SoundThinking, Inc.

Good afternoon and welcome to Sound Thinking's third quarter 2023 conference call. My name is Ariel and I will be your operator for today's call. Joining us are Sound Thinking 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 Sound Thinking'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 7, 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 at the company's website at ir.soundthinking.com. Now I would like to turn the conference call over to SoundThinking CEO, Ralph Clark. Sir, please proceed.

Good afternoon, and thank you for joining our Q3 2023 conference call. After Ellen and I share our update, we'll be happy to take your questions. I'm extremely proud of our ongoing efforts to build a powerful and growing business franchise. Our collective work is helping to save lives and make communities safer. And with respect to doing work that matters and expressing your values, it doesn't get any better than that. The solutions on our Safety Smart platform are seeing increased adoption across the board as agencies are dealing with increased demands for service in tackling a measurable uptick in crime, all the while facing diminished headcount resources. And with the recent acquisition of SafePoint and their AI-enabled weapons detection capability, we are now addressing a larger TAM opportunity than we were previously targeting. What is exciting about this new accelerated growth phase of our company are new and large adjacent bind centers outside of traditional local law enforcement that can now harness the power of technology in enhancing public safety initiatives. We hope investors, prospects, and partners will be paying close attention to our progress. Turning to our Q3 2023 financial performance, we achieved record revenues of $24 million compared to Q3 2022 revenue of $18.8 million, representing 28% year-over-year growth. Adjusted EBITDA was $4.3 million, or 18% of revenues, compared to $3.1 million, or 16% of revenues, for Q3 2022. Adjusted EBITDA grew approximately 40% year-over-year and approximately 79% sequentially from last quarter, Q2 2023. We also had another phenomenal quarter of ShotSpot or GoLive activity with seven new city captures. two city expansions, and one university expansion this quarter. That puts us at 20 new city logo deployments year to date. The new city logo deployments for this quarter include Chelsea, Massachusetts, Fayetteville, North Carolina, Baltimore County, Maryland, Suffolk County, New York, Ferguson, Missouri, and Montgomery County in Darby, Pennsylvania. We're on pace to surpass 140 go-live miles this year, representing over $9 million in net new ShotSpotter ARR in 2023. We plan to finish out the year by targeting the remaining 17 square mile build out of Suffolk County. And we expect to go live with at least three new city agency deals that were booked in Q3, including Escambia, Florida, Chester, Pennsylvania, as well as the strategically important tier one city of Philadelphia, which comes to us through the Philadelphia Housing Authority acquisitions. Overall revenue retention remains strong with only $41,000 of gap attrition from the non-renewal of a secure campus deployment at UC Irvine. The funding environment remains strong, including federal and local budget dollars that are being allocated to public safety. We're particularly excited about the new state funding initiatives in New Jersey and New York that are allocating dollars to acoustic gunshot detection. We believe that the New Jersey opportunity alone could unlock as many as 20 square miles of acoustic gunshot detection in the first half of 2024 through new city deployment and current contracted city expansions. We continue to be positive about the role our technology plays in helping Chicago PD improve response times and save lives in underreported community gunfire. The recent Mayor Johnson selection and unanimous city council approval of the appointment of Superintendent Snelling is a strong positive for the City of Chicago and our partnership. Superintendent Snelling has a strong track record in advocating for, defending, and leveraging technology as a force multiplier in helping Chicago PD meet its sworn obligation to serve and protect as well as improve community trust and engagement. We also note Mayor Johnson's recently presented 2024 budget did not include any defunding of the police that some activists within Chicago had been calling for. In fact, the police budget was increased 2.9% to approximately $2 billion, which importantly also included funding for the continued use of acoustic gunshot detection technology. We remain vigilant and hope to continue our successful Chicago partnership beyond our current contracted term through February 2024. I would point out that our Chicago partnership has thrived under three different mayoral administrations in over six superintendents over an eight-year period. Moving on to international, we are thrilled about our Q3 booking in Uruguay with the city of Montevideo. This will be our first deployment in Spanish-speaking South America, and we believe there are significant expansion opportunities within other cities in Uruguay once we demonstrate success in Montevideo. There has also been renewed interest in our solutions from several municipalities across Brazil, where we recently arranged for a Brazilian delegation to visit Cape Town, South Africa. We were encouraged with a strong ShotSpotter endorsement received from Cape Town mayoral committee member J.P. Smith and South African police leadership on how acoustic gunshot detection has been a game changer in addressing gangs and gun violence. We believe we are taking important and positive steps forward on re-securing a footprint in Brazil early next year. We've also made net for progress on our Puerto Rico Public Housing Authority Partnership. We were selected for a new contract under their RFP, but unfortunately HUD, who is the appropriator, determined our award constituted a sole source transaction given