SoundThinking, Inc.

Good afternoon, and welcome to Sound Thinking's third quarter 2024 conference call. My name is Shamali, 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 for our 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 risk. 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 the Sound Thinking SEC filings, including this registration statement on Form S-1. These four linking statements reflect management's beliefs, estimates, and predictions as of the date of this live broadcast, November 12, 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 replay via a link available in the Investor Relations section of the company's website at ir.soundthinking.com. With that, I'll now turn the call over to Ralph.

Good afternoon, everyone, and thank you for joining us today for Sound Thinking's Q3 2024 earnings call. We appreciate you taking the time to join us today as we discuss our third quarter financial results, provide an update on our strategic and operational progress, and share our outlook for the remainder of the year. We're pleased to report a strong third quarter with revenues of $26.3 million, up 10% from the same period last year. For the year-to-date period, we reported $78.6 million, representing an increase of 18% from the same period last year. The need for public safety technology solutions continues to be a compelling growth opportunity, and we believe the Safety Smart platform is uniquely positioned. As the landscape of public safety technology continues to evolve, we are not just keeping pace, but we are leading the charge. Following our recent strategic partnerships with ReCore Systems and the rollout of our co-branded Plate Ranger ALPR solution, the Safety Smart platform now offers six data-driven tools that leverage AI and machine learning technologies to enhance law enforcement operations. In addition to Plate Ranger, the Safety Smart platform includes ShotSpotter, which is our proven and market-leading gunshot detection system that improves police response to gunfire incidents and saves lives. Resource Router, our patrol management system that streamlines patrol operations to improve officer productivity and engagement. Case Builder, our case management and investigative collaboration tool to help close cases. Crime Tracer, the largest search engine platform for law enforcement that has over 1 billion criminal justice records to help accelerate investigations. And lastly, SafePoint, which is our discrete AI-based low-friction weapons detection solution. The Safety Smart platform's unique value proposition lies in its ability to deliver a holistic, unified client experience, offering a comprehensive suite of public safety solutions under one secure and scalable platform. We believe our safety smart platform strategy is gaining traction, empowering our law enforcement partners to deliver measurable, efficient, effective, and equitable public safety outcomes in the communities they serve. Our flagship shot spot offering went live in four new cities in one university, as well as expanded in eight current cities in Q3. We also booked or went live with over 10 new customers for our other safety smart platform solutions. Our ongoing market penetration is a testament to the effectiveness and reliability of our solutions in enhancing public safety. Domestically, we're on track to exceed 100 new ShotSpot or go-live miles this year, including five new cities and nine expansion projects in our current staff project pipeline expected to go live in Q4 of this year. Resource routers also performing above expectations and resonating in the markets. We currently have five resource router implementations in the queue for Q4 go lives. We're very pleased with the strong demand we see for resource router, which answers the challenges many agencies have around structural staffing shortages. Our strategic partnership with RECOR to integrate vehicle license plate recognition solutions into our safety smart platform is also another highlight of the quarter and the year following the launch of Plate Ranger in September, 2024. The Plate Ranger solution targets a $2.5 billion TAM that is growing at 15% CAGR. It's an attractive opportunity, and while it's still in the early days, we're excited by the growing strength of the pipeline build, and we look forward to sharing more updates on operational traction once we are fully underway. CaseBuilder, our comprehensive case management solution, grew subscription-based revenue approximately 1,000% for the third quarter year over year. We began recognizing $1 million of maintenance ARR earlier in the quarter with the delivery of the first major application or use case of PREA, the Prison Rape Elimination Act, to be followed by use of force in trial divisions and then eight other divisions within the DOC. The New York DOC leadership recently testified at a city council hearing on October 31st on the successful PREA bill live and their expectations that its implementation will help improve compliance and operational efficiencies on these types of corrections investigations. As expected, we also went live with Orleans