SoundThinking, Inc.

Good afternoon and welcome to ShotSpotter's third quarter 2022 earnings conference call. My name is Sarah 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 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 8, 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 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.

Thank you, and good afternoon to those of you joining us today. I'm very pleased to be able to report on the progress ShotSpotter is making toward our strategic objectives and helping drive the digital transformation of local law enforcement agencies globally. ShotSpotter has assembled a compelling set of precision police solutions that help address the critical challenges facing today's law enforcement profession. We are committed to help agencies become efficient, effective, and equitable in delivering positive public safety outcomes to the communities they are sworn to serve and protect. Financially, we reported revenues of $18.8 million, up 29% from $14.5 million in Q3 of 2021. Our quarterly adjusted EBITDA grew 37% to $3.1 million from $2.2 million last year. Overall, ShotSpot and Respond had a very strong go-live cadence this quarter. We went live with seven new customers, including Aurora, Illinois, Mobile, Alabama, Rancho Cordova, California, Homestead, Florida, Warrensville Heights, Ohio, along with Richland County and West Columbia, South Carolina. We also went live with six expansions of existing customers, including a nine-square-mile expansion in U.S. Virgin Islands. As a part of our security solutions, we were also very pleased to have added the Illinois State Police as a customer with eight linear miles covering the Dan Ryan Expressway. Our ability to detect and alert on freeway shootings represents a significant technology innovation and cam extender as the state and highway patrol agencies deal with the increasing scourge of freeway road rage and gang shootings. We believe we can deliver approximately 120 domestic respond go-live miles this year, not including any additional security-based freeway miles. This would represent the second year in a row we've achieved over 100 domestic go-live miles in the year. There are several RESPOND projects that are currently staffed and in process to be deployed over the next six months. These include the recently booked 30-plus square mile expansion in Detroit, which we formally contracted and booked just two weeks ago, the 10-square mile expansion approved by the City Council in Cleveland, and two already contracted and booked international go-live deployments that are going live this month in Cape Town, South Africa, and the Bahamas. These line-of-sight projects will help us finish the year strong and, more importantly, position us favorably with 2023 revenue-producing respond mileage from early Q1 2023 go-live activity. Even as we continue to build a strong pipeline, accelerate new bookings and go-lives, I'm even more thrilled with our consistent world-class retention experience with another quarter of minimal respond customer mileage attrition. Net of price increases and discounts, we estimate the core respond business to show less than 1% gap revenue attrition in 2022, which will be our third year in a row at these hyper-low attrition rates. We continue to book multi-year deals for new miles and expansions, demonstrating the efficacy and value of our solution. Our NPS process and score remain robust at 56. An example quote among several positive quotes from our NPS survey include the following, from a chief of police from a medium-sized northeastern agency. Quote, the power of this tool in response accuracy and speed is invaluable. When combined with other technologies, it becomes a legit force multiplier, end quote. As a company, we understand that a considerable amount of the sales momentum we are experiencing is due to the strong word-of-mouth referrals from our buying center of chiefs of police and their command staffs, along with mayors and other elected officials. Their public and private sharing of their satisfaction with our solutions are helping drive viral interest and adoption amongst their peers. Recently, Superintendent Brown of Chicago Police Department attributed the following impressive results over the past five years, including 125 gunshot wound victims' lives that had been saved, close to 3,000 firearms recovered, and over 24,000 pieces of evidence collected due to ShotSpotter when there was no, and I repeat, no corresponding call to 911. The general public sentiment beyond our law enforcement violence center to continue to address crime and support smart policing continues to grow in strength. A recent Pew Research poll revealed that 8 in 10 black U.S. voters say that violent crime is very important to their 2022 midterm vote, versus 34% of self-identified liberal Democrats. And more specifically, the National Policing Project conducted a citizen sentiment survey of residents of Chicago on the use of acoustic gunshot detection and found that 72% of Chicago residents showed support