Soundthinking, Inc. Q4 FY2020 Earnings Call

Good afternoon, and welcome to ShotSpotter's Fourth Quarter and Full Year 2020 Earnings Conference Call. My name is Sachi, and I will be your operator for today's call. Joining us are ShotSpotter'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 ShotSpotter'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 ShotSpotter'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, February 25, 2021, and ShotSpotter 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 of the company's website at ir.shotspotter.com. Now I would like to turn the call over to ShotSpotter's CEO, Ralph Clark. Sir, you may proceed.

Thank you for joining us this afternoon. I hope everyone on the call is doing well. I'm thrilled to have Alan back on this call as my partner and our Chief Financial Officer. I want to personally thank Mary for her careful stewardship during Alan's absence. As usual, I'll do a brief review of Q4 results and discuss our agile response to what has been an eventful year. We'll then share our outlook and focus initiatives for 2021 and beyond before taking your questions. 2020 proved to be a challenging year for everyone, and our company and law enforcement agency stakeholder ecosystem was no exception. I'm extremely proud of how our company has been able to adapt and respond to those challenges throughout the year. We finished 2020 on a positive note, putting us on a solid start to a fast growth path for this year and beyond. We reported Q4 '20 revenue of $12.6 million, including some modest contributions from a partial quarter of LEEDS revenue. This represented 16% year-over-year growth from the $10.9 million of revenue we reported last year. During the quarter, we went live with ShotSpotter response, our acoustic gunshot detection service, formerly branded as Flex, in 5 new cities, including marquee cities such as Cleveland and Fort Lauderdale, which represents our 6th and 14th cities deployed in Ohio and Florida, respectively. In addition, we expanded our footprint in a few cities, including New York City, St. Louis and Bakersfield, California. We're entering 2021 with $46.3 million in annual recurring revenue in our core ShotSpotter business and are well positioned with a robust number of respond projects in our pipeline scheduled to go live in the first half of 2021, which we believe sets us up for strong growth in the second half of this year into 2022 next year. Among those projects are additional expansions in New York City and Columbus, Ohio, along with new city captures such as Mansfield, Ohio, which will be our 7th city in Ohio, Memphis, Tennessee, Detroit and Harris County, Texas. We're very excited by our early foothold in Texas, where we're able to go live on our pilot project in Houston in December of 2020. Houston is already producing promising results with respond, which we expect to formally document in an independent academic study supported by Chief of Police in Houston PD. In addition to the planned study in Houston, we are also supporting a separate academic research initiative that will study the efficacy of ShotSpotter respond in a random sampling of agencies. Our goal is to build on a body of independent research that speaks to the impact of gunshot detection on positive public safety outcomes. We believe this can help accelerate our approach to the tipping point where gunshot detection is accepted as a standard of care solution. We've seen what we believe is the tipping point play out regionally in Ohio, where we have captured 7 cities, 4 of them in the past 24 months. The acoustic gunshot detection as a standard of care narrative has reached the state capital, where Governor Mike DeWine has specifically called for acoustic gunshot detection as a part of his public safety budget. Our accelerated traction in Ohio started from the spark of one net promoter customer who demonstrated the value of acoustic gunshot detection in delivering measurable positive public safety outcomes. This validates our focus on our immersive and innovative customer success and onboarding process and our leveraging the power of net promoter. The return on investment we've realized and our customer success and onboarding initiatives is reflected with a world-class NPS score of 70 in 2020. This achievement builds upon the success we had the year prior and our continued focus on improving processes and the customer experience and journey, implementing, measuring and sharing of institutional best practices as a game changer and speaks to the unique value our services provide. Our strong customer loyalty was further borne out in our ability to manage our GAAP revenue attrition to less than $500,000 in 2020, despite the pandemic municipal budget pressures and recent calls to deepen the police. We hear from our customers that our service is indispensable and mission critical. Strong word-of-mouth and positive referrals drive our customer creation costs of $0.51 per dollar of revenue. This puts us in an industry-leading position relative to other SaaS companies that have to spend well over $1 for a $1 worth of revenue. On a macro basis, the increased violent crime has been broadly reported by the press and very well documented