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Operator
Good afternoon, everyone, and welcome to ShotSpotter's second quarter 2022 earnings conference call. My name is Jamie, and I will be your operator for today's conference. 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 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 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 filing, 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 9, 2022, 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'd 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. At this time, I'd like to turn the conference call over to ShotSpotter CEO, Ralph Clark. Sir, you may proceed.
Jamie
Good afternoon, and thanks for joining us today. Let's dive right in and review the second quarter. After Al and I give our overviews, we'll be happy to take your questions. But before we discuss the second quarter, I want to just take a moment to tell you how ShotSpotter is doing in general. And even though we have a tremendous amount of work to do, I'm happy to report that we're doing quite well. This is an exciting time for us here at the midpoint of 2022. Not only is this our fifth year anniversary as a public company, it's also nearly two years into our effort to accelerate the company's revenue and profit growth through the build-out of our precision policing platform. As most of you know, this strategy was inspired by our goal to provide value and impact beyond acoustic gunshot detection into adjacent capabilities, including investigative and AI-based analysis tools. We now have several quarters under our belt, and based on our experience today, we believe the decision to build out this broader platform in order to grow our revenue and TAM opportunity was strategically sound. We're seeing that with the steady growth of our core gunshot detection customer base and coverage footprint. And we're seeing it with the emerging adoption and growing interest from the market in our multi-product solution set. ShotSpotter is a critical solution provider to law enforcement agencies around the country. Customer insight and intimacy is our currency. We know many of the key decision makers in law enforcement and are intimately familiar with the funding and political environment in which they operate. And we know how their needs are changing and we are grateful for their trust in our ability to meet those needs. Our strong execution on a tactical basis was evident in Q2. We reported revenue of $20 million up 37% from $14.6 million a year ago. Gap net income was $3 million or 24 cents per diluted share in Q2 this year, compared to a gap net loss of $250,000 for Q2 last year. And our adjusted EBITDA was $4.1 million at 20% margin this quarter, which was an increase of 39% from the $2.9 million in the second quarter of 2021. Let's specifically review ShotSpotter response momentum. We went live in four new cities during the quarter. Paris, California, North Miami Beach, Florida, Cape Girardeau, Missouri, and Forest City, Arkansas. We also saw expansions in six current customer coverage areas. And this traction looks like it will continue into the second half of 2022 with 12 new cities and eight expansions that are already contracted and being deployed to go live this year. Our international presence also continues to grow, with two new recently contracted deployments in process with Cape Town, South Africa, and an expansion in the Bahamas. As many of you know, selling to government entities is complex and can create slightly longer sales cycles. But the good news is our customers have funded mandates, they do not go out of business, and they tend to be quite loyal once you've earned their trust through consistent performance and execution. This provides an opportunity for long duration revenues that are extraordinarily sticky with low churn. In the first half of this year, we secured multi-year contracts in 68% of our new mile bookings, and more than 25% of our renewal bookings were multi-year, and 52% of total renewals included a price increase. Clearly, we're pleased with the continuing adoption and expansion of Respond and also the stickiness. We had zero attrition year-to-date and anticipate close to zero attrition for the remainder of 2022. Respond, of course, is a core product offering, but we're equally delighted with the growing interest in pipeline build of our other solutions in our platform. TopLink X, which we are currently marketing and selling through our forensic logic acquisition, has been in our portfolio only for a few months. But we're already seeing lots of inquiries and requests for demonstrations of how this cloud-based data source can be integrated into our customers' daily investigative work. We recently received an award of a seven-figure ARR deal from a state agency that we expect to take live in Q4 of this year. We're really quite bullish on this part of our platform being a significant growth driver for the company in 2023 and beyond. In the second quarter, we also saw very encouraging progress with ShotSpotter Investigate, our fully functional case management system. In Q2, we introduced ShotSpotter GCM, or gun crime management, which automates much of the inputting, coding, and tagging of the data from gunfire incidents that we identify and report out to our customers. We built this capability in-house, leveraging our existing expertise and experience and developed it to integrate with the other crime management and analysis applications available on