ShotSpotter, Inc. (NASDAQ:SSTI) Q3 2023 Earnings Call Transcript

ShotSpotter, Inc. (NASDAQ:SSTI) Q3 2023 Earnings Call Transcript November 7, 2023

ShotSpotter, Inc. misses on earnings expectations. Reported EPS is $-0.15 EPS, expectations were $-0.04.

Operator: Good afternoon, and welcome to SoundThinking’s Third Quarter 2023 Conference Call. My name is Ariel, 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 about 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 the actual results to differ materially from those stated or implied by those statements. Certain of these risks and assumptions are discussed in SoundThinking’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 SoundThinking 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’s CEO, Ralph Clark. Sir, please proceed.

Ralph Clark: Good afternoon, and thank you for joining our Q3 2023 conference call. After Alan 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 SafetySmart platform are seeing increased adoption across the board as agencies are dealing with increased demands for service and tackling a measurable uptick in crime, all the while facing diminished headcount resources. And with the recent acquisition of SafePointe 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 buying 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 ShotSpotter go-live activity with 7 new city captures, 2 city expansions and 1 university expansion this quarter.

That puts us at 20 new city logo deployments year-to-date. The new city local 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 are 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 3 new city agency deals that were booked in Q3, including Escambia, Florida; Chester, Pennsylvania as well as the strategically important Tier 1 city of Philadelphia, which comes to us through the Philadelphia Housing Authority acquisition.

Overall revenue retention remained strong with only $41,000 of GAAP attrition from the nonrenewal 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’s selection and unanimous City Council’s 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 as 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 3 different mayoral administrations and over 6 superintendents over an 8-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 the strong ShotSpotter endorsement received from Cape Town Mayoral Committee member, JP 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 resecuring 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 municipalities 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 Harrell’s $1.8 million anticrime proposal that principally included a gunshot detection system. We believe that is 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 3 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 SafetySmart platform also continues to grow. We closed a $900,000 deal combining CrimeTracer and CaseBuilder to a large state Department of Justice customer, charged with investigating insurance fraud. We also executed a deal with Chicago PD to pilot CrimeTracer for 6 months with the expectation it will convert into a mid- to high 6-figure deal transaction in the latter half of 2024.

We are also pleased to announce the recent contract execution and formal project kickoff this month of a major CaseBuilder deployment within New York City Department of Corrections. SHI, our prime contractor, has received purchase orders from the NYC DOC totaling $13.5 million for SoundThinking Professional Services and an annual subscription service to CaseBuilder. Once all POs are processed by the City of New York and SHI, this project will represent an $18 million contract for SoundThinking. We are 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 correction subvertical. 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 SafePointe into SoundThinking in the SafetySmart 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 2 new BDRs and 4 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 SafePointe at a major healthcare facility. I’ll conclude by formally announcing and welcoming several new senior executive additions to the leadership team, starting with Erin Edwards, who will be joining us as our new Senior Vice President of Solutions Sales and who was most recently a sales executive with Everbridge.

Erin 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 SoundThinking. We previously announced the additions of Greg Makuch, Larry Jackson, Anne Mueller and Mark Page to the management team. And we are also fortunate to be able to add Greg Holifield, the former CEO and Founder of SafePointe to the team. I am 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.

Engineers analyzing a complex network of process control software and systems.

Alan Stewart: Thank you, Ralph. We’re very pleased with our performance in the third quarter. As Ralph mentioned, this quarter, with our ShotSpotter solution, we went live in 7 new cities, expanded in 2 current cities and 1 university. We’re continuing to see an increase in the interest of our solutions across our SafetySmart platform. At this point, we expect to add over 140 new miles of ShotSpotter coverage this year, approximately 40% higher than 2022. Attrition in the third quarter was extremely small at only approximately $41,000 in GAAP 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 SafetySmart platform.

We’re also pleased to add SafePointe to our company and their products to our SafetySmart 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 SafePointe acquisition. Gross 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% to $4.3 million this year from $3.1 million last year for the third quarter. 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, 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 $15.2 million or 64% of revenues versus $6.2 million or 33% of revenues in the third quarter of 2022. Recall that the third quarter of 2022 operating expenses were reduced by $5.4 million related to contingent consideration reduction related to the Forensic Logic acquisition.

Operating expenses included higher costs primarily due to personnel expansion and higher-than-expected legal expenses. Breaking down our expenses. Sales and marketing expense for the third quarter was $6.3 million or 26% of total revenue versus $5.4 million or 29% of total revenue for the prior year period. The increase in costs was related to personnel costs as a result of increased headcount and increased revenue. Our R&D expenses for the third quarter were $3.2 million or 13% of total revenue compared to $2.4 million or 13% of total revenue for the prior year period. We continue to invest in increasing the functionality of all of our . G&A expenses for the quarter were $5.7 million or 24% of total revenue compared to $3.9 million or 21% of total revenue for the prior year period.

The increase in G&A expenses were primarily related to approximately $500,000 in increased leading costs, increased personnel-related costs and approximately $700,000 in business acquisition costs. We expect our G&A expenses will be reduced in Q4 versus Q3 in both absolute dollars and as a percentage of revenues related to certain expense savings initiatives that we have taken. Our GAAP net loss was $1.9 million or $0.15 per basic and diluted share for the quarter based on 12.5 million basic and diluted weighted average shares outstanding. This compares to net income of $4 million or an income of $0.33 per basic and diluted share for the third quarter based on 12.2 million and 12.4 million basic and diluted weighted average shares outstanding, respectively, for the prior year period.

