Good afternoon and welcome to ShotSpotter’s Third Quarter 2021 Earnings Conference Call. My name is Sachi, 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, uncertainties and assumptions that are difficult to predict and may cause the actual results to differ materially from those stated or implied by those statements.

Certain of these risks and assumptions are discussed in 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, November 9, 2021, 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 a 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, Ralph Clark..

Good afternoon, and thank you for joining us today. I hope everyone out there is doing well. As you I’ll start with a quick overview of the quarter and our operational outlook before Alan details the quarterly results. We’ll then take your questions.

We reported revenues in line with our expectations of $14.5 million up 28% from $11.4 million in Q3 of 2020. Quarterly adjusted EBITDA was $2.2 million compared to $3.3 million last year.

The adjusted EBITDA decrease was largely due to continued strategic communications in legal spend associated with defending the company of customers and our stakeholders from the weaponized false claims of various media outlets and our $300 million defamation suite against Vice Media.

Overall ShotSpotter respond had a very strong go-live in our cadence this quarter.

We secured three new customers, Winston Salem, Virginia Beach and Miramar, Florida, and went live with seven expansions of existing customers, including Puerto Rico and Albuquerque, which became our third and eighth largest clients by mileage at 30 and 40 miles respectively.

Based on our progress to date, we believe we have clear line of sight to an estimated 105 go-live miles this year, which be 15 miles or 17% more than the 90 we have forecasted earlier this year in an overall 100% increase of the 49 miles we went live within 2020.

There a growing number of respond projects that currently total over 50 miles that are staffed during the process of being deployed over the next four months. These include a new agency capture of an initial seven miles in Macon-Bibb County, Georgia, along with expansions for existing customers, such as Louisville and Fresno.

This mileage ad momentum represents a significant reacceleration of miles being added to the platform and sets the state for our continued strong growth in revenue in 2022. I’m also pleased to report that we experience another quarter of zero respond customer or mileage attrition.

Net of price increases in discounts, we estimate that the corresponding Connect business will show less than 1% GAAP revenue attrition in 2021. This is significantly lower than our original estimate of 3% to 4% for the year and represents a best-in-class gross attrition metric.

Almost 30% of our 67 renewal transactions and an incredible 65% of our new respond mileage transactions year-to-date have been executed on a multi-year basis. And we continue to drive a world-class net promoter process and score, which came in at 58% this year.

We believe these accomplishments, particularly in an environment of false allegations and some press about the quality and value of our service, our testament to the importance and stickiness of our services and law enforcements dependence and commitment to them.

Our unique success in this area effectively expands our recurring revenue TAM opportunity due to the longer customer lifetime value in duration, typically not seen in other comparable SaaS business models.

Broader public sentiment beyond our law enforcement buying center on the urgent need to address gun violence has been equally, if not more encouraging. In April Pew Research survey of 5,000 of adults revealed around half of Americans view gun violence as a very big problem in the country with another 24% saying it is moderately a big problem.

A more specific polling survey of over 2000 individuals conducted by morning gunshot showed that three in five adults support the use of gunshot detection.

This poll response, interestingly cuts across party affiliation and based on last week’s voting results, it is very clear that the broad body politic does not support the defund the police movement. The violent crime conversation has also captured the attention of policy makers and appropriators in federal government as well.

Recently, Former Chief OF Police now United States Representative Val Demings introduced the Violent Incident Clearance and Technological Investigative Methods Act of 2021 or VICTIM Act, which calls for the Department of Justice to establish a specific grant program of $100 million per year to help law enforcement agencies improve their clearance rates for homicides and non-fatal shootings.

In providing background for this initiative, representative Demings and her co-sponsors called out the 29.4% in increase in murders in the United States from 2019 to 2020, which sadly represents the largest one year increase ever recorded since the FBI has been collecting data going back to 1960.

Tragically, the disproportionate number of those homicides, at least 46% comprise black victims, who only represent 13.4% of the U.S. population. And while homicides have increased clearance rates have fallen precipitously from 57.6% to 47.3% according to the legislative proposal.

