Good afternoon, and welcome to ShotSpotter's Fourth Quarter and Full Year 2019 Earnings Conference Call. My name is Devin, and I will be your operator for today's call. Joining us are Shotspotter's CEO, Ralph Clark; and CFO, Alan Stewart.

Please note that certain information discussed on the call today will include forward-looking statements about future events and ShotSpotter's business strategy and future financial and operating performance.

These forward-looking statements are only predictions and are subject to risks and 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 regulation is 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 18, 2020, and ShotSpotter undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this call.

Finally, I would like to remind everyone that this call will be recorded and made available for replay via link available in the Investor Relations section of the company's website at ir.shotspotter.com. Now I would like to turn the call over to Shotspotter's CEO, Mr. Ralph Clark. Thank you, sir. You may proceed..

Thank you for joining us this afternoon. Al and I will do a review of Q4 results and recap the highlights of 2019. We will also share our outlook for the year ahead and then take your questions.

Before I formally begin, I want to personally thank the ShotSpotter team for the grit and resilience they showed in pushing through the take in 2019 with a solid Q4 performance that puts us in a strong position to increase our growth in 2020 and beyond. I'm gratified by this performance but not surprised.

I think many of you know that ShotSpotter is more than just a business for everyone here at the company. It is also our deeply held sense of purpose to reduce gun violence, improve public safety and help rebuild trust between communities and police that inspires the work that we do.

We've always understood that creating and leading a whole new market category would present challenges. In 2019, we successfully worked through those challenges, and we believe position the company for even stronger growth in revenues, adjusted EBITDA and net income in the coming year.

Specifically, in Q4, we went live on 34 net new miles, which included the expansion of Las Vegas plus three new cities in Puerto Rico as well as Dayton, Ohio, all with 0 attrition for the quarter.

Reported revenue came to $10.9 million, another record for us, and we delivered $0.11 per diluted share, compared to $9.7 million in revenue and $0.03 per diluted share a year ago. Las Vegas became our third largest customer deployment with 24 total miles just behind Chicago and New York City.

We are very pleased to have been able to leverage existing in-place permissions, combined with some early prep work in order to go live in Q4 with 16 of the 21 miles in Puerto Rico, ahead of schedule. Davie is now our fifth customer in Ohio.

This is a perfect example of the viral nature of our solution when customer adoption tips in geographic clusters as police chief shares success stories from their ShotSpotter deployment with their peers in nearby jurisdictions. For the full year 2019, we reported $40.8 million in revenue and net income of $1.8 million or $0.15 per diluted share.

We published more than 140,000 gun shuttlers and finished the year with approximately $43 million in annual recurring revenue. Our international pipeline remains strong with opportunities distributed between South Africa, The Caribbean and Greater Latin America. We expect international to contribute approximately 4% to 6% of our 2020 revenues.

In addition to our core Flex solution, ShotSpotter missions, our precision policing platform is playing a critical role in our diversified growth strategy. Missions represents an ideal way for us to deepen relationships with our public safety customers.

The more intelligence we can provide to law enforcement agencies to help them execute precision policing, the more valuable we are to them as a strategic partner. In 2019, we booked 5 Missions contracts and expect to be fully deployed on those opportunities in the next 90 days.

Beyond our unique technology and extraordinarily strong market position, we also continue to take active steps last year to position the company for sustainable, profitable growth. We have scaled our direct go-to-market capacity by adding 2 new VP positions in our sales organization.

Our new product sales VP owns product sales responsibilities and has 3 dedicated sales executives representing Flex, Missions and security. Our territory sales VP owns and sales exec at the account level, and we'll be launching a new initiative to focus on Tier 4 cities in jurisdictions.

Our Tier 4 sales initiative will be staffed by 2 inside sales reps, combined with marketing programs to feed them Tier 4 leads, helping us penetrate this largely untapped market. These headcount adds give our executive team more bandwidth for long-term strategic planning and key executive account relationship building.

Customer success and positive client outcomes continue to be an important strategy for our long-term profitable growth. Customer success drives efficient viral customer acquisition, which is demonstrated by our impressive sales and marketing spend of $0.43 per dollar of new annualized contract revenue.

It is also critical in minimizing attrition and maximizing upsell and expansion opportunities. We were successful in this regard as well by achieving a revenue retention rate of 111% in 2019. We know that client outcomes are just more than the result of our specialized solution working as prescribed.

It is also our consultative engagement that assists law enforcement executives in the custom development and application of gun violence reduction strategies and agency training and execution that drives measurable positive results. I'm happy to report that the company's Net Promoter Score increased to 53 in 2019.

We believe we can take that to the next level with the recent hire of a VP of customer success that reports directly to me and is engaged with the entire senior leadership team on enhancing the customer journey. Our customers continue to talk about the positive results they're seeing with our solution.

I would like to share just two of the many examples of positive outcomes making a difference within our customer base. In just the last year, Greenville, North Carolina, Chief of Police, Mark Holtzman, reported that his city has seen a 33% reduction in gunshot injury since ShotSpotter Flex was installed in February of 2019.

