SoundThinking, Inc.

Good afternoon, and welcome to ShotSpotter's third quarter 2021 earnings conference call. My name is Sachi, and I will be your operator for today's call. Joining us are ShotSpotter 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, November 9th, 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 CEO Ralph Clark.

Good afternoon and thank you for joining us today. I hope everyone out there 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'll then take your questions. We reported revenues in line with our expectations of 14.5 million, up 28% from 11.4 million in Q3 of 2020. Quarterly adjusted EBITDA was 2.2 million compared to 3.3 million last year. The adjusted EBITDA decrease was largely due to continued strategic communications and legal spend, associated with defending the company customers and our stakeholders from the weaponized false claims of various media outlets and our 300 million dollar defamation suit against vice media overall shot spotter respond had a very strong go live mile cadence this quarter we secured three new customers winston-salem virginia beach in miramar florida and went live with seven expansions of existing customers including Puerto Rico and Albuquerque, which became our third and eighth largest clients by mileage at 30 and 14 miles respectively. Based on our progress to date, we believe we have clear line of sight to an estimated 105 go live miles this year, which will be 15 miles or 17% more than the 90 we had forecasted earlier this year in an overall 100% increase of the 49 miles we went live with in 2020. There are a growing number of respond projects that currently total over 50 miles that are staffed or in the process of being deployed over the next four months. These include a new agency capture of an initial seven miles in Macon Bibb County, Georgia, along with expansions for existing customers such as Louisville and Fresno. This mileage add momentum represents a significant reacceleration of miles being added to the platform and sets the stage for our continued strong growth in revenue in 2022. I'm also pleased to report that we experienced another quarter of zero respond customer or mileage attrition. Net of price increases and discounts, we estimate that the core respond and connect business will show less than 1% gap revenue attrition in 2021. This is significantly lower than our original estimate of 3 to 4% for the year and represents a best in class gross attrition metric. Almost 30% of our 67 renewal transactions and an incredible 65% of our new respond mileage transactions year to date have been executed on a multi-year basis. And we continue to drive a world-class net promoter process and score, which came in at 58% this year. We believe these accomplishments, particularly in an environment of false allegations in some press about the quality and value of our service, are a testament to the importance and stickiness of our services and law enforcement's dependence and commitment to them. Our unique success in this area effectively expands our recurring revenue TAM opportunity due to the longer customer lifetime value and duration typically not seen in other comparable SAS business models. Broader public sentiment beyond our law enforcement buying center on the urgent need to address gun violence has been equally if not more encouraging. An April Pew research survey of 5,000 adults revealed around half of Americans view gun violence as a very big problem in the country, with another 24% saying it is moderately a big problem. A more specific polling survey of over 2,000 individuals conducted by Morning Consult showed that three in five adults support the use of gunshot detection. This poll response, interestingly, cuts across party affiliations. And based on last week's voting results, it is very clear that the broad body politic does not support the defund the police movement. The violent crime conversation has also captured the attention of policymakers and appropriators in federal government as well. Recently, former Chief of Police, now United States Representative Val Demings, introduced the Violent Incident Clearance and Technological Investigative Methods Act of 2021, or VICTIM Act, which calls for the Department of Justice to establish a specific grant program of $100 million per year to help law enforcement agencies improve their clearance rates for homicides and non-fatal shootings. In providing background for this initiative, Representative Demings and her co-sponsors called out the 29.4% increase in murders in the United States from 2019 to 2020, which sadly represents the largest one-year increase ever recorded since the FBI has been collecting data going back to 1960. Tragically, the disproportionate number of those homicides, at least 46%, comprise black victims who only represent 13.4% of the U.S. population. And while homicides have increased, clearance rates have fallen precipitously from 57.6% to 47.3%, according to the legislative proposals. This is exactly the problem that our precision policing platform is meant to address. From smarter patrolling strategies that can prevent crime without over-policing to real-time gunfire alerts that enable a fast and precise first responder dispatch, which leads to saving lives and disrupting serial shooters, and now an enterprise investigative case management solution specifically focused on improving case closure rates. Our solutions are what the Law Enforcement Buying Center responding to these challenges are demanding. It is also what local budgets and federal appropriators are funding in order to help address the increased demands being made on local law enforcement. Since the very recent reintroduction of earmarks in the legislative appropriations process, we have been successful in helping our local law enforcement agency customers in advocating for a total of eight earmarks. three from the Senate, and five earmarks from the House in their respective CJIS appropriations bill for fiscal 2022. These federal funding resources, when approved, will help provide strong tailwinds to our business and future growth prospects. On the international side of our business, we're still facing some timing challenge outside of our strong domestic business. We do not expect international respond revenue to add to 2021 revenue, as several countries continue to struggle with their response to the pandemic. Earlier this year, however, we submitted a proposal for a formally issued Cape Town South Africa tender, only to recently learn that Cape Town has withdrawn the tender based on a procurement process technicality, but they plan to reissue in the first part of 2022. Our lead colleagues continue to focus on NYPD Legacy Crime Center maintenance and support, along with professional services and separately our commercial market launch of ShotSpot or