Soundthinking, Inc. Q1 FY2024 Earnings Call

Good afternoon, and welcome to SoundThinking's First Quarter 2024 Conference Call. My name is Joe, 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, May 14, 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 in the Investor Relations section of the company's website. Now, I would like to turn the call over to SoundThinking's CEO, Ralph Clark. Sir, please go ahead.

Good afternoon, and thank you for joining our Q1 2024 earnings conference call. Before I review the specifics of this quarter's results, I want to first share how very excited we are about the growth prospects for this year and our strong start to 2024. As we highlighted in SoundThinking's recent investor letter, our growth strategy can be summarized as a land, expand, cross-sell, and retain model. Our land opportunities or new customer acquisitions have greatly expanded beyond our historical acoustic gunshot detection business. We are now going to market with five offerings that comprise our SafetySmart platform announced last year. As we land new customers on any specific solution on the platform, our goal is to maximize the value they experience. We believe this strategy drives retention. And if there's an identified need, it can also potentially lead to appropriate expansions and/or cross-sell opportunities. We believe we're early in the law enforcement and now commercial security digital transformation market and that this opportunity remains extremely attractive and significantly under-penetrated. We believe our go-to-market strength as a trusted advisor uniquely positions us to capitalize on this opportunity as we are now able to offer relevant solutions that address the pressing needs of this large and growing market. Here's what we accomplished in Q1 of this year. Revenues were in line with our expectations of $25.4 million compared to Q1 2023 revenue of $20.6 million, representing over 23% year-over-year growth. Adjusted EBITDA was $3 million or 12% of revenues compared to $2.9 million or 14% of revenues for Q1 2023. Our revenue attainment was primarily the result of our previously booked and deferred revenue, professional services revenue from our Technologic Solutions business, combined with net new business from the platform. Net new business included go-live traction with 11 new ShotSpotter customers in the quarter, including one campus security deployment at the University of Georgia. Four of the new public safety customers were in New Jersey, which is specifically budgeted for acoustic gunshot detection at the state level. We also went live with a strategic deployment in Philadelphia with the Philadelphia Housing Authority. This gives us an important strategic foothold in the city of Philadelphia with the possible future expansion opportunity in a major Tier 1 city. ShotSpotter also saw two expansions in Boston and Suffolk County. ResourceRouter went live in three new cities in the quarter, and we are seeing exceptional pipeline and bookings traction and new customer captures and cross-sell opportunities for ResourceRouter this year. In addition, we added two new CrimeTracer data providers, growing our already exceptionally large data footprint. We continue to make progress on our New York City Department of Corrections CaseBuilder implementation, which has led to several new corrections opportunities, including Orleans Parish, which has been booked and is expected to go live in the next 60 days, along with a CaseBuilder deployment within the California Department of Justice. Lastly, we landed four new SafePointe customers consisting of a hospital, a gaming venue, and two schools. Looking forward, we have 16 ShotSpotter go-live projects underway, representing eight new customers and eight expansions. We believe all these developments further validate the demand we are seeing in the marketplace and the strong execution on our key growth initiatives. On the international side, we were very pleased to report on the rapid adoption of best practices by our Montevideo, Uruguay ShotSpotter customer within the first 90 days of deployment. The client went live in mid-December 2023 with an array totaling 4.6 square miles. In the first 90 days of deployment, the agency has begun to effectively leverage ShotSpotter data to allocate policing resources to impacted areas and to support investigations, including the use of ShotSpotter data as evidence in a recent tragic killing of a police officer. In addition, the agency is fully embracing integrating ShotSpotter with other digital tools used in their policing and community engagement efforts. We believe these positive results and the client's willingness to broadly share their successes with other countries will enhance the potential market opportunity for ShotSpotter in the larger South American market. In fact, we are making steady progress to book and go live with another major South American city in early Q3 of this year. Overall, we continue to refine and enhance the SafePointe solution, including a major software upgrade coming this quarter. We are leveraging the existing SoundThinking software stack to provide a new and more modern user experience. For example, we're making it easier to monitor multiple facilities and entrances and to quickly find historical incidents of interest. Moving to this new code base will also enable faster future enhancements. We expect to deliver an upgrade later in the year to the object detection classifier by integrating a new camera system and machine learning model using the company's deep experience in artificial intelligence and machine learning, which we believe will enhance SafePointe's detection efficacy. In fact, we've been granted a new fundamental patent on using passive magnetic moment in motion to detect weapons, which allows the systems to be unobtrusive, helping to provide a better experience for visitors and employees while providing an important layer of security protection. Our SafePointe demand generation engine is fully operational with two dedicated BDRs assigned to drive over 250 discovery calls for the year, of which they have successfully delivered on 65 calls in a compressed Q1 2024. As a reminder, we also have five seasoned territory sales professionals, combined with two recently hired experienced security experts as customer success directors to help guide our go-to-market discussions as well as onboard new live customers. So far this year, we have secured business from our top three verticals: healthcare systems, casinos, and enterprise corporate accounts, and our momentum in healthcare is particularly impressive with having either secured lanes or being in advanced contract negotiations with multiple healthcare systems. We have seen security professionals in the healthcare system vertical that have already deployed competing products turning to SafePointe due to its lower total cost of ownership and discrete footprint. The SafePointe pipeline continues to grow in these key verticals and is currently over $12 million. We believe this provides solid coverage to meet the $5 million target for booked ARR forecasted for SafePointe this year. With respect to our full-year outlook, we are reaffirming our revenue guidance of $104 million to $106 million for 2024, along with our adjusted EBITDA margin guidance of 18% to 20% for the year. Now Alan, over to you.

