SoundThinking, Inc.

Good afternoon and welcome to ShotSpotter's second quarter 2021 earnings conference call. My name is Anastasia 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 in 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, August 10, 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, please proceed.

Good afternoon, and thank you for joining us today. I hope everyone is doing well. 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. We're very pleased with our second quarter results, reporting revenue in line with our expectations of $14.6 million, up 30% from Q2 of 2020. During the quarter, we went live with ShotSpotter Respond with one multi-unit security customer, two new cities, and three expansions. We also went live with three ShotSpotter Connect deployments and have built a very strong pipeline of prospects for ShotSpotter Investigate that we expect to go beta before year end. We believe our cross-solution sales momentum is confirmation that our precision policing platform and positioning is resonating with market demand. Quarterly adjusted EBITDA was $2.9 million compared to $3.4 million last year. The decrease was largely due to unbudgeted marketing and legal spend associated with addressing a defund the police variant intended to falsely smear the efficacy of our real-time acoustic gunshot detection and post-incident forensic services. Although distracting, this misguided effort for now appears to have had little to no impact on our short-term to medium-term revenue growth prospects. However, we intend to vigorously defend our long-term brand reputation and are carefully evaluating our strategic options, including legal actions going forward. Our field engineering and customer success teams are fully booked with over 13 Respond new customer and expansion projects in the process of being deployed and onboarded in the second half of this year. This includes a number of Tier 1 and Tier 2 expansions that demonstrate the value our customers experience with our solutions in helping them address violent crime. We're also incredibly grateful to renew our partnership with Chief Paul Newtigate, the Chief of Police in Virginia Beach. Chief Newtigate was previously the Assistant Chief of Police in Cincinnati and was both an artful user and ardent net promoter of ShotSpotter in the Ohio region. where we now have seven deployments, including Cleveland, Ohio. Strong partnerships do matter. I'm equally thrilled to report that we experienced zero customer or mileage attrition for ShotSpot or Respond. In net of price increases and discounts, we anticipate coming in at approximately 1% gap revenue attrition, which is lower than our original estimate of 3% to 4% for the year. This is a powerful testament to the stickiness of our solutions and how customers come to depend on the value of our services once we are formally engaged. Our deal cadence is picking up and our sales cycles are contracting due to the perfect confluence of three powerful and what we believe to be sustained themes. Number one, violent crime is measurably increasing in a large number of cities ranging from small to large and in between. Many of you have probably seen both local and national press coverage on the gun violence issue. As a company, we have participated in a number of academic and policy-maker convenings on the subject of increased violent crime. ShotSpot is at the forefront of this critical issue as a leading solutions provider directly engaged with an on-the-ground nexus. We see the real-world impact of violent crime playing out daily in 800 miles of acoustic gunshot detection coverage in over 100 cities. We have published 40% more gunfire alerts in the first half of this year compared to the 99,000 gunshots for the same period last year. Number two, we believe we've reached a viral tipping point given our early and consistent and demonstrable success in working with police departments. We help police implement precision policing strategies that forward-leaning police departments are seeking and residents are demanding. Communities want police to better respond to, prevent, and reduce violent crime, but without over-policing. The market is taking note of our work in places like NYPD and Pittsburgh, and even newer deployments that have registered early successes like Harris County, Houston, Detroit, and Memphis. Number three, we're experiencing a robust funding environment driven by direct federal funding to cities through the $350 billion American Rescue Act. a return to congressional earmarks, and a public endorsement of gunshot detection from the Biden administration. We've already tracked five earmarks calling for acoustic gunshot detection projects totaling $3 billion that have been secured in the House CJIS Appropriations Bill, including an earmark request from the Democratic Chair of the CJIS Appropriations Committee, Representative Hartwright of Pennsylvania. We were equally surprised and delighted to hear President Biden formally and publicly endorse the idea that federal dollars to cities could and should be used to implement gunshot detection. After the President's comments, the White House doubled down on that endorsement and released a public memo which highlighted Syracuse's plan to spend $4 million in American Rescue Plan aid, with a portion of that dedicated to reactivating and expanding their shot spotter response system. This was followed by an in-person visit to Chicago PD by Attorney General Garland and Senator Durbin to view one of the precincts where ShotSpotter was prominently featured as a part of their strategic decision support center platform. This type of credibility stamp of approval from the Oval Office establishes gunshot detection as a viable category in a similar fashion to the way the Obama administration took steps to legitimize body-worn cameras. It appears that our federal lobbying initiatives are finally bearing fruit, making the timing of our new Washington, D.C. office prescient. We were excited to host a formal opening in July of our D.C. office that included an official ribbon-cutting ceremony and remarks by Washington, D.C. Mayor Muriel Bowser and our Chief of Metro Police Robert Conte. The opening was attended by many other policymakers and influencers, as well as local and national press. Our DC satellite office adds more capacity and resiliency to our incident review center operations and allows us to have closer contact for briefings and training sessions with our East Coast and Caribbean law enforcement partners and prospects. In addition, we now share close proximity with many key organizations that share our objective to aggressively combat gun violence. These institutions include Police Executive Research Forum, or PERF, International Associations of Chiefs of Police, IACP, National Organization of Black Law Enforcement Executives, NOBLE, ATF, along with the Department of Homeland Security, the National Police Foundation, of course, appropriators and their staffers in Congress. Our lead colleagues continue to focus on the maintenance and support of the