we were the only bidder. and therefore not technically fundable under this specific appropriation vehicle. In the meantime, we have entered into a new interim agreement with a price increase of over 20% while they determine next steps of either leveraging another municipality's RFP, reissuing a new RFP, or pursuing a sole source justification with HUD. We are further encouraged by the noticeable shift in the national debate between policing of crime and disorder versus defunding the police. Several mayors in the cities they lead are publicly pivoting in prioritizing public safety as they respond to communities' vocalized concerns. In Oakland, the local chapter of the NAACP called on city leaders to declare a state of emergency due to rising crime. Recently, the Seattle Times editorial board explicitly called for the support of Mayor Bruce Harreld's $1.8 million anti-crime proposal that principally included a gunshot detection system. We believe that it's in this backdrop that ShotSpotter momentum is building. Since I last reported in our earnings call, we continue to invest in widening our competitive moat and setting us apart with key new capabilities that support increased law enforcement transparency and effectiveness. We plan to roll out an MSRP increase of 7% going forward from $70,000 per square mile to $75,000 per square mile starting in 2024 for cities greater than Tier 4 or Tier 5. It has been over three years since our last price increase, and given the improved capabilities we have made available, we felt a modest price increase was not only reasonable but timely. The pipeline and deal execution for our other solutions on the Safety Smart platform also continues to grow. We closed a $900,000 deal combining Crime Tracer and Case Builder to a large state Department of Justice customer charged with investigating insurance fraud. We also executed a deal with Chicago PD to pilot Crime Tracer for six months with the expectation it will convert into a mid to high six-figure deal transaction in the latter half of 2024. we're also pleased to announce the recent contract execution and formal project kickoff this month of a major case builder deployment within new york city department of corrections shi our prime contractor has received purchase orders from the nyc doc totaling 13.5 million dollars for Sound Thinking Professional Services and an annual subscription service to Case Builder. Once all POs are processed by the City of New York and SHI, this project will represent an $18 million contract for Sound Thinking. We're very excited about partnering with New York City Department of Corrections in their digital transformation efforts in becoming the standard for investigative solutions for the corrections sub-vertical. We consider our internal affairs and use of force investigative modules a must-have for corrections in investigations that include not only detainees, but also corrections officers as subjects. We've been very intentional in the integration of SafePoint into sound thinking in the Safety Smart platform. Our near-term focus is to add capacity to pipeline growth and go-to-market sales motion for this compelling solution. Our strategy includes adding two new BDRs and four outside sales director hires. The combined 2024 quota for this team is targeted to be $15 million in ARR bookings, representing approximately 200 lanes sold per outside sales director. We're very pleased to see a notable post-acquisition 19-lane win for SafePoint at a major healthcare facility. I'll conclude by formally announcing and welcoming several new senior executive additions to the leadership team, starting with Aaron Edwards, who will be joining us as our new senior vice president of solution sales and who was most recently a sales executive with Everbridge. Aaron will be fully taking the reins over from Gary Bunyard on January 1, 2024. Gary will be taking on a to-be-determined part-time role to continue to make a positive contribution to sound things. We previously announced the additions of Greg Maykesh, Larry Jackson, Ann Mueller, and Mark Page to the management team. And we're also fortunate to be able to add Greg Holyfield, the former CEO and founder of SafePoint to the team. I'm personally thrilled with these new additions and believe we now have everything necessary to drive long-term profitable growth and positively impact the public safety solutions ecosystem. And with that, let me turn the call over to Alan. Thank you, Ralph. We're very pleased with our performance in the third quarter. As Ralph mentioned, this quarter with our shots but our solution, we went live in seven new cities, expanded in two current cities and one university. We're continuing to see an increase in the interest of our solutions across our safety smart platform. At this point, we expect to add over 140 new miles of shots but our coverage this year, approximately 40% higher than 2022. Attrition in the third quarter was extremely small at only approximately $41,000 in gap revenue. Our bundled product strategy appears to be working well as we are starting to see an increase from customers who would like to contract with multiple products from our Safety Smart platform. We're also pleased to add SafePoint to our company and their products to our Safety Smart platform. Integration is going well. and we expect to see sales and related revenue continue to add to our growth as we head into 2024. 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 ahead of expectations at $24 million, a 28% increase over the $18.8 million in the third quarter of 2022. Revenue increased as our deployed miles are up significantly year over year, and we had a small contribution from our safe point acquisition. Most profit for the third quarter of 2023 was $13.8 million, or 57% of revenue, versus $10.3 million, or 55% of revenue for the prior year period.

We expect gross margins to continue to improve in the fourth quarter of the year. Our adjusted EBITDA increased approximately 40%