SoundThinking, Inc.

Good afternoon and welcome to Sound Thinking's second quarter 2026 earnings conference call. My name is Cleo 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 today's call will include forward-looking statements for future events and Sound Thinking's business strategy and future financial and operating performance. These forward-looking statements are only predictions and they are subject to risks and uncertainties and assumptions that are difficult to predict and may cause actual results to differ materially from those stated or implied by these statements. Certain of these risks, uncertainties, and assumptions are discussed in Sound Thinking'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 the date of this live broadcast, August 13, 2026, 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 reoccurring revenue. Non-GAAP measures should be reviewed in addition to and not as alternative for the company's reported GAAP results. A reconciliation of these non-GAAP measures to their most directly compatible GAAP measures as well as definitions of the key business metrics referenced and management reasons for including the non-GAAP measures and key business metrics referenced may be found in the press release. Finally, I would like to remind everyone that this call will be recorded and made available for replay Good afternoon and thank you for joining us.

I want to start today's call in an unusual place by going back to last quarter's call. In Q1, we discussed several strategic initiatives that we believed would shape our year. I want to review those strategic initiatives and share where we deliver and where we fell short, and more importantly, what we are doing on a go-forward basis. Let's start on where we delivered. I told you our year had structural shape and that Q1 sat below our operating leverage line and that Q2 through Q4 would sit above it, with incremental revenue converting to adjusted EBITDA. Despite sequential flattish revenue growth, we crossed that line in Q2. adjusted EBITDA moved from roughly negative $100,000 in the first quarter to a positive $1.2 million in the second quarter. We've been aggressively applying AI across our own operations, and that is a meaningful part of why we believe the workforce and business optimization initiatives we actioned this year, from which we expect approximately $4 million of annualized savings, is structural rather than a one-time cut. This was not a headcount reduction dressed up as strategy. We believe it is a lower, more scalable cost base that lets us intentionally reduce our expense burn going forward while protecting the investments that drive growth. Our cost discipline can cushion the profitability impact of a lighter top line. We believe it is a durable advantage, not a one-quarter maneuver. Revenue retention continues to be a business model differentiator for us as we drive revenue renewals to protect the revenue growth gains. We close more than $23 million in total contract value across several multi-year renewals. A five-year shot spotter renewal with Albuquerque covering approximately 42 square miles, three-year shot spotter renewals with Worcester, Massachusetts, Richland County, South Carolina, Macomb, Bibb, Georgia, Peoria, Illinois, and a two-year crime tracer renewal with the Massachusetts State Police. Additionally, we saw a key shot spotter renewal in Fayetteville, North Carolina funded through 2029 as a part of the city's $324 million fiscal 2027 budget. Further, we also secured a modest term but critically important nine-month extension of our 38 square mile Detroit deployment to bridge them to and through their RFP process, which is expected to conclude early 2027. The number and quality of these multi-year renewals speaks to the stickiness of our solutions and the high confidence and satisfaction our customers have in our capabilities. We also saw two key shot spotter win backs recently with Erie, Pennsylvania and Cambridge, Massachusetts. Erie's deployment lapsed in January due to funding challenges. However, our customer and their local civic leadership were motivated and successful in securing outside funding to come back online with six miles, which we're targeting for later this month. As for Cambridge, this is a win back that was unfortunately driven by tragedy. When Cambridge City Council decided to withdraw from the Boston Five coverage area against the protests of Cambridge police leadership, Their allocated coverage mile was quickly absorbed into the larger Boston Five coverage area, making it a commercial neutral impact