Soundthinking, Inc. Q4 FY2023 Earnings Call

Good afternoon, and welcome to SoundThinking's Fourth Quarter and Full Year 2023 Conference Call. My name is Paul, 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 and uncertainties and assumptions that are difficult to predict and may cause the actual results to differ materially from those stated or implied by these 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, February 27, 2024, 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 of the company's website at ir.soundthinking.com. Now I would like to turn the call over to SoundThinking's CEO, Ralph Clark. Sir, please proceed.

Good afternoon, and thank you for joining us today. Alan and I have a lot to cover in today's earnings call. So we're going to go ahead and get started. Fiscal 2023 was significant for us, starting with our transformational rebrand to SoundThinking and the introduction of our SafetySmart platform that includes a suite of complementary solutions that are extremely powerful. The SafetySmart platform fairly signaled our broad ambitions to move beyond the acoustic gunshot detection space, primarily focused on domestic law enforcement and to embrace new solutions with new commercial vertical markets and new buying centers. Two very important developments that capped off that 2023 transformation journey are the closing of a greater than $13 million CaseBuilder deal with the New York City Department of Corrections that we expect to grow to be worth approximately $18 million in addition to our entry into the $25 billion weapons detection space with our strategic acquisition of SafePointe. Accordingly, we believe our market opportunity has significantly increased, yet remains largely underpenetrated and is incredibly attractive. Our proven ability to execute at scale as the company approaches $100 million in revenue with over 300 employees is encouraging as a proof point that we are up to the challenge to drive long-term profitable growth. Our relentless focus on product innovation and quality, combined with our passion for the customer in developing deep trusted partnerships, provides an important opportunity to make an impact on making the world a better place and doing work that matters. Turning to Q4 2023 financial performance. Our revenues increased 24% to a quarterly record of $26 million from the prior year's $21 million in Q4 2022. Adjusted EBITDA came in at $4.8 million or 18% of revenues compared to $4.3 million or 20% of revenues for Q4 2022. ShotSpotter went live with six new cities, including our third international deployment with a go-live in the city of Montevideo, Uruguay, along with three expansions for the quarter. Q4 2023 also saw SafePointe deployments on over 30 lanes. In addition to the CaseBuilder New York City Department of Corrections deal, several other projects were kicked off for CaseBuilder, CrimeTracer and ResourceRouter. Revenues for the full year increased 14% to a record $92.7 million with a $14.3 million of adjusted EBITDA or 15% of revenues. ShotSpotter finished the year with 25 new cities, 19 expansions and 155 miles taken live in a year. Our ShotSpotter go-live cadence represented a greater than 50% increase from last year. Overall, we had another strong year with 107 new miles booked in 77 subscription renewals with 37.5% of those bookings representing multi-year agreements. Of note was the exceptional performance of our Tier 4, Tier 5 initiative, which represented almost 20% of the domestic new miles booked in 2023. We view this specific vertical as a significant untapped total addressable market expansion opportunity and are keenly focused on continuing to build upon the successful inroads we've made in this largely untapped segment. We believe our customer retention results remain best in class for an operating SaaS company. In 2023, we were able to realize approximately only 1% of GAAP revenue attrition. As I reported on