on-prem version of our case management solution, along with professional services projects within NYPD. They were quite busy in delivering on their professional services commitments in Q1 and have been gearing up and planning in Q2 for another set of professional services projects for the second half of 2021 and early 2022. These projects are based on a number of anticipated work orders making their way through NYPD's procurement process, which we expect to be formally approved and funded later this month. We're bullish on achieving at least $10 million in GAAP revenue from leads for the year based on the ongoing revenue from maintenance and support, combined with the pending new work orders for professional services. We've been encouraged by the strong positive response we've had with ShotSpotter Investigate. We recently announced our partnership with Anti-Trafficking International, or ATI, to help them speed up and improve the cross-jurisdictional investigative process with human trafficking. This is the first of several deployments we expect to operationalize later this year. We have a dedicated quota carrying sales resource for Investigate and are likely to add at least one more later this year. In addition, we're investing in further enhancing Investigate's capabilities to expand in broader investigative use cases that grow our TAM opportunity. As a result of our performance this quarter and continued forward momentum, we are reaffirming our full year 2021 revenue guidance of $60 to $61 million, representing a 32% revenue growth from 2020 to 2021 at the midpoint. And while we're not formally establishing revenue guidance for 2022, we believe next year will be very strong, given the improving demand environment for our core ShotSpotter response solution, including its stronger retention, along with the increased upsell of our ShotSpotter Connect offering and our growing confidence in the prospects for ShotSpotter Investigate. I'll now turn it over to Alan, and I look forward to taking your questions later. Thank you, Ralph. we're pleased with our performance in the second quarter. As Ralph mentioned, we added two new response cities and one security customer this quarter while seeing no city attrition. We also had three city expansions and achieved strong revenue growth of 30% compared to the second quarter of 2020. Losing those cities to attrition continues the trend of keeping our actual attrition low, similar to what we experienced in 2020. With this ongoing success, we expect that our 2021 revenue interest will be close to only 1%, similar to last year's excellent results. Early feedback on our third quarter deployments is also positive, with the addition of new city customers and expansions already underway. Let me provide more details on the quarter, and then I will share some thoughts around the balance of the year. Second quarter revenues were in line with the expectations at $14.6 million, a 30% increase over the $11.3 million in the second quarter of 2020. Revenue increased as our deployed miles are up year over year, along with revenue contribution from our leads acquisition. Gross profit for the second quarter of 2021 was $8.3 million, or 57% of revenue, versus $6.9 million, or 61% of revenue for the prior year period. Gross margin was a bit lower as a result of slightly lower gross margins on the professional services provided by our leads team. Adjusted EBITDA for the second quarter was $2.9 million, a decrease from the $3.4 million in the second quarter of 2020. As a reminder, adjusted EBITDA is calculated by taking our gap net income or net loss and adding back interest, taxes, depreciation, amortization, and stock-based compensations. As Ralph mentioned, the primary reason for our lower adjusted EBITDA and our net loss for the quarter is primarily related to the increased costs that we're experiencing in our marketing and legal costs related to address negative publicity generated by certain entities and organizations opposing the efficacy of the ShotSpotter solutions. Now turning to our expenses. Our operating expenses for the second quarter were $8.5 million, or 58% of revenue, versus $6 million or 53% of revenue in the second quarter of 2020. As expected, in addition to the operating expense increases related to marketing and legal, we also had costs associated with personnel expansion and incremental expenses associated with leads. Breaking down our expenses, sales and marketing expense for the second quarter was $3.9 million or 27% of total revenue versus $2.3 million or 21% of total revenue for the prior year period. Our sales and marketing teams continue 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. During the quarter, we also added sales capacity for our Investigate product to position this segment for expected growth in 2022. Our R&D expenses for the second quarter were $1.7 million or 12% of total revenue compared to $1.4 million or 12% of total revenue for the prior year period. We continue to invest in increasing the functionality of all of our products. G&A expenses for the quarter were $2.8 million or 19% of total revenue compared to $2.3 million or 21% of total revenue for the prior year period. The increase in G&A expenses in absolute dollars were primarily related to the increased legal and public relations expenses mentioned above. Our net loss for the second quarter was a loss of $250,000, or a loss of two cents per share on 11.6 million average shares outstanding on both a basic and diluted basis. This compares to adjusted net income of $866,000, or eight cents per share based on 11.4 million basic and 7 cents per share based on 11.7 million diluted weighted average shares outstanding for the prior year period. There were no acquisition-related expenses during this quarter. Deferred revenue at the end of the quarter was $19.8 million versus $25 million at the end of Q1 2021. We ended the quarter with $15.6 million in cash and cash equivalents versus $10.9 million at the end of the first quarter. During the quarter, we repurchased 12,585 shares for approximately $500,000. We have no short or long-term debt outstanding, and as previously discussed, we possess a $20 million line of credit to improve our financial flexibility. Turning to our full 2021 outlook, our revenue guidance remains at $60 to $61 million. Please note that the midpoint of our new guidance reflects 32% year-over-year growth. We also expect that we will be profitable for the full year of 2021. Now back to Ralph for some final thoughts, and then we'll be happy to take your questions. Thank you, Alan. As you can see, there's a lot to be excited about here. We continue to be inspired in our work of bringing precision policing solutions to market. Policing is undergoing a fundamental transformation, and we're grateful to be a positive force in that journey. 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 1 on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then 2. We will pause for a moment as callers join the queue. The first question comes from Will Power with Baird. Please go ahead.