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spk01: Good afternoon and welcome to Sound Thinking's first quarter 2023 conference call. My name is Ali and I will be your operator for today's call. Joining us are Sound Thinking'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 and sound thinking'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 SoundThinking'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. May 9th, 2023, and Sound Thinking 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.soundthinking.com. I would now like to turn the call over to SoundThinking's CEO, Ralph Clark. Sir, please proceed.
spk04: Good afternoon, and thank you for joining our Q1 2023 quarterly conference call and our first public earnings call at SoundThinking. We're very excited about our rebranding effort and the positive response we've seen from prospects, clients, partners, employees, and many of you, our investors. As I point out in my recent investor letter, our corporate rebrand is an intentional effort to signal the next phase of our growth journey as a platform play that not only includes the world's leading acoustic gunshot detection offering, but also other complimentary and adjacent solutions as well. The Safety Smart platform is focused on digitizing and automating manual law enforcement processes and converting data into actionable intelligence. Digital transformation will help accelerate law enforcement agencies of all sizes to be more efficient, effective, and equitable in co-producing public safety outcomes. We believe the opportunity remains extremely attractive and significantly under-penetrated. And our go-to-market strength as a trusted advisor uniquely positions us to bring additional relevant capabilities that addresses the pressing needs of law enforcement agencies throughout the world, not only today but in the future. Turning to financial performance, our Q1 2023 revenues were mostly in line with our expectations. With $20.6 million compared to Q1 2022 elevated revenue of $21.2 million, due to some material catch-up revenue from our leads division. Adjusted EBITDA was $2.9 million, or 14% of revenues, compared to 4.5 million, or 21% of revenues, for Q1 2022. Again, this was primarily driven by the catch-up revenue from leads in Q1 2022 that mostly flowed to the bottom line. We went live in six new cities and delivered eight expansion projects with the ShotSpotter solution this quarter. This included approximately 22 miles of Detroit going live within the quarter, placing them as our third largest ShotSpotter deployment with approximately 30 square miles total. We currently have over 80 contracted miles represented by 22 projects in the process of being deployed over the next three months plus, including 22 miles of the recently contracted Suffolk County and a modest expansion in Cape Town, South Africa. Speaking of Cape Town, South Africa, we held a very successful press conference with the Mayor Hill Lewis and Alderman J.P. Smith, who is responsible for the security portfolio for the city of Cape Town. And as fate would have it, during the Q&A session, a shot spotter alert came in where the assembled press had the opportunity to view live stream CCTV footage showing the tactical response to the scene within two minutes of the alert. The on-scene investigation led to two arrests, and we subsequently learned that those arrested individuals were on the lam for prior murder charges. We believe this extremely positive showing and press coverage has created strong momentum to drive discussions around a much needed and larger expansion opportunity in Cape Town. Just yesterday, the mayor of Cape Town publicly presented his budget request that allocates more budget dollars for additional ShotSpotter expansions, along with other technologies that will help improve public safety. We continue to build a strong pipeline of our investigative solutions, crime tracer, and case builder that we feel very good about. The large Department of Corrections opportunity that we have discussed in previous calls has made another substantial positive step forward with a statement of work, cloud agreement, and service level agreement contract elements all having been formally negotiated and documented. This is expected to be a $16 million five-year deal that includes professional services work and delivery along with an annual subscription and support fee. Given the size and complexity of the deal, we have been very intentional on ensuring the expectations and risk allocation were fairly negotiated and properly documented. The proposed contract is now in the process of getting formally registered within the Office of Budget and Management, OMB, as a part of this particular customer's procurement process. We hope to be able to publicly announce the execution of this agreement by our Q2 2023 earnings call. We're also very pleased to report that we had no reported attrition despite the significant press coverage of the recent Chicago mayoral election that led to the election of Brandon Johnson. Mayor-elect Johnson publicly ran on a progressive platform that specifically called for the canceling of the ShotSpotter contract. Our ShotSpotter deployment represents $8 million of annual recurring revenue, and the contract was recently extended through mid-February of 2024 under current Mayor Lightfoot's administration. We've taken measured steps to shore up our support among the City Council, the Chicago Police Department, and residents, and we're encouraged with the more recent public position of Mayor-elect Johnson, where he proffers a view that, quote, there might be better uses for funds currently going to ShotSpotter. This pivots the public discourse around the value discussions. And we're well equipped and experienced in having to articulate and demonstrate our value. To date, we've been very successful on this front, which is indicated by our high overall retention rate. That being said, we felt we needed to adjust for a potential risk of cancellation of the contract