Thank you, Ralph. We're pleased with our performance in the first quarter. As Ralph mentioned, this quarter, we went live with our ShotSpotter gunshot detection solution in 10 new cities and one university, expanded our ShotSpotter coverage in two cities, and added seven new customers with our other software solutions, as well as several previously booked customers that have gone live. Revenue is in line with our expectations and was obtained from deferred revenue previously booked being recognized in the quarter, professional services revenue from our Technologic Solutions business, and also from new business mentioned above that went live. We had minor attrition of only 6 miles this quarter. Let me provide more details in the quarter, and then I will share some thoughts around the balance of the year. First quarter revenues were slightly above expectations at $25.4 million. Revenue is over 23% higher than the first quarter of 2023 as we continue to grow in all aspects of our business. Gross profit for the first quarter of 2024 was $14.9 million or 59% of revenue, versus $11.3 million or 55% of revenue for the prior year period. We expect gross margins to continue to improve as the year progresses. Our adjusted EBITDA for the first quarter of 2024 was $3 million, up slightly from $2.9 million in the first quarter of 2023. Our adjusted EBITDA is lower than analyst expectations primarily because of continued higher-than-expected labor costs, some other one-time expenses, and also because we conducted our company all-hands meeting in the first quarter, which added a one-time cost of almost $1 million. It is important to understand that we did not provide guidance on a quarterly basis for revenue or adjusted EBITDA. Adjusted EBITDA, a non-GAAP financial measure, is calculated by taking our GAAP net loss and adding back interest expense, income, taxes, depreciation, amortization and impairment, stock-based compensation, and acquisition-related expenses, including adjustments to our contingent consideration obligation. Turning to our expenses. Our operating expenses for the first quarter were $17.5 million or 69% of revenues versus $13.1 million or 64% of revenues in the first quarter of 2023. Operating expense increases were primarily related to higher headcount and employee-related costs, including personnel cost increases related to expected SafePointe growth. Breaking down our expenses, sales and marketing expense for the first quarter was $7.1 million or 28% of total revenue versus $5.8 million, also 28% of total revenue for the prior year period. Our sales and marketing teams continue to build our sales pipelines and expand our marketing efforts. We also continue to focus on maintaining high levels of customer satisfaction, which helps keep our attrition rates low. Our R&D expenses for the first quarter were $3.6 million or 14% of total revenue compared to $2.7 million or 13% 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 $6.8 million or 27% of total revenue, compared to $4.6 million or 22% of total revenue for the prior year period. G&A expenses were higher due to legal costs, our headcount increase, and other employee-related costs, such as our all-hands meeting mentioned previously. We expect our G&A expenses will fluctuate quarterly throughout the year in absolute dollars as the company growth will require some investment that will be offset by the expected reductions of certain one-time expenses incurred during Q1. Our net loss for the first quarter was $2.9 million, or $0.23 per share based on 12.8 million basic and diluted weighted average shares outstanding. This compares to a net loss of $1.8 million or $0.15 per share based on 12.3 million basic and diluted weighted average shares outstanding for the prior year period. Deferred revenue at the end of the quarter was $50.8 million versus $42.1 million at the end of the fourth quarter of 2023. We ended the quarter with $8.5 million in cash and cash equivalents versus $5.7 million at the end of the fourth quarter of 2023. The increase is primarily related to AR collections, partially offset by the payment of the company annual bonuses in February. We have approximately $7 million of debt outstanding on our $25 million line of credit related to cash used to partially fund the SafePointe acquisition last year. Turning to our full 2024 outlook. We are reaffirming our full year 2024 revenue guidance range of $104 million to $106 million, representing over 13% year-over-year growth at the midpoint compared to 2023. We are also reaffirming our expectation for adjusted EBITDA margin to be approximately 18% to 20% of forecasted revenues in 2024. Now back to Ralph for some final thoughts, and then we'll be happy to take your questions.