Parish in September and continue to have a healthy pipeline of new case builder opportunities headed into 2025. Our very successful deployment of case builder in one of California Department of Justice divisions is expected to create further opportunities for us within the agency. Crime Tracer, our investigative search engine, was successfully deployed with six new customers, adding to the 250-plus customers currently leveraging Crime Tracer. We expect to continue to make significant investments to maintain and improve the performance of our solutions. To that end, during the third quarter, we announced the availability of a major upgrade to our advanced weapons detection system called SafePoint NextGen. which reflects our conviction and commitment to innovation in meeting the increasingly complex security needs of our customers. We're actively migrating our current customer install base to the NextGen platform and securing new customers who have been waiting for NextGen's new features along with SOC 2 and HIPAA compliance. On the operational front, we continue to make significant strides highlighted by the recently announced three-year agreement with the Ministry of Interior of Uruguay to expand ShotSpotter's gunshot detection coverage in Montevideo by an additional 12 square kilometers, which represents a doubling of its current footprint in the capital city. We have two major contract renewals in process with NYPD, including ShotSpotter, as well as the maintenance and professional services work performed by our Technologic Division that provides critical ongoing enhancements and support of NYPD's on-premises ERP system. Both contracts have successfully made their way through NYPD's Information Technology Bureau, or ITB, onto New York City's Office of the Management and Budget, OMB. And late last week, we learned that the three-year shot spotter renewal has moved on to final approval, and it sits with the New York City Comptroller's Office. Given the criticality of these solutions and the strong support it has from NYPD leadership in the Mayor's Office, we're confident that both contracts will be executed by year end. As a reminder, our shots fired service in Chicago operationally concluded in late September with a formal contract termination that will occur later this month. Comprehensive civic debates between the mayor and the city council on extending the service beyond this month are ongoing in entering the city's overall 2025 budget negotiation process. There continues to be strong support from a veto proof majority coalition of the city council. Residents were polling data revealed that 70% of all Chicago voters strongly support or support Chicago's continuing use of ShotSpotter, as well as local press and the business community that have recently organized themselves to raise over $2.5 million to help defray the cost of ShotSpotter. In addition, a very strong positive came in from the recent University of Chicago crime lab study that statistically estimated that Chicago ShotSpotter deployment saves approximately 85 lives per year. In the meantime, the city has published an RFI due later this month intending to reimagine community safety by soliciting bids for quote-unquote first responder technology solutions. In part, the RFI details requirements such as the ability to detect, locate, and alert on gunfire within 60 seconds with exact positional data. In addition, the RFI also calls for the alert to include a forensic timestamp recorded snippet of the gunfire incident. Coincidentally, many of these requirements are among the same capabilities that ShotSpotter has operationally demonstrated in Chicago since 2012. In terms of market position, our strategic initiatives and product launches have strengthened our standings. We're leveraging our technological expertise and market insights to navigate the dynamic landscape and seize on new growth opportunities. Our strategic partnerships and product innovations are the driving force behind our operational excellence, which has resulted in another world-class net promoter score of 66%, moving up two percentage points from last year's 64%. As a reminder, a score of 60 or higher is considered world-class in any industry. It is notable since 2020 to year-to-date, the company has added over 85 new ShotSpotter customers, executed 50-plus expansions, and processed over 660 annualized renewals compared to only 15 non-renewals, which effectively averages to 139 annualized renewals per year versus three non-renewals per year. As a reminder, Chicago's non-renewal has already been factored into our 2025 budget and 2024 guidance, which we're maintaining at 104 to $106 million in revenue with 18 to 20% adjusted EBITDA margin. We are confident in our guidance and believe we are well positioned to drive diversified and profitable growth into 2025 and beyond. In summary, our strategic initiatives, product expansion, and ALPR reseller partnerships have positioned us for continued growth and operational efficiency. We're extremely excited about the opportunities ahead and remain committed to delivering innovative solutions that enhance public