before the end of its contracted term in February of 2024. That adjustment, combined with some recent contract renewal and payment issues in Puerto Rico, have led us to reduce our full-year revenue guidance to the range of $92 to $94 million. We still expect that our full year adjusted EBITDA margin will be in the range of 24 to 26% of revenues. And with that, let me turn the call over to Alan. Thank you, Ralph. We're pleased with our performance in the first quarter. As Ralph mentioned, this quarter we went live with our shots by our gunshot detection solution in six new cities, expanded our shot spotter coverage in seven cities and one university. We also added two new taste filter customers and added a new state agency for our crime tracer solution. Revenue is relatively flat from Q4 to Q1, which is partially explained by some significant catch-up revenue related to a couple renewals in the fourth quarter of 2022. We had no attrition this quarter. That said, we are experiencing a delay in our renewal with Puerto Rico that ended at the end of 2022. While we expect a renewal to ultimately get awarded, the annual revenue of the Puerto Rico deployment is over $2 million, and our revenue will be negatively affected if they are not permitted to start the new renewal on the original due date. Let me provide more details on the quarter, and then I will share some thoughts around the balance of the year. First quarter revenues were slightly behind expectations at $20.6 million. Revenue is less than Q1 of 2022, primarily due to one-time catch-up of approximately $2.4 million from our lead subsidiary that was recognized in Q1 of 2022 versus the expected Q4 of 2021. Without that one-time increase, our revenue from the first quarter of last year would have been approximately $18.8 million, resulting in this year's revenue being approximately 10% higher than Q1 of 2022. The additional $2.4 million of revenue in Q1 of last year also positively affected gross margin, net income, and adjusted EBITDA, as it had only about $600,000 of associated costs. You will see those impacts as I cover the rest of this year's financials versus Q1 of last year. Gross profit for the first quarter of 2023 was $11.3 million or 55% of revenue versus $12.9 million or 61% of revenue for the prior year period. As noted, gross margin for the first quarter of 2022 benefited from the additional $2.4 million in revenue. We expect gross margin to improve throughout the rest of this year. Our adjusted EBITDA for the first quarter of 2023 was $2.9 million, down from $4.5 million in the first quarter of 2022. As a reminder, adjusted EBITDA, a non-GAAP financial measure, is calculated by taking our GAAP net income and adding back interest income, income taxes, depreciation and amortization, stock-based compensation expenses, and acquisition-related expenses. Turning to our expenses, Our operating expenses for the first quarter were $13.1 million or 64% of revenues versus $12.5 million or 59% of revenues in the first quarter of 2022. Operating expenses increases were primarily related to higher headcount and employee-related costs. Breaking down our expenses, sales and marketing expense for the first quarter was $5.8 million or 28% of total revenue, versus $5.6 million, or 26% 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 rates low. Our R&D expenses for the first quarter were $2.7 million, or 13%, of total revenue versus $2.6 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 $4.6 million, or 22% of total revenue, compared to $4.3 million, or 20% of total revenue for the prior year period. G&A expenses were higher due to headcount increase and other employee-related costs. We expect our G&A expenses will continue to increase in absolute dollars as the company grows. Our adjusted net loss for the first quarter was $1.8 million, or 15 cents per share loss, based on 12.3 million basic and diluted weighted average shares outstanding. This compares to adjusted net income of $488,000, or 4 cents per share, based on 12.2 million basic and 12.3 million 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. When accounting for acquisition-related expenses, our GAAP net income was $387,000, or 3 cents per share of basic and diluted, for last year's quarter. Deferred revenue at the end of the quarter was $37.5 million versus 43.7 million at the end of the fourth quarter of 2022. And the decrease was primarily related to the timing of renewals and related billings. We ended the quarter with $5.1 million in cash and cash equivalents versus 10.5 million at the end of the fourth quarter of 2022. The decrease is primarily related to $1.5 million paid to the lead sellers for achievement of their 2022 earn-out and payment of 2022 company bonuses during the quarter. During the first quarter, we also repurchased 35,369 of our shares at an average price of $35.43 for approximately $1.3 million. As of today, we have approximately $10 million in cash. We have no short or long-term debt outstanding, and as previously discussed, we possess approximately $25 million available in our line of credit if ever needed. Turning to our full-year 2023 outlook, we are reducing our full-year 2023 revenue guidance to a range of $92 million to $94 million, representing approximately 15% year-over-year growth at the midpoint compared to 2022. primarily related to the delay in our shot spotter renewal with Puerto Rico and also factoring in any potential risk of a change to our Chicago contract before the current end date of February 2024. We are reaffirming our expectation for adjusted EBITDA to be approximately 24% to 26% of forecasted revenue in 2023. Now back to Ralph for some final thoughts And then we'll be happy to take your questions. Thank you, Alan. We want to publicly acknowledge the tragic sacrifice of Chicago Police Officer Arianna Preston. Our thoughts and prayers go out to her family and the Chicago Police Department. She wanted to help make the world a better place and do work that matters. We'll now open it up for your questions.