our last earnings call, our customer success organization, robust customer onboarding program, world-class Net Promoter collaborative process and score of 64% are essential to our customer retention strategy. In addition to helping drive positive outcomes that promote stickiness, it also contributes to a strong sales and marketing spend of only $0.52 for a dollar's worth of annualized contract value for 2023. Now many of you have probably been following the news coverage of our situation in Chicago. We're very pleased to report that we reached a compromise with Mayor Johnson in order to prevent a disruption in the critical ShotSpotter service that was scheduled to end on February 16 when the then current term expired. ShotSpotter has been serving the city of Chicago and its residents for over seven years, and we believe the impact of pulling the plug in February would have been less than optimal for everyone involved. The now executed contract extension has a term that ends in September, which provides Chicago with service through the historically challenging summer months of gun violence and both the Democratic National Convention and the Republican National Convention. There is an additional two months of reserve term that effectively carries the contract extension through November 22, 2024. We're incredibly inspired and grateful to have seen the large and vocal outpouring of support for the ShotSpotter solution received from local press, downtown business interests, older persons and the Chicago Police Department and most importantly, community members residing in our collective coverage areas. These residents have responded with an 85% plus favorable rating for ShotSpotter, according to a Fallon Research poll we commissioned in January of this year. We intend to use the remaining time of the Chicago contract extension to continue our work with the Chicago Police Department on tracking and reporting out data and metrics as well as building upon and galvanizing the support we've seen over the past two weeks. We believe this will provide a compelling case to support CPD's continued use of this critical tool and hope the business case will be considered in Chicago's go-forward plans. Now despite some limited headwinds from our Chicago situation, we believe our overall SafetySmart platform demand drivers and funding sources remain strong. There are increasing demands on cities to deal with elevated violent crime in a transparent fashion, while many agencies are materially under-resourced headcount-wise. As a reference point, we published over 330,000 gunshot alerts in 2023. An overwhelming percent of those alerts did not have a corresponding 911 call, which hinders the efforts of any agency to respond to and investigate criminal gunfire as well as save lives. Given these demand drivers and the constructive funding environment, we continue to be bullish on our ability to drive profitable growth for the foreseeable near and medium term. We recently brought on significant senior leadership talent to help us scale over the next several years, and we continue to innovate across our suite of proprietary technology solutions. We're establishing 2024 revenue guidance at $104 million to $106 million. Supporting that outlook is $95.4 million of annual recurring revenue as of January 1, 2024, combined with $6 million of booked professional services revenue through our Technologic division and their work with both NYPD and New York City Department of Corrections. This then totals $101 million. The remaining $3 million to $5 million of revenue we expect to come from new sales of solutions from our SafetySmart platform that has $45 million in growing pipeline. We intend to continue to execute on top line growth while being prudent in managing expenses to ensure we are delivering cash flow back to the business to continue to improve our balance sheet. And with that, let me turn the call over to Alan.