This is exactly the problem that our Precision Policing Platform is meant to address.

From smarter patrolling strategies that could prevent crime without over policing to real time gunfire alerts that enable a fast and precise first responder dispatch, which LEEDS to saving lives and disrupting serial shooters and now an enterprise investigative case management solution specifically focused on improving case closure rates.

Our solutions are what the law enforcement buying center responding to these challenges are demanding. It is also what local budgets and federal appropriators are funding in order to help address the increased demands being made on local law enforcement.

Since the very recent reintroduction of earmarks in the legislative appropriations process, we have been successful in helping our local law enforcement agency customers in advocating for a total of eight earmarks, three from the Senate in five earmarks from the house in their respective CJS appropriations bill for fiscal 2022.

These federal funding resources when approved will help provide strong tailwinds to our business and future growth prospects. On the international side of our business, we’re still facing some timing challenge outside of our strong domestic business.

We do not expect the national respond revenue to add to 2021 revenue as several countries continue to struggle with their response to the pandemic.

Earlier this year, however, we submitted a proposal for a formally issued Cape Town, South Africa tender only to recently learn that Cape Town has withdrawn the tender based on a procurement process technicality, but they plan to reissue in the first part of 2022.

Our LEEDS colleagues continue to focus on NYPD legacy crime center maintenance and support along with professional services and separately our commercial market launch of ShotSpotter Investigate.

Our maintenance and support responsibilities at NYPD have expanded over the years and last month we submitted a contract extension, which would increase the annual recurring revenue associated with the maintenance and support by over 40% to just under $10 million per year.

In addition LEEDS with successful in securing six new professional services work orders totaling over $6 million that will be completed over the next six to nine months. We’re extremely proud that LEEDS in ShotSpotter continues to be a critical partner to NYPD in their digital enterprise resource journey.

And we continue to be extremely excited about the product development progress and revenue pipeline build a ShotSpotter Investigate.

We believe that ShotSpotter Investigate is a robust functional case management system that hits the mark of a wide swap of local agency requirements and can scale to address very complex case management requirements for state and federal agencies as well.

We are maintaining our full year 2021 revenue guidance of $60 million to $61 million, which represents 32% revenue growth from 2020 to 2021 at the midpoint. And given our solid year-to-date ARR bill from respond go-live miles and little to no attrition combined with an expected strong Q4 finish and quick 2022 start.

We are establishing revenue guidance of $71 million to $73 million for 2022. This represents 19% year-over-year growth at the midpoint from 2021 and 2022.

We’re making the appropriate investments to drive to and possibly exceed that target and are excited about the number of opportunities we have to grow our business and have impact on making communities safer. Now, Alan, over to you..

Thank you, Ralph. As Ralph mentioned with respond, we went live in three new cities and also booked two new campus customers this quarter, while, once again, seeing no city attrition. We also went live with seven city expansions and achieved strong revenue growth, 28% compared to the third quarter of 2020.

With our continued success in retaining customers through Q3 of this year, we expect that our 2021 revenue attrition will be less than 1% similar to last year’s excellent results. Let me provide more details on the quarter, and then I will share some thoughts around the balance of the year.

Third quarter revenues came in at $14.5 million at 28% increase over the $11.4 million in the third quarter of 2020. Revenue increased as our deployed miles increased year-over-year, along with revenue contributions from our LEEDS acquisition.

Professional services revenue from LEEDS was sequentially down versus the last two quarters, which is lumpy in nature on a quarter-to-quarter basis. We expect the professional services revenue to increase in the fourth quarter.

Gross profit for the third quarter of 2021 was $8 million or 55% of revenue versus $6.4 million or 57% of revenue for the prior year period. Gross margin was a bit lower as a result of lower gross margins on the professional services provided by our LEEDS team. We expect this to improve in Q4.

Adjusted EBITDA for the third quarter was $2.2 million a decrease from the $3.3 million in the third quarter 2020. As a reminder, adjusted EBITDA is calculated by taking our GAAP net income or loss and adding back interest taxes, depreciation, amortization and stock-based compensation.

