Soundthinking, Inc. Q1 FY2025 Earnings Call

Good afternoon, and welcome to SoundThinking's First Quarter 2025 Earnings Conference Call. My name is Kevin, and I'll 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 for our 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 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 13, 2025, 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'd 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. With that, I'll turn the call over to Ralph. Ralph, please go ahead.

Good afternoon, and thank you for joining SoundThinking Q1 2025 Earnings Call. I'll start by providing some high-level commentary on our financial results, progress we're making on our key strategic initiatives and then share some thoughts on the headwinds and tailwinds we are seeing in the public safety and security marketplace. I'm pleased to report that we're off to a strong start in 2025, delivering disciplined growth and expanding our platform and data aggregation capabilities to help position SoundThinking as a clear leader in the public safety technology space. Our work matters, and we believe it's resonating in the market. I'm proud of the momentum we've built and even more excited about what's ahead. In the first quarter, we delivered 12% revenue growth year-over-year of $28.3 million, driven by solid new sales and renewal activity. As a reminder, there was approximately $3.5 million of catch-up revenue in the quarter based on the renewal of two delayed contracts with the New York City Police Department, including ShotSpotter and Technologic, which totaled $64 million over a 3-year term. Our adjusted EBITDA grew 50% year-over-year to $4.5 million, highlighting our operational leverage and profitable growth strategy. ShotSpotter remains a core part of our SafetySmart portfolio and is trusted by public safety agencies across the country. In Q1, that trust was reaffirmed with NYPD's decision to extend their ShotSpotter contract for an additional three years. We believe that this renewal with one of our largest and longest-standing customers, 12 years and counting, speaks volumes about the sustained value and operational reliability of our gunshot detection platform in America's largest city. We also went live with 4 new cities plus one expansion in the quarter. Our international ShotSpotter pipeline is robust and growing. We're very pleased to see a soon-to-be live ShotSpotter deployment in Niteroi, Brazil, marking our return to this strategically important market. We will now have two strong and important reference customers in both Spanish-speaking and Portuguese-speaking Latin America. We expect to see accelerated traction with ShotSpotter internationally in the second half of this year and early 2026 based on these touchstones. Let me also take a moment to address the recent 5-year Chicago gunshot detection RFP, which we bid on in April. We believe our submission represents a comprehensive and compelling proposal that reflects our deep experience, proven performance and long-standing partnership with the city, which spanned well over a decade. We fully respect the integrity and objectivity of the procurement process, but quietly feel confident in the strength of our offering and the differentiated value that we will bring back to the city of Chicago. And while we await the outcome of the formal bid adjudication process, I must also emphasize that our current outlook does not include any contribution from Chicago. Any potential reengagement with Chicago would represent pure upside. Our CrimeTracer solution is evolving into one of the most powerful AI-enhanced law enforcement tools in the country. We warehouse over 1 billion CJIS compliant documents for more than 1,000 law enforcement agencies and federate to billions more through Index, Navy Links and Thomson Reuters, Clare, giving investigators access to an expansive depth of structured and unstructured data. But what we believe makes CrimeTracer truly unique is how we can apply generative AI and soon-to-be large language models and agents to make that data not just searchable, but contextually insightful. This quarter, we deployed new features that allow investigators to ask natural language queries like 'show me persons of interest who match known patterns in recent thefts involving white vans in three counties' and receive actionable insights that would take hours, if not days, to surface manually. The combination of search, summarization and synthesis is transforming what's possible for digital case work and crime linking. Furthermore, we also made progress integrating CrimeTracer's large data footprint with PlateRanger's ALPR data to unlock powerful response and investigative use cases for our customers. We believe that this integration provides a force multiplier for real-time and retrospective investigations, allowing investigators to seamlessly move back and forth from narrative-based incident search to connected license plate recognition. We believe this ability will enable agencies to help solve cases faster with fewer resources. The early feedback has been extremely positive and has proven to be a powerful differentiator in driving PlateRanger traction. More importantly, we view this as foundational to move into building a truly multimodal investigative intelligence platform that combines people, places, vehicles and incidents in a single pane of glass. We continue to scale ResourceRouter, our proactive patrol planning tool with strong adoption and demonstrable results. ResourceRouter is currently deployed in over 20 agencies, more than double its installed base in less than 18 months. Agencies are using it to allocate limited officer resources to areas with the highest probability of criminal activity, and we're seeing real-world impact in both community engagement and crime suppression. As public safety agencies face mounting pressure to do more with less, ResourceRouter seems to be an essential capability, not just a nice-to-have. Now let me turn to one of our most exciting growth areas, SafePointe. Following the passage of California Assembly Bill 2975, hospitals are now required to deploy weapon detection systems at all public entrances by 2027. This is a seismic shift in health care security's policy and plays directly to SafePointe's strength. Our system uses passive low-frequency magnetic field detection, not invasive scanners or disruptive walk-through gates or intimidating checkpoints. That means hospitals can maintain patient dignity, visitor experience and operational throughput, all while meeting the new legal compliance standard for safety. We've already engaged with multiple large health care systems in California, and we see similar legislation advancing in Maryland, New Jersey and beyond. With over 400 hospitals impacted in California alone, each with multiple entrances, the now mandated and addressable opportunity is significant. We believe SafePointe can become a category-defining solution in this space, not only for hospitals but for any environment where high flow, high-stake security is required. As we move further into 2025, we remain bullish and focused on executing our growth strategy and strategic roadmap. And while there have been very positive tailwinds to our business driving strong demand for our capabilities, we remain acutely vigilant around lingering headwinds, especially those related to municipal funding and budgets. We are taking appropriate risk mitigation efforts, including doubling down on our customer success and engagement efforts, adding a grant writing resource and modeling higher levels of attrition than what we have historically experienced to account for that volatility. To that end, we continue to believe that we are well positioned to drive both revenue and ARR growth for 2025. We are reaffirming our full-year revenue guidance range of $111 million to $113 million, while slightly reducing our adjusted EBITDA guidance range to 20% to 22% to account for the modest impact of the current tariff regime, along with investments we are making in AI modeling and tools in AWS that are being incorporated in our products as well as for our internal operational use. I will now turn the call over to Alan to discuss our financial results for the first quarter 2025 as well as guidance for the full year 2025 in detail, and then we will be happy to take your questions.