Thank you, Ralph. I'll cover highlights for both Q4 and 2023 as a whole. In Q4, we went live in six new cities, one of which was international in Montevideo, Uruguay, and expanded with one commercial security customer. We also expanded with two current ShotSpotter cities and achieved revenue growth of 24% compared to the fourth quarter of 2022. We did lose two small customers with less than 2 miles of coverage in total. That said, our 2023 GAAP revenue attrition, net of price increases, was still only 1% for the fourth year in a row. We also went live with three CaseBuilder customers, including the long awaited but large contract with New York City Department of Corrections currently worth over $13 million. We expect this to be worth approximately $18 million in total later this year to cover the six years of the contract. We are also pleased to report that we had total bookings for the year of over $70 million across our various solutions. Let me provide more details on the quarter, and then I will share some thoughts around 2023 and guidance for this year. Fourth quarter revenues came in at $26 million, an approximately 24% increase over the $21 million in the fourth quarter of 2022. Revenues increased primarily due to the increase of our deployed miles year-over-year as well as revenue growth from our expanding SafetySmart platform products. Gross profit for the fourth quarter was $15 million or 58% of revenue, a 26% increase over the $11.9 million or 57% of revenue for the prior year period. Gross margin for the fourth quarter was higher than the prior year period as our revenue base grows. Our net income for the fourth quarter was $3.6 million or $0.29 per share on a 12.7 million weighted average shares outstanding on a basic basis and $0.28 per share on 12.9 million weighted average shares outstanding on a diluted basis. This compares to a net loss of $1 million or $0.09 per share on a 12.2 million weighted average shares outstanding on both a basic and diluted basis for the prior year period. In Q4, our expenses for the quarter were reduced primarily due to a reduction in the contingent consideration liability related to both Forensic Logic and SafePointe earnouts of approximately $4.8 million as the related revenues in 2023 were lower than expected, and we reduced the expected future revenues for SafePointe. Adjusted EBITDA for the fourth quarter was $4.8 million, an increase from the $4.3 million in the fourth quarter of 2022. As a reminder, adjusted EBITDA is calculated by taking our GAAP net income or loss and adding back interest, taxes, depreciation, amortization, stock-based compensation and acquisition-related expenses, including adjustments to our contingent consideration liability related to earnouts. Our operating expenses for the fourth quarter were $10.6 million or 41% of revenue versus $11.9 million or 57% of revenue in the fourth quarter of 2022. Breaking down our expenses, sales and marketing expense for the fourth quarter was $7.4 million or 28% of total revenue versus $5.7 million or 27% of total revenue for the prior year period. We continue to focus on investing appropriately to grow our sales and marketing capabilities for all of our products. These investments are important for our continued growth, and we are seeing success as we continue to build our sales pipeline and expand our marketing efforts. We continue to focus on maintaining high levels of customer satisfaction, which helps keep our attrition rate low. Our R&D expenses for the fourth quarter were $3.2 million or 12% of total revenue compared to $2.5 million or 12% of total revenue for the prior year period. We continue to invest in increasing the functionality of all of our products. G&A expenses for the quarter were $4.8 million or 18% of total revenue compared to $4 million or 19% of total revenue for the prior year period. G&A expenses in absolute dollars were reduced due to the $4.8 million reduction in the contingent consideration liability related to the Forensic Logic and SafePointe acquisitions. Our revenue results for 2023 were $92.7 million, an increase of 14% from 2022. The increase was primarily due to revenues related to significant expansion in customers using our gunshot detection solutions, having added 25 new customers, expanding in 19 customers and going live in over 155 miles during the year. There was a slight addition of revenues from our new New York City Department of Corrections contract and SafePointe for less than $2 million combined. Gross profit for 2023 was $52.7 million or 57% of revenue versus $46.8 million or 58% of revenue for the prior year. Our net loss for 2023 was $2.7 million or $0.22 per share based on 12.4 million weighted average shares outstanding on both a basic and diluted basis. This compares to net income of $6.4 million or $0.52 per share based on 12.2 million basic weighted average shares outstanding and 12.3 million weighted average shares outstanding computed on a diluted basis for the prior year. Adjusted EBITDA for 2023 was $14.3 million, a reduction from the $15.9 million in 2022. Our revenue retention rate remained positive at 107% in 2023, down from 124% in 2022. Additionally, our sales and marketing spend per dollar of new annualized contract value for the next 12 months was $0.52 per dollar in 2023 versus $0.40 per dollar in 2022. Deferred revenue as of December 31 was $41.9 million versus $43.7 million at the end of 2022. We ended Q4 with $5.7 million in cash and cash equivalents, similar to the $5.8 million at the end of the prior quarter. At the end of 2023, we had $7 million of debt outstanding related to the partial funding of our SafePointe acquisition and approximately $18 million available on our line of credit if we ever needed. Our annual recurring revenue starting on January 1, 2024 was $95.4 million compared to $79.7 million that we started with in 2023. Our revenue guidance for 2024 is $104 million to $106 million. As Ralph explained and to provide a bit more detail as to how we got to that range, the following may be helpful. We start with slightly over $95 million in ARR. We then went out and already booked $4 million of professional services from our Technologic Solutions division in support of ongoing New York City projects and then $2 million of professional services related to the CaseBuilder deployment for the Department of Corrections. This gets us to a preliminary total just over $101 million. We expect to recognize another total of $3 million to $5 million of revenue from a cumulative 2024 pipeline of greater than $44 million from domestic and international ShotSpotter, SafePointe, CaseBuilder, CrimeTracer and ResourceRouter bookings to get to our $104 million to $106 million GAAP revenue guidance. We are also providing guidance for our 2024 adjusted EBITDA. We expect our adjusted EBITDA to be higher than the 15% we achieved in 2023 and are raising our guidance range to between 18% and 20% in 2024. Now back to Ralph for some final thoughts, and then we'll be happy to take your questions.

