SoundThinking, Inc.

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.

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.

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.