As Ralph mentioned, the reason for our lower adjusted EBITDA and our net loss for the quarter is primarily related to the increase in legal and strategic communications costs related to our lawsuit against Vice Media and also addressing negative publicity generated by certain entities and organizations of posing the efficacy of our solutions.

Now, turning to our expenses. Our operating expenses for the third quarter were $8.9 million or 61% of revenue versus $5.8 million or 51% of revenue in the third quarter of 2020.

As expected, in addition to the operating expense increases related to legal and strategic communications we also had cost associated with personal expansions and cost related to LEEDS, which were not included in the third quarter of 2020.

Breaking down our expenses, sales and marketing expense for the third quarter was $4 million or 28% of total revenue versus $2.4 million or 21% of total revenue for the prior year period. Our sales and marketing teams continue to build our sales pipeline and expand our marketing efforts.

We continue to focus on maintaining high levels of customer satisfaction, which helps keep our attrition rates low. Our R&D expenses for the third quarter of $1.7 million or 12% of total revenue compared to $1.4 million or 12% of total revenue for the prior year period. We continue to invest in increasing the functionality of all of our products.

G&A expenses for the quarter were $3.2 million or 22% of total revenue compared to $2 million or 18% of total revenue for the prior year period. The increase in G&A expenses and absolute dollars were primarily related to the increased legal and strategic communications expenses mentioned above.

Our net loss for the third quarter was $949,000 or loss of $0.08 per share on a $11.7 million weighted average shares outstanding on both a basic and diluted basis.

This compares to an adjusted net income of $566,000 or $0.05 per share based on a $11.4 million basic weighted average shares outstanding, and $0.05 per share based on $11.7 million diluted weighted average shares outstanding for the prior year period.

Deferred revenue at September 30 was $21.8 million, which was up from $19.8 million at the end of Q2. We ended Q3 with the $13.1 million in cash, and cash equivalents versus $15.6 million at the end of second quarter. During the third quarter, we also repurchased approximately 26,400 shares for approximately $900,000.

We have no short or long term debt outstanding and as mentioned previous calls, we have a $20 million line of credit available to improve our financial flexibility. Our revenue guidance for 2021 remains at $60 million to $61 million.

Please note that the midpoint of our this guidance reflects 32% year-over-year growth with the increased costs related to strategic communications and our ongoing lawsuit against Vice Media we now expect to have a small loss for the year. Our revenue guidance for 2022 is $71 million to $73 million.

Based on current information, we expect that our annual recurring revenue starting January 1, 2022, to have increased to $64 million up significantly from the $53.1 million that we started this year with if you include the recurring revenue from LEEDS.

In addition to the $64 million in ARR, we also have over $5 million of professional services revenue for 2022 already under contract. Ultimately, any attrition contract modifications or delays may reduce those amounts. Now back to Ralph for some final thoughts, and then we’ll be happy to take your questions..

Thanks, Alan. We’re always very grateful for the strong support we receive from our many stakeholders, especially our work colleagues who continue to passionately lean in every day in servicing law enforcement and their efforts to serve and protect our most vulnerable communities. We’ll now take your questions..

[Operator Instructions] The first question is from Matt Pfau from William Blair. Please go ahead..

Hey guys, thanks for taking my questions. I wanted to start off with the 2022 guidance and maybe you can just give us a little bit more detail on what’s factored into that. How many miles that you’re expecting are sort of already in the books.

And then, when you look at some of your other solutions like Investigate, are you expecting a material contribution from that? Thanks..

Sure. This is Alan. I’ll go ahead and start, and Ralph go ahead and add or correct as needed. So in terms of the guidance, we’re saying $71 million to $73 million. We also said that we are starting the year with $64 million in ARR and $5 million in professional services.

So basically we already start the year with $69 million that would either be already under contract or expected. So there’s nothing that is tied into that $69 that even deals with the X expansions and the go-live miles for next year.

So, we do expect to have a similar year next with go-live miles, depending on when those actually go-live that will add actual GAAP revenue to the $69 that I was referring to..

