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spk05: 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.
spk02: 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.
spk05: 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.
spk04: Hey, guys. Thanks for taking my questions. I wanted to start off with the 2022 guidance, and maybe you can just give us a little bit more detail on what's factored into that, you know, how many Miles that you're expecting are sort of already in the books. And then, you know, when you look at some of your other solutions like investigate, um, are you, are you expecting a material contribution from that? Thanks.
spk02: Sure. This is Alan. I'll go ahead and start and Ralph go ahead and add, um, or correct as, as needed. So, um, in terms of the guidance, you know, we're saying 71 to 73 million. Um, we also said that we are starting the year. with 64 million in ARR and 5 million in professional services. So basically, we already start the year with $69 million that would either be already under contract or expected. So there's nothing that is tied into that 69 that even deals with the expansions and the go-live miles for next year. So we do expect to have a similar year next year with go-live miles. depending on when those actually go live, that will add actual gap revenue to the 69 that I was referring to.
spk04: Great. That's super helpful. And then the other thing I wanted to ask about was, you know, in terms of the customer response or response from prospects in respect to the lawsuit that you filed against Vice Media, what has the feedback been there? Has it maybe helped alleviate concerns that may have been holding back prospective customers. Thanks.
spk02: Sure. So this is Ralph. I think it's fair to say with our existing install base or customer relationships, we've gotten very, very positive feedback because our holding Vice Media to account is just not only on behalf of the company and our employees and the like, but also our many stakeholders and partners in our customer universe. I think it's also fair to say that although we've had a great year this year with kind of bringing on new cities and agencies on the platform, the weaponization of these false claims from Vice has created some headwind for us. And so that's why we're just being very thoughtful about how we think about guidance going forward. Again, it's very, very positive. We start the year 2022 with $69 million of very, very visible revenue, but certainly the vice media defamation has kind of created some headwinds for us. It's made deals take longer. We have to spend more money to drive revenue, and it certainly added some risk.
spk04: Great. Thanks for taking my questions, guys. Appreciate it. Thank you.
spk05: The next question is from Brian Ruttenberg from Imperial Capital. Please go ahead.
spk03: Yes. Thank you very much. Um, first of all, on legal expense in the quarter, um, how much, uh, was in that, uh, how much legal was in there and how much was it, uh, strategic marketing? Do you have any kind of breakout on that?
spk02: Yeah. So this is Alan. Basically, um, we had overall for the quarter legal and strategic marketing, uh, communications costs a little over $800,000. However, that would typically be closer to maybe a quarter million dollars or up to $300,000. So the increase was about a half million dollars going towards what we're talking about. Okay.
spk03: And then going forward into the fourth quarter, you're saying gross margins are going to increase and that will legal expense go down in the fourth quarter or should it stay where it is?
spk02: I think at this point we still expect to be spending appropriately in the legal expenses, so it would be similar to expect it to be close to what we spent in Q3. Gross margin, we expect to be significantly higher in the percentage basis and a dollar basis as well, because some of the professional services that basically were down in Q3 will start to increase in Q4 and then continue to increase in Q1. That helps significantly in both the gross margin and net income and adjusted EBITDA as well.
spk03: Okay. And then in terms of the guidance, just going back to that first question, the 71 to 73, given that you have 69, it appears in hand, seems extremely conservative. Are you just being extremely conservative? Or you think that there's just such a long lead time with new projects that you that that's a realistic, you know, projection.
spk02: Yes, I think this is Ralph. I think, I think. Go ahead, Alan. Sorry. Yeah, no, I think, I think we're trying to be very reasonable and thoughtful here. I think it's a great benefit to the company to start with visibility with $69 million. I think getting to 72 would require us obviously to continue making progress on going live with additional miles. We're certainly expecting contributions from Connect and Investigate in 2022. And I think international is still a bit of a wild card. I think that could be potentially very impactful. I think in my comments I made the statement that we're making the appropriate investments to make sure that we, hit our guides and possibly even exceed it. So there definitely is some upside potential in that number.
spk03: Great. Ralph, did you want to add anything to that before I ask one more question?
spk02: Oh, that was Ralph. Yeah. So maybe it's Alan. Oh, I'm sorry. No, I'm Ralph. Yeah. So Alan, would you say anything? Would you have any add to that or moderation to that? No, I think you covered it well. Sorry about that.
spk03: Okay, last question in terms of federal funding coming down. Do you see anything in the near term, you know, end of the fiscal year, you know, already happened, the government fiscal year, so we're in a new fiscal year. Do you see any appropriation settled sides that you can touch with your product?