Thank you, Ralph, and good afternoon, everyone. As Ralph mentioned, we are pleased with our first quarter 2025 results. Our strong financial performance reflects the success of our ongoing strategic initiatives, operational efficiency measures and our commitment to delivering value to our shareholders. Revenues were $28.3 million, representing a 12% increase over the $25.4 million in the first quarter of 2024. As Ralph mentioned, our 2024 year-end financial results were impacted primarily due to the delayed renewal of two contracts with the New York City Police Department. Both of the NYPD contracts were signed in the first quarter with approximately $3.5 million of the catch-up revenue from the contracts. We're also pleased to report that both of those contracts were 3-year renewals, representing over $64 million in contract awards. The bookings of all of our SafetySmart Platform solutions, some of which are multiyear contracts, are also growing healthily. Gross profit was $16.6 million or 59% of revenue compared to $14.9 million or 59% of revenue for the prior year period. Our adjusted EBITDA was $4.5 million compared to $3 million in the first quarter of 2024. Our adjusted EBITDA increase was related to the delayed contracts. As a reminder, adjusted EBITDA, a non-GAAP financial measure, is calculated by taking our GAAP net income or loss and adjusting out interest income, income taxes, depreciation, amortization and impairment, restructuring costs and losses, including those related to fixed asset disposals, stock-based compensation expenses and acquisition-related expenses, including adjustments to our contingent consideration obligations. Our adjusted EBITDA was a bit lower than consensus estimates as we held our company all-hands meeting, which cost over $700,000 in the first quarter. This one-time event happens only once a year, generally in the first quarter. Our legal and accounting expenses are also historically higher in the first quarter as we complete our annual financial audit and our preparation for and filing of our 10-K. And as Ralph mentioned, we are investing more in our AI capabilities as well. Our operating expenses were $17.8 million or 63% of revenues compared to $17.5 million or 69% of revenues in the first quarter of 2024. Breaking down our expenses, sales and marketing expense in the first quarter was $7.3 million or 26% of total revenue compared to $7.1 million or 28% of total revenue in-line with the prior year period. Our R&D expenses were $4.1 million or 14% of total revenue compared to $3.6 million or 14% of total revenue in the prior year period. G&A expenses for the quarter were $6.5 million or 23% of total revenue compared to $6.8 million or 27% of total revenue for the prior year period. As a reminder, we expect our G&A expenses to grow less than our revenue on a percentage basis as our company grows. It's important to recognize that the percentage of revenue of each of our OpEx categories is at or below the level of the first quarter of last year. Our GAAP net loss was approximately $1.5 million or a loss of $0.12 per basic and diluted share for the quarter based on 12.6 million basic and diluted weighted average shares outstanding. This compares to a net loss of $2.9 million or $0.23 per basic and diluted share based on 12.8 million basic and diluted weighted average shares outstanding for the prior year period. Deferred revenue as of March 31, 2025, was largely in line at $45.4 million compared to $44.2 million at the end of fourth quarter 2024. We ended the first quarter with $11.7 million in cash and cash equivalents compared to $13.2 million at the end of fourth quarter 2024 and much higher than the $5.7 million that we had at the end of 2023. We repurchased 33,493 of our shares at an average price of $15.04 for approximately $504,000 in the first quarter of 2025. Currently, we have approximately $21 million available on our line of credit as we have approximately $4 million in debt outstanding, all of which is on our line of credit. Now turning to our guidance for the full year of 2025. We are reaffirming our full-year revenue guidance range of $111 million to $113 million. We are reducing our full-year 2025 adjusted EBITDA margin guidance range to 20% to 22% related to potential costs associated with tariff changes and the investments that we are making in AI modeling and tools that we are incorporating in our products and internal operational use. We are reaffirming our expectation for our annual recurring revenue, or ARR, to increase from $95.6 million at the beginning of 2025 to approximately $110 million at the beginning of 2026. As a reminder, this guidance is in spite of the loss of approximately $9.7 million from the loss of the Chicago ShotSpotter contract in 2024. Overall, we are pleased with the progress we have made on each of our strategic initiatives and operational performance of the business. With that, we're now happy to open the call for questions.

