Connect traction enables us not only to grow share of wallet within existing customer accounts, but also to add value and make impact beyond acoustic gunshot detection with a robust patrol management solution. We've initiated a focused marketing campaign to build ShotSpotter Connect pipeline outside of our install base. I expect to see some measurable booking success on that front later this year and early into next year. I'm happy to report that the integration of our leads acquisition is going very well. Their senior leadership team is now able to offload much of the administrative minutia involved in being a standalone business by leveraging our back office infrastructure. This has freed them up to invest even more time and energy on their customer-facing professional services activities and their work with us on ShotSpotter Investigate development. We've been able to quickly form a productive, collaborative working relationship rooted in our shared values that has enabled us to launch ShotSpotter Investigate ahead of schedule. This morning, we officially announced the availability of the investigative case management solution for demonstration and sale, including new functionality and integration with ShotSpot to respond. ShotSpot Investigate completes the third pillar of our precision policing platform and is exactly what police departments need at this critical juncture. It extends our total addressable market and leverages our strength and entry point from our gunshot detection heritage. As a result of our performance this quarter and forward momentum, we are raising our previous full-year 2021 revenue guidance of $58 to $60 million to $60 to $61 million, representing 32% revenue growth from 2020 to 2021. Our guidance raise is driven by the improving demand environment for our core ShotSpire response solution, including its stronger retention, increased upsell of our ShotSpire Connect offering, and better visibility into the Q2 and early Q3 go-live cadence of both ShotSpot or Respond and ShotSpot or Connect. Alan will review more of the puts and takes that goes into our guidance, along with a deeper dive on the results. And I look forward to taking your questions once he's finished. Alan, over to you. Thank you, Ralph. We're very pleased with our performance in the first quarter. As Ralph mentioned, we added six new response cities this quarter, while only seeing attrition from one small site-secure deployment. We also had five respond city expansions achieve record revenue and record gross profit. It is noteworthy that there has been some abatement of the budget challenges for our current customers and potential new ones as federal stimulus has brought customers back to the table in early 2021. We are pleased with a minor Q1 attrition, which continues the trend of lower-than-expected seen in 2020. While encouraging, ShotSpot, our sales organization, remains focused on generating new and expanding current programs to achieve growth targets while offsetting attrition. As Ralph mentioned, we are expecting our actual attrition will come in well below our previous estimate of 3% to 4%. Let me provide more details in a quarter, and then I will share some thoughts around the balance of the year. First quarter revenues were ahead of expectations at $15 million, an impressive 44% increase over the 10.5 million in the first quarter of 2020. Revenue increased as our deployed miles are up year over year, and we also recorded our first full-year quarter revenue from the LEEDS acquisition. Gross profit for the first quarter of 2021 was $8.7 million, or 58% of revenue, versus $6.1 million or 58% of revenue for the prior year period. Gross margin will continue to be minorly impacted as we started replacing 3G sensors at the beginning of the second quarter. That said, we still expect gross margins to continue to improve as we proceed through 2021. We also saw impressive growth in adjusted EBITDA for the first quarter, which was $3.3 million, a 53% increase from the $2.2 million in the first quarter of 2020. As a reminder, adjusted EBITDA is calculated by taking our GAAP net income and adding back interest, taxes, depreciation, amortization, impairment, stock-based compensation, and acquisition-related expenses. Turning to our expenses, our operating expenses for the first quarter were $8.5 million, or 57% of revenue, versus $6.1 million, or 59% of revenue in the first quarter of 2020. Operating expense increases were primarily related to higher legal and employee-related costs, as well as incremental costs related to our leads acquisition. Breaking down our expenses. Sales and marketing expense for the first quarter was $3.9 million, or 26% of total revenues, versus $2.5 million, or 24% of total revenue for the prior year period. Our sales and marketing teams continued to build our sales pipeline and expand our marketing efforts. We continue to focus on maintaining high levels of customer satisfaction, which helps keep our attrition rates low. We also expect to add sales capacity for our Investigate product in Q2 to position this revenue segment for growth in 2022. Our R&D expenses for the second quarter were $1.7 million, or 11% of total revenue, compared to $1.4 million, or 13% of total revenue for the prior year period. We continue to invest in increasing the functionality of our products with a focus on cost efficiency. G&A expenses for the quarter were $2.9 million, or 19% of total revenue, compared to $2.3 million, or 22% of total revenue for the prior year period. The increase in G&A expenses in absolute dollars were primarily related to our leads acquisition and an increase in legal costs and cost-weighted personnel. Our adjusted net income for the first quarter was $244,000, or two cents per share, based on $11.6 million basic and two cents per share based on $11.9 million diluted weighted average shares outstanding. This compares to $13,000, or zero cents per share, based on $11.3 million basic and $11.7 million diluted weighted average shares outstanding for the prior year period. Adjusted net income, a non-GAAP financial measure, is calculated by taking our GAAP net income and back acquisition-related expenses. When accounting for acquisition-related expenses, our GAAP net income was $79,000, or one cent per share, basic and diluted for the quarter. Deferred revenue at the end of the quarter was $25 million versus $24.6 million at the end of Q4 2020. We ended the quarter with $10.9 million in cash and cash equivalents versus $16 million at the end of the fourth quarter. Cash is slightly lower as we are waiting for some payments of large receivables expected to be received soon. During Q1, we also repurchased approximately 56,000 of our shares at an average price of $39.02 or $2.2 million. We have no short or long-term debt outstanding. And as previously discussed, we possess a $20 million line of credit to improve financial flexibility. Turning to our full year 2021 outlook, we are raising our full year guidance from $58 to $60 million to $60 to $61 million. Our mileage cadence is proceeding ahead of plan, and our attrition appears to be tracking well below our 3 to 4% earlier estimate. 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. Thank you, Alan. Before we take your questions, I would like to express my gratitude to my ShotSpotter colleagues, our customers, and the communities they serve. You're all doing amazing work that is making our community safer. Thank you. We're now ready to take your questions.

Thank you. We will now begin the question and answer session. To join the question queue, you may press star then one on your telephone keypad. You will hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press Start and 2. We will pause for a moment as callers join the queue. Our first question is from Richard Baldry with Ross Capital Partners. Please go ahead.