Good afternoon, and welcome to ShotSpotter's Fourth Quarter and Full Year 2018 Earnings Conference Call. My name is Matt, and I'll be your operator on today's conference. Joining us are ShotSpotter 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 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 19, 2019.

And ShotSpotter undertakes no obligations 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.shotspotter.com. Now, I'd like to turn the conference over to CEO, Ralph Clark. Thank you. You may begin..

Thank you for joining us to discuss our 2018 fourth quarter and full year results. This quarter was an exceptionally strong finish and a transformational year for ShotSpotter. Q4 2018 revenues grew 49% to $9.7 million, which was beyond our expectations. And as our guidance predicted, we achieved our first ever quarter of GAAP profitability.

We couldn't be more thrilled that we are in $302,000 of net income or $0.03 per share. Alan will provide more specific details around the quarter and the year, so I wanted to review our progress and achievements through the lens of our full year 2018 execution. Revenues for 2018 increased 46% to $34.8 million.

This was driven by a solid deferred revenue position and strong renewal execution along with a 168 square miles going live in the year. This includes 24 miles going live with zero miles of attrition this quarter. As we said before, deploying new miles can be uneven on a quarterly basis throughout the year.

As we ended 2018, we are deployed over 640 square miles, up 35% from 2017. We now have deployments in 95 cities at year-end, including the addition of two new cities this quarter, Bridgeport, Connecticut and Little Rock, Arkansas.

Some notable new cities added to our customer roaster this year, includes Baltimore, West Palm Beach and Jackson, Tennessee among others just to name a few. We've also standard deployments in nine cities and reached a three-year agreement with Chicago worth approximately $23 million.

ShotSpotter is also now deployed on 10 campuses and other sites such as our Highway deployment in Richmond, California. We're very excited to complete our first acquisition as a public company with the purchase in October of HunchLab, now rebranded as ShotSpotter Missions.

We believe this puts us at the forefront of the nexus of predictive analysis, artificial intelligence and precision policing. We're pleased with the early positive feedback from current ShotSpotter Flex customers and prospects as we build our deal pipeline.

We see Missions as a critical platform extension for our solution with the potential to become over the long-term a growth and margin driver for our business. Missions will be an important focus for us this year as we invest to extend its market penetration and broaden its capabilities.

Our larger platform strategy ties directly to our increased investment in marketing this past year. We hired Sam Klepper as our Senior VP of Marketing and Product Strategy and have further expanded the marketing mandate to be able to execute on our product roadmap strategy as well as develop new-lead generation program.

The goals of these new lead gen-program is to drive and qualify new leads at a faster rate, accelerate the sales cycle for existing prospects, and free-up critical bandwidth of our direct sales team. These programs include engaging directly with communities and cities that have significant gun violence issues.

In fact, was saw recent example in Pleasant Hill, New Jersey of how citizens can drive the adoption of ShotSpotter. On Election Day 70% of voters have proofed a small municipal tax to fund a ShotSpotter deployment covering 90% of the city.

Pleasant Hill was the first municipality in the country to put a ShotSpotter tax measure on the ballet, which we believe is the strong statement about how community members value the safety our solutions can help bring to their city.

Our marketing efforts are also focused on creating a conversation around the impact of gun violence, with leading Trauma Care hospitals.

We believe that working with hospitals directly not only creates an opportunity to improve gunshot wound victims outcomes, but it can also help generate strong advocates and possible new funding streams for ShotSpotter's deployment.

We also expanded our sales reach this year by executing the reseller agreement with Verizon to sell our Flex product augmenting the Smart Cities initiative that we already have employed. We've completed the training of Verizon's sales force and have puts in place a monthly sales team check-in and deals pipeline process review.

We see this collaboration is having an important and longer-term impact on our existing sales efforts and hope to begin to see initial traction in late 2019, helping us drive to our goal of adding approximately 100 new customers to our platform over the next four-plus years.

We also added resources to our international sales efforts and expect to see additional international revenues near the latter part of 2019. Indeed, our international expansion is already underway, with the recent announcement of new contract with the Bahamas.

So while progress across the business and the company's financial success, are very important. The reason we come to work every day is the positive role we have played in helping our customers reduce gun violence in their communities.

Not only do larger cities like New York City and Chicago benefit from ShotSpotter's Gunshot Detection Technology as a critical factor in their reduction of gun violence, but so do midsized and smaller cities. For example, Bakersfield, California with the population of approximately 380,000 went live with ShotSpotter in March 2018.

In the first nine months of use, the Bakersfield PD identified over 300 gunshot incidents that they wouldn't have known about, made 30 arrests and seized 27 guns. Overall, the city saw 13% reduction in gun assault, while ShotSpotter was activate at Bakersfield in 2018.

With our solution directing police to the precise location of gun crime, physical evidence can be more readily collected and witnesses can be located and interviewed. Our forensic data has been used in over 100 criminal prosecutions throughout the United States.