Thanks. Now that you've got a broader suite of tools, can you talk about how you manage sort of the pipeline there to make sure you're not overweighting or underweighting resources in each of those areas?

Yes. Thanks for that question, Rich. This is Ralph. So each product solution has its own pipeline metrics that we're tracking. And I would say that the pipeline is fairly solid across the platform and particularly strong in a couple of segments, including ResourceRouter and CrimeTracer.

And then maybe looking at SafePointe specifically, I think you've revamped that product in the past year. So is there any early feedback on that? Maybe any customer cases, maybe without naming names, maybe verticals you sold into at that?

Yes. So thanks for that question again. This is Ralph. So as you know, we're focused on the health care vertical, casino vertical, and then high-end commercial properties. And we've seen real success across the board, particularly in the health care vertical, where I think our discrete architecture is critically important to a health care concern. I think we talked about on our last call that we have a couple of proof-of-concept deployments going in on one of the top five, top 10 health care chains here in the U.S. One of those has actually kicked off and it's going pretty well. We're hoping to light up the second one here in Q2. So more to come on SafePointe in the health care vertical.

Hey. Hi, this is Aditya on behalf of Mike Latimore. Could you give some color on if you expect meaningful bookings to come from PlateRanger this year?

Do you want to take that, Alan?

Yes, this is Alan. We are still finalizing our actual bookings and have a significant amount of pipeline. I expect actual bookings to be in the $1 million-plus range, with slight revenue decreases this year but a substantial increase in revenue next year. There’s a lot of interest, and we are implementing various marketing strategies to attract more customers to the contracts.

Got it. And do you see additional expansion in Puerto Rico this year?

Yes, this is Ralph...