by public safety associations, such as PERF, the Police Executive Research Foundation and ICP. Given our unique vantage point of engaging with over 110 cities with over 750 miles of coverage, we're able to alert on 234,000 gunshot activations in 2020 and have measured the material increase of gun violence from 2019. This uptick in violent crime is not unique to large urban cities, but it's also experienced in medium and small cities. We believe this broad experience has been a material contributor to our recent success in penetrating the large and untapped Tier 4 and Tier 5 market vertical. In the past year, we've added 6 cities in this segment, which was consistent with our expectations prior to the pandemic in late 2019 when we launched a focused sales and marketing program to develop this segment. Smaller agency adoption is demonstrating the compelling need and viability of our gunshot detection services in this large and significantly underpenetrated market. We have a number of additional Tier 4 and Tier 5 pending projects and a large and growing sales pipeline. Our goal is to make every single deployed department, a net promoter and a proof point in applying precision policing technologies, even at smaller, less well-resourced agencies. A great example of our work in this segment is our partnership with the city of Kankakee, Illinois, which has a population of 26,000. Kankakee PD reported a 50% reduction in the response time to ShotSpotter alerts, enabling increased evidence recovery and witness interviews. In January, Kankakee PD made arrests or identified suspects in 4 out of the 6 ShotSpotter alerts they responded to. In one specific case, the police credited the precise real-time ShotSpotter alert, combined with the quick action of the responding officer in saving the life of the gunshot victim. These powerful results speak for themselves and are generating interest from similarly situated agencies considering adding gunshot detection to their crime-fighting toolkit. While we've been able to successfully overcome the headwinds of COVID-19 domestically, our international deal progression has been a bit more challenging. Unfortunately, the top 3 focus areas for us outside of the United States, South Africa, Brazil and Mexico, have been among the most severely ravaged by the COVID-19 pandemic. We've seen material public safety budget cuts, reallocation of federal resources and political mindshare pivot to the response to the spread and mutation of the virus. And while gun violence continues to be a pressing issue, it has taken on a lower priority in these countries for the time being. We continue to be present in those markets in order to maintain our key relationships and protect the pipeline that we've built, with the expectation that converting that pipeline into bookings is more likely to happen over the medium term versus the short term. I am pleased to report that we've made good progress on integrating LEEDS into ShotSpotter. We see an attractive growth opportunity in offering a cloud-based investigative case management solution. Every law enforcement agency has the duty and mandate to document and investigate alleged crimes in order to hold perpetrators accountable and provide resolution for victims. Unfortunately, the options to do this in a digitized and automated way are generally lacking. We believe LEEDS has developed the most complete investigative case management solution that has been proven to be effective with one of the leading law enforcement agencies in the country. We're working on some refinements and integrations to make it an attractive option for small, medium, as well as large agencies before launching it in early Q3. We're already generating $6.7 million of annual recurring revenue from the licensing and support contract from the legacy deployment of the LEEDS investigative case management solution. Any commercial sales that will be launched and branded as ShotSpotter Investigate will be incremental. ShotSpotter Investigate, in combination with ShotSpotter Respond and ShotSpotter Connect, unlocks a compelling new value proposition with which we can target an entirely new set of law enforcement agencies. We now have a complete precision policing platform that provides more efficient and effective ways to respond to, investigate and prevent crime beyond gunshot detection. We believe this integrated, data-driven platform can make an outsized impact on the way policing gets done without over-policing and underserving communities, thereby building community trust and legitimacy, which is the real MVP in delivering sustainable public safety outcomes. We're maintaining and reaffirming our previous revenue guidance of $58 million to $60 million this year for the combined ShotSpotter, LEEDS business. If we're able to manage attrition loss lower than our current estimate of 3% to 4% and/or we get an earlier recovery on the international front, we believe we can come in on the high side of our guidance. At the midpoint of our current 2021 guidance, our revenue growth would be 29% year-over-year from 2020. Okay. Alan's ready to go a little bit deeper into our results. I'll look forward to taking your questions when he's done. Alan, over to you.