our platform. Because we work so closely with our customers, we know this is the capability that they will value as it enhances the utility of our overall solutions. So we're feeling quite confident about ShotSpotter as we enter the second half of 2022 and lay the foundation for 2023 growth and beyond. At a macro level, we're seeing a pronounced and measurable uptick in crime along with increased pressure for law enforcement transparency. And at the same time, and this cannot be underestimated, police departments are struggling to maintain full staffing to address the increasing demands for service and accountability. According to the May 2021 National Employment and Wage Estimates Report conducted by the Bureau of Labor Statistics, in 2020, the number of police officers employed nationwide declined 1.6%. This is the first time this has happened in over a decade. Increased funding through healthier federal, state, and municipal budgets, while constructive, will not be enough to bridge the gap. We believe this creates strong structural tailwinds for the adoption of technology solutions that drive smarter, intelligent-led strategies, leading to more efficient, effective, and equitable community policing. We're extremely proud to have been successful in keeping our momentum through a global pandemic fears of an impending recession, supply chain constraints, and inaccurate reporting about our company. And despite those challenges, we continue to persevere, and we believe we are right on track to execute on the significant opportunity ahead of us. Alan will go through the numbers in more detail, but looking forward, we're maintaining our full-year revenue guidance for 2022 at $81 to $83 million, which is 41% year-over-year growth at the midpoint. Our adjusted EBITDA margin guidance also remains at the previously guided 19 to 21% of our forecasted revenues for 2022. One bit of non-operating news worth mentioning is that the judge in our defamation suit against Vice Media did grant their motion to dismiss. And while we're disappointed in that decision, we are pleased that Vice Media, even after the dismissal, has stepped up and agreed to do the right thing. They have publicly corrected the record on key misstatements, which were at the heart of our defamation suit in the first place. They have now joined the Associated Press and several other publications to repudiate the false narrative that ShotSpotter had somehow engaged in tampering with evidence at the behest of law enforcement. We believe we made the appropriate decision to defend ourselves and our customers by pursuing our defamation complaint, which, by the way, provided a critical venue for us to correct the record. However, we're now pleased to put this unfortunate matter behind us and focus on our work of saving lives, helping communities become safer, and doing work that matters. Alan, over to you.
Al
Thank you, Ralph. We're very pleased with our performance in the second quarter. As Ralph mentioned, this quarter we went live in four new response cities and expanded in six current cities. We are seeing an increase in the interest of our solutions. In fact, we already have 20 new respond contracts executed. Of these, 12 are contracts with new cities and eight are expansions with current customers. And Ralph also mentioned our two new international contracts. This is the highest level of new contracts that we have had at any earnings release since going public. In fact, several of them have already gone live since the end of the second quarter. 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 slightly ahead of expectations at $20 million, a 37% increase over the $14.6 million in the second quarter of 2021. Revenue increased as our deployed miles are up year over year, and we also had a higher level of professional services in our leads division. Gross profit for the second quarter of 2022 was $11.6 million or 58% of revenue versus $8.3 million or 57% of revenue for the prior year period. Gross margin may continue to be impacted to a slight small extent as we continue to replace 3G sensors throughout the end of the year. We also saw impressive growth in adjusted EBITDA for the second quarter which was $4.1 million, a 39% increase from the $2.9 million in the second quarter of 2021. As a reminder, adjusted EBITDA, a non-GAAP financial measure, is calculated by taking our GAAP net income and adjusting out interest income, income taxes, depreciation, amortization, stock-based compensation expenses, and acquisition-related expenses, including adjustments to our contingent consideration obligation. Turning to our expenses, our operating expenses for the second quarter were $8.4 million or 42% of revenues versus $8.5 million or 57% of revenues in the second quarter of 2021. Operating expenses included higher personnel related costs as well as costs associated forensic logic which was acquired in January 2022. That said, operating expenses for the second quarter were offset by a contingent consideration adjustment, a reduction of approximately $3.4 million, related to the potential earn-out payments associated with our forensic logic acquisition, which have been reduced for 2022 but increased for 2023 due to a delay in some expected contracts. Breaking down our expenses, sales and marketing expense for the second quarter was $5.8 million, or 29% of total revenue, versus $3.9 million, or 27% of total revenue for the prior year period. Our sales and marketing teams continue to build our sales pipelines