SoundThinking, Inc.

Good afternoon and welcome to SoundThinking's second quarter 2025 earnings conference call. My name is Diego and I will be your operator for today's call. Joining us are SoundThinking's 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 SoundThinking'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 actual results to differ materially from those stated or implied by those statements. These risks, uncertainties, and assumptions are discussed in SoundThinking's SEC filings, including its most recent annual report on Form 10-K and other SEC filings. These forward-looking statements reflect management's beliefs estimates, and predictions as of the date of this live broadcast, August 12, 2025, 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. In addition, our comments on the call today contain references to non-GAAP financial measures such as adjusted EBITDA and key business metrics such as annual recurring revenue. Non-GAAP measures should be viewed in addition to and not as an alternative for the company's reported GAAP results. A reconciliation of these non-GAAP measures to their most directly comparable GAAP measures, as well as definitions of the key business metrics reference and management's reasons for including the non-GAAP measures and key business metrics reference, may be found in the press release. 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, and thank you for joining SoundThinking's Q2 2025 earnings call. I'll start by providing some high-level commentary on our financial results and then share exciting updates about our strategic investment and growth initiatives. We're pleased to report a solid Q2 marked by continued progress on our transformation into a broader public safety technology company. Our early strategic investments in technology, innovation, talent, and market positioning are yielding results. We remain focused on building sustainable growth, operational execution, and delivering measurable impact for our company, our customers, and communities. Our second quarter revenues were in line with our expectations at $25.9 million, representing a sequential decline from the boost at Q1 of this year. During the second quarter, we took ShotSpotter Live in four new cities, including New Orleans, Methune, Massachusetts, Victorville, California, and Niteroi, Brazil, along with expanding in four additional cities and adding one new security deployment. And while GAAP revenue met expectations this quarter, our bookings did fall short of our internal targets for the quarter, primarily due to the timing of a few large deals, including a significant $2.5 million crime tracer transaction and a 400-unit plate ranger transaction that was pushed into Q3. That said, we were pleased to close a marquee 20-lane SafePoint transaction combined with ShotSpotter Secure Campus that was sold to an historically black college university. We have a healthy diversified pipeline of over $37 million for the remainder of 2025, which continues to grow beyond domestic ShotSpotter targeted toward traditional law enforcement customers. In fact, because of the recent tragic Midtown New York City shooting, we were approached by a major financial institution to provide a ShotSpotter secure campus deployment. It was very important to them to work with a best-in-class acoustic gunshot detection system used and positively referenced by NYPD. We have taken this opportunity to propose adding a perimeter-based sniper solution that we're in the process of perfecting for the utility substation market in early Q1 2026. The result will be a hybrid wide area acoustic gunshot detection solution, providing a dome of protection of several blocks beyond the headquarters location, combined with a perimeter-based solution, which can detect and alert on inbound sniper fire directed at specific ingress-egress points at the building. This effectively will be providing the best of both worlds. We believe this corporate security opportunity, along with the critical infrastructure opportunity represented by utility substations, embassies, and forward operating bases are a significant growth in TAM extension for our demonstrated capability in gunshot detection. Our overall customer attrition is outperforming expectations, underscoring the effectiveness of our retention initiatives and the value our solutions deliver to our customers. However, our renewal in Puerto Rico still merits close attention due to a new and unexpected requirement to issue a formal RFP in lieu of a standard contract extension that had enjoyed strong support from the new incoming administration. Puerto Rico committed to and is in the process of issuing an interim extension to continue the ShotSpotter service through the RFP process, but bureaucratic delays prevented us from securing the interim extension prior to the June 30th contract extension date. This unfortunately has forced us to suspend service and revenue recognition until we can get the formal contract