Thank you, Ralph, and good afternoon, everyone. As Ralph mentioned, we went live in 5 new cities during the quarter and expanded coverage on several existing customers. For the fiscal year 2020, we went live on 13 gross and 10 net new cities, culminating in 62 gross and 49 net new miles live for the year. This also ended the year with 779 miles live with approximately 813 miles under contract. As we expand our product portfolio to provide a broader suite of precision policing solutions, we intend to report on new response miles deployed at the end of each year rather than each quarter. We will continue to highlight the new cities added each quarter. Our revenue retention rate for the year was still excellent at 107% compared to 111% for 2019. Our current customers and potential new ones continue to have budget challenges. In spite of that, our attrition for 2020 was quite low and represented just over 1% of revenues, which is significantly lower than we expected at the beginning of 2020 and indicative of the value of our solutions. We're still cautious regarding 2021, though, and are estimating for attrition of up to approximately 3% to 4%. Let me provide more details on the quarter and the full year. Fourth quarter revenues were $12.6 million, a 16% increase from $10.9 million in the fourth quarter of 2019. Revenue increased as our deployed miles are up year-over-year, and we also recorded our first revenues from the LEEDS acquisition, although contributed for less than half the quarter. For the full year, revenue was $45.7 million, up over 12% from $40.8 million in 2019. Gross profit for the fourth quarter of 2020 was $7.5 million or 59% of revenue versus $6.8 million or 62% of revenue for the prior year period. As expected, gross margin continues to be impacted as we work through our backlog of maintenance work. These efforts required using resources that are a bit more expensive as a result of COVID-19 restrictions. We believe these costs are now almost complete and expect gross margins to return to a more normalized level in the latter part of 2021. For the full year 2020, our gross profit also increased versus 2019. It was $27 million or 59% of revenues, up 11% compared to $24.3 million or 60% of revenues in 2019. Adjusted EBITDA for the fourth quarter, which we calculate by taking our GAAP net income and adding back interest, taxes, depreciation, amortization and stock-based compensation and acquisition-related expenses, was $3.1 million compared to $3.2 million in the fourth quarter of 2019. For the full year 2020, adjusted EBITDA increased to $11.9 million, up 28% from $9.4 million in 2019. Both the fourth quarter of 2020 and the entire year of 2020, adjusted EBITDA numbers include an add-back of approximately $630,000 for costs related to our LEEDS acquisition. Now turning to expenses. Our operating expenses for the fourth quarter were $7.7 million or 61% of revenue versus $5.6 million or 51% of revenue in the fourth quarter of 2019. For the full year, operating expenses were $25.7 million or 56% of total revenue compared to $22.7 million or 56% of total revenue in 2019. Operating expense increases were primarily related to higher employee-related costs as well as increased costs related to the LEEDS acquisition. Breaking down our expenses, sales and marketing expenses for the fourth quarter were $3.1 million or 24% of total revenue versus $2.5 million or 23% of total revenue for the prior year period. Our sales and marketing teams continue to build our sales pipelines and are also expanding our marketing efforts. Continued emphasis on retention and renewals directly contribute to our low attrition for the year, so we're pleased with the results of our investment in this area. As Ralph mentioned, our sales and marketing spend per dollar of new annualized contract revenue remained very low at only $0.51 per dollar. R&D expenses for the fourth quarter were $1.5 million or 12% of total revenue compared to $1.3 million or 12% of total revenue for the prior year period. While we continued to invest in increasing the functionality of our products, we've been able to maintain expense control well. G&A expenses for the quarter were $3.1 million or 25% of total revenue compared to $1.7 million or 60% of total revenue for the prior year period. The increase in G&A expenses was primarily related to our LEEDS acquisition and an increase in personnel costs. Our GAAP net loss for the fourth quarter was $220,000 or a loss of $0.02 per share based on 11.5 million basic and diluted shares outstanding. For fiscal year 2020, our GAAP net income was $1.2 million or $0.11 per share based on 11.4 million basic shares outstanding and $0.10 per share based on 11.7 million diluted weighted average shares outstanding. Our adjusted net income, which excludes acquisition costs related to the LEEDS acquisition, was a positive $418,000 for the fourth quarter or $0.04 per share on both a basic share and diluted share count basis. For the full year, our adjusted net income was $1.9 million or $0.16 per share on both a basic and a diluted share count basis. In Q4, we ended the quarter with 779 miles live with approximately 813 miles under contract. Deferred revenue at the end of the quarter was $24.6 million versus $20.6 million at the end of the third quarter of 2020. We ended the quarter with $16 million in cash and cash equivalents versus $28.7 million at the end of Q3. While we paid $15 million in cash for the LEEDS acquisition in November, we did not repurchase any shares during the quarter. We have no short or long-term debt outstanding. As we discussed last quarter, in August 2020, we did increase our available line of credit to $20 million to improve financial flexibility. Turning to our full year 2021 outlook, there is no change to the $58 million to $60 million that we discussed last quarter. We continue to expect LEEDS will contribute approximately $10 million in revenue. We also expect that we will remain profitable during 2021. Now back to Ralph for some final thoughts, and then we'll be happy to take your questions.