And in 2018 alone ShotSpotter expert witnesses have testified 25 times in supportive of their forensic findings. Forensic services will be an increasing area of focus for us in 2019, as we make investments to expand the applications for our unique data.

It is still the early days for this part of our strategy, but look for further progress as the year unfolds as we continue to work to expand, both our product portfolio and our addressable market. Yet, we are still very much in our early days of addressing the U.S.

market with our core Flex product, with a market that has less than 10% of the domestic TAM penetrated and while we'll never take not anything for granted. We continue to see no real viable competitor alternative to our solution.

Our strong competitive position is evidenced by our efficient $0.30 spend for each $1 of annualized contract revenue added in 2018.

With large deployments in Tier 1 cities like Chicago and New York mostly complete, our focus this year will be on adding more domestic Tier 2 and Tier 3 cities, along with international deployments, while we continue to lay the groundwork necessary to capture the next set of Tier 1 cities that make up the largest cities and the U.S.

Our strategy of maintaining the key focus on customer onboarding and customer success has paid outsized dividends, as it enables us to maintain high rates of customer satisfaction as evidenced by strong Net Promoter Score of 50, achieved very low rates of customer churn and helps drive expansions.

In fact, our revenue retention rate this past year was 118% if you don't include the Chicago expansion. If we include the Chicago expansion, the revenue retention rate is 139%. To be clear, we don't expect the revenue retention rate of 139% to be sustainable over time.

As seen with the Chicago expansion, revenue retention rates can be materially impacted by the presence or absence of large expansions or attrition. However, if we successfully execute on our business strategy, we will expect our revenue retention rates to stay above 100% for the foreseeable future.

So after a successful 2018, we have set a very aggressive growth agenda for 2019 and beyond and we are energized to get at it. As reported in our earnings release, we are reaffirming our guidance for 2019 to grow revenues approximately 30% to a range of $45 million to $47 million this year, while achieving full year GAAP profitability.

And most importantly we want to continue to lead the way in helping law enforcement apply our solution in addressing and reducing violent crimes and position the ShotSpotter solution as a standard of care. So that concludes my prepared remarks.

I will now turn the call over to Alan who will provide further details on the fourth quarter and full year 2018, along with our expectations for financial leverage and continued margin expansion in 2019..

Thank you, Ralph, and good afternoon, everyone. We ended 2018 on a strong note. Revenues for the fourth quarter exceeded our expectations, increasing 49% from the fourth quarter of 2017 to $9.7 million.

Our full year revenue increased by 46% to a record $34.8 million, which also exceeds the guidance we last updated back in November 2018, reflecting growth in number of miles covered through expanded deployments for current customers, as well as the addition of new customers.

Our revenue and gross margin were also positively impacted from a receipt of a payment of approximately $170,000 from the U.S. Virgin Islands, for services provided prior to hurricanes Irma and Maria destroying their ShotSpotter systems. We added 24 net new miles in the fourth quarter. On top of this, our revenue retention rate ended 2018 at 139%.

If the Chicago expansion were excluded, our revenue retention rate would still be in the 118%, which as Ralph mentioned, is close to inline to what our expectations are for the future. We're happy to announce our first quarter of GAAP profitability, with a net income of $302,000 or $0.03 per share.

Our stated objective was to reach this milestone by the end of 2018 and we are pleased to have achieved this goal. So let's look at some of the details of the quarter and the year. Gross profit for the fourth quarter was $5.6 million, or 58% of total revenues, up from $3.2 million or 49% for the fourth quarter of 2017.

For the full year, our gross profit was $19.2 million, or 55% of revenue, an improvement from the $11.6 million or 49% of revenues for 2017.

Now turning to our expense, our operating expenses for the fourth quarter were $5.1 million actually decreasing 5% from the fourth quarter last year due to larger onetime expenses in the fourth quarter of 2017 related to certain legal and filing expenses, professional and other outside service fees.

For the full year, our operating expenses were $21.8 million or 63% of total revenues versus $15.9 million or 67% in 2017. The increase in operating expenses overall was primarily related to the growth in our business.

With our focus on therapeutic limited capital, our sales and marketing spend per $1 of annualized contract revenue was approximately $0.30 per dollar in 2018, down from $0.34 per $1 in 2017, while revenue retention rate of 139% was achieved for the full year.

Sales and marketing expenses for the fourth quarter were $2.2 million or 22% of total revenues versus $1.9 million or 29% of total revenues for the prior year period. As we stated this increase in total dollars reflects our investments in marketing, international sales efforts and our customer success initiatives.

Our R&D expenses for the fourth quarter were $1.3 million or 13% of total revenues compared to $1.1 million or 17% of total revenues for the prior year period. We continue to invest in R&D to add features and functionality to our Missions product, improve our analytics capabilities and conduct other initiatives.