extension in place. On the innovation and integration front, we've made solid progress partnering with several drone providers as we enable a unique drone as first responder capability in response to shot spotter alerts. The integration ensures that drones can be automatically dispatched to the exact location of a gunfire incident delivering real-time aerial intelligence to officers on the ground, such as identifying victims who need an EMS intervention, along with providing valuable situational awareness to arriving officers. The combination of ShotSpotter and drones extends the value of ShotSpotter by delivering a powerful use case demanded by forward-leaning law enforcement agencies. Additionally, we have recently completed an integration between our Plate Ranger LPR solution and Crime Tracer, our industry-leading investigative solution. Now, any license plate or vehicle information associated with a crime can be automatically passed to Crime Tracer that will initiate an agentic search across the largest CJIS database in the country to associate that vehicle with people, addresses, and past crimes. It's a huge step forward for the investigators to be able to quickly get actionable intelligence from the powerful combination of our safety smart products. And we believe it far exceeds the Flock OS capabilities in this area. I will add that this capability was completed in 1.20 at the time using AI coding tools and is emblematic of the huge productivity gains we are seeing as we embrace our journey in becoming an AI native company. We also continue to make meaningful progress in Q2 on the weapons detection space. As mentioned earlier, SafeCore scored a large campus transaction at an HBCU along with some selected expansion lanes with casino customers. Importantly, we continue to make progress in the sizable healthcare vertical, which is expected to get even a further boost from California's AB 2975 statute, which mandates weapon screening capability at state hospitals to address workplace violence. A quick note on the New York political landscape. The recent primary win by assembly member Zoran Mamdani has triggered some understandable questions. but I want to be perfectly clear on three points. First and most importantly, we're in year one of a three-year citywide contract that has two additional option years with NYPD. And while the NYPD contract does have termination for convenience clauses, like most municipal contracts, the potential litigation costs and reputational damage makes a termination highly unlikely, short of the city going into extreme financial distress. Second, NYPD's operational footprint and priorities are distinct and data-driven. And because of their professional standing, NYPD maintains strong autonomy in operational decision-making and public safety infrastructure that helps them save lives, which enlists broad-based support across many communities. And finally, unlike the Chicago situation, during the peak of the defund the police fad, there does not appear to be any specific political agenda pushing for a full-scale rollback of police technology tools like ShotSpotter. We'll continue to focus on execution and we believe our ability to deliver lifesaving alerts and critical crime intelligence helps us to be well positioned independent of any political outcome. Now, let me close by addressing the status of the Chicago Gunshot Detection RFP, which we bid on in April. We're gaining real traction in what we believe is one of the most consequential public safety RFPs in the country. We've cleared multiple competitive hurdles from being shortlisted to completing oral presentations. And we've now been invited to the live demo phase, frankly, a process that we invented over 10 years ago. This is a critical opportunity for us to showcase how far ahead we are in terms of accuracy, reliability, functionality, and real-world performance at scale. And while no formal decision has been made, we are entering the next phase with growing confidence and a strong belief that our technology is unmatched and aligned with the City of Chicago's stated needs as reflected in their RFP. I would like to reiterate that our current outlook does not include any contribution from Chicago. Any potential engagement with Chicago, if it were to happen, would most likely contribute to 2026 results. As we move into the remainder of 2025, we'll continue to focus on driving deeper penetration in existing customer accounts, expanding to mid-sized and small municipalities, and growing our non-ShotSpot or Safety Smart recurring software revenue, all the while delivering operational leverage as we scale. We're reaffirming our full year revenue guidance range of $111 to $113 million and reaffirming our adjusted EBITDA guidance range of 20 to 22%. I will now turn the call over to Alan to discuss our financial results for the second quarter of 2025, as well as guidance for the full year 2025 in detail. We'll then be happy to take your questions.