spk01: Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in with Imperium Capital. Sir, you may proceed.
spk05: Yes, thank you very much. You talk about adjusted EBITDA being maintained in the 20s. Is there something that happened in the first quarter where you're going to make up that underperformance in terms of adjusted EBITDA in the second, third, or fourth quarters to make up for that delta?
spk04: Yeah, this is Alan. I'll go ahead and start and then Ralph, you can add as well. Well, we have had a little bit of reduction in terms of the first quarter revenue related to Puerto Rico. That is still costing us in terms of depreciation. Hopefully that will get improved as we go forward. The other thing though is we've already added costs significantly. to our sales and marketing, R&D, and G&A already through the first quarter. We're not going to need to add a significant amount of any of that for the rest of the year. So as revenue continues to go up, as we hit closer to our revenue guidance, the operating expenses are going to be relatively flat, although up a little bit. All of that's going to increase our adjusted EBITDA.
spk05: Great. Will it be weighted then just a follow on weighted to the third and fourth quarters? Do we see a dramatically improvement in second quarter versus first quarter? How should we be thinking about that adjusted EBITDA margin expansion?
spk04: Yeah, great question. It is more weighted in third and fourth quarter. Primarily, although we are going live in a lot of miles, that's going to help us. The majority of the revenue increase is most likely going to come in third and fourth quarter, especially as we get the Department of Corrections contract that we'll talk about potentially more in the Q&A finally exercised and ramping up.
spk02: Great. Thank you very much. Thank you.
spk01: Our next question is coming from Richard Baldry with Roth MKM. You may proceed.
spk07: Thanks. Maybe to follow up on that then, on the Department of Corrections deal as it sits today, if you talk about the types of deliverables, timings, you know, deployment cycles, things like that, that would help us understand sort of what that revenue recognition would look like, whether it's, you know, sort of equal weighted annually, you know, front end loaded on implementation, back end loaded on recognition, just so that we have an idea of how you expect that to play out over a multi-year period.
spk04: Thanks. Do you want to take that, Alan? Yeah, sure. So this is Alan. I guess the good news is, as we've said the last couple quarters, the total amount continued to increase. We know that at this point the contract will be approximately $16 million. which is the highest we've mentioned before. Out of that, there's approximately $6 million of that, a little bit more than $6 million, which is professional services. It's a five-year contract, but those professional services we expect will be complete within the first probably two to two and a half years. So that will ramp up relatively quickly. We think that will add a significant amount of revenue for us in Q3 and Q4. The remaining balance of the $16 million is which is basically $9 million as a subscription. That is a little lower in year one, and then almost doubles in year two, three, and four, and five. Great.
spk07: Then on the Puerto Rico renewal, you've had a history of sometimes these things push out. Is there anything unusual about this renewal negotiation process that makes you think it's more risky than others, or is it really just a matter of timing, getting the right documents in the right place?
spk03: Yeah, this is Ralph.
spk04: I'll take that one. Oh, sorry. You want to go, Alan?
spk06: Go ahead, Ralph.
spk04: Yeah. So I think this does represent a slightly different risk profile, because in this particular case, the comments that are being made by the customer are that even if they were to renew, and we have every expectation that they will renew at some point in time, they might have a difficult time kind of going back retro to compensate us for the services we've delivered to date. And so that's the reason that we're making the adjustment that we are. Typically, customers, even though they might renew late, You know, we always are able to kind of go back in and start the term at the point in time that the contract ended, even though they renewed, you know, three or four months later. And that's what kind of represents some of that lumpy catch-up revenue from time to time we experienced. We're going to be negotiating pretty hard with Puerto Rico and making sure that we're going to be compensated for services that have been delivered as of the beginning of this year.