G&A expenses for the quarter, $1.7 million or 17% of total revenue which is a decrease from the $2.4 million or 37% of total revenues for the prior year period. Note that G&A in the fourth quarter of 2017 included higher legal and filing expenses professional and outside service fees.

We are pleased that we're beginning to see operating leverage in all of our expense line. We continue to believe that our ongoing investment in sales and marketing as well as our R&D are a prudent and helping us reinforce our leading market position.

Our GAAP net income for the fourth quarter was $302,000 or $0.03 per share based on $10.8 million basic and $11.7 million diluted weighted average shares outstanding. This compares to a GAAP net loss of $2.5 million or $0.26 per share during the prior year period on $9.7 million basic and diluted weighted average shares outstanding.

Again, we are so pleased that we achieved our first quarter GAAP profitability on the timeline and we laid out in early 2018 and on a much lower revenue base than most stashed companies.

For the full year, our GAAP net loss was $2.7 million or $0.26 per share based on $10.6 million basic and diluted weighted average shares outstanding versus a loss of $10 million or $1.61 per share based on $6.2 million basic and diluted weighted average shares outstanding in 2017.

Adjusted EBITDA for the fourth quarter was $2.1 million, up significantly from the $1.2 million adjusted EBITDA loss for the prior year period. Adjusted EBITDA for 2018 was $3.6 million also up significantly from the $5 million adjusted EBITDA loss for 2017.

We added 24 new go-live miles in Q4 of 2018 comparable with the 23 miles we added in Q4 of 2017 reflecting the normal lumpiness of our business. For the full year we added 168 new go-live miles, an increased from the 114 go-live miles we added in 2017.

We ended 2018 with approximately 670 public safety miles under contract of which approximately 640 were live. Deferred revenue at the end of the year was $24.2 million, up from $20.3 million in the previous quarter. Of this amount, $23.1 million was short-term and $1.1 million was long-term.

In general, we expect short-term deferred revenues to be recognized within fourth quarters. However, as always we caution that you shouldn't read too much into the quarterly changes and deferred revenue as timing during the quarter when new miles can go-live can have a significant impact on deferred revenue.

We consider this another metric is more informative on a year-to-year basis versus on a quarterly basis. We ended the year in a solid financial position with $10.3 million in cash.

Cash flow used in operations for the year was $1.4 million, primarily due to working capital used as our accounts receivable increased to over $15 million by the end of the year due to billings to Chicago in connection with their expansion.

Also contributing to the cash usage was our acquisition of HunchLab and the settlement of the contracts litigation as we previously discussed last quarter. While we have a $10 million line of credit with Umpqua Bank, we have not yet used it and still have no short- or long-term debt.

We are reiterating our full year revenue guidance of a range of $45 million to $47 million. Our confidence in our full year outlook is based on the strength of our short-term deferred revenue, on historically strong renewal rates and new and expected contract awards who expect to go-live before the end of the year.

Of course, we'll upgrade the guidance during the year, if business conditions contract wins or deployments schedules change. We plan to continue our investments in 2019 with the goal of further penetrating this largely untapped market.

We're investing to expand our marketing efforts, which proved very valuable last year to accelerate our sales and add new clients and expand our efforts to grow international. We also expect to accelerate our R&D spend primarily to add enhancements to our Missions product.

We expect operating expenses during 2019 to increase each quarter on a dollar basis in each category. Historically, our first quarter revenues tend to be flat from the previous fourth quarter.

Therefore, with the increases we plan to make in our operating expenses in the first quarter of 2019, we expect to incur a moderate GAAP net loss during the first quarter. However, as Ralph noted earlier, we anticipate achieving GAAP profitability for the full year of 2019.

In closing, we entered the year with significant financial and operational momentum. We're excited and energized for our prospects in 2019 and beyond and we look forward to sharing our progress with you throughout the year as we help communities reduce gun violence. Now back over to you Ralph..

Thanks, Alan. Before we open up the call to your questions I want to thank the ShotSpotter team for their hard work, their commitment to reducing gun violence and enthusiasm in helping ShotSpotter to fulfill our purpose is truly inspiring. I look forward to another successful year with all of you.

And to our customers, business partners and loyal shareholders, thank you for your confidence and sharing this journey with us. We're now prepared to take your questions..

Great. Thank you. [Operator Instructions] Our first question is from Matt Pfau from William Blair. Please go ahead..

Hey, guys, thanks for taking my questions. First, wanted to start off on the Missions product and may be get some details there.

So first of all, if you could talk about, are you seeing any trend in terms of types of cities or police departments that are most interested in the Missions product? And then where do you anticipating or what's the initial feel in terms of sales cycle related to Missions? And then Ralph you hinted that there could be some changes with the product in terms of functionality and perhaps on the sales front.

So anything you can provide details on that will be helpful as well?.

Great. So great, great question. And I'll start and Alan can jump as appropriate. So I guess the first part of the question is where are we seeing the interest? Our focus is really on existing ShotSpotter customers first and foremost, and then the rest of ShotSpotter prospects that we've been having some conversations with them.