Great. That’s super helpful. And then the other thing I wanted to ask about was, in terms of the customer response or response from prospects and respect to the lawsuit, that you filed against Vice Media, what has the feedback been there? Has it maybe helped alleviate concerns that may have been holding back prospective customers? Thanks..

Sure. So this is Ralph, I think it’s fair to say with our existing install base or customer relationships we’ve gotten very, very positive feedback because our holding Vice Media to account is just not only on behalf of the company and our employees in the, like, but also our many stakeholders and partners in our customer universe.

I think it’s also fair to say that although we’ve had a great year, this year with kind of bringing on cities and agencies on the platform the weaponization of these false claims from Vice has created some headwind for us. And so that’s why we’re just being very, thoughtful about how we think about guidance going forward.

Again, it’s very, very positive. We start the year 2022 with $69 million of very, very visible revenue, but certainly the Vice Media defamation has kind of created some headwinds for us it’s made deals take longer, we have to spend more money to drive revenue and it certainly added some risk..

Great. thanks for taking my questions guys. Appreciate it..

Thank you..

The next question is from Brian Ruttenbur from Imperial Capital. Please go ahead..

Yes, thank you very much. First of all, on legal expense in the quarter, how much was in that – how much legal was in there and how much was it strategic marketing.

Do you have any kind of break out on that?.

Yes, so this is Alan basically. We had overall for the quarter legal and strategic marketing communications cost a little over $800,000. However, that would typically be closer to maybe a $25 million or up to $300,000. So the increase was about a $0.5 million going towards what we’re talking about..

Okay.

And then going forward into the fourth quarter, you’re saying gross margins are going to increase and that will legal expense go down in the fourth quarter or should it stay where it is?.

Let’s see Alan again, I think at this point we still expect to be spending appropriately in the legal expenses. So it would be similar to expect it to be close to what we’d spent in Q3. Gross margin we expect to be significantly higher in a percentage basis in a dollar basis as well.

Because some of the professional services that basically were down in Q3 will start to increase in Q4 and then continue to increase in Q1 that helps significantly both the gross margin and net income and adjusted EBITDA as well..

Okay. And then in terms of the guidance, just going back to that first question, the $71 million to $73 million, given that you have $69 million, it appears in hand seems extremely conservative.

Are you just being extremely conservative or you think that there’s just such a long lead time with new projects that’s a realistic projection?.

Yes, this is Ralph, I think..Go ahead, Alan..

Sorry..

Yes, no, I think, I think we’re trying to be very reasonable and thoughtful here. I think it’s a great benefit to the company to start with visibility with $69 million. I think getting to $72 million would require us obviously to continue making progress ongoing live with additional miles.

We’re certainly expecting contributions from Connect and Investigate in 2022. And I think international is still a bit of a wide wildcard. I think that could be potentially very impactful. I think in my comments, I made the statement that we’re making the appropriate investments to make sure that we hit our guidance and possibly even exceeded.

So there definitely is some upside potential in that number..

Great.

Ralph, did you want add anything to that before I ask one more question?.

That was Ralph. Yes. So maybe it’s – Alan. .

Yes. That I’m Ralph.

Yes, so Alan would you say anything, would you, have you have any add to that or moderate to that?.

No, I think you, you covered it well,.

Sorry about that. Okay. Last question, in terms of federal funding coming down do you see anything in the near term, end of the fiscal year, already happened the government fiscal year, so we’re in a new fiscal year.

Do you see any appropriation settled sides that you can touch with your product?.

Yes, so I think we talked about getting, so making some really good progress on the earmarks process. So earmarks are coming back.

We’ve been very successful in advocating for eight earmarks across the Senate and the house that those still haven’t been formally approved as a overall appropriations package, but they have kind of come out of their perspective CJs committee. So that’s extremely positive.

Certainly the American Rescue act has had a lot of beneficial tailwind to our business. And increasingly we’re seeing municipal governments that are allocating budget dollars to address gun violence because of the significant and measurable uptick in gun violence.