safety and community trust. I want to thank you for your time and continued support. I'll now turn the call over to Alan to discuss our financial results for the quarter and guidance for the year. Thank you, Ralph. Good afternoon, everyone. We're pleased with our third quarter results. Our strong financial performance reflects the success of our ongoing strategic initiatives, operational efficiency measures, and our commitment to delivering value to our shareholders. The third quarter revenues were $26.3 million, representing a 10% increase of the $24 million in the third quarter of 2023. Revenues were driven by new customers, expansion of existing customer coverage areas, additional cross-selling, including from Newport News, which added our Prime Tracer and Case Builder solutions to complement already implemented ShotSpotter and Resource Router solutions. Bookings of all of our Safety Smart Platform solutions, some of which are multi-year contracts, are also growing healthy. Gross profit for the third quarter of 2024 was $15.2 million or 58% of revenue versus 13.8 million or 57% of revenue for the prior year period. We expect gross margins to be higher in Q4, ending the year near the 60% that we have indicated in previous quarters. Adjusted EBITDA was up approximately 5% from the third quarter of last year to $4.5 million up from $4.3 million. Our adjusted EBITDA increase was related to revenue growth in all solutions. 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, income taxes, depreciation, amortization, and impairment, restructuring costs and losses, including on the related fixed asset disposals, stock-based compensation expenses and acquisition related expenses, including adjustments to our contingent consideration obligations. Turning to our expenses, our operating expenses for the third quarter were $16.3 million or 62% of revenues versus 15.2 million or 64% of revenues in the third quarter of 2023. Third quarter 2023 had an approximately $100,000 adjustment for contingent consideration related to our forensic logic acquisition. Breaking down our expenses, sales and marketing expense for the third quarter was $7.2 million or 27% of total revenue compared to $6.3 million or 26% of total revenue for the prior year period. Our R&D expenses for the third quarter were $3.4 million or 13% of total revenue compared to $3.2 million or 13% of total revenue, in line with the prior year period. G&A expenses for the quarter were $5.7 million, or 22% of total revenue, compared to $5.7 million, or 24% of total revenue for the prior year period. In the third quarter of last year, our G&A expenses included an approximately $100,000 reduction related to the change in the fair value of the contingent consideration relates to forensic logic or not expectations. We expect our G&A expenses to grow less than our revenue on a percentage basis as our company grows. Our GAAP net loss was approximately $1.4 million or loss of 11 cents per basic and diluted shares for the quarter based on 12.7 million basic and diluted weighted average shares outstanding. This compares to a net loss of $1.9 million or a loss of 15 cents per basic and diluted shares, based on 12.5 million basic and diluted weighted out shares outstanding, respectively, for the prior year period. Deferred revenue at the end of the quarter was largely in line at $49.5 million, compared to $49.4 million at the end of Q2 of 2024. We ended the quarter with $15.3 million in cash and cash equivalents, versus $9.8 million at the end of the second quarter of 2024. The cash balance is higher than the end of the second quarter even after we repurchased 294,790 of our shares at an average price of $14 for approximately $4 million. Currently, we have approximately $21 million available on our line of credit as we have only approximately $4 million in debt outstanding, all on our line of credit. Now turning to guidance. For the full year 2024, we're maintaining our full year revenue guidance range at $104 to $106 million. We are expecting the Q4 revenues will be over $26 million, even after including the loss of approximately $1.2 million from the loss of the Chicago contract in Q4, which is expected to end on November 22nd. We are maintaining our full year 2024 adjusted EBITDA margin guidance at 18 to 20%. For our 2025 guidance, even with the loss of approximately $8.5 million from the loss of the Chicago contract, we're expecting our revenue to increase to a range of $107 to $109 million. We are also expecting our adjusted EBITDA to increase to a range of 19 to 21%. Overall, we are pleased with the progress we have made on our strategic initiatives and the performance of the business. With that, we're now happy to open the call for questions. Operator, will you please open the call for Q&A?

Thank you. We will now 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 the question queue. you may press Star 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the Star key. One moment, please, while we poll for questions. Our first question comes from the line of Richard Baldry with Ross Capital. Please proceed with your question.