And the uptake has been actually quite positive. We're building -- we're in the process of building the pipeline right now. We developed a pricing model. We have a product roadmap that we're working on in terms of improving the functionality and integration of the Missions product with our existing ShotSpotter Flex solution.

So we’re really quite encouraged by the uptake as we're seeing in terms of equal interest in the solution. And I think as we stated in our number of occasions, we're going to expect that revenue contribution to happen of course on Missions specifically later in the year 2019..

Okay. And then just a follow-up on that question, Ralph. So you reiterated earlier in the comments that how ShotSpotter Flex can be used for both large and smaller cities as well.

Are you seeing the same with the Missions product? Or is the interest primarily with perhaps larger more sophisticated police departments?.

Yeah. So we're not really seeing the cut back away. I mean, we're talking to some very large customers of ours that have very large ShotSpotter deployments in our tier one cities. And we're also seeing interest in tier two and tier three cities as well. So it's really across the board..

Got it, okay. And last one from me. Just -- there's been some moving parts here early in the year that could have a potential impact on you guys. So first in terms of the severe weather there's obviously northern parts of the U.S. been some pretty bad weather.

Has that impacted deployments at all? And then is the government being shut down for part of the year? Did that have any impact either on deployments or contract signed?.

Sure a great question. This is Alan. Well, I think in general you’ll realize it’s very lumpy by nature and of course they can be impacted by items not just getting permission, bad weather or other factors. I think maybe bad weather affected a little bit in Q4.

But we also just generally expect less go-live miles in the winter months, especially for cities in the north. We haven't really seen an impact from the government shutdown, it’s still mature in fact at this point.

That doesn't mean that we won't see something in the future if there is some effect on some of the agencies that occasionally provide earnings to our customers, DoJs and things like that. It's a little early to tell our impact, but we have not seen any at this point..

Got it. That’s it for me guys. Thanks for taking my questions..

Our next question is from Jaeson Schmidt from Lake Street Capital Markets. Please go ahead..

Hey, guys. Thanks for taking my questions. I just want to look at 2019. Alan you mentioned sort of a normal seasonal pattering here in Q1.

But should we expect the normal seasonality to continue throughout 2019?.

Sure. We do expect in general that Q1 revenues will be flat from Q4. We do expect that to occur as well this year. Generally, we’d also expect Q3 to be somewhat better than Q2. Although, we do expect to see that. It might be mitigated a bit this year and less pronounced than in past years..

Okay. That's helpful.

And looking at the international opportunity, can you talk a little bit about how your customer engagement funnel has expanded over the past few months?.

Sure. As you know we hired a -- this is Ralph, we hired a VP of International to focus on Latin America. And John has been a quite busy in market both in Central America as well as South America.

And we continue to be very constructive around the idea that we'd expect to see some additional international revenues that come about later this year, later 2019.

As you heard on the call, which we definitely don’t do, we talked about a bookings that hasn't gone live yet, but we did talk about bookings in Bahamas, Nassau, Bahamas which is international client as well. Now that's proceeding pretty nicely. We're also expecting to have some traction, additional traction in South Africa.

We already have a deployment there in Cape Town, South Africa, which is very successful. And there's a number of cities in South Africa that have very similar gun violence issues to that of Cape Town.

So between Cape Town potentially expanding and possibly another city or two coming on board out of South Africa is where we'd expect to see some revenue -- international revenue contribution outside of Latin America and Central America. And Caribbean I should say, if I'm going to include the Bahamas..

Okay. Thanks a lot, guys..

Our next question is from Chris Van Horn from B. Riley. Please go ahead..

Good afternoon. Thanks for taking my call. Just as a follow-up on the international deployments. Is there any difference in terms of pricing or investment needed? And then maybe you can talk a little bit about how the Bahamas contract came about.

Was it from a referral from another region in the U.S.? Or was it just an organic sales effort?.

Sure. So on the pricing model, we do charge more for international sale. It’s slightly more expensive to do business there, but we do charge more.

And it's still the same contractual term in terms of its annual subscription fee, same kind of set up fee configuration and the like, but the pricing is higher for international deployments because of the cost, one of the reasons is the cost is a little bit higher.

And with respect to the Bahamas, I don’t think we can never underestimate how network effects happened from successful deployments in the U.S. People look to what we're seeing in Chicago, New York, Miami and other places and they're paying attention to that.

So I would say in the case of the Bahamas engagement is probably a combination of both kind of organic kind of feed on the ground, selling along with them kind of talking to various satisfied customers here in the U.S..

Got it. Thanks. And then just a follow-up.

On the guidance for revenues in 2019, does that include any mission business or any Verizon reseller agreement business?.

