SoundThinking, Inc.

Good afternoon and welcome to Sound Thinking's second quarter 2024 conference call. My name is Shomali 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 SoundThink's SEC filing, including this 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 6, 2024, And SoundThinking undertakes no obligation to revise or update any forwarding 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 free via a link available in the Investor Relations section of the company's website at ir.soundthinking.com. Now, I would like to turn the call over to SoundThinking's CEO, Ralph Clark. Sir, please proceed.

Good afternoon, and thank you for joining our second quarter 2024 earnings call. I'm pleased to report another strong quarter marked by several positive operational and financial achievements. Before I turn the call over to Alan for a detailed financial review, I'll provide my thoughts on our operating performance and offer additional context on the key market drivers that underpin our optimistic outlook for the growth opportunity ahead. The need for public safety solutions has never been more critical, especially within the increasingly challenged law enforcement ecosystem. Public safety officials are expected to address high crime levels with diminishing personnel resources, creating a structural public safety gap that only technology can fill. We believe sound thinking is uniquely positioned to bridge that gap with our integrated safety smart platform. We are a trusted partner to law enforcement agencies of all sizes, both domestically and internationally, as they embark on digital transformation strategies rooted in data-driven policing. We think public sentiment has significantly shifted from the de-policing movement to the investing in policing movement and holding policing accountable to protect and serve efficiently, effectively, and equitably. In fact, in a Gallup poll conducted just this year, Americans' confidence in police increased eight percentage points over the past year to 51%, the largest year-over-year change in public perceptions of the 17 major U.S. institutions measured by Gallup's annual update. What was very telling was a confidence increase among the persons of color subgroup whose confidence grew even faster. increasing 1300 basis points from 2023 to 2024. This is a particularly significant counterbalance to the headline noise generated by some selected media outlets, but is entirely consistent with what we're seeing on the ground in the markets we serve. We believe this demonstrates strong support for constitutional policing amongst residents in the most vulnerable communities that our agency partners are serving every single day. Within this positive opportunity set with strong macro tailwinds, we've been able to successfully execute another strong quarter of performance that was overall in line with our expectations. In our core acoustic gunshot detection business, ShotSpotter was taken live in three new cities and expanded in four cities. Additionally, ShotSpotter was deployed outside of our traditional local law enforcement buying center with two new commercial customers and one university as a part of their security framework. The international ShotSpotter business is also quite promising with a soon to be awarded expansion in Uruguay and a re-win in Nelson Mandela Bay in South Africa. We still believe we can book and go live with ShotSpotter in Brazil later this year and are very encouraged with the recent elections and formation of the National Unity Government in South Africa. We believe this represents a significant path forward for opportunities beyond the current DA-led municipalities by directly engaging South African police or SAPs at the national level. Domestically, we're on track to exceed 100 new ShotSpot or go live miles this year with an outside shot of getting to the previously forecasted 120 miles. We continue to outperform on the retention front and believe we will see potential upside to our overall revenue forecast with better than forecasted retention rates for the full year further contradicting the rhetoric being platformed by a few news outlets. Resource Router, our AI-based patrol management solution, is also performing above expectations and gaining market acceptance for its capabilities that enhance community safety while protecting residents from over-policing. We currently have over seven Resource Router implementations in the queue for Q3 Go Lives. We're also thrilled that Resource Router is making important inroads into community-based violence interruption organizations. These organizations, such as the UMA Futures International in Miami-Dade, Florida, are adopting our community-facing version of Resource Router as a part of their violence interruption efforts, such as the Walking One Stop. using a proven data-driven approach. Mr. Rollins has been spreading the word both nationally and internationally that community violence intervention work cannot simply be done to the highest caliber without applying innovative technology as a force multiplier. Case builder subscription-based revenue grew approximately 700% for the second quarter year over year with the kickoff of the New York City Department of Corrections project which is ahead of schedule. We will be recognizing another $1 million of maintenance ARR in early Q3 with the delivery of the first major application or use case of PREA, the Prison Rape