Thanks, Alan, and welcome back. I'm more excited today than I've ever been about the prospects for our company. Our domestic pipeline remains strong, and we're hopeful that South Africa and Latin America will be able to pull through the pandemic, and will be able to soon reengage on critical public safety initiatives. We're excited about the total addressable market extension and traction we're seeing with ShotSpotter Connect and are confident about our ability to expand our product portfolio with the launch of ShotSpotter Investigate later this year. We're mostly grateful, however, to play an important role in how policing is being reimagined in its adoption of precision policing strategies. Our expanded solutions suite fits perfectly into 21st century policing principles where data is transformed into actionable real-time intelligence that can help prevent, reduce and resolve crime with surgical precision. Our goal remains the same, and that is to continue our journey to be a trusted platform solutions provider to public safety agencies around the globe, helping them better serve and protect communities. And yes, we want to continue to do great work that matters. We're now happy to take your questions.

The first question is from Joseph Osha from JMP Securities.

This is actually Hilary on for Joe. Welcome back, Alan. It's great to hear your voice on the call. I wanted to get your thoughts on when we might begin discussing a return to in-person engagements at schools and work campuses. Could you provide an update on any conversations happening in that regard, and whether we might see deployments on campus later this year?

Sure. This is Ralph. We are actively engaged in the security aspect of our business, focusing on both college and corporate campus opportunities. This particularly includes large retailers located in neighborhoods facing intermediate issues with gun violence. We are optimistic about gaining traction in the security sector.

And then just kind of higher level. I know you kind of just did this LEEDS acquisition, getting a couple of other initiatives up and running. Just kind of when you look at the portfolio of potential skill sets that you might look at. Just any thoughts on what potential M&A opportunities might be interesting to you? And that's all I had.

Sure. This is Alan. I would say, having just acquired LEEDS, we're very excited about what they're doing and what they bring to us in terms of adding to our product portfolio, especially in the case management area. It helps in numerous areas. It helps us in terms of looking at different potential customers, it helps us from expanding the total addressable market. So I would say at this point, we're not necessarily looking for adding any other companies right now from an M&A perspective until we're finally working well with what we've done with LEEDS.

The next question is from Richard Baldry from ROTH Capital.

When I look at, I guess, your backlog, the difference between contracted and deployed, the 34-mile delta. That's about half of what you deployed for all of 2020. So I'm sort of curious what gates that deployment? Are there factors at the city level or COVID restrictions that will measure how fast that comes out or is that just a matter of you getting to it, so it could start the year on a faster pace than maybe we would otherwise expect?

Yes, this is Alan. Please go ahead, Ralph.

Go ahead, Alan.

No, go ahead.

During our last quarter, we talked about there being 50 miles going live in the next period of time. We're probably halfway there. In Q4, we would expect some of that in terms of the stuff that's under contract right now will happen in Q1, but I think it's definitely true to say, Richard, like you said, in terms of versus 2020, we feel better about where we are and where we're positioned from a pipeline and go-live miles in 2021 than we thought at the beginning of 2020.

And when you talk about churn was obviously very low this year but could be back up to something like 3% or 4% next year. Is that something you see and you have awareness of spots inside of the renewals that are unlikely or is that just generic caution entering any year with uncertainties?

This is Ralph. I believe we are more focused on caution. COVID-19 is not a short-term event; we consider it to be more like an 18- to 24-month situation. To use an analogy, we are really in the fifth inning of this process. While we managed attrition well in 2020, we don’t think we are completely through it yet. Therefore, we thought it wise to estimate an attrition rate of about 3% to 4%, with the hope that we can perform better than that. It's encouraging to note that we did a great job last year, and I’m optimistic about our performance this year as well, but we recognize that it remains a challenging environment with regards to municipal budgets.

And lastly, when we look into your operating expenses, how much of that reflects LEEDS now? And maybe as a new sort of baseline to look at going forward, or are there any fourth quarter one-time things that we should back out, maybe related to your end bonuses, et cetera? Just sort of getting a baseline for spending starting 2021.

So this is Alan. Great question. Look, we do have some revenue in Q4, but it's less than half the quarter from LEEDS. We also had that went along with the revenue, some expenses that would be included as well. You can also expect that we're going to have some amortization costs related to the actual transaction itself that will be adding throughout 2021. So I would say, if you think about in terms of where our expense line items are going to be, we'll probably have a little more percentage spent in sales and marketing. R&D will be very similar. And G&A will be similar to what it's been in the past and probably even lower than Q4 because Q4 had all the M&A expenses associated with it.

The next question is from Ryan Kimbrel from Craig-Hallum.