The Chief of Surgery at the regional Trauma Center even tweeted that deploying ShotSpotter has been "an incredible injury prevention success story in this national epidemic of gunshot death." And in Toledo, Ohio, Police Chief, George Kral, says that ShotSpotter Flex is, "a game changer that has turned into one of the most important COGS in our wheel of addressing gun violence".

In just the first 6 months of going live and Toledo, the system has led to 50 arrest and 36 firearm recoveries. These outcomes illustrate not only the value of ShotSpotter technical proficiency but also what is possible when our technology meets intentional ongoing best practices. Two last points before I turn it over to Alan.

We will be opening a Shotspotter office in Washington, D.C. later this year.

This office will not only bring us closer to national law enforcement opinion leaders and decision makers, it will also give us a way to tangibly demonstrate our technology to potential clients and influencers because this new office will house a satellite incident review center.

In addition to providing some amount of backup resiliency to our headquarters-based instant review center, this office will also include a portion of our forensic services and product marketing teams. We are very excited as our Washington, D.C. presence will also enhance our nascent federal government relations efforts.

Case in point, we've been advocating for the creation and adoption of a house authorization bill, H.R.5385, that, in short, would direct the attorney journal to carve out $10 million per year for fiscal years 2020 through 2023 for a gun fire detection technology grant program.

This is one of the few bills related to gun violence prevention that has bipartisan supporting Congress, with the co-sponsorship of representatives, Robin Kelly and Jim Sensenbrenner.

Lastly, after carefully assessing the dynamics and history of gun violence in Houston, America's fourth largest city, we are convinced that our system can positively leverage police efforts there in addressing gun crime and serve as a regional catalyst to help more quickly penetrate the large Texas market.

Houston PD is led by Chief Art Acevedo, who also happens to be the President of the Major Cities Chiefs Association. Given the very unique circumstances this situation provides us, we have agreed to offer 5 square miles of shots fire to Houston on a trial basis.

This is based on the condition that Chief Acevedo directs its department to fully embrace our proven best practices. Chief Acevedo has further agreed that if department is happy with the results of the deployment, they will transition to a paid subscription after the trial program and potentially expand the system over time.

Although we do not anticipate this will produce any revenues for 2020, we firmly believe that we will, again, prove the value of our system in one of America's most challenging city, just as we've done in Chicago, Oakland, New York City and elsewhere, and that we can gain a strong advocate in Chief Acevedo.

Texas is a market that is traditionally conservative and naturally skeptical. Modern policing technologies can be slow to gain acceptance there.

We believe we can overcome that skepticism with our actionable high-value gun fire detection intelligence, and we believe the very small financial risk of this creative experiment is minimal compared to the potential market penetration in Texas, along with other member cities that are part of Major Cities Chiefs Association.

So that will do it for me. I look forward to take your questions after Alan reviews our financial results. Over to you, Alan..

Thank you, Ralph, and good afternoon, everyone. We ended 2019 on a solid note.

Our progress in many areas contributed to our performance, including completing the Las Vegas expansion, finalizing our contracts in Puerto Rico and the initial deployment in three cities on the island as well as the addition of our fifth city in Ohio, which is a great example of the tracks we are seeing in certain markets.

We went live on 34 net new miles in the quarter, adding a total of 98 gross and 82 net new miles for the year. Even with continued investment to expand our leadership position, we were profitable for both the fourth quarter and the full year while adjusted EBITDA increased significantly, especially for the full year.

So leveraging our business model was a highlight for the year, and it will continue to drive profitability in 2020. Revenue retention for the year was 111% compared to 139% for 2018. Note, the 2018 rate included a large Chicago expansion. Our revenue retention rate is now more in line with our current and future expectations.

Let's look at the details of the quarter and the year. Revenues for the fourth quarter were $10.9 million, an increase of 12% over the fourth quarter of 2018.

Our solid conclusion to the year helped drive to a record top line for the full year of $40.8 million, a 17% increase over 2018, reflecting growth in the number of miles covered through the expanded deployments for current customers as well as the addition of new customers.

Note that we ended the year with an annual recurring revenue of approximately $43 million. We accomplished this goal by rapid deployment of the first 16 of the miles under contract with Puerto Rico, which offset the ARR associated with Cape Town as we continue to wait for the formal renewal of that deployment.

Gross profit for the fourth quarter increased 21% to $6.8 million or 62% of total revenue versus $5.6 million or 58% of total revenue in the fourth quarter of 2018.

We saw even greater expansion in the gross profit for the full year where 2019 gross profit increased 27% to $24.3 million or 60% of revenue compared to $19.2 million or 55% of revenue in 2018.

In accordance with evolving accounting best practices regarding the accounting treatment of customer success costs, starting in 2020, we will be allocating the majority of our customer success costs to cost of goods sold.

This will result in lower operating costs in sales and marketing but will also increase our cost of goods sold, reducing our overall gross margin by approximately 2% on an annual basis. The net effect of shifting these costs to cost of goods sold from sales and marketing will result in no change to overall operating income.