So, this is Alan. I would say in terms of guidance for 2019, we do have some Missions revenue that are expected to come in. As Ralph mentioned, the majority of those will be in the latter part of 2019. In terms of Verizon, nothing specifically allocated to the Verizon, however, we continue to joint sales calls with Verizon at this point.

And some of those maybe into our actual pipeline with some kind of a factor, but nothing that's specifically allocated to Verizon per se..

Great. Thank you. And then last one from me.

You had a tremendous success with your existing customer line-up and I was just curious on the bigger customers like Chicago or New York, how much more adoption or penetration do you kind of see in the pipeline for those customers as you look going out?.

So, this is Ralph. I would say with those two customers, I think they are barely fully deployed at this point in time.

And so our focus really this year, 2019, is the focus on the fairly robust pipeline we have with a number of Tier 2 and Tier 3 cities as we kind of lay the foundational work to kind of bring on our next set of kind of Tier 1 cities that aren't on the ShotSpotter platform today.

But I think Chicago and New York are fairly well deployed at this point in time..

Okay. Thanks again and congrats on the quarter..

Thank you..

Our next question is from Jeremy Hamblin from Dougherty & Company. Please go ahead..

Thanks. Congratulations on another very strong quarter. I wanted to get in to -- you had a comment about on expanding our forensic capabilities in 2019.

And can we just tie that into maybe clarifying what you mean by expanding those capabilities, is that tied into ShotSpotter Missions revs, but maybe just a little additional color on that?.

Great. Thank you for the question. So, our thoughts are that we're going to be much more intentional around kind of building a professional services revenue component to our business.

Right now, for example, on the forensic side, we produced these detailed forensic reports and provide excellent witness testimony and frankly, only charging people, customers traveling expense for the bandwidth and hours that we're spending on a witness stand in a court case.

And so our belief is that we can have package up of those service and chart more of the consulting rate for that time combined with what we're already doing with respect to training, kind of, let's see what's the other one that we're -- it's like training, forensic services, integration services.

So, we have notification engine that we charge a subscription fee for that. We think we can be much more intentional around kind of bumping up fee services and kind of putting them under a professional services umbrella and really focus on that as a revenue contributor -- contributions to the company..

And I would just add that as Ralph mentioned, this is what we hope to be incremental dollars which should basically top to bottom-line because these are things that we're already providing basically now, but for break..

Okay. And just in terms of thinking about how your customer feels about that. It sounds like it does expand your TAM overall. Have you gotten the sense from customers? I'm sure you've had conversations with them about paying for that capability.

Or you just kind of making them aware at this point time spent doing the investigation work and getting that data together to be used in that type of planning?.

Yeah. So this is Ralph. I would say in case of forensic services. There is one thing to note is that. It's really coming from a different wallet.

So, typically, our core customers been the law enforcement agency or Police Department, often times when we're engaged an expert witness testimony, it's really behest of District Attorney, which is the separate budget line item and so we're very confident that business within the realm of the heart possible.

They pay for expert witness testimonies of various types of forensics services and so ours is really no different. I think we're just asking people to kind of value the real capability that we're bringing to the table and charging appropriately.

And I don't want to mislead anyone to think that this is going to be, I mean, a huge revenue driver for us although it is a very nice margin business as Alan pointed out. But you can just think of this kind of being – kind of incremental to what we're already doing from a revenue bases.

And just managing in a way that, it's – again much more intentional then having a real focus on monetizing basically 8,000 hours of capacities is out there that could – that we can charge for, to the extent that we can get them on witness stance in the like..

Again, I would just add as we've always – we're going to be thoughtful about implementation. It's easy to start a new customer's out paying right away, where we might have a different plan for customers that are used to some of the services that have been provides for the free.

So we're going to be thoughtful as always customer-focused when we implement this..

Is that something where you could foresee revenues in 2020 in that business line?.

I think we're going to see it for 2019..

Okay. And then the other thing I just wanted to get a little additional color on your G&A cost, I mean, incredible job on margin overall and operating expense, your G&A cost on an absolute dollar basis were lowest in Q4.

And I know that, you had the comparison from last year, where you had a bunch of one timers, but just in terms of putting some context around – even though, this was obviously your highest revenue quarter, who's your lowest on a G&A front? Any color you could provide just in thinking about that in context as we look forward in 2019?.

Sure. This is Alan. I would say there – there is a couple of things. We are being very thoughtful about our G&A expenses. I would also say that, there is – just some aspects of certain areas that the accrual sort of matched out earlier in the quarter.

For example, a bonus accrual, such that, an accrual on Q4 might be slightly lower than accrual in Q1, where we need to be starting over on that. There's little bit of an impact there. But in general, we're not adding significantly to our G&A costs. And we're being very thoughtful when we do add them..

Okay.

And just to confirm, your legal accruals those are now done with, from what you had the several quarters earlier in 2018 and 2017?.

I think the legal accruals you're talking about is related to the litigations that we had with the contractors..

Yes..