Elimination Act, to be followed by nine other divisions within the DOC. Some of the overarching goals of this significant initiative include improving efficiency and compliance in the case management process at DOC and increasing transparency and accountability by implementing a modern application that replaces disparate case management systems in manual paper-based documentation currently in use across DOC's organizational divisions. Case Builder was also successfully deployed at the California Department of Justice in Q2 for investigations and insurance fraud and has the potential to grow users by expanding to other divisions within CalDOJ and utilizing Case Builder for new use cases. Finally, we expect to go live with Orleans Parish in September and have a healthy pipeline of new case builder opportunities for the remainder of 2024 and early 2025. Although the SafePoint top of funnel pipeline remains strong and continues to grow, we're experiencing slower than expected sales, primarily being delayed as prospects wait for key new functionality that will be a part of a major September release. This major release includes a new 3D camera integration, enhanced machine learning object classification, a major upgrade to the user interface, along with SOC 2 and HIPAA compliance, which are table stakes for larger hospital chain prospects. We believe these enhancements will significantly improve the overall customer experience and reduce customers' operational costs. It will also enable efficiencies in our processes within the alert review center or arc which is the safe point equivalent of the shot spotter incident review center or irc unfortunately unlocking much of the feature set was dependent upon a specific 3d camera whose availability qualification and integration experienced a four plus month delay during this period we have taken the opportunity to retool our safe point sales leadership and further integrate SafePoint supply chain and customer success and support into sound thinking operations while we continue to build the SafePoint sales pipeline. So I wanted to take a brief moment to share with you how sound thinking has been leveraging artificial intelligence and machine learning to drive innovation and enhance our services. For over a decade, our machine learning algorithms have been at the core of our ShotSpotter incident filtering process for acoustic gunshot detection technology. By regularly training our models with our diverse and extensive data sets, we're improving the filtering capability of our gunshot detection system, which importantly allows us to significantly scale our customer and coverage area footprint while effectively managing the cost of our incident review center. In addition, artificial intelligence and machine learning are core to our resource router solution. which is used to analyze patterns and trends in crime, providing valuable insights, data-driven patrol strategies, and community safety initiatives. Lastly, recent developments in cloud-based AI tools make it possible for our SafePoint team to train neural networks using large labeled data sets with detailed features from our SafePoint sensors capturing the magnetic moment and the 3D camera tracking speed, direction, and skeletal model in order to use these features in real time to classify weapons, pinpoint the individual carrying the weapon, along with the weapon location. What is very exciting, and we know this from our over decade plus of work on from ShotSpotter, is that the SafePoint system has the potential to continue to improve by incorporating new data and refining its models. We believe we're in the early second inning of what's possible with artificial intelligence and machine learning, and harnessing it for the benefit of our customers and investors. We recently announced a strategic partnership with ReCore, a leader in roadway intelligence technology and vehicle recognition solutions. This collaboration brings together two industry leaders combining sound thinking expertise and acoustic gunshot detection and investigative solutions with ReCore's best-in-class vehicle and LPR solutions. Our new product, Plate Ranger, is now available for demonstration and quotation and is expected to be part of the Safety Smart platform starting in September 2024, marking our expansion into the growing LPR market. This market is estimated to be $3.2 billion globally, according to Emergent Research. We are highly encouraged with the initial response to our launch announcement and have already booked several discovery calls with accounts that literally stretch across the United States. Our ShotSpotter service in Chicago ends in late September with a formal contract termination in late November. And while there's still a significant civic debate between the mayor and the city council on extending the service beyond November 2024, we continue to focus on providing what we believe to be and data suggests is a life-saving solution as we've done for the past 10 plus years. Chicago's non-renewal in Q4 2024 is already factored into our 2024 guidance, which is being maintained at $104 million to $106 million in revenue with 18% to 20% adjusted EBITDA margin. We are confident that we can achieve our 2024 guidance and believe we are well positioned to drive profitable growth in 2025 and beyond. Thank you for your attention. I'll now turn the call over to Alan for a detailed look at our financial performance.