Adjusted EBITDA for the fourth quarter, which is calculated by taking our GAAP net income and adding back interest, taxes, depreciation, amortization and stock-based compensation was $3.2 million, up 50% from $2.1 million in the fourth quarter 2018.

For the full year 2019, adjusted EBITDA was $9.4 million, up a dramatic 162% from $3.6 million in 2018. Now turning to our expenses. Our operating expenses for the fourth quarter were $5.6 million or 51% of revenue versus $5.1 million or 53% in the fourth quarter of 2018.

For the full year, operating expenses were $22.7 million or 56% of total revenue compared to $21.8 million or 63% of total revenue in 2018.

Of note, our cost of result and operating expenses were positively affected in the fourth quarter and the year as a whole because our company bonuses were ultimately over accrued relative to final revenue growth that we achieved.

Parcel reversal this accrual in the fourth quarter reduced compensation expenses in both cost of goods sold and operating expenses. Our sales and marketing spend per dollar of annualized contract revenue was approximately $0.43 per dollar in 2019 versus $0.30 per dollar in 2018.

We continue to make strategic investments to increase our customer success efforts and expand our sales and marketing programs, among other outlays.

In addition, even at this higher level, we believe our spend per dollar is significantly lower than most SaaS companies as we continue to enjoy the benefits of targeting one specific vertical with little viable competition.

Now breaking down our expenses, sales and marketing expenses for the fourth quarter were $2.5 million or 23% of total revenue versus $2.2 million or 22% of total revenue for the prior year period. This increase reflects the cost of some of the programs, such as expanding our sales and marketing programs that I just discussed.

Our R&D expenses for the fourth quarter were $1.3 million or 12% of total revenue compared to $1.3 million or 13% of total revenue for the prior year period. We continue to invest in the functionality of our Missions platform, improving our software algorithms, our customer applications and expanding our analytic capability.

G&A expenses for the quarter were $1.7 million or 16% of total revenue compared to $1.7 million or 17% of total revenue for the prior year period. Our GAAP net income for the fourth quarter was $1.3 million or $0.12 per share based on 11.4 million basic and $0.11 per share based on 11.8 million diluted weighted average shares outstanding.

This compares to a GAAP net income of $302,000 or $0.03 per share based on 10.8 million basic and 10.7 million diluted weighted average shares outstanding for the prior period. As I noted above, we are very pleased to achieve profitability for the full year.

For the full year, our GAAP net income was $1.8 million or $0.16 per share based on 11.3 million basic and $0.15 per share based on 11.8 million diluted weighted average shares outstanding versus a loss of $2.7 million or $0.26 per share based on 10.6 million basic and diluted weighted average shares outstanding in 2018.

We added 34 net new go-live miles in the fourth quarter, up from 24 added in the same period a year ago with no attrition. For the full year, we added 98 gross and 82 net new miles for a total of 730 miles live at the end of the year. In Q4, we went live in 4 new cities. And as of year-end, ShotSpotter was deployed in 102 cities.

At the end of December, we had approximately 760 miles under contract. Deferred revenue at the end of the year was $27 million versus $21.3 million at the end of the third quarter. During 2019, we repurchased 257,824 shares of our stock, deploying approximately $6.7 million in cash.

After this use of cash, we ended the quarter with $24.6 million in cash and short-term investments, down slightly from the $26.1 million at the end of Q3. As a reminder, we have no short or long-term debt. A few other items before I turn the call back to Ralph and we take your questions.

The price increase we have discussed went into effect on January 1, increasing our base rate from $65,000 to $70,000 per mile for domestic customers.

Note that we don't expect any revenue impact until later in the year as most deployments over the next couple of quarters would have been sold last year at the lower rate, but we do expect the change to contribute several hundred thousand dollars and contribute to increased profitability for the full year.

Also I did want to follow-up on the comment I made last quarter about the potential cost impact of replacing our 3G sensors over the next few years.

We've now learned that the 3G networks will not be turned off into early 2022, so we don't currently expect to incur any material costs related to 3G sensor upgrades in 2020 unless we note material degradation in our deployed networks. Now turning to our guidance. We are expecting 2020 revenues of $48 million to $50 million.

As we discussed, we still expect this to include a contribution from new international markets this year. We expect revenue to largely follow our normal cadence, Q1 flat with Q4, an increase from Q1 to Q2, flat again to Q3 and an uptick in Q4.

While we continue to invest in our growth and to expand our leadership position, we expect to maintain profitability as we benefit from the leverage in the business and see further improvement to adjusted EBITDA. We plan to continue our investments in 2020 to further our leadership and penetration in this growing market.

We're continuing to invest and expand our customer success and sales and marketing efforts, to support our efforts to grow internationally and to accelerate our R&D programs, among other initiatives. The expenses will continue to increase on a dollar basis across all categories. Now back over to you, Ralph..

Thank you very much, Alan. We believe the momentum we are seeing in our business not only instills customer confidence, but it inspires our confidence as well. We're extremely positive about the path that we're on and feel great about the difference we're making along the way. We want to thank all of you for your feedback and help.

And now we're ready to take your questions..

[Operator Instructions]. Our first question comes from the line of Matt Pfau with William Blair. .