Investigate. Our maintenance and support responsibilities at NYPD have expanded over the years, and last month we submitted a contract extension which would increase the annual recurring revenue associated with the maintenance and support by over 40% to just under $10 million per year. In addition, Leeds was successful in securing six new professional services work orders, totaling over $6 million, that will be completed over the next six to nine months. We're extremely proud that Leeds and ShotSpotter continues to be a critical partner to NYPD in their digital enterprise resource journey. And we continue to be extremely excited about the product development progress and revenue pipeline build of ShotSpotter Investigate. We believe that ShotSpotter Investigate is a robust functional case management system that hits the mark of a wide swath of local agency requirements and can scale to address very complex case management requirements for state and federal agencies as well. We are maintaining our full year 2021 revenue guidance of 60 to 61 million, which represents 32% revenue growth from 2020 to 2021 at the midpoint. And given our solid year to date ARR bill from respond go live miles and little to no attrition, combined with an expected strong Q4 finish and quick 2022 start, we're establishing revenue guidance of 71 to 73 million for 2022. This represents 19% year-over-year growth at the midpoint from 2021 and 2022. We're making the appropriate investments to drive to and possibly exceed that target and are excited about the number of opportunities we have to grow our business and have impact on making communities safer. Now, Alan, over to you. Thank you, Ralph. As Ralph mentioned, with Respond, we went live in three new cities and also booked two new campus customers this quarter, while once again seeing no city attrition. We also went live with seven city expansions and achieved strong revenue growth of 28% compared to the third quarter of 2020. With our continued success in retaining customers through Q3 of this year, we expect that our 2021 revenue attrition will be less than 1%, similar to last year's excellent results. Let me provide more details on the quarter, and then I will share some thoughts around the balance of the year. Third quarter revenues came in at $14.5 million, a 28% increase over the $11.4 million in the third quarter of 2020. Revenue increased as our deployed miles increased year over year, along with revenue contributions from our Leeds acquisition. Professional services revenue from Leeds was sequentially down versus the last two quarters, which is lumpy in nature on a quarter-to-quarter basis. We expect the professional services revenue to increase in the fourth quarter. Gross profit for the third quarter of 2021 was $8 million, or 55% of revenue, versus $6.4 million, or 57% of revenue, for the prior year period. Gross margin was a bit lower as a result of lower gross margins on the professional services provided by our leads team. We expect this to improve in Q4. Adjusted EBITDA for the third quarter was $2.2 million, a decrease from the $3.3 million in the third quarter of 2020. As a reminder, adjusted EBITDA is calculated by taking our gap net income or loss and adding back interest, taxes, depreciation, amortization, and stock-based compensation. As Ralph mentioned, the reason for our lower adjusted EBITDA and our net loss for the quarter is primarily related to the increase in legal and strategic communications costs related to our lawsuit against Vice Media, and also addressing negative publicity generated by certain entities and organizations opposing the efficacy of our solutions. Now turning to our expenses. Our operating expenses for the third quarter were $8.9 million, or 61% of revenue, versus $5.8 million, or 51% of revenue in the third quarter of 2020. As expected, in addition to the operating expense increases related to legal and strategic communications, we also had costs associated with personal expansions and costs related to leads, which were not included in the third quarter of 2020. Breaking down our expenses, sales and marketing expense for the third quarter was $4 million, or 28% of total revenue, versus $2.4 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. Our R&D expenses for the third quarter are $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 $3.2 million, or 22% of total revenue, compared to $2 million, or 18% 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 strategic communications expenses mentioned above. Our net loss for the third quarter was $949,000 or a loss of 8 cents per share on 11.7 million weighted average shares outstanding on both a basic and diluted basis. This compares to an adjusted net income of $566,000 or 5 cents per share based on 11.4 million basic weighted average shares outstanding and 5 cents per share based on 11.7 million diluted weighted average shares outstanding for the prior year period. Deferred revenue at September 30th was $21.8 million, which was up from $19.8 million at the end of Q2. We ended Q3 with the $13.1 million in cash and cash equivalents versus $15.6 million at the end of second quarter. During the third quarter, we also repurchased approximately 26,400 shares for approximately $900,000. We have no short or long-term debt outstanding. And as mentioned in previous calls, we have a $20 million line of credit available to improve our financial flexibility. Our revenue guidance for 2021 remains at $60 to $61 million. Please note that the midpoint of this guidance reflects 32% year-over-year growth. With the increased costs related to strategic communications and our ongoing lawsuit against Vice Media, We now expect to have a small loss for the year. Our revenue guidance for 2022 is $71 to $73 million. Based on current information, we expect that our annual recurring revenue starting January 1, 2022, to have increased to $64 million, up significantly from the $53.1 million that we started this year with, if you include the recurring revenue from leased. In addition to the $64 million in ARR, we also have over $5 million of professional services revenue for 2022 already under contract. Ultimately, any attrition, contract modifications, or delays may reduce those amounts. Now back to Ralph for some final thoughts, and then we'll be happy to take your questions. Thanks, Alan. We're always very grateful for the strong support we receive from our many stakeholders. especially our work colleagues who continue to passionately lean in every day in servicing law enforcement in their efforts to serve and protect our most vulnerable communities. We'll now take your questions.

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 star then two. We will pause for a moment as callers join the queue. The first question is from Matt Pfau from William Blair. Please go ahead.