So, I don’t think the funding environment has been more constructive or positive than it’s ever been in the past 11 years that I’ve been with the company. That’s probably one of the really strong things about our business that we’re quite encouraged by the funding is not a issue it’s creating a significant tailwinds for us..

Great. Thank you..

The next question is from Ryan Kimbrel from Craig-Hallum. Please go ahead..

Hey guys.

I know it’s been touched on already, but I just want to clarify, is there any, is there a minimum base run rate, maybe I guess, of what we should be expecting on a go forward basis from the legal costs associated with the defamation suite?.

Yes, this is Alan. I do think that, in terms of what we are spending right now, we did spend quite a bit preparing to actually file the lawsuit. So it is possible that maybe on a quarterly basis, it goes down a little bit. Although it could also go know up or even stay the same.

So, I would say it’s pretty appropriate to expand for the next couple quarters to say, it’s going to be about the same..

Okay, great. And then last one for me, I just want to touch on the Houston trial. I believe we’re coming up on that one earmark.

Can you give us an update of how things are going there, have you started to see any of the positive network effect happen? Like you’ve talked about and, is there anything you can tell us on long-term contract talks that you haven’t already?.

Yes. So this is Ralph, I would say things in Houston and also Harris County by the way, which is next door to Houston are going extremely well. Both those agencies are excellent practitioners of leveraging our real time alerts to help respond to and ultimately prevent and reduce gun violence in both those areas.

Our expectations are that we are going to see a go forward on that Houston deployment. And there will be a paying customer going into 2022, that’s our full expectation..

Okay, great. Thanks guys..

Thank you..

Thank you..

The next question is from Mike Latimore from Northland Capital. Please go ahead..

Hi, this is Aditya on behalf of Mike Latimore.

Could you give me some color on the sales cycle? How do you characterize your sales cycle? Has it been shrinking in the recent times?.

Yes. So this is Ralph. I’ll give it a shot, Alan, and jump in and add on a correct me it’s appropriate, but I would say it’s a bit mixed.

I think in certain situations we’ve seen a fairly significant collapse of the sales cycles, but at the same time, I think it’s appropriate that we factor in some complications on the sales factor or – excuse me, on the sales cycle due to some of the headwinds we’ve seen from this defamation characterization that Vice Media put out there.

We’ve seen a couple situations and it’s been publicly reported where there was an agency that ultimately went forward, but they had to jump through a lot more hoops and kind of respond to ridiculousness and so I think it’s a bit of a mixed message.

And again, that’s why we’re trying to be very thoughtful and careful around our guidance for 2022, we’re starting from a great base of $60, $69 million of visibility.

So we’re effectively looking at adding another $3 million of GAAP revenue, which if we were to do something on the order of a hundred miles next year, evenly spread over the year, that would kind of get us to $3.5 million assuming, kind of $7 million kind of on average ARR spread across the, the, the year.

So that gives you a sense of how we’re trying to be thoughtful about guidance going for, or knowing that we’re, going into some headwinds, great tailwinds, but also seeing some headwinds as well..

All right.

And also, could you give some color on the international market? Do you see the international market quite constrained at the moment?.

Yes, so this is Alan. I mean, we continue to see challenge internationally. They’re still dealing with the results of the pandemic. I would say we did go out, in the Nelson Mandela Bay at the end of last year. And as Ralph mentioned about Cape Town, we hope that that will still come live in 2022.

Other than that we’re still pursuing options and opportunities that are in places like Mexico, Brazil, and other areas as well.

Some maybe even some expansions in some other international that we have, but it is still challenging and it is, there’s not a significant expectation in our current guidance to get to our $71 million to $73 million from international at this point, hopefully that changes..

All right, fine. Thank you..

This concludes the question-and-answer session. I would like to turn the conference back over to Ralph Clark for any closing remarks..

Great. No, thank you very much, really appreciate everyone’s support over the year. And certainly this past quarter we’re excited to kind of get back to work and finish the year on a really strong footing and looking forward to being very successful in 2022. So thank you all very much. Really appreciate it..

This concludes today’s conference call. You may disconnect your lines. Thank you for participating and have a pleasant day..