Thanks, Alan. Let me take a moment to thank my fellow colleagues and partners for a truly remarkable 2023. We are all committed to and excited about continuing to build and service safer communities and gathering places globally. Operator, I think we're now available to open it up for questions.

Thank you. We will now begin the question-and-answer session. Our first question comes from Richard Baldry with ROTH Capital. Please go ahead with your question.

Thanks. My understanding on the SafePointe is per lane, it might be about a one to three economic ratio versus your traditional ShotSpotter gunshot detection. So you added 30 lanes in the quarter, that'd be like adding another 10 square miles. Can you go over my math and then make sure I'm right? And then the reason I'm asking is that I would argue if that was a run rate, you're adding 40 a year-ish to what your 100 to 150 recently been, it's a pretty significant new growth engine for you now. Is that 30 lane sort of an outlier? Is it something that's going to bounce around a little bit as you sort of get your legs under yourselves with that? How do we think about the sustainability of that type of execution? Thanks.

Yeah. So this is Alan. I'll start and then Ralph, you can add additional comments or thoughts too. The average price on a lane is somewhere between $17,000 and $20,000. So your numbers are pretty close. We have gotten some traction fairly well in the last quarter. And we do expect that as we continue to add capability, both sales, marketing and deployment as well, that will expand as we go into '24. From a profit standpoint, each one of those lanes costs less than 50% of the actual price per lane. So we would expect that the gross margins to be significant as well.

And can you talk about the pipeline or the sustainability maybe of what you've seen so far? And it seems to me some of the applications that can support are pretty large-scale deployments, not just hundreds, possibly thousands. So where are you looking at? Starting small where elephant hunting concept comes in? Sort of overall, how you're feeling about the opportunity there?

Yeah, Rich. This is Ralph. Is that question specifically to the SafePointe pipeline?

Yes.

Or in general? Yeah. So I think it's worth noting that we have an overall pipeline of about $45 million or so, and it's growing. About $10 million or so of that pipeline is associated with SafePointe and it's growing every single day as we put kind of more marketing resources around kind of discovery opportunities. I think our go-to-market motion strategy is really around kind of land and expand, very similar to our experience with ShotSpotter, is to kind of get some lanes going, kind of show efficacy and then work with those corporate customers typically to expand our lane penetration within a physical enterprise and within a broader enterprise. So that's the strategy.

Great. In regard to the increase in go-lives for traditional gunshot detection to 155 in 2023, which was previously around 100 at its peak, do you believe this has affected your pipeline in the short term? Or do you think this indicates a genuine rise in demand that could sustain itself? Thank you.

Sure. This is Ralph again. So I think it's worth noting for the past few years, it's been a couple hundred miles kind of per year cadence for go-live. I think last year was an exceptional year with 155. I think going forward, 2024, we're expecting to go live on fewer lanes, I would say, definitely north of 100, but probably south of 155. I think from a mix point of view, our expectation is that we're going to see much more international contributions. So on a revenue basis, it will probably be a nice kind of uptick because, as you know, we price a little bit higher on the international deployments. And we're really liking what we're seeing in terms of Uruguay's initial success with ShotSpotter, and we think that's going to lead to some additional opportunities in Latin America.

Great. Regarding the Department of Corrections contract, which is the largest you've encountered to date, have there been any challenges with it? Do you believe everything is progressing smoothly? What is your overall feedback on it, and how do you think it will be viewed as a reference moving forward? Thanks.

Yeah, so this is Ralph again. It's very early, but it's going extremely well. We have a very capable executive leading that effort with a very strong team, mostly the Technologic team that's kind of been in and around supporting NYPD over the years. We've kind of grown that team to support our go-live efforts on the New York City Department of Corrections contract. And we do believe that there are going to be a bellwether to other kind of corrections opportunities for our CaseBuilder solution, very similar, again, to the way the New York Police Department. NYPD was a bit of a bellwether account for us with respect to ShotSpotter.