for the use of gunshot detection technology. These on-the-ground perspectives of residents living in communities concerned about public safety provide a very different outlook than what mischaracterized defund shot spotter campaigns would suggest. It is no surprise that elected officials and appropriators are responding to the real-world issue of crime in both policy and budget, not only by refunding the police, but also providing them the tools required to help them save lives and keep communities safe. In my 12 years with the company, our customer's funding environment has never been stronger. New Jersey, Ohio, and now New York State have specifically allocated funds for police to acquire acoustic gunshot detection along with other law enforcement technology solutions. This is in addition to the resources continuing to be made by the federal and local budget coffers. News broadcaster ABC examined the budgets of more than 100 cities and counties and found that 83% are spending at least 2% more on police in 2022 than in 2019, despite the fears from the pandemic and post-George Floyd protests that their budgets were going to be significantly reduced. There's a lot to be positive about in our pursuit of driving positive impact in local police agencies. However, what is particularly exciting for our company is adding different, although adjacent, state and federal law enforcement agency prospects with our CopLinkX solutions. We're also seeing early traction in the Department of Corrections market with our ShotSpotter Investigate solution. You've heard me mention on earlier earnings calls about a large seven-figure Investigate deal with a Department of Corrections prospect on which we have been diligently working. While that deal has taken longer to process due to the scale and operational use case and user complexity, I am thrilled that the proposed deal has been upsized to a much larger eight-figure deal over five years. We believe this win will be a bellwether account that will accelerate the adoption and consideration of other corrections prospects that we have in our growing corrections pipeline. Given our increased visibility, we are now narrowing our full year 2022 revenue guidance to $81 to $82 million, which will represent 40% revenue growth from 2021 to 2022 at the midpoint. We believe we will go into 2023 with $80 million of ARR versus the $63 million of ARR that we started with in 2022. That starting ARR position and momentum helps inform our formally establishing revenue 2023 revenue guidance of $94 to $96 million with 24 to 26% adjusted EBITDA margin. This represents 17% organic year-over-year growth at the midpoint from 2022 to 2023. Now, Alan, over to you. Thank you, Ralph. We're pleased with our performance in the third quarter. As Ralph previewed during this quarter, we went live with 10 new customers, which included seven respond cities, one investigate agency, and two security customers, of which one was a school and one was a highway project, and also expanded respond in six current cities. Our only attrition in the third quarter was a small security customer. We continue to see an increase in the interest of all of our solutions. In addition to the above, we already have 40 new respond miles under contract, and are awaiting final contract executions on over 20 additional new respond miles, a new eight-figure multi-year investigate customer, and two new security contracts, of which the first is an expansion at a current university customer, and the second is a multi-year deal that we obtained through a new reseller partnership focused on colleges and universities. For the second quarter in a row, this is the highest level of new miles and bookings that we have had since going public. Let me provide more details on the quarter and then I will share some thoughts around the balance of the year. Third quarter revenues were $18.8 million, a 29% increase over the 14.5 million in the third quarter of 2021. Positives to revenue were customer expansions and deployed miles are up year over year. That said, almost $700,000 of expected revenue for the quarter will shift to Q4 because some of the renewals that we were hoping to receive are still awaiting final customer execution. As many of you may know, this happens frequently in the third quarter and is not concerning. Additionally, the professional services in our leads division continue to be very lumpy quarter to quarter and was over a million dollars lower in Q3 than Q2. This will continue to vary quarter to quarter based on the customer needs. Gross profit for the third quarter of 2022 was $10.3 million, or 55% of revenue, versus $8 million, or 55% of revenue, for the prior year period. Gross margin going forward will be impacted to a small extent as we have completed the replacement of all 3G sensors. That said, our new international respond contracts contribute a higher gross margin, so we expect that that will offset some of the impact. We also saw growth in adjusted EBITDA for the third quarter, which was $3.1 million, a 37% increase