and expand our marketing efforts. We continue to focus on maintaining high levels of customer satisfaction, which helps keep our attrition rate low. Our R&D expenses for the second quarter were $2.5 million, or 13% of total revenue, compared to $1.7 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 approximately $100,000, or less than 1% of total revenue, compared to $2.8 million, or 19% of total revenue, for the prior year period. The reduction in G&A expenses was primarily related to the offset from the contingent consideration adjustment related to the forensic logic earn-out expectations. We expect our G&A expenses will continue to increase in both percentage of revenue and in absolute dollars as our company grows. For the third and fourth quarters, we expect it will increase as a percentage of revenues from what we experienced in the second quarter. Our gap net income was $3 million, or $0.25 per basic share and $0.24 per diluted share, for the quarter based on 12.1 and 12.3 million basic and diluted weighted average shares outstanding, respectively. This compares to a loss of $250,000, or a loss of $0.02 per share based on 11.6 million basic and diluted weighted average shares outstanding for the prior year period. Our adjusted net income for the second quarter was a loss of $427,000, or a loss of 4 cents per share, based on 12.1 million basic and diluted weighted average shares outstanding. This compares to a loss of $244,000, or a loss of 2 cents per share based on 11.6 million basic and diluted weighted average shares outstanding for the prior year period. Adjusted net income, a non-GAAP financial measure, is calculated by taking our gap net income and adding back acquisition-related expenses, including adjustments to our contingent consideration obligation. Deferred revenue at the end of the quarter increased to $35.8 million from $26.7 million at the end of Q4 2021, and the increase was primarily related to our growth in revenues and the addition of forensic logic deferred revenue. We ended the quarter with $3.4 million in cash and cash equivalents versus $15.6 million at the end of fourth quarter 2021. The decrease is primarily related to almost $28 million in accounts receivable that we had at the end of the second quarter, much of which has already been collected. Our current cash balance is greater than $14 million. During the second quarter, we also repurchased $49,369 of our shares at an average price of $29.35 for approximately $1.45 million. We have approximately $15 million available on our line of credit if ever needed. While the actual line of credit is still $20 million, we did issue a $5 million letter of credit related to one of our customers' contract requirements. That said, this issued letter of credit does not actually add any debt, so we still have no short or long-term debt outstanding. Turning to our full-year 2022 outlook, we are maintaining our full-year revenue guidance at $81 to $83 million, and we are maintaining our expected adjusted debt margin at 19 to 21%. Now back to you, Ralph, for some final thoughts, and then we'll be happy to take your questions.
Jamie
Thanks, Alan. In closing, we believe that we have the wind at our back operationally with very constructive macro market trends. Our annual revenue rate is strong and durable. Our unit economics are compelling, and we believe we have developed a large and sustainable competitive moat. In addition, our scale and operational efficiency continue to expand. So here at the midpoint of 2022, we're feeling quite optimistic, not only for a strong finish for the year, but also a robust and quick start into 2023. And so with that, let's open it up for questions.
Operator
Ladies and gentlemen, at this time, we'll begin the question and answer session. To ask a question, you may press star and then one using a touchtone telephone. To withdraw your questions, you may press star and two. If you are using a speakerphone, we do ask that you please pick up the handset prior to pressing the keys to ensure the best sound quality. Once again, that is star and then one to join the question queue.
Alan
We'll pause momentarily to assemble the roster.
Operator
And our first question today comes from Richard Baldry from Roth Capital. Please go ahead with your question.
Richard Baldry
Thanks. I know you've announced you've got a large number of contracted deals for the second half. You said 12 new cities and eight expansions. So I'm curious if you can talk about the pipeline outside of that that would obviously impact more either fourth quarter if they close soon or more like 2023, how you feel about that given the large number of wins you've had both in the first half and already signed for the second half. Thanks.
Jamie
Yeah, so thanks for that question. Maybe I'll start and Alan jump in as appropriate. So we're actually feeling quite bullish about our bookings momentum, just not with respond. There's some additional bookings that we expect to happen outside of the ones that we referenced in our earnings report here. And we're continuing to see very strong pipeline build with our connect solution and investigate. And I think we talked a little bit about a fairly large booking transaction we had through our forensic logic acquisition with CoplinkX that we're expecting some additional traction there. So it's going to be a very busy second half for us this year, and I think that's what gives us a lot of confidence about how we're going to be thinking about 2023 and beyond.