Thank you, Ralph, and good afternoon, everyone. As Ralph mentioned, we are pleased with our second quarter 2025 results, and they are primarily consistent with our expectations. Our financial performance reflects our ongoing strategic initiatives, operational efficiency measures, and our commitment to delivering value to our shareholders. Revenues were $25.9 million, representing a 4% decrease from the $27 million in the second quarter of 2024. Note that our revenue was only 4% lower than the second quarter of last year, which included approximately $2.8 million in revenue loss for the non-renewal of our contract with the City of Chicago as we continue to grow in all of our safety smart platform solutions. We did execute two NYPD contracts in the first quarter which added approximately $3.5 million of catch-up revenue in that quarter. Gross profit was $13.8 million, or 53% of revenue, compared to $16.1 million, or 60% of revenue for the prior year period. Gross margin was lower, as expected, primarily related to additional maintenance of existing short-splitter deployments and expenses related to licensing of software for the NYPD, as well as an expected delay of the execution of the associated sub-licensing of the new NYPD contract of approximately $1 million per year. We expect to enter into the new contract in the third quarter of 2025 and also anticipate receiving catch-up revenue related to the additional costs of the revenues that were expensed in the second quarter of 2025. Our adjusted EBITDA was $3.4 million compared to $5.1 million in the second quarter of 2024, reflecting the delayed contract just mentioned above and the increase in the cost of revenues related to the additional maintenance, as well as investments in enhancing our AR capabilities that Ralph discussed. 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 or expense, income taxes, depreciation, amortization, and impairment, restructuring costs and losses, including unrelated fixed asset disposals, stock-based compensation expenses, and adjustments to our contingent consideration obligations. Our operating expenses were $16.7 million or 65% of revenues compared to $16.7 million or 62% of revenues in the second quarter of 2024. Our operating expenses for the second quarter declined from first quarter of 2025, but were relatively flat compared to the second quarter of 2024, even as we invest in AI modeling and tools to enhance the capabilities of our SafePoint platform solution. We also had a $0.6 million adjustment in the fair value of continued consideration related to the save point acquisition, which reduced second quarter 2024 operating expenses. As a reminder, we expect operating expenses will continue to grow less than the revenue growth rate, even with our additional costs. Breaking down our expenses, sales and marketing expense in the second quarter were reduced to $6.5 million, or 25% of total revenue, compared to $7.3 million, or 27% of total revenue for the prior year period. Our R&D expenses were $3.7 million or 14% of total revenue compared to $3.5 million or 13% of total revenue in the prior year period, reflecting our increased expenses related to our AI investments. G&A expenses for the quarter were $6.5 million or 25% of total revenue compared to $5.9 million or 22% of total revenue with the prior year period. G&A expense increases were primarily related to additional internal and external efforts associated with compliance with our SOX 404 requirements. As a reminder, we expect our G&A expenses to grow less than our revenue on a percentage basis as our company grows. Our gap net loss was approximately $3.1 million, or a loss of 25 cents per basic and diluted share for the quarter, based on 12.7 million basic and diluted weighted average shares outstanding. This compares to a net loss of $.8 million, or a loss of 6 cents per basic and diluted share, based on 12.8 million basic and diluted weighted average shares outstanding for the prior year period. Deferred revenue as of June 30th, 2025 was largely aligned at $43.5 million compared to $45.4 million at the end of Q1 2025. We ended the second quarter with $9 million in cash and cash equivalents compared to $11.7 million at the end of first quarter 2025. As of today, our cash balance is over $16 million. We repurchased 31,570 of our shares at an average price of $14.84 for approximately $1.5 million in the second quarter of 2025. Currently, we have approximately $21 million available on our line of credit, as we have approximately $4 million in debt outstanding, all on our line of credit. As we enter the second half of 2025, we remain focused on execution and long-term value creation. We are encouraged by our pipeline visibility for the back half of the year, the strong renewal rate of our customer base, expanding strategic partnerships and integrations, and our ability to generate consistent cash flow while investing for growth. Now turning to our guidance for the full year 2025. We are reaffirming our full year revenue guidance of $111 to $113 million. We are also reaffirming our full year 2025 adjusted EBITDA margin guidance range of 20 to 22%, taking into account potential costs associated with tariff changes and the investments that we are making in AI modeling and tools that we are incorporating in our products and internal operational use. Finally, we are reaffirming our expectation for our annual recurring revenue, or ARR, to increase from $95.6 million at the beginning of 2025 to approximately $110 million at the beginning of 2026. As a reminder, this guidance is in spite of the loss of approximately $9.7 million in annual revenue from the non-renewal of the contract with the City of Chicago in 2024. Overall, we are pleased with the progress we have made on each of our strategic initiatives and operational performance of the business. We are now ready to take your questions. Operator, will you please open the line?