for us. But within three weeks of this withdrawal, a young city employee by the name of Xavier Batista was shot and found dead an estimated hour plus after his shooting. Xavier was a father, a fiance, a son, and a beloved friend who deserved more than to bleed out without first responders even knowing that he was shot and wounded and therefore they were unable to render potentially lifesaving assistance. The response from his family and the broader community was swift, along with local and even national attention, including but not limited to editorials from the Boston Globe, the Boston Herald, as well as the editorial board of the Washington Post, all questioning the wisdom of voluntarily and intentionally taking this potentially lifesaving technology offline. This forceful public response, which by all accounts led to the City Council to reverse its decision and reinstate ShotSpotter for an initial 90-day reevaluation period, was both encouraging and correct in our view. For our part in being a good corporate partner and citizen and also playing homage to Xavier's legacy, we're investing in restoring the ShotSpotter coverage at no cost to the City of Cambridge during this period. Lastly, we discussed in last quarter's earnings call an impending large state crime tracer deal that, in my words, was no more than 30 to 45 days from being papered. I'm pleased to report that crime tracer deal is now fully executed as a new multi-year contract worth approximately $2.5 million in annual recurring revenue for the Texas Anti-Gang Program, which is also known as TAG, which has regional Texas anti-gang centers across the state. These multi-agency hubs are funded through the Public Safety Office within the Office of the Texas Governor and coordinated alongside the Texas Department of Public Safety, DPS. We're very excited to share more in the future with respect to the use case and strategic implications for what is now our fourth crime tracer state-level deal beyond Tennessee, Massachusetts, and Utah, and now includes the great state of Texas. We believe once we can demonstrate early success that this can potentially expand to triple the footprint beyond the initial user base of this current phase one deployment. We cannot underestimate the value of our over 1 billion proprietary Cegis records and documents combined with our recent significant investments in user interface and artificial intelligence enhancements and features, which we believe makes Crime Tracers a unique solution. Now for the more difficult review of where we came up short. We had long held and even reaffirmed the view that on a top-line revenue basis, we expected roughly $50 million in GAAP revenue in the first half of 2026 and $60 million in the second half of 2026. We came in at about $48 million in revenue in the first half with a Q2 revenue attainment of $23.9 million, a near miss but a miss nevertheless and should be counted as one. Most of the $2 million shortfall can be attributed to some renewal timing and professional service project delays from Technologic and NYC Department of Corrections. These delays and projects are solely customer-oriented, and because they're already booked and budgeted, it is not a revenue loss, but it is effectively a revenue push-out into 2027. Our second half $60 million revenue expectation was tied to our full year revenue guidance range of $109 to $111 million, which we are now revising to $99 to $100 million. We had expected to recapture the Puerto Rico shot spotter contract in the second half, as we did with the Texas anti-gang contract. But now that recapture has been pushed out of our 2026 plan entirely. We are now pivoting from engaging exclusively with the state of Puerto Rico, where our project is delayed, along with several other post-hurricane initiatives, toward another procurement avenue in order to get something across the line sooner. This restart effectively puts us on a different deal clock post-2026. The rest of the second half reduction comes from our two growth engines, and I want to be precise about which problem is which, because they are not the same problem. The first is SafePoint, and here the issue is cadence, not demand. Our SafePoint bookings remain strong, and our hospital pipeline continues to build. But SafePoint revenue is recognized as systems go live, and go lives are inherently lumpy, especially as we begin to implement double-digit lane deployments within the enterprise. These deployments depend on customer-side facility readiness, construction, door schedules, credentialing, and the sequencing of multi-site