Thank you, Ralph. We're very pleased with our performance in the second quarter. As Ralph mentioned, our safety smart platform product strategy appears to be working well as we're seeing strong demand for our public safety solutions across the platform. Let me provide more details in the quarter, and then I will share some thoughts around the balance of the year. Second quarter revenues were a record at $27 million and included the revenue associated with our case builder department of corrections contract. The $27 million is a 22% increase over the 22.1 million in the second quarter of 2023. Revenue increased as sales of all of our safety smart platform solutions are growing. Our diversification of revenues is also working. For example, Our domestic shot spot of revenue was only 66% of revenue this quarter versus 70% in second quarter of 2023. Gross profit for the second quarter of 2024 was $16.1 million or 60% of revenue versus $12.7 million or 57% of revenue for the prior year period. We expect gross margins to be similar to Q2 for the remainder of the year ending the year at or near the 60% that we have indicated last quarter. Our adjusted EBITDA was up over 110% from the second quarter of last year to $5.1 million, up from $2.4 million. This is also significantly higher than the $3 million in the first quarter of this year. Our adjusted EBITDA increase was related to revenue growth of all of our solutions as well as some expense reductions in various categories. As a reminder, adjusted EBITDA non-GAAP financial measure is calculated by taking our GAAP net income or loss and adjusting out interest income, income taxes, depreciation, amortization, and impairment, stock-based compensation expenses, restructuring expenses, and acquisition related expenses, including adjustments to our contingent consideration obligations. Turning to our expenses, our operating expenses for the second quarter were $16.1 million or 60% of revenues versus $15 million or 68% of revenues in the second quarter of 2023. Breaking down our expenses, sales and marketing expense for the second quarter was $7.3 million or 27% of total revenue down from $7.4 million or 34% of total revenue for the prior year period. Our R&D expenses for the second quarter were $3.5 million, or 13% of total revenue, compared to $3.1 million, or 14% of total revenue for the prior year period. DNA expenses for the quarter were $5.9 million, or 22% of total revenue, up from $5.5 million, or 25% of total revenue for the prior year period. offsetting our G&A expenses included the approximately $600,000 reduction in Q2 of this year related to the change in the fair value of the contingent consideration related to the safe point earn-out expectations. In Q2 of last year, our G&A expenses were offset by approximately $1 million reduction related to the change in fair value of the contingent consideration related to the forensic logic earn-out expectations. We do expect our GNN expenses will continue to increase a bit in absolute dollars as our company grows. Lastly, we had approximately $350,000 in costs related to restructuring efforts that took place that reduced some personnel and office lease costs. A portion of the restructuring expenses were related to severance paid to terminate employees that represented less than 5% of the workforce, that we expect should save approximately $2 million annually. These costs were added back to the overall adjusted EBITDA amount for the quarter. Our GAAP net loss was approximately $800,000.06 per basic and diluted share for the quarter based on 12.8 million basic and diluted weighted average shares outstanding. This compares to a net loss of $2.7 million or a loss of 22 cents per basic and diluted share based on 12.2 million basic and diluted weighted average shares outstanding for the prior year period. Our adjusted net loss for the second quarter was a loss of $955,000 or a loss of 7 cents per share based on 12.8 million basic and diluted weighted average shares outstanding. This compares to a loss of $3.5 million or a loss of 28 cents per share based on 12.2 million basic and diluted weighted average shares outstanding for the prior year period. Adjusted net loss, a non-GAAP financial measure, is calculated by taking our GAAP net income or loss and adding back acquisition related expenses, including adjustments to our contingent consideration obligation and restructuring expenses. Deferred revenue at the end of the quarter decreased to $49.4 million from $50.8 million at the end of the first quarter of 2024. This decrease was primarily related to the timing of renewals. We ended the quarter with $9.8 million in cash and cash equivalents versus $8.5 million at the end of the first quarter of 2024. The cash balance is higher than the end of the first quarter, even after we repurchased 134,150 of our shares at an average price of $14.86 for approximately $2 million. In fact, after the quarter closed, we repaid $3 million of our line of credit, and our current cash balance is still approximately $12 million. Currently, after our recent repayment, we have only approximately $4 million in short and long-term debt outstanding, and have approximately $21 million still available on our line of credit. Turning to our full year 2024 outlook, we're maintaining our full year revenue guidance range at 104 to $106 million, which means that the second half revenues are expected to be between 51.5 and $53.5 million. We are expecting that Q3 revenues will be sequentially down from Q2 related to an acceleration of professional services in Q2 from Q3 related to our case builder and NYPD technologic projects. We then expect Q4 revenue to be sequentially higher from Q3, including the loss of $1.2 million from Chicago in Q4, which currently is expected to end on November 22, assuming no contract renewal. We are maintaining our adjusted EBITDA margin guidance at 18 to 20%. Now back to Ralph for some final thoughts, and then we'll be happy to take your questions. Thanks, Alan.