Richard Baldry
And could you maybe talk about whether any of the deals that you've won or that are ahead have managed to tap any new funding sources, whether that's federal set-asides in legislation or earmarks successfully used?
Jamie
Yeah, so it's a fabric of funding sources that's all over the place. A lot of it's being driven by municipal budget help, but there's also some fairly robust support coming in from the federal government. And we also just have the nominal support, continued support from the president that refers to Akusa gunshot detection as being a viable solution to use some of these funding streams available that he's making available to address violent crime.
Richard Baldry
Then maybe last one for me. I guess I assume that there were still some litigation costs in the second quarter. You talk about the scale of that and if that all comes out for the third quarter and the second half, or if there's any residual for a mopping up of those expenses. Thanks.
Al
Yeah, this is Alan. So I'll take that and Ralph, you can have as well. Um, there were definitely legal expenses in the second quarter from a gap basis. So it was less than what we have in the first quarter. Um, we did continue a little bit into Q3 as you expect, uh, where we were finalizing the final things with vice. So those expenses are in for at least one month. But we do expect that our legal expenses are going to go down in Q3 and Q4 based on what we know right now.
Alan
Great. Thanks for the great start to the year. Thank you.
Operator
Once again, if you would like to ask a question, please press star and then one. To withdraw your questions, you may press star and two. Our next question comes from Matt Fah from William Blair. Please go ahead with your question.
Matt Fah
Hey, guys. Thanks for taking my question. I wanted to ask on the pipeline and how do you feel about your ability to get those deals implemented this year, particularly given it's more backlogged than you've had historically as a public company?
Jamie
You want to take that, Alan?
Al
Yeah, sure. So this is Alan. I think we certainly feel really good about the fact they're already signed. So that's great. We are working. Some have already gone live. Some of those are smaller. Contracts might be a Tier 4 or Tier 5, so maybe one or two miles. Those may go a little faster. The rest of them, sometimes it's a little hard to tell when we get the access to hang the sensors exactly right. how fast we'll be able to go live with those. But we've already said that we're expecting to go live north of 120 miles by the end of the year. We still believe that to be true. The contracts that we have already signed are going to help us get there. But again, until we actually get them live, we can't recognize the revenue. So we'll see how that goes. The entire team is working hard to make sure we can go as fast as we can on those. Because we have more in the pipeline that are going to get signed as well as the year goes on.
Jamie
Yeah, and I think I would just add, Alan, that we're not seeing any supply chain constraints that would prevent us from a materials point of view to be able to accomplish the 120 miles plus this year. That's correct.
Matt Fah
Okay, great. And then you wanted to follow up on the comments around forensic logic and the CopLinkX product. So you cited you're seeing good demand there, and you called out the win with the state of Massachusetts. But there were also some comments on the contingent consideration around some delays. So just maybe a little bit more detail on what's going on in that business, both on the positive side and then on the delay side as well.
Al
Sure. This is Alan. I'll start, and then Ralph can add, too. You may recall that when we went into the year, we expected to get about $6 million in and ARR related to the forensic logic acquisition. We will be north of that. We've also though not mentioned exactly what is required to get the earn out considerations for both 22 and 23. They are getting new contracts. They might be just a little later than we would have expected for them to get a higher amount of the 2022 earn out expectation, but it also increases the expectation
Alan
that they'll get a little more revenue in 23. Okay.
Alan
Great. Thanks, guys, for taking my questions. Appreciate it. Sure.
Operator
And, ladies and gentlemen, in showing no additional questions, we'll end today's question and answer session. If your question was not taken, you may contact ShotSpotter's investor relations team by emailing ssti at gatewayir.com. I'd now like to turn the floor back over to Mr. Clark for closing remarks.
Jamie
Great. Thank you very much for that. Really appreciate everyone dialing in. As Al and I discussed, we're having a tremendous year this year and expect to finish out very strong. So appreciate your interest and looking forward to chatting with many of you on our follow-on calls.
Operator
And, ladies and gentlemen, with that, we will conclude today's conference call. We thank you for joining us today. You may now disconnect your lines.
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