spk07: So that just creates the one question, which is if they weren't to pay for that, do you think in the future you've got to build a contract that's got firmer terms around if deals aren't concluded on time, you have to actually cancel the service immediately so that you're not left in a position where you've been providing a service that's not compensated for? Maybe play a little harder ball with these people. Thanks.
spk04: Yeah, so I mean, I think this is a fairly unusual conversation. We haven't confronted this before. And it's still yet to be resolved. So I think we're not giving up on it just yet. I think it's going to be a matter of negotiation. But to be very clear, if the customer chose not to renew and then obviously not compensate us for the services that we've already delivered, that's a $2 million hit to us. It represents about $2 million of ARR, and because the contract term was to start at the early part of this year, it would represent $2 million of GAAP revenue. That's at rest.
spk03: Great. Okay. Thanks.
spk01: Thank you. Our next question is coming from Jeremy Hamlin with Craig Hallam. You may proceed.
spk08: Thanks for taking the question. And I wanted to come back to just understanding what's embedded within the revenue guidance for the year. So if we look at getting to the midpoint of your guide for the remainder of the year, I think it's about $24 million a quarter for Q2, 3, 4. I think you said that you've got about 30 contract miles expected to go live in Q2, and if we were to assume, you know, roughly that $75 million, I'm sorry, $75,000 per square mile run rate that you typically have, that would be about, what, $2.25 million on an annualized basis. I'm just trying to understand, in terms of what's embedded in that guidance, are we including catch-up revenue for Puerto Rico, and then, you know, kind of I guess what are we assuming on the $16 million five-year deal in terms of what's embedded in 2023 guidance?
spk04: Yeah, great question. This is Alan. I'll go ahead and respond to that. I think if you just took a look at what we did in Q1 and just multiplied that literally just by that times four, you're about $82.5 million in revenue. What I can tell you is And we haven't given actual miles that have gone live, but the additional revenue that we're a gap revenue that we're going to see from go live miles this year is, um, is over $4 million more. So you can do the calculation yourself and realize how well things are going in terms of new miles, the department of corrections. We do expect it'll be several million. So by the time you add all that together, you're pretty close to 90. The balance is things like international forensic logic expansions, case builder expansions, leads expansion in terms of additional professional services that we know are coming. And lastly, we're actually going to have some new revenue this year again in our labs. So you add all that together, it's pretty easy to get to our guidance.
spk08: Gotcha. That's helpful. And then the other question I wanted to follow up on was, you know, with the follow-up here around gross margin and You know, it sounds like, you know, you're going to see a much bigger ramp in the second half of the year. Just in terms of thinking about, you know, kind of the current run rate in the last few quarters, we've been, you know, kind of more in that mid 50s gross margin range. Can you just help walk us through in terms of, you know, thinking about that level versus kind of the high 50s level? And I think you're probably looking in like the 59% range for the year, which would imply back half got to get to like 60% plus. But I was hoping for a little bit more color around that.
spk04: Sure, this is Alan. I'll go ahead and give some information Ralph can add as well. A couple things. First off, Q1 actual gross margin was a little lower because we did have a little bit more in terms of depreciation and actual maintenance and repair costs. were really more one time of nature in q1 um primarily related because last year we were doing all the 3g uh replacements so we had to catch up in some of the uh the maintenance and repair that was kind of a one-time cost in q1 so actually gross margins should go a little higher with that alone the other aspect of that is we are seeing a bit more cost some of it is related to the ramp up of some people that we have set up for the revenue growth. Some of that actually flows up into cost of goods sold related to customer success and some operational allocations that will up there as well. We firmly believe that our gross margins are going to improve certainly by the time we get to Q3 and Q4 where the other revenues are coming in and we've already hired the people that are going to be involved in that.
spk08: Got it. That's helpful. Thanks. Last one, you went through it quick, but I think you noted you bought back maybe like 35,000 shares. What was the average price per share on that? And then where you have cash balance now, how are you thinking about that in terms of potential capital allocation moving forward?
spk04: Yeah, great question. It was a little over $35 per share. So a little North of where we are now. Um, but even after doing that, paying bonuses and paying out the leads, um, you know, earn out that they, uh, they earned, uh, we still ended the year or end of the quarter, slightly North of $5 million in cash. Today's cash balance is actually close to $10 million. So we continue to do very well in terms of, of cash. Um, I would say that the board did approve. a $25 million share repurchase. Historically, we've looked at what the market has thought about our stock, and it would not be surprising if we did use some of that to repurchase more shares.