Thanks, Alan. And just to close my prepared remarks, it was exactly one year ago when we acknowledged the ultimate sacrifice of Chicago Police Officer Areanah Preston, who was tragically killed in an attempted carjacking when returning home from work. Sadly, we are here again one year later with the killing of another Chicago Police Officer, Luis Huesca this past month in another attempted carjacking. Our sincere thoughts and prayers go out to his family, loved ones, and the Chicago police department. We believe these tragic incidents require us to be even more determined to do our part in providing tools and critical expertise to help law enforcement, first responders, and the communities they serve to save lives and to drive better public safety outcomes. We're now prepared to take your questions.

Our first question comes from Richard Baldry with ROTH Capital Partners.

I was wondering if you can go into a little more detail on the Philadelphia win. I noted it was with the housing authority. How will they work between themselves and the local police? Is it something where you have the ability to grow outside of the housing authority relatively easily? Or do you have to build new relationships outside of that to grow into other areas of Philadelphia, so we sort of understand what that initial deployment represents?

Yes. This is Ralph. So there is a very strong collaboration between the Philadelphia Housing Authority, which is the buyer of the ShotSpotter services for this particular implementation, and the broader Philadelphia Police Department. So we're really quite encouraged by their fact, and we're working closely together, and we believe it will open up a potential opportunity for us to expand beyond the Philadelphia Housing Authority to broader Philadelphia because it can certainly use a technology like ShotSpotter and other solutions to help them address the crime problem in Philadelphia.

And could you remind us in terms of the $12 million in identified pipeline on SafePointe? The economics are on, I think I recall $20,000 a lane, which would imply something like 600. Where was that pipeline when you bought the company so we can sort of gauge how quickly it's expanding?

Yes. So when we bought the company, they had a pipeline, and we've gone through the vetting process to have that pipeline match up to our standards. So there are some puts and takes there. And so I think what you see in the current pipeline is some subtractions from the pipeline that we inherited. We kept some, but there's been a lot of healthy growth with the BDR investment that we've made. Our five quota-carrying salespeople are also developing their own pipeline. So it's been fairly strong and we're really quite encouraged. We're seeing that pipeline develop across those three key verticals that I spoke about earlier.

And maybe last for me, following on SafePointe. Any challenges you'll see ahead or areas you might need to smooth out in the supply chain in order to kind of scale up your ability to do those deployments? Are there any custom deliverables you need to make sure you have access to? Or is it something you feel that the friction to growth should be pretty minimal?