First start on the Latin America opportunity.

I'm just wondering if you've received any feedback on some of those initial proposals that you put out in, I think, the 4 country that you were targeting?.

Great. Thank you very much for that question, Matt. We have not produced a defendant back in a way that we're prepared to share today, but we feel very constructive about the pipeline that we're building, not only in Latin America, but also in the Caribbean and South Africa as well.

And I think it was stated on our prepared remarks, we're looking for international to contribute somewhere between 3% and 5% of revenues -- I'm sorry, 4% to 6% of our revenues for 2020..

Got it.

And are some of those Caribbean opportunities newer that proposals that you've put out there?.

Yes. That's correct..

Okay. And then the Houston trial is pretty interesting.

Maybe can you just give us some insight into -- if everything goes well and they're satisfied with the solution and want to move over to a paid customer, what does that process look like in terms of budgeting? I guess how difficult is it for them then to get that approved with whoever allocates the budget? Or is that something that's already sort of pre-negotiated with this trial? And then as you've had discussions with other large cities, had this sort of trial basis been pitched? And is it something that's sort of interest to other large Tier 1 potential customers that are out there?.

Yes. Great question. So I think with respect to Houston, that's a very, very unique situation. Given its size, it's the fourth largest city here in the U.S. It has a very large police department.

With a very large gun violence problem that is spread across a very large city that also happens to be in a state that we believe has a lot of opportunity for us.

That, combined with our Art Acevedo being the very unique Chief that he is, he's a very well-renowned and respected Chief of Police inside of law enforcement, certainly being the President of Major Cities Chiefs and speaks a lot to his credibility.

So we felt all those things kind of came together in a way that gave us an opportunity to really be creative and try to move something forward in Houston and not have to wait.

And for us, that involves this trial concept that we're prepared to march forward with Chief Acevedo in Houston on -- under the proviso that he is going to direct his officers to apply our proven best practices because we know, typically, when those best practices are applied, good results happen.

And his statement to us is that good results happen, and we're satisfied with this deployment, I'm happy to move forward on being a paid subscriber to the system and even potentially look at expanding. We tried to be very clear to folks, so that they don't bake that into any kind of revenue guidance.

That will have 0 revenue impact for us in 2020, even if we're successful. I would look at this much more as a kind of 2021 opportunity if we're successful to have some revenue contribution there, but it's not going to have any impact to our revenue for 2020.

But it is a very important signal, we think, to the marketplace, specifically in Texas, and also specifically to Art Acevedo's peers that are Chief of Police of other major cities where we haven't been deployed to have his support. And really building him into a net promoter which we plan on doing. And I think we're going to be successful doing that..

Nice job on the strong finish of the year..

Thank you..

Our next question comes from the line of Richard Baldry with Roth Capital..

It sounds like you have a few Missions deployment to go live to.

Could you talk through the revenue recognition behind that? And how that -- is it more upfront? Is it more recurring? When does that time versus the actual deployment versus wins or contract signing?.

Sure. No, the revenue recognition will be very similar to what we have in Flex. There might be a small upfront or deployment charge but then the subscription fee will be recognized ratably over the year for the period, very similar to our Flex deployments..

Okay.

Then aside from Houston, are there any more updates on sort of Tier 1 city discussions? Your thoughts for the possibility to add any of those in 2020 or beyond?.

We haven't really stipulated any other specifics on other Tier 1 cities. We continue to have discussions with the ones that we've talked about in past earnings calls. We do believe that this Houston deployment might spark some additional discussions as well. But we continue to work on the other Tier 1s..

With some costs, I guess, assume by yourselves, while the Houston goes up.

Is that way even moderately or slightly on the gross margin side? Or is that somehow capitalized until determine whether that's a successful initiative or not?.

No. It will be held on the balance sheet as basically cost in progress at that point. So it won't translate to the income statement until it ultimately goes live. That is revenue produced..

And last one would be, any update on development for partners, either smart streetlights, smart street signals that you've won a while ago for the smart cities initiatives.

Anything you think more traction or trending better heading into 2020 or beyond?.

Yes. So really nothing new to report there..

Our next question comes from the line of Jerry Hamblin with Craig-Hallum..

Have my congratulations on the strong finish. I want to come back to Missions for a second. You came up with a creative opportunity to expand the network permissions and through an offer of free Flex mile.

In terms of the learnings that you've had with that, I would say, market tactic, what have you learned? How have cities response to that? And how do you expect that to drive your business, not just in 2020 for Missions but beyond that in 2021? Is that something that has accelerated that particular offer?.

Yes. Thanks for that question. This is Ralph. So I'll take a stab at answering at least part of it, and Alan jump in as appropriate or necessary. So I think our mission's marketing program is really a great example of our ability to be very creative and adapt very quickly to market considerations. We had some amount of interest in missions.

But to really kind of push people across the line, we felt it would be appropriate and useful to offer effectively a free mile as a part of that 4, 4 8, 4 [ph] a year. And I think at the end of the day, what we will get is Missions -- paying Missions customers, because they are paying for Missions currently.