Our adjusted net income loss for the third quarter was a loss of $1.1 million or a loss of $0.09 per share based on 12.5 million basic and diluted weighted average shares outstanding. This compares to a loss of $1.4 million or a loss of $0.11 per share based on 12.2 million basic and diluted weighted average shares outstanding for the prior year period. Adjusted net income, a non-GAAP financial measure, is calculated by taking our GAAP net income and adding back acquisition-related expenses, including adjustments to our continued consideration obligation. Deferred revenue at the end of the quarter decreased to $38.3 million from $43.7 million at the end of Q4 2022, and the decrease is primarily related to the timing of renewals. We ended the quarter with $5.8 million in cash and cash equivalents versus $10.5 million at the end of fourth quarter 2022.

The decrease was primarily related to almost $25 million in accounts receivable that we had at the end of the third quarter, some of which has already been collected. Our current cash balance is approximately $7 million. During the third quarter, we also repurchased approximately 93,000 of our shares at an average price of $20.88 for approximately $1.9 million. We have approximately $18 million available on our line of credit if ever needed. We used $7 million of our line of credit during the quarter to provide a portion of the cash used to purchase SafePointe in August. Turning to our full year 2023 outlook. We are maintaining our full year revenue guidance range of $92 million to $94 million and our adjusted EBITDA margin guidance at 16% to 18%.

We are expecting our annual recurring revenue, or ARR, at December 13, 2023 to have increased over 17% to approximately $93.5 million, up from $79.7 million on December 31, 2022. We intend to provide revenue and adjusted EBITDA guidance for 2024 once Chicago formally approves Mayor Brandon Johnson’s proposed budget, which is expected to be approved in the next 2 weeks. Now back to Ralph for some final thoughts, and then we’ll be happy to take your questions.

Ralph Clark: Thanks, Alan. I want to take this opportunity to give a shout out to the entire company on achieving an NPS score of 64, representing an 8-point increase from last year’s world-class score of 56. This is phenomenal. We’re stoke that we also saw increase in the agency participation rate, which shows a significant amount of customer engagement. The insight and feedback beyond the specific score is what’s most important. In addition to getting constructive feedback on how to make our services even better, we also learned that 42% of the respondents indicated an interest in learning more about our new platform strategy and expanded solution set. This represents a measurable upsell, cross-sell opportunity within our current installed base.

Again, our NPS process and ultimate score is very much a cross-team collaboration and is core to our company DNA. I’m extremely proud of our collective effort in servicing our clients as trusted advisers in seeing the proof point that our strategy is making a difference. We’re now happy to take your questions.

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Q&A Session

Operator: [Operator Instructions]. Our first question comes from Richard Baldry of ROTH MKM.

Richard Baldry: Maybe given that’s where I live, could we start with the Philadelphia. I’m sort of curious, remind us where the entry point was. Can you maybe talk about sort of the opportunity there? Obviously, it’s a pretty big city. Sort of curious what your thoughts are on building that from its foundation.

Ralph Clark: Great. Rich, can you hear me? This is Ralph.

Richard Baldry: Yes.

Ralph Clark: Yes. Hello. So maybe I’ll start, and Alan, you can jump in as necessary to correct or add. So we’re really excited about getting a footprint reestablished in Philadelphia. I think as you mentioned, the entry point is through the Philadelphia Housing Authority, but we’re expecting a significant amount of collaboration and cooperation with the general Philadelphia police department. And of course, being a Tier 1 city with the amount of challenges they have around violent crime, we think it represents a fairly significant opportunity as a Tier 1 city to be able to deploy a significant number of miles once we prove success with our first entry point there, reentry point in Philadelphia.

Richard Baldry: And then switching to SafePointe. Can you go over sort of the new team build-out, the quota, I think it was something like 200 lanes or something. How does that compare historically to what they’ve typically done annually or life to date? And what kind of economics does that represent on a revenue basis on either per lane or any metric that can kind of help us with that.

Ralph Clark: Maybe, Alan, I’ll start and you can jump in. And so I think SafePointe is a greenfield opportunity for us. And so it’s not really quite relevant to compare what SafePointe was doing as probably under-resourced company focused on this very large TAM opportunity. We’re looking at this as an opportunity to leverage our kind of scale and brand reputation and willingness to invest in significant go-to-market motion to completely change the trajectory point. Although it has performed very well as an independent company, we’re expecting to take it to the next level. Alan, I’ll let you address the unit economics.

Alan Stewart: Yes, sure. So this is Alan. It’s interesting, each line is about $20,000 in terms of annual revenue. That can be a little higher or a little lower. But if you think about it, so 200 of those puts about $4 million roughly in potential revenue ultimately. So having 4 different salespeople related each with the target of 200 puts the potential revenue ultimately, if we were to hit all those north of $15 million. So it’s going to take some time to do that, but we’re already working hard to get closer to those types of numbers.

Richard Baldry: So could you talk about sort of the go-to-market motion there? Because it is different than your government-centric in the past. How do you feel about your ability to beat the bushes and find those opportunities? Is it digital marketing that’s leading the way there? Is it referenceability of some early wins? So how do you build that pipeline? And what’s the profile sort of who you bring in to do the sales in that?

Ralph Clark: Yes. So this is Ralph. Maybe I’ll start. So I think it’s all of the above. I mean, so we’re building the pipe digitally. Of course, we inherited a pipeline when we acquired SafePointe along with some key deployments that represent a fairly nice referenceable accounts, if you will. We’re going to be targeting our focus on a couple of industry verticals, I’ll just mention a few. We think the healthcare vertical is really quite interesting, and we’ve had a lot of success there. We think higher ed is another interesting vertical. And we also like, I would say, the gaming vertical as well. And what’s interesting about these verticals is they have a compelling need to do weapons detection, but they want to do it more covertly as overtly.