spk02: Yes, I think we talked about getting some making some really good progress on the earmarks process. So earmarks are coming back. We've been very successful in advocating for eight earmarks across the Senate and the House that those still haven't been formally approved as the overall appropriations package. But they have kind of come out of their respective CJIS committee. So that's extremely positive. Certainly, the American Rescue Act has had a lot of beneficial tailwind to our business. And increasingly, we're seeing municipal governments that are allocating budget dollars to address gun violence because of the significant and measurable uptick in gun violence. So I don't think the funding environment has been more constructive or positive than it's ever been in the past 11 years that I've been with the company. That's probably one of the really strong things about our business that we're quite encouraged by. The funding is not an issue. It's creating significant tailwinds for us.
spk03: Great. Thank you.
spk05: The next question is from Ryan Kimbrell from Craig Hallam. Please go ahead.
spk01: Hey, guys. I know it's been touched on already, but I just want to clarify. Is there a minimum base run rate, maybe, I guess, of what we should be expecting on a go-forward basis from the legal costs associated with the defamation suit?
spk02: Yeah, this is Alan. I do think that, you know, in terms of what we are spending right now, we did spend quite a bit preparing to actually file the lawsuit. So it is possible that maybe on a quarterly basis it goes down a little bit. although it could also go up or even stay the same. So I would say it's pretty appropriate to expand for the next couple quarters and say it's going to be about the same.
spk01: Okay, great. And then last one for me, I just want to touch on the Houston trial. I believe we're coming up on that one year mark. Can you give us an update of how things are going there? Have you started to see any of the, you know, the positive network effect happen like you've talked about? And
spk02: know is there anything you can tell us on long-term contract talks that you haven't already yeah so this is ralph i would say things in houston and also harris county by the way which is next door to houston are going extremely well both those agencies are excellent practitioners of leveraging our real-time alerts to help respond to and ultimately prevent and reduce gun violence in both those areas our expectations are that we're are going to see a go forward on that Houston deployment, and there will be a paying customer going into 2022. That's our full expectation.
spk01: Okay, great. Thanks, guys.
spk02: Thank you. Thank you.
spk05: The next question is from Mike Lattimore from Northland Capital. Please go ahead.
spk00: Hi, this is Aditya on behalf of Mike Lattimore. Could you give me some color on the sales cycle? How do you characterize the sales cycle? Has it been shrinking in the recent times?
spk02: Yeah, so this is Ralph. I'll give it a shot, Alan, and jump in and add on or correct me as appropriate. But I would say it's a bit mixed. I think in certain situations, we've seen a fairly significant collapse of the sales cycles. But at the same time, I think it's appropriate that we factor some complications on the sales cycle due to some of the headwinds we've seen from this defamation characterization that Vice Media put out there. You know, we've seen a couple situations, and it's been publicly reported, where there was an agency that ultimately went forward, but they had to jump through a lot more hoops and kind of respond to ridiculousness. I think it's a bit of a mixed message. And again, that's why we're trying to be very thoughtful and careful around our guidance for 2022. We're starting from a great base of 69 million dollars of visibility. So we're effectively looking at adding another three million dollars of gap revenue, which if we were to do something on the order of a hundred miles next year, evenly spread over the year, that would kind of get us to three and a half million dollars, assuming you know, kind of $7 million kind of on average ARR spread across the year. So that gives you a sense of how we're trying to be thoughtful about guidance going forward, knowing that we're, you know, going into some headwinds, great tailwinds, but also seeing some headwinds as well.
spk00: All right. All right. And also, could you give some color on the international market? Do you see the international market quite constrained at the moment?
spk02: Yeah, so this is Alan. I mean, we continue to see challenges internationally. They're still dealing with the results of the pandemic. I would say we did go up in the Nelson Mandela Bay at the end of last year. And as Ralph mentioned about Cape Town, we hope that that will still come live in 2022. Other than that, we're still pursuing options and opportunities that are in places like Mexico, Brazil and other areas as well. So maybe some expansions in some other international that we have, but it is still challenging and it is not a significant expectation in our current guidance to get to our or 71 to 73 from international at this point. Hopefully that changes.
spk00: All right. All right. Fine. Thank you.
spk05: This concludes the question and answer session. I would like to turn the conference back over to Ralph Clark for any closing remarks.
spk02: Great. No, thank you very much. Really appreciate everyone's support over the year. And certainly this past quarter, we're excited to kind of get back to work and finish the year on a really strong footing and looking forward to being very successful in 2022. So thank you all very much. Really appreciate it.
spk05: This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
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