And then a year from now, that mile that we've deployed, I'm predicting a high percentage of those will continue on as paying customers for that extra mile. So effectively, what we've done is kind of front-loaded a little bit of expense for deploying a free mile for an existing customer as a way of signaling the strength of the partnership.

And our goal, really, is with these first 5-to-so customers is really get useful information about how Missions is making a difference to their precision policing efforts, and then use them as reference selling objects really to kind of go get that next 5 to 10 to 15 customers within our customer base.

So it's a way for us to kind of accelerate it or kind of juice the market adoption, so we can really quickly learn not only, again, about how they're using missions but frankly, we're going to get some very valuable feedback on enhancements we can make in Missions, make it even more valuable to those existing customers and then prospective new customers as well.

So I think it's a really positive thing. We're pretty excited about it here within the company..

Great. And then at the end of last year, you had some really remarkable success stories.

You mentioned some of them on the prepared remarks but certainly, great PR out of your largest customers in Chicago and New York with very public statements about the reduction in gun violence and homicide rates and really kind of start contrast to, let's say, other large cities like Philadelphia that has seen 5, 6 or to 8 years of increased violence using a competing system.

Has that helped in terms of inbound inquiries? Are you seeing an acceleration when you get such good PR like that here kind of early in 2020?.

Well, I think -- this is Ralph again. I think customer success and positive customer outcomes are very critical to our ability to acquire customers on the efficient basis and what we do. I mean, our sales team is fantastic. We've got some really great, strong sales executives within the company.

But I don't think we can discount the impact that a net promoting Chief has with respect to selling to his or her peers, how ShotSpotter's made a difference in those efforts. And you actually see that.

I think, again, in my prepared remarks around this kind of concept of regional tipping point when you get some successes like out of a Cincinnati, how that can breed to other cities within the Ohio region. And we talked about Ohio, but the same thing could be said for Inland, California. The same thing can be said for South Florida as well.

Certainly, New England as well. And so I think customer success and positive outcomes and people standing up and saying how ShotSpotter's made a difference in their violent crime reduction efforts is very critical to what we do. And that's why we continue to invest in our customer success organization.

And we often kind of get into a discussion with folks about why don't you hire more salespeople, and we feel like we have the right number of salespeople to go after the market opportunity.

But we will continue to invest and grow and enhance our customer success organization because those -- that organization is primarily responsible for helping create those net promoter customers that are also part of our virtual sales team..

Great. And then just want to wrap up with a couple of clarifying questions on the margin commentary. The first is just 3G impact.

In terms of thinking about 2021, Alan, could you give us some clarification on what you think the comprehensive impact of that might be on gross margin for 2021? And then secondly, just clarifying for 2020, and the adjustments, including the accruals, the over accrual, you mentioned for compensation having a positive impact on Q4? And then kind of the allocation in terms of accounting procedural between cost of goods sold and sales in market.

Just any clarification on where do you think we might see these in 2020?.

Sure. Yes. I'll go ahead and start with the 3G. So we continue to swap out sensors that are 3G with new sensors as just part of our normal maintenance cycle. We still do expect, at some point, most likely in 2021 and 2022 to have to still swap out the remaining ones. The cost will be somewhere between $4 million and $6 million.

But they'll also most likely just be starting over the depreciation cycle of those sensors as they get replaced. So it's most likely not going to be an all-in one-time expense in most cases, it'll be sensors that have already been fully depreciated, starting a depreciation over again.

In terms of the margins, I did mention that we're shifting some of the customer success costs now that we have a formal VP in charge of that organization. Some of those costs are going to be shifted up into cost of goods sold. And that will tend to increase the cost of goods sold and reduced the gross margins by approximately 2% or 200 basis points.

Then you'll see a likewise reduction in the sales and marketing expense, such as the bottom line in terms of operating income, there will be no change there. And then lastly, I would say, when we did the adjustment to Q4, we had asked the change on the company bonuses that were based on our original performance metrics.

So that did positively impact Q4 and also, the year as a whole. We will begin 2020 accruing at the higher rate, again, to be tied to the performance metrics that are set out for 2020..

The company bonuses, what was the total impact in Q4?.

There's about $400,000 reduction in expense..

Our next question comes from the line of Chris Van Horn with FBR..

I wanted to know with the Dayton, Ohio win, congratulations there, and I imagine it was a competitive bid.

Anything to highlight in terms of your competitive advantage in that process?.

Yes. This is Ralph. So I'm not quite sure how to answer that question other than to say that we feel really good about our competitive position. I mean we continue to create promoters like Dayton, Ohio; Greenville, North Carolina; Columbia, South Carolina, et cetera.

And we're continuing to make enhancements in our technology to make it cheaper, better, faster for us. And we've yet to see any successful deployment of anyone claiming to do gunshot detection. We're obviously very curious about the Canton, Ohio situation.

We don't know or haven't seen at least publicly that they have successfully deployed there yet, although, I guess, they booked it sometime in November of last year. They're about some -- so we're still waiting to see that. But we think we're in a very, very strong competitive position.