Ryan on for Jeremy Hamblin here today. Congrats on the nice quarter. You guys highlighted and made a lot of smaller deals over the past few months. Does this mark sort of a broader change in strategy in terms of letting some smaller cities try out the product on a trial basis or how is your overall viewpoint on that change in the last 3 or so quarters?

So this is Ralph. We've been focused on creating a targeted sales and marketing program aimed at the Tier 4 and Tier 5 market verticals. We're seeing good results in this area, even though the deals are smaller, more like singles and doubles rather than big wins. However, we appreciate this approach because our initial experience suggests that the sales cycles are shorter and less complicated compared to larger city environments. Additionally, our work across various cities and agencies indicates an interesting trend regarding the increase in violent crime. It's important to note that this uptick is not just occurring in major urban centers; we're also observing significant rises in gun violence in smaller cities facing specific challenges. We're optimistic about continuing this trend. We're investing in these efforts and gaining momentum, and as we onboard more Tier 4 and Tier 5 cities, these agencies can become advocates for us, helping to bring in other nearby agencies. Success stories from cities like Kankakee make it easier for other smaller cities to see the potential for their own situations. We're genuinely excited about this opportunity.

Great. Can you provide an indication of the cadence for the $10 million contribution regarding LEEDS next year? Is it still too early to discuss the overall LEEDS margin profile and how it compares to the ShotSpotter business on a high level?

Sure. This is Alan. Currently, we're discussing $10 million in LEEDS, which can be divided into a couple of categories. Approximately $6.7 million comes from annual recurring revenue, while the remainder is tied to professional services. For instance, in 2020, they had some professional services that were slightly higher than in previous years, which they managed to complete in 2020. When considering the $10 million figure, we aim to make a reasonable estimate for professional services, and while there's always a chance it could exceed our expectations, we don't anticipate it going lower. This is how we arrive at the $10 million in our current guidance.

And then the margin profile. It's probably too early for us to get into details about the margin profile. Just to answer your second question, secondary part of your question.

The next question is from Mike Latimore from Northland Capital Markets.

Very nice quarter there. I guess you talked a little bit about the shorter sales cycles for Tier 4, Tier 5 cities. I guess how are the sales cycles generally for kind of your average customer now versus, say, 6 to 9 months ago?

So I don't think we're changing from our traditional view of sales cadence being around 12 to 18 months. As we entered the pandemic and experienced municipal budget pressures, we observed some interesting dynamics. We had two categories of customers. Some were quite busy dealing with social unrest and protests and indicated they might have budgetary issues. They expressed interest but would be slower to focus on our offerings. Conversely, there were agencies that recognized the increase in gun violence, which motivated them to take action. Consequently, we saw a few deals with much shorter sales cycles than our usual timeframe. However, some deals may take longer due to the situations within particular agencies. It's really a combination of both. Alan, do you have any different insights or anything you would like to add?

No. I think you covered it pretty well.

Great. And then on attrition, I guess we've had 2 months of 2021 so far. I guess, have you seen an uptick in churn rating so far or no major change yet?

So this is Alan. I think we'll talk about the attrition that we would see at the end of Q1, but I would say, right now, we feel pretty good about how things are going. As Ralph mentioned earlier, we are counting on or at least expecting as high as 3% to 4%. Last year, only a little over 1% was fantastic. It would be our goal and our efforts to try to keep it as slow to that as we can.

Got it. And then just last on LEEDS. So $10 million, kind of reiterate that. That's all from 1 customer. So you're not building any new customer sales in this year, right?

Yes, that's correct.

Okay. And are there prospects for landing and recognizing revenue on new this year or is that really just going to happen kind of later?

So we don't have it in our guidance, I would say. We are planning to launch ShotSpotter Investigate later this year, say, early Q3. It could be the case, and this would be upside if we were able to generate some revenues from some early adopters jumping on that platform sooner versus later. We're not planning on it though, so we're looking more to that from a planning point of view, really generating measurable revenues in 2022, but it is potential that it could happen late this year.

At this time, this concludes our question-and-answer session. If your question was not taken, you may contact ShotSpotter's Investor Relations team by e-mailing ssti@gatewayir.com. I'd now like to turn the call back over to Mr. Clark for his closing comments.

Thank you very much. I want to thank everyone for joining the call. We're looking forward to seeing many of you over the next month-or-so, one at our Investor Analyst Day, which will be at the end of March, and we're also planning to participate in the ROTH conference mid-March as well. So thanks, again. I hope everyone continues to stay safe and be well. Thank you.

Thank you for joining us today for today's call. You may disconnect your lines now.