from the $2.2 million in the third quarter of 2021. As a reminder, adjusted EBITDA, a non-GAAP financial measure, is calculated by taking our GAAP net income or loss and adjusting out interest income, expense, income taxes, depreciation, amortization, and impairment stock-based compensation expense, and acquisition-related expenses, including any adjustments to our contingent consideration obligation. Turning to our expenses, our operating expenses for the third quarter were $6.2 million, or 33% of revenues, versus $8.9 million, or 61% of revenues, in the third quarter of 2021. Operating expenses included higher personnel-related costs, as well as costs associated with Forensic Logic, which was acquired in January 2022. That said, operating expenses for the third quarter were offset by a contingent consideration adjustment, a reduction of approximately $5.4 million related to the potential earn-out payments associated with Forensic Logic acquisition, which have been reduced for 2022 and 2023 due to a delay in some expected contracts from Forensic Logic. Breaking down our expenses, sales and marketing expense for the third quarter was $5.4 million, or 28.5% of total revenue, versus $4 million, or 27.6% 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 also continue to focus on maintaining high levels of customer satisfaction, which helps keep our attrition rate low. Our R&D expenses for the third quarter were $2.4 million, or 12.8% of total revenue, versus $1.7 million, or 11.7% of total revenue, for the prior year period. We continue to invest in increasing the functionality of all of our products. DNA expenses for the quarter were a negative $1.5 million, compared to $3.2 million, or 22.1% of total revenue for the prior year period. The 2022 reduction in G&A expenses was primarily related to the offset from the contingent consideration adjustment related to the forensic logic earn-out expectations. Without that adjustment, G&A expenses would have been $3.9 million or 20.6% of total revenue. 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 fourth quarter, we expect it will increase as a percentage of revenues from what we experienced in the second and third quarters. Our gap net income was $4 million or 33 cents per basic and diluted share for the quarter based on 12.2 million and 12.4 million basic and diluted weighted average shares outstanding respectively. This compares to a loss of $940,000 or a loss of 8 cents per share based on 11.7 million basic and diluted weighted average shares outstanding for the prior year period. Our adjusted net income for the third quarter was a loss of $1.4 million, or a loss of 11 cents per share based on 12.2 million and 12.4 million basic and diluted weighted average shares outstanding, respectively. This compares to a loss of $940,000, or a loss of 8 cents per share based on 11.7 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 GAAP net income and adding back acquisition-related expenses, including any adjustments to our contingent consideration obligation. Deferred revenue at the end of the quarter increased to $37 million last from 26.7 million at the end of fourth quarter 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 $9.6 million in cash and cash equivalents versus 15.5 million at the end of fourth quarter 2021. We also had approximately 20.2 million in accounts receivable at the end of the third quarter. We're in the process of increasing our line of credit to $25 million to keep strong flexibility in addition to our prudent cash balance. We still have no short or long-term debt outstanding. Our board has also approved a new stock repurchase program and has authorized the company to use up to $25 million to repurchase our stock when appropriate. Turning to our full-year 2022 outlook, we are narrowing our full-year revenue guidance range to $81 to $82 million, and we are maintaining our expected adjusted EBITDA margin at 19 to 21%. For 2023, we are currently expecting our ARR to exceed $80 million at the start of the year, which is significantly higher than the $63 million that we started with in 2022. This $80 million of ARR includes over $17 million related to our product solutions other than our respond gunshot detection. For 2023, we expect revenues of $94 million to $96 million, representing an increase of 17% at the midpoint compared to the midpoint of the 2022 guidance range. Additionally, we expect our adjusted EBITDA to expand to be approximately 24 to 26% of the forecast revenue range in 2023. Now back to Ralph for some final thoughts, and then we'll be happy to take your questions. Great. Hey, thank you very much, Alan. I'm very pleased with our Q3 results, and I'm extremely proud of my work colleagues here at ShotSpotter who continue to execute across the business. As a company, we are all extremely grateful for the partnerships we've formed with our customers and the difference we know we're making in saving lives and helping improve public safety outcomes.

I think at this point now we'll be ready to take your questions.