Pretty minimal. I think we're in pretty good shape from a supply chain point of view, so no constraints.

And our next question comes from the line of C.J Dipollino with Craig-Hallum Capital Group.

I'm on for Jeremy Hamblin tonight. First, I wanted to touch on the income statement. It looks like you guys made some nice progress with gross margin expansion. Is there anything specifically that you could point to that led to the increase year-over-year and actually sequentially too?

Yes. So this is Alan. Thanks for the question. Yes, if you think about it, we've got up 23% as a whole, had a gross margin of about 57%. Q4 was at 58%, now we're at 58.6%. So it continues to improve as we expect it's going to continue to go higher, and that's for a lot of reasons. As we continue to grow the revenues, we don't have to increase the cost of goods sold as much across the board. Pretty much any of the software solutions that we have, so revenue growth is going to continue to help drive that gross margin a lot higher. We do expect to end the year closer to 60%.

Okay, great. And then one more question on the income statement. I know you mentioned that G&A expenses were higher due to what seemed like some one-time costs. Could you please quantify how much of the G&A increase, which we estimate at $2.2 million year-over-year, was caused by the increase in headcount? This would help us establish a baseline moving forward.

Absolutely. Great question. This is Alan again as well. It's almost significantly in two major categories. Number one, last year, we did our all-hands meeting in Q2, so you would see G&A go higher in Q2 last year. This year, we did it in Q1, and that was almost $1 million. The company has grown. We have over 300 people now, so it costs a lot more to do that. That was done in Q1. So out of that, $1 million was there. We also had additional legal costs related to some issues that we had with two of our employees that did things that were inappropriate. We're continuing to defend ourselves on that, and that was about almost $0.25 million as well. So just between those two alone, which are certainly the all-hands is one-time, and the legal costs, we're hoping those continue to go down, that would have been $0.25 million. The delta is just slightly under higher things related to G&A with the growth of the company.

Okay, great. That's very helpful. And then one more on the Philadelphia Housing Authority contract, if you don't mind. Is there any details you could share on economics surrounding that deal, maybe the contract length, things in that nature?

Yes, fairly standard. I mean, that's our standard MSRP pricing. We write annual contracts, so nothing unique there on the Philadelphia Housing Authority transaction.

And the next question comes from the line of Mike Latimore with Northland Capital.

This is Aditya on behalf of Mike Latimore. Could you give some color on the sales cycle for gunshot detection? Is this stabilizing or could you give some color on that?

Yes. This is Ralph. Thank you for that question. So the question, just to repeat it, is what we're seeing in terms of the sales cycle for our acoustic gunshot detection solution, otherwise known as ShotSpotter? I think there are some interesting puts and takes there. We're certainly seeing a little bit of headwind that's lengthening the sales process in certain situations because of some noise coming out of Chicago, to be candid. But then also, we're seeing some collapsing sales cycles as we more deeply penetrate Tier 4 and Tier 5. You probably noticed that in this particular quarter, we put up a lot of new customers, around 10 ShotSpotter customers. A number of those customers were smaller customers. Those sales cycles tend to happen much shorter. You can think about those sales cycles being 9 to 12 months, while our other sales cycles be more the traditional 18 months with a little bit of headwind that's been added to the larger deals.

Got it. And what percentage of your gunshot detection pipeline is international?

Yes, this is Alan. At this point, our international deployments are still relatively small, including locations like the Bahamas, South Africa, and Uruguay. When we combine these, they amount to a couple million dollars. We also plan to expand, aiming to initiate another deployment in a different country that we've previously mentioned in Q3, which should contribute approximately $500,000 to $600,000 annually for that first deployment. We anticipate growth in both this upcoming project and in our existing operations in South Africa and Uruguay.

And the next question comes from the line of Trevor Walsh with JMP Securities.