Yes. That' been complete. We are still – we still have one outstanding litigation that we can't really comment on. We don't have any accruals at this point related to that. We can't accurately measure what those might be. And when we can then we will evaluate any necessary accruals there..

Great. Thanks guys and good luck this year..

Thank you..

Thanks..

Our next question is from Richard Baldry from Roth Capital Partners. Please go ahead..

Thanks. Can you talk maybe about, how you see growth split in 2019 between expansions versus new cities or regions? May be trying to gauge, how much visibility you have entering 2019 versus prior years? Thanks..

Sure. This is Alan. I guess in general, we give our guidance in a way that we think is realistic and achievable and we do have a lot of visibility in those revenues. I would say, if we were to look at a split as probably the majority of the new revenues are coming from new city captures as opposed to expansions.

But I don't want to really give a percentage split in terms of 60-40 or 50-50 at this point..

And maybe you talk about how you feel about sales team. You've been adding selectively with the new Missions capability. Do you feel like you need to add more aggressively? Are there types of people that you thing you would need to have to sell changing or still very similar to what you had in the past? Thanks..

Yes, so this is Ralph. I mean, we build really constructive on our kind of sales reinforcement. They're very capable and scale.

They get did a great job in 2018 and we walk through this sales pipeline with the direct sales team domestically and feel really good that we have the right resources and focus to bring about what we need to make happen to be successful this year.

I would say with respect to Missions I think we probably are maybe a headcount higher in the future to kind of focus more on the Missions product. But we're going to be looking at kind of probably maybe bring that person on more and kind of customer successful as opposed to more of a direct selling role.

And I think I would just add again that as we always do that we shouldn't underestimate the benefit that our customer’s success and on-boarding team kind of brings to the sales effort.

Although, they are not order carrying folks, they are really quite instrumental in trying to drive a very high customer satisfaction and kind of highest Net Promoter Scores to our solution, which are so critical in getting that very strong word of mouth or reference sales out there, because that's how the market moves here in domestic public safety.

People pay attention to successful chiefs. And a successful chiefs are incorporating our solution in driving outcomes and it makes a lot easier for us to kind of sell that new prospect..

Great. Thank you..

Our next question is from Joseph Osha from JMP Securities. Please go ahead..

Hello, everyone. Sorry, I've got a little bit of cold. Just -- to return to the previous question.

I'm wondering if you can talk about what kinds of resources and what the engagement process looks like where the smaller Tier 2 customers you're engaging now versus the Tier 1 customers?.

Yes. This is Ralph. So that's an interesting question. I mean, it's very similar I would say I mean, your -- engaging the buying center is the same. The buying center tends to be the police department.

What makes it a complex sales is that you have to get I guess engagement and alignments around people that are kind of sitting around the police department be it Latin officials or sometimes even community to kind of get engaged. So we saw that process actually play out in pleasant though lesser interesting case study there.

So I would say the process is very, very similar the scale is different.

Maybe larger Tier 1 cities are certainly a little more complex as a lot more people you try to get in the room and try to have a conversation with to try and get them socialized to the idea of incorporating ShotSpotter solution as a part of their overall gun violence reduction efforts. But it doesn't -- it's really not that different.

It might take a little bit longer, the dollars are bigger, often times the square miles we're talking about are bigger.

But it's basically kind of the same recipe, respecting and understanding that the buying center is the Chief of Police or Deputy Chief of Police and that we need to kind of coordinate with that buying center along again with that are people sitting outside of the buying center to help influence that sale.

And again, leveraging existing customers that have seen great outcomes. We're seeing….

Okay..

…Police Chiefs talk about ShotSpotter and Mayors talk about ShotSpotter, so really bringing that content to the conversation is important..

Okay. Thank you. Part of where I was headed with this, just thinking about 2019 is wondering whether these smaller customers perhaps have a more quick -- a more rapid close cycle than the bigger ones..

I think that's probably a fair assessment. And I think, we're still looking at longer sales cycle, kind of, 12 to 18 months. It could be the case that the medium to smaller sized cities might be kind closer to kind of 12 to 15 months versus more of the 15 months to 18 or 20 months in terms of a very large Tier 1 city.

But I think with large Tier 1 cities, you can probably look at sales cycle longer than 18 months, frankly. They can take up to two years.

And that's why we try to impart on this call that at least for 2019 our expectation is that, we're going to get there kind of hitting a lot of doubles with Tier 2 and Tier 3 cities, while we're laying the foundational work to kind of capture those next one, two, three Tier 1 cities, because those do take a little bit longer to, kind of, bring about.

But those will be probably be more of a 2020 opportunity for us versus 2019..

Okay great. And then, just on a related point, at your analyst meeting you talked a lot about the notion of rather than just adding sales people willy-nilly, adding customer, success people, retention people, sort of putting on a wrapper around your sales force, as opposed to expanding the number of direct sales.

Does that still continue to be the thought process as you think about how 2019 works?.