And the market is one that we feel that we've created and pretty much owned for right now. And so we're continuing to kind of focus on kind of bringing new customers into the fold and making sure that once they come on the platform, they're going to get value out of the service..

Okay, great. And then, we've heard of some of the prosecuting officers or the DAs starting to influence some of the buying decision around ShotSpotter.

I was curious, is that a trend that you're continuing to see? Or is it a little bit more one-off and any kind of or commentary there?.

Yes. So this is Ralph. I mean this is very much a complex sale, where a lot of folks can potentially weigh in to make a ShotSpotter decision, a positive decision, including DAs. We have a great track record in working with not only local prosecutors but federal prosecutors as well.

They understand the value that our precision alerts can provide in their prosecutorial efforts. And they can be very big influencers because oftentimes, politically, they're very well connected. Sometimes they actually bring budget to the opportunity as well, which can be very helpful.

But we don't want to leave out the growing influence we see from executives at local trauma care centers that are also beginning to see the benefit or feel the benefit of a ShotSpotter deployment and wanting to get involved in helping a city and agency fund and deploy ShotSpotter.

So there's a lot of people in the mix, and that's what makes our sales organization, we think, just a premier sales organization. Because they know how to coordinate all those interested parties in a way to kind of get people to yes. And although it can frustratedly take a long time, we've always talked about long sales cycles in our business.

That's just the nature of it because they have to really kind of coordinate all those players in the mix and kind of get them all shaking their head that this is something they want to do. And I -- again, our sales organization has really skilled at being able to do that..

Okay, got it. And then last for me. It looks like CapEx was down year-over-year.

Anything driving that? And is there a level we can think about for 2020?.

Yes. This is Alan. So I would say if you look at 2020, it's probably going to be similar to 2019. And the reason for the reduction in 2019 versus '18 was at the beginning of '18, we had a large amount of CapEx going to do the Chicago deployment. And it was, frankly, just a lot more expensive to deploy.

So that was what drove the CapEx to be so high in 2018..

Congrats on the quarter..

Our next question comes from the line of Joseph Osha with JMP Securities..

So I hope that you now we're hearing that you under accrued for bonuses. The -- a couple of questions for you. First, a thematic one. It's interesting hearing about the ramp of Missions. I'm wondering as you look at the other skill sets that are adjacent to what ShotSpotter does now. Are there any -- obviously, nothing near term.

Are there any other skill sets that you think might be additive to what you're able to do right now?.

So this is Alan. I would say that we feel pretty good about the skill sets we have right now in terms of what they're doing to make our Flex solutions better. And there's a lot of things going on behind the scenes in terms of apps that the customers use, internal tools that we use. So our team does a lot of that behind the scenes.

In terms of what we're doing in Missions, I would say that our early adopter program has been incredibly important for us in finding out, as Ralph mentioned, what the customers want. And some of those things by themselves are somewhat unique and a bit challenging from a technical side, but also, we'll add a lot of high value.

So I would say the team that we have is going to continue to do that. And there might be some outgrowth of that into peripheral products or things that just allow us to do more with what we already have. I don't know, Ralph, are....

Sorry, I guess, maybe that was an overly MBA-ish way of asking whether you see any other plans for diversifying. Let me ask the question that way..

Yes. This is Ralph. I mean so nothing that we'd be prepared to talk about on this phone call, I would say. I mean, when you look at our kind of core business, Flex, where we've penetrated in the market, we basically own 100% of, right? We're just in north of 100 cities, and we've talked aspirationally in terms of a domestic TAM of 1,400 cities.

So for us, really on Flex, which is our kind of core solution, which is driving most of the revenues is kind of wash, rinse, repeat.

I mean, we just got to keep hammering away at that, and it's really all about getting new customers on the platform, making sure they're on-boarded appropriately, they're driving good value add, they become net promoters. And then help us sell that next contingent layer of agencies. We've done some things.

You haven't asked the question about the Tier 4 program. But I think you're seeing us, again, get very accretive about how to kind of slice and dice the market and get that other underpenetrated markets within that kind of 1,400, maybe 1,400 plus cities that we're doing. But that's basically using the same technology platform.

And I think Missions is slightly different, I think, as Alan alluded to. I think that they're going to have to really probably exercise our product management skills because, as you know, with Flex, it's really about putting a dot on the map, and we kind of invented that 20 years ago.

And yes, there's things we've done to improve it over the years, but fundamentally, it's the same thing. It's always been, which is when someone fires a gun and put a dot on a map in a highly reliable, precise way within 30 to 45 seconds of that trigger being pulled, not much new stuff to put around that.

I think the Missions solution is something that's a little bit -- has a broad aperture, I would say. There's a lot of different things, a lot of different directions that we could go into.

So I think we're going to have to be very disciplined and focused around prioritizing all the great input that we're going to get from our first 5 set of customers and our next set of 5 to 10 customers we're getting and prioritize things that can have a big impact broadly. But hopefully, it doesn't cost a lot of money to implement.

We think we're pretty well resourced on the engineering side to be able to do some amount of kind of version enhancement commissions over the next several quarters.