Ralph, I'll begin with you. You mentioned some best practices in your prepared remarks, particularly regarding international business. Building on that, if a customer were to assess the cost-benefit analysis concerning ShotSpotter, I know you previously mentioned that you don't necessarily want to quantify the human lives saved, although there are compelling examples of ShotSpotter achieving that. What best practices are customers using when they want to perform that cost-benefit analysis? What other metrics could they consider to help illustrate and justify spending to city councils, like saving officer time? How is that measured?

Yes. Thank you very much for that question. So it's a couple of things. I think, first, there's the overall awareness of criminal gunfire that takes place in neighborhoods. From years of experience across multiple deployments, we know that 80% to 90% of criminal gunfire goes unreported via the traditional broken 911 system. Having the ability to have real-time alerts that are completely vetted get to a dispatch center and then dispatch out to an officer in less than 60 seconds with a very precise location is a game-changer. It shows a community that police are prioritizing the response to gunfire. When police respond to gunfire, they are aiding a victim, which is where you get into lives saved. We have lots of evidence that the physical forensic evidence collection process is significantly enhanced, which is critical for investigations. We're very excited about our data-for-good initiative, where we are repurposing the data and sharing it with resources that help get critical non-enforcement resources to these communities that are suffering from gun crime. We're also seeing customers aggregate the data over time to plan their resource deployments based on exactly where gunfire occurs over specific time windows. There's a theme of encouraging our customers to be transparent in sharing data and outcomes. It really gets down to getting police to every shooting and trying to save lives, recovering forensic evidence, and taking guns off the street. I'm leaning into the idea of valuing the saving of a life, because those lives are critically important and have value. We resist taking on the responsibility for overall prevention and reduction of gun violence from a singular point of view because we understand that it's complex and requires multiple technologies and processes all working together. You can't single out a particular technology for that.

Great. Maybe one more higher-level question for you, and then I have a couple for Alan. You mentioned the kind of momentum in New Jersey and how that's more state-level funded. What do you think the appetite is for that type of funding profile to come from state government versus local across the U.S.?

Yes. There are a couple of states beyond New Jersey. I won't name them, but we're working closely with a few states to replicate the allocation of specific funding for acoustic gunshot detection. It is recognized how important this technology is in helping police better respond to gunfire. So more to come there, but we're quite encouraged with some movement we're seeing in a couple of other states.

Great. Terrific. Alan, maybe for you. I appreciated the ARR guidance, kind of how you build your 2024 number. Was there anything in the quarter from a trending perspective that gave you more or less confidence around that $100 million ARR number?

No, thanks for the question. Nothing has changed. We are still struggling a bit with Puerto Rico, trying to get that back online, but we included that in our ARR growth to get north of $100 million. We hope that we can get Puerto Rico positive again. Everything else seems to be going well across our products.

Okay, great. Maybe just one more, just kind of piggybacking on some of the SafePointe questions. Have you seen a noticeable change in sales cycles for SafePointe, especially from when the company was standalone versus in the short time it's been part of the SoundThinking family?

Yes. This is still relatively new for us. I would first acknowledge that we take a consultative approach, ensuring we do diagnostics and discovery calls with our customers. We are thoughtful and intentional about understanding their needs and making sure our solution can fit. We're not trying to be transactional. We want to get in, solve problems, and build long-term relationships.

And the next question comes from the line of Yi Fu Lee with Cantor Fitzgerald.

Hello, Ralph and Alan. So first question is really on the go-live customers underway for SoundThinking. Can you provide more color on this pipeline, whether it be Tier 1, Tier 2, Tier 3 cities? And what kind of profile are these?

So I think we stated earlier, this is Ralph. We've got 16 projects in Q1 for ShotSpotter. Eight of those are expansion customers, and that's a mix of various types of customers in that expansion side. The new customers are also a mixture. We are still holding to our target of 120 miles going live this year for ShotSpotter across the board, and we're on track.

Okay. And then along the same lines, great job on the cross-sell for the CaseBuilder and CrimeTracer on the Virginia win. Could you give us more color in terms of the cross-selling opportunities now that you have more experience in this motion? How frictionless is the selling experience for your sales team?