spk08: Got it. Thanks for the call, guys.
spk03: Best wishes. Thank you.
spk01: Thank you. Our next question is coming from Jason Schmidt with Lake Street. You may proceed.
spk06: Hey, guys. Thanks for taking my questions. Just curious with things such as the Department of Corrections contract and sort of this delay in Puerto Rico, if maybe the cadence of the year doesn't follow traditional seasonality.
spk03: Do you think that's the case this year? Yeah, this is Alan. I'll go ahead and say absolutely.
spk04: Last year was a little odd because Q1 was odd because we had $2.4 million rolled into Q1 that hopefully and should have come in in 2021 had we got the contract in time. Basically, what that made 22 look like was pretty much flat throughout the year. You're going to see pretty much the exact opposite as we look into 23. 23, we start here. we would expect to see the cadence of revenue increase into each of the following quarters and significantly going up in Q3 and Q4.
spk06: Okay, that's helpful. And I apologize if I missed it, but how should we think about OPEX trending the remainder of this year?
spk04: Yeah, this is Alan again. Well, we have been investing significantly in sales marketing for basically the last two years. We still are adding some costs related there for things that are wise. R&D this year will go up a bit because we are adding more capability in terms of personnel, particularly related to having four software products now, although it's not going to be significant. G&A will go up a bit, but should be relatively flat as well. So I mentioned earlier that we have already invested in all three of those categories. So even though they are going to go up a bit, they're going to go up less than the amount of revenue continues to go up.
spk03: Okay. Got it. Thanks a lot, guys. Thank you.
spk01: Thank you. Our next question is coming from Willow Miller with William Blair & Company. You may proceed.
spk00: Hi, guys. Thanks for taking my questions. Just a clarifying question first. How much of the guidance revision to revenue is driven by Chicago versus Puerto Rico? I know you mentioned Puerto Rico could be as much as $2 million if that contract is not renewed, so any color there would be really helpful.
spk04: Yeah, this is Ralph. I'll take that one. So the total exposure, if Chicago were to cancel a contract as of, say, July 1, even though technically we're contracted through mid-February of 2024, and if Puerto Rico were to not completely renew nor to catch us up on the services that we provided them essentially for past up, that total exposure is a little bit above 6.4%. approximately $6.4 million in gap revenue. And so we're basically kind of factoring in on a combined risk basis $2 million across four. It isn't a useful exercise for us to kind of do it one by one. We kind of pool all the risks together and decided that, you know, we don't think it's zero exposure, nor do we think it's $6.4 million of exposure. We felt like the appropriate number to use on a risk-adjusted basis was $2 million. Okay.
spk00: Okay, that makes sense. And then my next question is, last quarter you called out strong performance in the Tier 4 and Tier 5 cities, just based on one salesperson, and you were looking to expand. How is that initiative going, and do you believe you can expand beyond the four reps that you called out previously?
spk04: Yeah, terrific question. So we've made really good progress there. Currently, we now have three reps that are 100% focused on Tier 4, Tier 5, I think hopefully you've heard in this call, I mean, the success that we had in lighting up new customers. I think, you know, it's, I mean, six customers is pretty impressive work. I didn't mention the cities, but I'll maybe just call them out now for folks. Cleveland, Ohio, Hawaiian Gardens, Holyoke, Manchester, Florida. And we actually, in some of the expansions that we had, There were a couple of tier four, tier five customers that actually expanded their initial footprint as well. So that initiative for us is going very well. I think you've heard us talk previously about the shortened sales cycles that appears to take place there. So we're very excited and are still anxiously looking for that fourth tier four, tier five sales rep to round out the team.
spk00: Sounds great. That's great color. Thanks for taking my questions.
spk03: Thank you.
spk01: At this time, this concludes our question and answer session. If your question was not taken, you may contact SoundThinking's investor relations team by emailing ssti at gatewayir.com. I will now hand it back to Mr. Clark for any closing comments he may have.
spk04: Great, thank you very much. Just very excited to be in this opportunity space. We know we're making a difference, and thank you all very much for dialing in and asking some really good questions about the business. Looking forward to the one-on-one calls here in a bit.
spk01: Thank you. This does conclude today's call. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation.
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