rollouts, much what sits beyond our control. Several goal lives we had modeled for the back half have moved by a quarter or two on to customer timelines, which pushes the associated revenue, though not the underlying bookings, into 2027. The booked ARR is still intact and growing. What has shifted is the timing of when it converts to recognized revenue. I'm not troubled by SafePoint's trajectory. We're simply not going to model lumpy go-live cadence as though it were linear, and our revised guidance reflects that discipline. The second driver, and frankly the more disappointing one, is ShotSpotter, and here we will not hide behind cadence, because this quarter it was both bookings and go-lives that came in well below our expectations. Some of this is explainable. The wind down of ARPA, the slower flow of federal budget dollars to municipalities has delayed funding that several new and expansion deployments were counting on. But that would be too easy and not fully honest to lay it all on federal timing. The fuller truth is that ShotSpotter sales cycles are elongating at the same time our sales team is underperforming. Deals that historically closed within a predictable window are now moving through more stakeholders, more budget scrutiny, in an environment where gunshot detection has become more public and more politicized, decisions requiring much longer deliberations before a chief or council will commit. That is real, and our revised full-year guidance now reflects a more conservative view of how quickly that pipeline converts and our ability to measurably grow qualified pipelines. We do not believe that it reflects any erosion of underlying, if latent, demand. The winbacks I described in Erie and Cambridge, the strength of our renewals, and the momentum of positive sentiment we're seeing in places like Chicago, which I'll discuss next, all point to the same direction. When communities weigh the true cost of going without this technology, they want it or they want it back. Our job now is to underwrite a longer sales cycle, honestly. keep proving the operational value that ultimately decides these deals and convert that demand as funding and political timelines catch up. Before I turn over to Alan, let me summarize recent developments in Chicago since our last earnings call. First, while there's been no definitive award on the city of Chicago's acoustic gunshot detection RFP published in February of 2025, there has been public inquiry and discussion between the city council through hearings held by the Public Safety Committee and the chief procurement officer on the status of the RFP. The upshot is that the process is still ongoing and resides with the chief procurement officer. When asked specifically about the timing of a final decision, the formal response was that it could possibly take all the way up to February 2027. While the timing is not quite what we had hoped for, given earlier public commentary, we were nevertheless pleased to see the city's apparent commitment to see the process through to its conclusion slash award. We remain positive about our submission and track record and respectful of the process. In other key developments, the city council was successful in adding a non-binding referendum to the November ballot, putting forward the question directly to voters on bringing gunshot detection back to Chicago. Referendums are notoriously difficult to add to the ballot in Chicago, as there are only three slots available in many competing candidates for those three slots. It therefore speaks to the importance of the technology in the City Council's resolve to keep gunshot detection front and center of a public discourse. If the referendum tracks the recent public polling responses, we expect to see continued strong support, especially in those neighborhoods that have been dealing with ongoing persistent gunfire. Lastly, the Chicago mayoral election is coming at us fast in 2027. Declarations are being made, and campaigning has ensued. Approximately nine candidates have declared, and four of those nine have publicly included bringing back gunshot detection to the city of Chicago as a part of their policy platform, including the two presumed frontrunners, Susana Mendoza and Alexi Janolius. The active campaigning in debate combined with a non-binding referendum in November in the outstanding RFP gives us increasing confidence that we will have more clarity about the future of gunshot detection in Chicago early next year, if not sooner. I'll now turn it over to Alan to walk you through the financials. Alan, over to you.