Yes. We've been doing cross-selling and bundling products for over a year and it is working. We've had about 20 of our customers using more than one product. The more we do this, the better our sales team gets at it.

Got it. And on the Puerto Rico incident, what needs to happen to get this contract back live?

Yes, 100% funding. It's a funding issue.

And then last one Alan, is more of the numbers. What is the time horizon we should consider for the long-term guidance you provided regarding the 70% gross margin and 40% EBITDA margin?

This is Alan. That's a great question. I mean, we've guided for 18% to 20% adjusted EBITDA right now. You can expect that it's going to go about 5% a year. So maybe in the next 3.5 to 4 years, I would expect this to be close to 40%.

Got it. Congrats, I guess, on a strong start to 2024.

Our next question comes from Louie DiPalma with William Blair.

From a bookings perspective, at the end of 2023, I think you ended with 170 cities under contract and 19 campuses for gunshot detection. Did those figures move higher in the first quarter despite the noise from Chicago and the elongated sales cycle?

This is Alan. Yes, they did move higher. They did not move a lot higher, just to be honest, but it is somewhat lumpy. We have quarters where we add a lot, and then we have quarters where we execute going live in a lot, and the bookings maybe just take a little longer, but it went up.

Great. You discussed cross-selling of CaseBuilder and CrimeTracer specifically with the Newport News account, which I believe is also a ShotSpotter customer. How many of your existing ShotSpotter cities use multiple solutions? And is there a lot of opportunities there in the pipeline for that?

This is Alan. At this point, about 20 of them are using more than one solution. We expect a strong pipeline there. We're excited about the growth in ResourceRouter and CaseBuilder.

Great. For SafePointe, how significant are the software enhancements that you're implementing? Does the effectiveness of the solution continue to improve over time with the machine learning technology?

So we're making a fairly significant investment in the technology platform for SafePointe. We're encouraged by our starting position. The innovation around using magnetic moment in motion as a passive sensor technology is highly differentiated. Our plan is to continue to build on that, improving overall detection efficacy and creating applications that work around it. We have a lot of experience applying that to ShotSpotter and will apply the same playbook to SafePointe. We're in a good place and will continue to invest in this significant market opportunity.

Great. And one final one for me. Do you expect the Chicago noise to die down? It seems that Chicago is an anomaly here in that you have 170 cities under contract, and there's one very loud one that seems to be opposed. Do you expect that to die down for the sales cycles to return to normal this year?

Yes. First thing I'll say is, Alan owes me $10 because I made him a bet that we wouldn't get through this call without someone asking about Chicago. Let me make it clear: our guidance for 2024 is not impacted at all by Chicago's actions. What you're really talking about is Mayor Brandon Johnson versus what his superintendent has been supporting along with the majority of city councilmen. Residents of Chicago are being vocal about their need for this technology. We've been deployed now in Chicago since 2011. We aim to continue building on that service tradition through the end of the current contract period, which will take us through November of 2024. Our focus remains on momentum; we added 10 new customers in Q1 and have eight new customers planned for Q2.

And 10 is the highest we have ever had in a quarter, actually.

And is RFP activity similar, greater, or less than this year versus last year?

Yes. RFPs have never really been a significant portion of our business because this is viewed as a kind of sole-source technology. I don't think RFP stuff is really kind of noise. We've tended to respond well, and I don't think we've ever lost an RFP. If they made a decision to execute against it, we've been the winner.

Even when they ended up selecting someone else.

There's been no impact from emerging competitors bundling gun detection with ALPR cameras. People recognize that combining ears with eyes on the same physical platform is challenging, which keeps us in a good competitive space.

Ladies and gentlemen, 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. Now, I'd like to turn the call back over to Mr. Clark for his closing remarks.

Great. Thank you very much, Alan. I want to thank everyone who took the time to dial in, and thank you for your questions. We're looking forward to a number of follow-up calls with you all in the next few hours. Thank you all very much. Be safe.

This concludes today's conference. You may now disconnect your lines at this time. Thank you for your participation.