I think we're ready to proceed, Ralph.

No, go ahead. Sorry.

No. I was saying that Puerto Rico, as we mentioned before, the contract that we have right now ends at the end of June. We are in ongoing discussions with them to not only extend that contract but to make that into a multiyear extension renewal. We are also in discussion with them. I won't give you too much more details on that, but with some potential expansions beyond the 30 miles that we have there. So things are going positively there. But as we all know, it just takes some time, especially dealing with Puerto Rico.

Thanks. Hey Alan and Ralph, thanks for taking the questions. Maybe rotating back to the SafePointe piece. Great to hear the legislative win in California. Can you maybe, Ralph, just give us a sense of where you see the sales cycle around SafePointe executing now currently and then based on that 2027 requirement, when you think deals will start to materialize around that? I would imagine maybe more into 2026 just based on the timing, but how far in advance do customers need to start prepping for that new requirement?

Thank you for the question. This is Ralph. You're correct that AB 2975 presents more of an opportunity for us in 2026. However, we are making significant progress in other regions with SafePointe, particularly in hospitals and gaming casinos. Our strategy involves a comprehensive campaign in California to establish our presence in that market. As we've mentioned in previous calls, our biggest competitor is inaction, and this new mandate from California means that at least 400 hospitals now need to take action in weapons detection. Given the distinctive nature of our offering—passive sensors with discreet deployment and no checkpoints—we believe we are well-positioned to capture a significant share of that market. Nonetheless, we'll need to invest time and energy, particularly in collaboration with CalOSHA and the stakeholders who supported this bill, including California's hospital chains. We are quite enthusiastic about this development.

Yes. This is Alan. Thanks for that question, and it's a valid question too. I think what we are seeing already, at least in Q1, we hit the adjusted EBITDA of $4.5 million, but we had about $1 million in additional expenses. Our all-hands meeting was north of $700,000. We also had some increase as we do the AI algorithms and the modeling. That increased our actual bandwidth usage of like AWS and Azure. That was probably a couple of hundred thousand dollars as well. So when you start adding the $1 million in terms of expenses, had those not occurred, then the adjusted EBITDA would have been significantly higher, specifically related to the New York City contracts. A lot of that did flow to the bottom line, as you would expect. There were still some things that we had to cost a little bit related to some actual commissions that were owed to the prior company that was doing some of that as well as a little bit of cost of goods sold cost related to that.

Curious to know about the revenue progression, given the outsized $3.5 million lumpiness that occurred in Q1. How should we be thinking about the progression to Q2? I know at least what I've got for consensus is 27.8%, which would be a step-up from the 28.3% minus 3.5%. Just wanted to make sure you're comfortable with that step-up.

Yes, this is Alan. That's a great question. Having that 3.5% removed would have brought us down to approximately 24.8%. Being above 27% is somewhat too high for what we need to meet our annual revenue guidance. We don't provide quarterly revenue guidance, but it is more likely that we'll see a decrease in Q2, then an increase in Q3, and a more significant increase in Q4 as our current investments, particularly in SafePointe, begin to generate more revenue.

Thanks for taking the questions. And I want to come back to AB 2975, SafePointe. And just understand in terms of the total number of facilities within the state of California that you believe to be required under this new law to put in place detection. That's part one. And then part two is, I think you mentioned Maryland, New Jersey, Virginia as other states looking at similar legislation. If you add those states in, then what's the total number of addressable facilities that we're talking about?