Thanks.

Our next question is from Michael Latimore with Northland Capital Markets. Please proceed with your question.

Thanks a lot. So Ralph, regarding your comment about the international gunshot detection business, does this mean you expect gunshot bookings to increase year-over-year, even if the go-live milestones are somewhat lower?

Yeah. No, I was just commenting on the overall revenue mix. I think I'll be very clear. I think from a total miles point of view, our expectation is that we're going to be south probably of 155, but north of 100 square miles. And just the mix of those miles will include more international contribution.

So the revenue effect is expected to be better than the 155 go-live miles from this year given the international context.

I would not comment specifically on that. The question is whether the reduced miles are offset by the additional international go-live miles. We don’t have that fully clarified.

Yes. Okay. And then does your guidance for fiscal '24 assume the Chicago contract goes through September or November?

Yeah. This is Alan. So the contract actually goes to November 22.

Got it. Okay. All right. And then in terms of the CaseBuilder opportunities, obviously, the Corrections Department is great. I think you mentioned a couple of others. In the pipeline, do you have notable prospects in the pipeline for CaseBuilder, 7-figure kind of range deals?

I believe it's a combination of different deal sizes. There aren't any deals in the 7-figure range, but there are definitely several 6-figure deals along with some in the 5-figure range.

Yeah. And just last, the $70 million of bookings that you referenced for '23, what kind of growth was that?

Yeah. This is Alan. So it's pretty much the same as what we had last year. Ultimately, when you think about the bookings, sometimes it's a multi-year contract. It gets a little higher, sometimes it's just one year. But it was still significant for the year for us.

Thank you. Our next question is from Rustam Kanga with Citizens JMP. Please proceed with your question.

Good afternoon. Thank you for the question. This is Rus standing in for Trevor Walsh. The evaluation from Duke Law regarding the DPD deployment indicated that ShotSpotter was instrumental in helping DPD respond to more confirmed gunfire incidents compared to relying solely on 911. How would you assess these types of third-party evaluations? Additionally, do you believe that they could serve as a catalyst for securing new city deployments?

Great. That's a great question. I think that the Duke study for Durham is very consistent with what we've seen kind of across our deployments. One is the significant underreporting issue of a traditional community gunfire that takes place. We know from experience and also several studies that 80% to 90% of community criminal gunfire goes unreported by traditional 911. So that stands the reason that when you have an incredible tool, like a response tool like ShotSpotter in the form of the acoustic gunshot detection technology, you're going to be able to get much broader coverage. And because we are providing a very precise location and doing all this within 30 to 45 seconds of the trigger pull, we're going to see really significantly improved response rates literally to the dot. And once you equip officers to be able to respond to gunfire very quickly and precisely in a much more comprehensive way, you're going to get good outcomes. And those good outcomes take the form, first and foremost, of saving lives for many of those situations where gunfire rings out. You have a gunshot-wound victim on the other end. And so getting officers to the scenes of these events where they can render life-saving first aid is incredibly important in terms of kind of saving and preserving lives. You're going to find more evidence, collecting shell casings, running them through the NIBIN system, which allows you to really speed up your investigations and find out who might be responsible for these types of events is also very important and preventative, I would say. Sometimes you're actually going to capture a trigger puller, sadly that aren't smart enough to take off after they fire that weapon. We know that does happen in a material amount of time, not a significant percent but enough to make a difference. And so if you can take a serial trigger puller off the street from an enforcement point of view, that's incredibly important. And then lastly, I'll just add that when communities see police kind of responding very quickly and precisely to these events in a very respectful way as guardians, it really does change the dynamic and the perception that communities have about law enforcement, which is critically, critically important for agencies to have that kind of engaged community support for them to be able to do the things that they do to kind of create safer communities. So all in all, it's a no-brainer from our point of view if you're a city that has ongoing persistent gun violence to have a tool like this. And seeing the Duke study and other studies that we see, too, I think Dennis Myers (ph) has had done some work at Winston, Salem as an example, that just really kind of confirm the obvious value that a technology tool like this provides.