Yes, certainly, very much so. But I think I would add to that, we have a very powerful ally now, certainly in terms of kind of lead generation and working with the Verizon on the reseller front, I mean, they just have a much kind of bigger footprint across the public safety market, at least domestically.

And so that, I think, is going to be quite a interesting lever for us that we're expecting to generate, some kind of interesting bookings opportunity for us later in the year..

And that kind of neatly anticipated my question, we really should think of Verizon as a lead-gen opportunity that would feed into your existing business process, not something that's adjacent necessary..

Yes. I think that's a way to think about it. I think, we're still going to be required to be very much intimately involved in the sales process. I mean, it's a certain skin and set of experiences to I think be successful in selling this type of solution to public safety customers.

And I think Verizon is going to want to leverage our expertise and experience in that matter. So I think, we're going to very much involved, I think, in sales process with them. But I think they can help bring us to the party in several places where we otherwise might not be able to be, just because of their reach..

Okay. Thank you.

And then, the last one for me, any just quick update on the uptake our general efficacy of NIBEN? And how that's being utilized?.

So anecdotally, this is Ralph, I mean, we continue to see very, very strong evidence that agencies that engage in the NIBEN process and for those of you on the phone that aren't familiar with what NIBEN is, you can think of it as essential kind of fingerprinting database for gunshot shelves, so what we're asking customers to do as a result of ShotSpotter alert, kind of, getting cops a dot and more likely to recover the shell case once they run into NIBEN system being able to do the network analysis to figure out the movement of a crime gun which then helps them response and identify those very few shooters that are driving most of the gun violence problems in these very small at-risk communities.

And so that strategy is proven to be very successful. We see anecdotes through this -- of this all over the place. And as one Chief of Police says, if you want to predict tomorrow's homicide, investigate today's shooting and that's what we enable. ShotSpotter's frontend combined with NIBEN on the backend. It's a very strong combination..

Thank you very much..

Our next question is from Tim Klasell from Northland Securities. Please go ahead..

Hey guys. Congrats on the nice quarter. Sort of follow on your marketing comments and what you said earlier.

Moving on a lot of press, and particularly, around talking about some of the benefit of ShotSpotter shell casings and what have you that you mentioned, is that shoring-up with your customers, are your sales guy walking in and talking to a potential customer and are they further along in understanding the value proposition now? You think that will, sort of, shrink that sale cycle down a bit going forward.

I'll leave it at that. Thanks..

Yes, so we lean-in pretty heavily on the idea of NIBEN and what they call Crime Gun Intelligence Center because that's a very clear measurable benefit that customers get when they deploy ShotSpotter.

Our assumption is that some point in time, the ShotSpotter solution will become the standard-of-care where it's just something that you do as a part of having agency just as you would have a non-lethal or body-worn cameras that you would want to have ShotSpotter in the event that you were dealing with violent crime in your city.

I think it's fair to say we're not there yet. We're still kind of expecting to see frankly that we're looking at 12 to 18-month sales cycle. When we do reach the tipping point, our expectation would be that those sale cycles will shrink pretty rapidly and then we're dealing with a whole different kind of go-to-market strategy.

But I don't think we're anticipating that certainly in 2019. But hopefully it will happen sooner versus later. But we're not planning or depending on it to happen for this year..

Okay, good. A quick follow-up. You had mention you guys -- obviously the Bahaman win, congratulation, and U.S. Virgin Islands made a payment to you. How about Puerto Rico, any thoughts there about them potentially coming back to life or is that still a ways out? Thank you..

Sure, this is Alan. I mean we're hopeful that Puerto Rico return to customers, right? So, we just have them in our pipeline. And the pipeline, in general, has different probabilities just tying to those. So, when we give our guidance, we do have a weighted average on those. So, Puerto Rico was and continues to be on our prospected pipeline.

We have seen some improvement there, but it's still, honestly, too early to tell exactly when something might happen..

Okay, great. Thank you very much..

Our next question is from Jeff Kessler from Imperial Capital. Please go ahead..

Hi, Alan. Hi Ralph, it’s Jeff. I recently was at a safe city, secured cities conference. And one of the things that they talked about in terms of funding various programs was a catalyst, something that kind of tie the various services together around which the public partnerships could actually agree on funding.

And my question to you is, do you think that you -- in your relationships with companies like Verizon, are you able to get that mind share in which these – we would also say these groups would be able to get mind share around you too, taking on -- essentially you being the brand name that they used to go out to the community and try to get funds for not just ShotSpotter, but you serving as a catalyst for other types of safety and public safety measures? In other words that builds up your value proposition as well?.

So this is Alan.

I would say that, we're still cautiously optimistic about how a large providers of Smart Cities, Smart Communities like Verizon and GE and others can view ShotSpotter as a launching pad from what -- I think you're saying is, sometimes a city that isn't necessarily ready to do a full smart city and smarty community deployment, where Verizon or someone else might be able to say well, let's get started with something like this and sort of prime to pump.