Thank you, Ralph, and good afternoon, everyone. Revenue for the second quarter was $23.9 million. and many more. The total operating expenses were $16.2 million compared with $16.7 million in the prior year quarter. During the quarter, we continued executing on the workforce and business optimization initiatives announced earlier this year. While approximately $900,000 of restructuring-related costs were recognized during the period, We remain on track to achieve approximately $4 million of annualized savings. These actions improve our visibility into the margin profile of the business while preserving our ability to invest in key growth initiatives across the safety smart platform, AI capabilities, and commercial security opportunities. Gap net loss for the quarter was $4.8 million or $0.37 per diluted share compared with a gap net loss of $3.1 million or $0.24 per diluted share in a prior year period. Adjusted EBITDA was $1.2 million compared with $3.4 million in the second quarter of 2025. Despite a lower year-over-year revenue comparison, we generated positive adjusted EBITDA and reduced operating expenses by approximately $1.5 million compared to the second quarter of 2025, reflecting the benefits of our workforce optimization and broader cost management initiatives. These actions are helping us preserve investment in innovation and growth opportunities. As we move through the remainder of 2026, we expect these structural cost reductions to support stronger adjusted EBITDA performance and contribute meaningfully to margin expansion. As a reminder, adjusted EBITDA, a non-GAAP financial measure, is calculated by taking our GAAP net income or loss and adjusting our interest income, income taxes, depreciation, amortization and impairment, restructuring and related expenses, and stock-based compensation expenses. Importantly, while we have experienced a slight decline in revenue from recent quarters, we continued to make meaningful progress on managing costs of our business. Adjusted EBITDA improvement on a sequential basis as the benefits of our workforce and business optimization initiatives and disciplined expense management begin to flow through the P&L. As a result, we are entering the second half of the year with a leaner cost structure, improved operating leverage and greater confidence in our ability to expand margins as our annual recurring revenue, our ARR, converts to revenue and deployments accelerated. Total operating expenses were $16.2 million compared to $16.7 million in the second quarter of 2025. The year-over-year decrease was primarily driven by reduced sales and marketing costs partially offset by increased AI research and development investments and restructuring charges related to the workforce and business optimization initiatives we announced earlier this year. Breaking down our operating expenses, sales and marketing expense was $5.9 million compared to $6.5 million in the prior year quarter, reflecting discipline spending while maintaining support for our strategic growth initiatives. Sales and marketing expenses represented approximately 25% of revenue during the quarter. R&D expense was $4 million compared to $3.7 million in the prior year period. Our continued investments reflects ongoing development across the Safety Smart platform, including AI-enabled innovations such as Safety Smart Field Agents, as well as enhancements designed to support future platform expansion and deeper customer engagement. R&D spending represents approximately 17% of revenue during the quarter. DNA expense was $6.3 million compared to $6.5 million in the second quarter of 2025. The decrease was primarily driven by our ongoing cost optimization initiatives. In the near term, we expect our G&A expenses to be relatively flat as compared to fiscal year 2025. More broadly, we continue to evaluate opportunities to improve efficiency across the organization while remaining focused on our core growth initiatives. We believe the actions taken during the first half of the year have established a more scalable operating model and enables profitability to improve faster than revenue growth as we continue executing against our ARR objectives. Deferred revenue as of June 30, 2026 was approximately $36 million. In addition, we ended the quarter with approximately $93.1 million of contractually committed revenue, providing strong visibility into future revenue and reinforcing the recurring nature of our business model. We ended the quarter with $6.4 million in cash and cash equivalents, $24.5 million of accounts receivable and contract assets, and approximately $36 million of deferred revenue, and $4 million outstanding on our credit facility. We also have approximately $36 million of available borrowing capacity under our facility. Our balance sheet continues to provide us with the flexibility to invest in our strategic priorities while supporting the growth opportunities we see across both public safety and commercial security markets. Now turning to our guidance for the full year 2026. We are reducing our full year revenue to between $99 and $100 million, primarily due to delays related to professional services related to our technologic solutions division, which reduced our expected revenue by almost $3 million. While our pipeline is strong in SafePoint, the deployments have gone slower than expected, reducing our expected revenue by another $2 million. As Ralph mentioned, until the Puerto Rico contract gets resolved, we have excluded that from our guidance as well which originally represented almost $1.5 million in our original guidance. The remaining revenue guidance reduction is related to slower expected sales growth and deployment delays for other booked contracts that are not gone but are moving to 2027. As our revenue growth drives most of our adjusted EBITDA growth, we are also reducing our full year 2026 adjusted EBITDA margin guidance to a range of 8% to 9%. We continue to expect ARR to increase from $95.4 million at the beginning of 2026 to over $100 million entering 2027. As a reminder, revenue and profitability are back and loaded as deployments, renewals, and expansions build throughout the year. Our outlook continues to assume no contribution from a renewed Chicago ShotSpotter contract. We remain confident in the underlying strength of our business and our ability to execute against our long-term growth strategy.