And I think we're pretty happy with where we are now and don't really have to look outside of kind of ShotSpotter Flex, Missions and security, which we basically added a brand-new headcount reporting into our VP of product sales to just go focus on the security solution.

Again, technically the same technology but applying it in a slightly different use case around campus security or corporate security and the like..

Okay. A couple more granular ones. You had previously shared, sort of, thoughts about a rough annual cadence that you might be able to sustain.

Would you care to put another marker out there for the next couple of years in terms of miles added?.

Well, I think we're still looking at getting to that $100 million revenue mark in the next -- it's called midterm, which we've always referred to as 4-ish years. And that would imply a CAGR growth rate, somewhere around 20%. So I think we feel pretty comfortable with that.

We also feel comfortable that as we continue to grow and leverage the expenses we put on, the EBITDA, adjusted EBITDA will continue to increase. We have said that at that $100 million mark, we expect our EBITDA margins to be approximately 4%. I think we still feel comfortable with that. So we're heading in the right direction.

I hope you can see that through the financial results that we've had that we just reported in terms of where our adjusted EBITDA is and the significant increase over even last year as well as the expense control that we've been able to use through a disciplined approach.

Now we are going to continue to add expenses appropriately, internationally, customer success, sales and marketing and the other OpEx categories as well. So you are going to see more dollars being spent there, but that doesn't change our basically expectations of where we're going to be at that $100 million range..

Okay. And did I hear you say, Alan, at one point, 760 miles under contract.

So that would imply that you're coming into the year here with 30 miles contracted but not yet deployed?.

That's correct. And I always say approximately because we don't say exactly, but yes, you're correct..

All right. And the last question, is it fair to assume, following up on one of the earlier questions on CapEx that we're kind of between $45,000 and $50,000 a square mile for new deployments.

Is that still a reasonable number to use?.

So we've never said exactly how much it costs us to deploy, but you're certainly in the ballpark..

Our next question comes from the line of Will Power with Baird..

This is Charlie Erlikh on for Will. I was hoping if you could talk a little bit more about the international expectations in 2020 that 4% to 6% of revenue, which customers are you far this along with right now? And what would have to happen for you to end up at the high end or the low end of that 4% to 6%..

Yes. So this is Ralph. I think there's a really strong demand across all of the 3 major geographies that we spoke about, South Africa, Greater Latin America and the Caribbean.

I would say one interesting slight advantage maybe that the Caribbean and South Africa has is some very kind of recent customer experience there in South Africa with Cape Town, of course, and then with -- Caribbean with the Bahamas.

So that's kind of interesting in terms of how that can maybe lead to other folks within those geographies kind of tipping over on the platform. But I've been really quite impressed with the level of discussions we've had in Latin America.

And again, just to remind folks the countries that we're focused on because we had to focus on a specific number of countries. There's 4 that we're really looking at, and that's Mexico, Brazil, Colombia and Panama. And all very interesting and valuable in their home, right.

And so we expect that between those 3 big geographies, Latin America, the Caribbean and South Africa that we will be getting to that 4% to 6% range to get to the midpoint of our guidance. Now what can happen to make that number be closer to 6% versus 4%. It really gets down to timing. It's size and timing, right? And timing really does matter.

And so getting a, call it, on the ARR basis, being able to go live on, say, a kind of $1 million ARR deal in July 1 has the opportunity to produce $500,000 of GAAP revenue. If that, for some reason, slides to September or October 1, that $500,000 becomes $250,000. But it's still $1 million ARR deal and very strategically important to us.

So I think the way I would ask people to help us think about or we would encourage you to think about our international opportunity is, it's not a question of if, it's a question of when. Very similar to what we're trying to communicate last year around our opportunity in Puerto Rico.

I mean we were very confident that we were ultimately going to get Puerto Rico back on the platform again. Again, it took longer than we thought. We knew it was going to happen, but it wasn't a question of if, again, it was a question of when. I think that's the same for international..

Great. Now that makes sense.

And then also, could you talk a little bit about the early reception to the increase in prices that you rolled out at the beginning of the year? And are you conservatively forecasting any increase in attrition related to those price increases? Or have you gotten any sort of pushback so far? I know it's early, but any early reads on reception from customers on that?.

Yes. So this is Alan. I think, in general, most of our customers expect some type of increase for most of their vendors around this range.

So although we've gotten some comments, I don't think we've gotten any pushback that we feel overly concerned about and certainly not that would cause us to increase the amount of attrition that we expect for the year, which is generally somewhere between 2% and 3%. So far, fairly smooth sailing there..

Okay, great. And just one quick housekeeping question.

Did you guys say how many security customers you had in the quarter?.

We did not. We did not add another new -- any new security customers..

[Operator Instructions]. Our next question comes from the line of Jeff Kessler with Imperial Capital..

One of the questions I wanted to ask was somewhat about the cadence of revenue and then timing. Because, clearly, there was -- what you had to go through with Puerto Rico and with, let's say, no large cities coming on, left the impression that all of a sudden, your business is slowing.

Can you talk a little bit about where you think the -- I'm not going to say the backlog, but the pipeline looks like now relative to where it looked perhaps a year ago when you had a lot of business to do. But it wasn't as big as the business that you have already installed.