Yes, thank you, Jeremy. This is Ralph. Regarding California, we estimate that there are approximately 400 hospitals. Each of these hospitals likely has one to three buildings, and on average, about 10 points of entry and exit that need to be secured. There are exceptions for some rural hospitals and clinics that do not have to comply with this legislation. However, we believe about 400 hospitals will be required to comply, translating to an estimated opportunity of around 4,000 lanes in California. We are not considering other states in relation to this legislation at this time. It's important to note that due to the significant issues of workplace violence in hospital settings, we wouldn't be surprised if other states start exploring similar legislative measures as California. For instance, Illinois has implemented a similar requirement for weapons detection in casinos, even though it does not apply to hospitals. Overall, this situation will be part of the market as certain entities must comply, and they cannot afford to remain inactive. This represents an unfunded mandate that we will continue to monitor. Thank you for that follow-up question. I can share details about our pricing and business model. We charge approximately $20,000 annually for each lane, which is comparable to ShotSpotter in terms of deployment costs and how we recoup that investment. We break even on a lane within 12 months, and if customers choose to renew, the ongoing subscription fee is highly profitable for us. Interestingly, we are seeing commercial opportunities with several customers signing multiyear contracts, ranging from two to three years. In terms of total cost comparison, we believe our solution is quite compelling due to its unique features, particularly the fact that it does not require personnel to monitor checkpoints. We consider the total cost of ownership for our solution to be highly attractive compared to others that depend on more labor-intensive resources at checkpoints. Our experience with ShotSpotter has taught us not only the importance of weapon detection but also the value of reporting and analytics associated with it. We have developed the SafePointe solution, which allows agencies and corporate entities to monitor their entry points, track the number of detections, and validate instances where individuals have been searched and found to be carrying weapons. This reporting tool is powerful and goes beyond mere weapon detection, which we believe will be appealing to organizations in California and OSHA, as they prioritize facility safety and the collection of robust data to mitigate the risk of workplace violence in hospitals. So you're absolutely correct. The international sales cycles tend to be even longer than the long sales cycles domestically, but they're super impactful. Just to remind you and others that our pricing leverage there is we typically charge 3x to what we charge domestically. So when the deals happen, they happen in fairly big ways. Hey, look, we're really excited about Latin America, particularly kind of going back to Brazil. We were in Brazil in a couple of cities back when I joined the company in 2010 on our legacy business model. So to be able to return to Brazil is really exciting because of all the Latin American countries that have issues with gun violence. I would say Brazil is most similar to the U.S. than almost any other country in Latin America or, frankly, even South Africa in terms of the intensity and scale of the problem. Brazil is a very big country. There are a lot of cities there that have a lot of square miles of coverage need. So to actually get our first mover in Niteroi, Brazil, which is importantly Portuguese-speaking, is going to be important for us to hopefully reopen that market opportunity. And we're already in discussions, without saying too much more. We're already in discussions with a couple of other cities in Brazil, kind of doing a quick follow, hopefully, to Niterói. We saw the quick expansion that happened in Montevideo, Uruguay. We're excited about that, of course, and they represent a very compelling first mover early adopter customer in Spanish-speaking Latin America. We've had a number of municipalities from other neighboring Latin American countries, South American countries, that have visited Montevideo, and they've actually gone out to various Latin America security conferences talking about their success. I do also want to point out that it's just not ShotSpotter, but we're really excited about a couple of pretty interesting opportunities with ResourceRouter in both an existing Latin American country where that's already a ShotSpotter customer and then one non-ShotSpotter customer that's pretty substantial and then also true with a PlateRanger as well. And if you follow our press in anything or follow the press in South Africa, you'll see that there is a real, real need for an expanded footprint in and around Cape Town that we're hopefully going to get the Western province to support. So we've got a lot of interesting activities going on. Timing-wise, I think the best way to think about this is late 2025, early 2026 for some of those cards to flip over. Did that answer your question?

Yes, great question. This is Alan. It was primarily related to two things. One would be the personnel assisting us with the AI algorithms. We're currently engaged in a lot of modeling related to SafePointe, and most of the costs are associated with that. Additionally, some costs related to AWS and other bandwidth services also fall under the R&D category. I believe you'll see the costs of around $4 million, maybe $4.1 million, decrease slightly as we stabilize those, but it won't drop significantly for the rest of the year. However, it will certainly grow at a slower rate than the revenue.

Great. Yes. Thank you very much, and thank you all for joining us again today. As you've heard, we're executing well across the board. We're expanding our platform, deepening customer relationships, and pursuing new opportunities in AI-driven public safety. We appreciate your continued support and look forward to keeping you updated on our progress. Thanks again for joining the call.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.