I think that is possible. We have seen very little movement there frankly in terms of how fast they move in these deals, but we're certainly hopeful that can and will occur either later on this year or into 2020 and beyond..

All right, good.

Second question is, have you ever considered the marketing of ShotSpotter to places where there are guns which are in place already? Military bases, protective areas like ring centers things like that -- in covering rings there’s from time to time some violence in some of these depots, do you market – you do market commercially at all or is it all – is there all municipal city related?.

Yes this is Ralph. I would say the vast majority of our marketing efforts and focus really is on municipalities and police department because that's where the low hanging fruit is certainly.

We have seen some kind of interesting things come over that I think you're familiar with our freeway project which is a little bit different type of a model for us. Certainly our SecureCampus solution is an example of slightly different variance to our kind of law enforcement focus.

But I think our folks are really trying to fit on to those umbrella by kind of thinking -- doing more kind of commercially oriented things like protecting banks or bring sort of things like that. That may be out there. But I think we just have too much low hanging fruit for us to go pick before we get fancy and elude our focus to other things..

One final question, at the last ASIS conference and obviously you will see that the ASUS conference. There's a lot of companies that do have a technology for inside and they've been trying to develop something that works out of doors. Clearly they have not made any dense in the road.

Can you talk a little bit about where the competitive landscape meaning is there? You're essentially a brand name, a standard at this point.

Are there any companies that you see out there that are -- that essentially would be of either concern or of interest to you if they were to become big enough?.

So -- yeah, this is Ralph. So we try not to take anything for granted to perfectly honest with you. But honestly we have not seen any real strong viable direct competition to our outdoor wide area franchise. I think what we do is extremely difficult and challenging.

We got a lot of intellectual property built into our solution and certainly a lot of experience carve attributes and benefits. And I think it would be extremely challenging and difficult for new entrants that come into the space and execute at the high fidelity that we trade in the market to expect in terms of quality of service.

I’ll also quickly say that you can't take anything for granted, because who knows, I mean, tomorrow somebody could come on the scene, but we've seen a little bit of chatter, we haven't seen any real deployment that make us particularly concerned or worried at this point in time..

Great. Thank you. Thank you for taking the call, and you’ll be hearing more from me..

Thanks, Jeff..

Your next question is from Will Power from Robert W. Baird. Please go ahead..

Great, thanks. Hey, Alan, maybe first with you, I think you talk about the investment cost for OpEx rising through the year.

Any color on gross margins should we expect that to take up any seasonal factors be aware of there?.

Sure. I would say in general, we expect our gross margins to increase as well. We don't expect any real seasonality related to that. It is something that we would certainly expect the end of next year Q4 to be higher than Q4 this year. And I can't say it will be in a straight line increase, but generally upward and to the right..

Okay. And then just more broadly, if you look at -- we’re still -- a number of tier one opportunities out there.

Are there any common areas of pushback or barriers that you're running into? And I guess as a follow-up to that, if you think about earlier forensics commentary, is there something that some of the city's -- that you don't have maybe what you're looking for that can maybe push you over the edge to help win some of those contracts? I guess really trying to figure out what gives you over the line on some of these other tier one cities versus just between the right applicants in place over time?.

Yes. So this is Ralph. Every single one is different. I would say we have kind of series active pursuits in number of these tier one cities where we've not deployed now. And each one of has its own kind of unique story or narrative.

And so I can't really -- we cannot deploy it down to a singular kind of use case or things friction point that is kind of preventing us from getting here to there.

I think it's really important that we are impatiently patient about some of these in pursuit’s engagement because at the end of the day, it's really does take a prepared mind to adopt this technology and use it the right way to drive positive outcome.

And so I think my first opinion is I would rather wait until we have everybody aligned buying and meeting and waiting to deploy and use this technology in the right way to drive great outcomes versus kind of forcing a transactional sales where may be a customer is not ready.

And the nice thing for us is that there are so many opportunities out there for us in kind of tier two, tier three land for now that we can afford to the persistently patient until we can get one, two or three of these other kind of tier one cities that decide to lean and adopt the solution.

Because what we do know from experience there is senior use case or our case study relative to tier one usages. Once that tier one agency comes on board and start using the technology, they tend to expand and become very, very big important customers for us. So that will be the way I guess I’d answer that question. Hopefully that was helpful..

Yes. So that makes a lot of sense. Thanks..

This concludes the question-and-answer session. I'd like to turn the floor back to Mr. Clark for any closing comments..

I want to thank everyone very much for dialing in and listening into our earnings call. As I mentioned in my earlier comments, we're super excited about 2019 and we're also incredibly grateful for all the hard work that went in to 2018 on behalf of the team and myself at ShotSpotter.

So thank you very much and looking forward to chatting with you all again in three-or-so month, and updating you on your progress in early 2019. Thank you..

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