Because it sounded like over the course of the late fall into December, you became -- you sounded a lot more optimistic about the pipeline.

And I'm wondering if that optimism has increased significantly since the middle of the year up until now?.

Yes. So this is Ralph. I'll maybe start with a way to think about that is kind of think about how we entered the year with respect to our book of business related to annual recurring revenue. So we're starting the year with approximately $43 million of annual recurring revenue.

To the extent that we're able to kind of hold on to that in terms of getting a very high renewal rate, you would expect that we would need to add another $6 million or so of GAAP revenue over the course of the year to get to the $49 million And I think early in our Analyst Day presentation, we kind of thought broadly a pathway to get to that kind of $6 million plus.

Actually, it was like $7 million because I think we put $1 million -- we assume like $1 million of attrition there..

All right, great.

Also, can you talk a little bit about improvements in your sensors in terms of size being able to -- and placement, and what happens -- is that going to be part while it's not directly related to -- is that going to be part of the 3G upgrade, a slightly smaller design, things like that?.

So this is Alan. We don't anticipate large changes in the form factor of the sensors themselves. That said, we do continue to make incremental modifications to things like address wind noise and things like that as we continue to do more deployment and learn about those.

But the actual shift from 3G to the 4G LTE is not going to involve a large form factor change..

Okay. Last question. In looking at your Latin American opportunity, what -- and that includes getting back into Puerto Rico as well.

What types of cities are you looking at, in addition to the largest -- [indiscernible] as the capital city of those countries? Is there a second-tier of cities that goes along with the marketing that you're going to be doing there?.

So this is Ralph. I would just point out that we consider Puerto Rico, by the way, to be a domestic customer not an international customer. Just so we're on the same page there.

With respect to the cities within those geographies, there's really a mix of, I would say, smaller cities, medium-sized cities and some very large cities that you might be familiar with, with probably the vast majority of the demand.

If I just kind of go through my head, I would say they're probably more medium- to small-sized cities, actually across those three geographies that we spoke about..

Right. And the last question, I guess, is regarding Brazil. Unfortunately, for better or for worse, Brazil has become a kind of notorious in the last 2 or 3 years.

Is there a specific type of marketing program that you have for those countries where violence has really just overwhelmed the law enforcement capability?.

I mean, no, it's basically on the ground, belly-to-belly selling with all of the cohorts within those specific regions that have a interest in addressing gun crime and getting them kind of familiar with ShotSpotter. As you might imagine, we're not necessarily a household name down there.

And so our focus really is not only in Brazil, but frankly, Mexico and Panama and Colombia is to kind of get 1 or 2, kind of, reference sites, there they're up and successfully deployed that we can kind of point to as they reference customers and then kind of build off of that.

We don't feel like we have to kind of boil the ocean on our first foray into Brazil, as an example. Just getting 1 or even 2 cities in Brazil will be a fantastic start to our efforts there in that country, which is very large, by the way, and has a very large gun violence problem..

Our final question comes from the line of Tyler Wood with Northland Securities..

I'll add in my -- congratulations on the quarter and the foothold in Texas. Going back to the international opportunity.

Once we start seeing cities actually get signed, how long should we expect between deal signing and go-live? Since you haven't done as many deployments internationally, should we expect it to be longer than domestically or pretty much the same?.

Yes. That's hard to know. I think it really depends on the specific geo that we're talking about. I think -- I have a sense that things will probably move a lot faster in South Africa just because we have some experience there.

And possibly move faster in the Caribbean because we have some experience in kind of dealing with the infrastructure players down in that region. But for planning purposes, I mean, I wouldn't assume anything less than 4 months. Yes. And I would say, probably if you want to be conservative, maybe 6 months-or-so in those other geos.

But I think things can happen faster in the Caribbean and South Africa..

All right. That's helpful. And then one more. Going back to the security side of the business. And it sounds like you've got some new kind of leadership there. Could you kind of talk to us about how you're thinking about that strategically going into 2020.

Is the focus still mostly on campuses? Or any changes on that side of the business we should expect?.

Yes. This is Ralph again. So there's kind of two major focus areas for us. It's kind of campus security is kind of represented by higher ad college campuses and the like. And also, we think there's an opportunity in corporate securities, well, corporate campuses as well. We do have our freeway project that I think many of you are familiar with.

And we've actually -- believe it or not, sadly, have actually detected some gunfire along the highway corridor that we're protecting. That's another very interesting area for us to kind of reference sell off of kind of infrastructure, critical infrastructure protection, i.e., being free ways that have intermittent issues with gun violence.

So I would say that would probably be a potential third leg of the stool. Plenty of stuff for us to do, though, in that market..

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

Great. Thank you very much. Again, we really appreciate folks partnering with us on our journey. This isn't a sprint for us at all, but it really is a journey, and we're in it for the long-term to make an impact globally. So thank you very much for your support. And with that, I think we can end the call..

Thanks again. Now I just want to say thanks as well..

Yes..

Thank you for joining us for today's teleconference. You may now disconnect your lines at this time, and have a wonderful day..