Thank you. Our next question is from Yi Fu Lee with Cantor Fitzgerald. Please proceed with your question.

Thank you for taking my question. Congratulations on the strong finish to the fourth quarter. I have two questions for Ralph and one for Alan. I want to focus on the Chicago exposure. With the renewal coming up in November, could you comment on the actions you might take to better position yourselves for the upcoming year? I know predicting next year's outcome is difficult, but how can you enhance SoundThinking’s readiness for Chicago?

Thank you for that question. I want to emphasize that we have been successfully operating in Chicago for a long time across various administrations. Our main goal has been to assist a city facing significant challenges with gun violence by enabling officers to respond quickly to incidents and provide life-saving interventions. We plan to continue delivering the same high-quality support we have offered in the past, while also aiming to gather more data. While the Chicago Police Department is aware of the data being collected, we believe we can improve transparency and share this information with a wider audience, including residents, city council, the Mayor's office, and local media. We are pleased to have reached an agreement with the city and the Mayor to extend our services through November. As we approach a challenging summer, we recognize there will be many opportunities to demonstrate our value. We believe that showcasing our work will lead to meaningful discussions about the future of our services in Chicago, especially when there was significant support against the idea of potentially terminating the service, as many people expressed their reliance on this technology.

And then while we have on the exposure question, like, can you double click on the Puerto Rico situation? I remember like last quarter was a $2 million exposure, right? And has that been sorted out, like signed and gone through? Are we still working on an extension on the PR side? That's Puerto Rico.

Do you want me to take that, Alan? Or do you want to take that?

No, I'd be glad. I would take it. This is Alan. So we're still working with Puerto Rico, to be honest. We did have it funded through January, still working on them to get something longer term. And so we're not done fighting that battle. Just to be honest, we still have some risk there with Puerto Rico.

I thought it was interesting because SoundThinking was the only provider. So it didn't seem like there was too much risk since you guys are in a strong position. Is that right?

Well, it wasn't a risk from a competitive point of view. But I mean, there was always kind of a funding issue that we're dealing with. I think that's what Alan's referring to. So we're still working with Puerto Rico on finding a funding source to continue the service.

And then on the expansion side, last quarter, we mentioned about like the Philly, New Jersey housing. How is that coming along in terms of the expansion? If you guys could give us an update on that as well?

Yeah. This is Alan. We're still working on the go-live with that. Once that is complete, then we're expecting and hoping that both the housing authority and the police departments will be working together to make that a significant potential for us. There's a lot of gun violence in Philadelphia. Everybody knows that. We believe that once they see the positive effects of our solutions, that could turn into something significant.

Is there a rough timeline for this, Alan? Last time you mentioned potentially 20 miles. Has that changed, and what is the timeline?

Yeah, still Alan. We haven't talked about how big it could be. I mean, it is a large city with a big issue, but we won't be giving any guidance in terms of where that could be other than it could be significant.

Okay. And just my final question is congrats on the Uruguay win. In terms of other areas you guys are looking at internationally, are there regions you might consider, such as Brazil? I know you're already in South Africa, but could you comment on that?

Yes, it's interesting that you mentioned Brazil. We're definitely interested in Brazil, Mexico, and some Caribbean countries. Recently, a Brazilian delegation visited South Africa and had a very successful trip. We are excited about the potential in Latin America and believe that, given our success in Uruguay, we have the opportunity to achieve impressive international numbers later this year.

Okay. Thank you very much, Ralph and Alan.

Thank you.

Thank you.

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

Great. Thank you very much. I want to thank everyone for joining today's call and looking forward to hopefully seeing many of you on our Investor Day, which is currently scheduled for March 14. Thank you very much and be safe.

Thank you for joining us today for our call. You may now disconnect.