SoundThinking Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 9, 2023

Key Takeaways

  • Sound Thinking completed a corporate rebrand and positioned its SafetySmart platform to drive digital transformation in law enforcement beyond gunshot detection to adjacent data-driven solutions.
  • Q1 2023 revenue was $20.6 million, roughly in line with expectations but down from $21.2 million in Q1 2022 due to prior-year catch-up revenue, and adjusted EBITDA was $2.9 million (14% of revenues) versus 21% a year ago.
  • The company went live in six new cities and delivered eight expansions of its ShotSpotter solution, including adding 22 square miles in Detroit, and has over 80 contracted miles in 22 projects pending deployment.
  • Sound Thinking anticipates a $16 million Department of Corrections contract pending execution and reported strong momentum in Cape Town following a live ShotSpotter demonstration that led to arrests and prompted budget increases.
  • The company has lowered full-year revenue guidance to $92 million–$94 million to factor in potential risks around Puerto Rico’s renewal and Chicago contract uncertainty, while reaffirming an adjusted EBITDA margin target of 24%–26%.
AI Generated. May Contain Errors.
Earnings Conference Call
SoundThinking Q1 2023
00:00 / 00:00

There are 8 speakers on the call.

Operator

Good afternoon, and welcome to Sound Thinking's First Quarter 2023 Conference Call. My name is Ali, and I will be your operator for today's call. Joining us are Sound Thinking'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 Sound Thinking'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.

Operator

Certain of these risks and assumptions are discussed in Sound Thinking's SEC filings, including its registration statement on Form S-1. These forward looking statements reflect management's beliefs, estimates and predictions as of the date of this live broadcast, May 9, 2023. And Sound Thinking 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. Soundthinking.com.

Operator

I would now like to turn the call over to Sound Thinking's CEO, Ralph Clark. Sir, please proceed.

Speaker 1

Good afternoon and thank you for joining our Q1 2023 quarterly conference call and our first public earnings call as Sound Thinking. We're very excited about our rebranding effort and the positive response we've seen from prospects, clients, partners, Employees and many of you are investors. As I point out in my recent investor letter, our corporate rebrand is an intentional effort This signaled the next phase of our growth journey as a platform play that not only includes the world's leading acoustic gunshot detection offering, but also other complementary and adjacent solutions as well. The SafetySmart platform is focused on digitizing and automating manual law enforcement Processes and converting data into actionable intelligence. Digital transformation will help accelerate law enforcement agencies of all sizes to be more efficient, effective and equitable in co producing public safety outcomes.

Speaker 1

We believe the opportunity remains extremely attractive And significantly underpenetrated. And our go to market strength as a trusted advisor uniquely positions us to bring additional relevant capabilities that addresses the pressing needs of law enforcement agencies throughout the world, not only today, but in the future. Turning to financial performance, our Q1 2023 revenues were mostly in line with our expectations, With $20,600,000 compared to Q1 2022 elevated revenue of $21,200,000 due to some material catch up revenue from our leads division. Adjusted EBITDA was $2,900,000 or 14% of revenues compared to $4,500,000 or 21 percent of revenues for Q1 2022. Again, this was primarily driven by the catch up revenue from leads in Q1 1, 2022 that mostly flowed to the bottom line.

Speaker 1

We went live in 6 new cities and delivered 8 expansion projects With the ShotSpotter solution this quarter, this included approximately 22 miles of Detroit going live within the quarter, placing them as our 3rd largest ShotSpotter deployment with approximately 30 square miles total. We currently have over 80 contracted miles represented by 22 projects in the process of being deployed over the next 3 months plus, including 22 miles of the recently contracted Suffolk County and a modest expansion in Cape Town, South Africa. Speaking of Cape Town, South Africa, we held a very successful press conference with the Mayor Hill Lewis and Alderman J. P. Smith, Who is responsible for the security portfolio for the city of Cape Town.

Speaker 1

And as fate would have it, during the Q and A session, a ShotSpotter alert came in where the assembled press Had the opportunity to view live stream CCTV footage showing the tactical response to the scene within 2 minutes of the alert. The on scene investigation led to 2 arrests and we subsequently learned that those arrested individuals We're on the lam for prior murder charges. We believe this extremely positive showing and press coverage has created strong momentum to drive discussions around a much needed and larger expansion opportunity in Cape Town. Just yesterday, the Mayor of Cape Town publicly presented his budget request that allocates more budget dollars for additional ShotSpotter expansions along with other technologies that will help improve public safety. We continue to build a strong pipeline of our investigative solutions, crime tracer and Case Builder that we feel very good about.

Speaker 1

The large Department of Corrections opportunity that we have discussed in previous calls has made another substantial positive step forward With the statement of work, cloud agreement and service level agreement contract elements all having been formally negotiated and documented. This is expected to be a $16,000,000 5 year deal that includes professional services work and delivery along with an annual subscription and support fee. Given the size and complexity of the deal, we have been very We hope to be able to publicly announce the execution of this agreement by our Q2 2023 earnings call. We're also very pleased to report that we had no reported attrition despite the significant press coverage of the recent Chicago mayoral election that led to the election of Brandon Johnson. Mare Led Johnson publicly ran on a progressive platform that specifically called for the canceling of the ShotSpotter contract.

Speaker 1

Our ShotSpot deployment represents $8,000,000 of annual recurring revenue and the contract was recently Extended through mid February of 2024 under current Mayor Lightfoot's administration. We've taken measured steps to shore up our support among the city council, the Chicago Police Department and residents, And we're encouraged with the more recent public position of Marelett Johnson, where he proffers a view that there might be better uses for funds Currently going to ShotSpotter. This pivots the public discourse around the value discussion And we are well equipped and experienced in having to articulate and demonstrate our value. To date, we've been very successful in this front, which is indicated by our High overall retention rate. That being said, we felt we needed to adjust for a potential risk of cancellation of the contract before the end of its contracted term in February of 2024.

Speaker 1

That adjustment combined with some recent contract renewal and payment issues in Puerto Rico have led us to reduce our full year revenue guidance to the range of $92,000,000 to $94,000,000 We still expect that our full year adjusted EBITDA margin will be in the range of 24% to 26% of revenues. And with that, let me turn the call over to Alan.

Speaker 2

Thank you, Ralph. We're pleased with our performance in the Q1. As Ralph mentioned, this quarter we went live with our ShotSpot gunshot detection solution in 6 new cities, Expanded our ShotSpotter coverage in 7 cities and 1 university. We also added 2 new case voter customers and added a new state agency for our crimetracer solution. Revenue is relatively flat from Q4 to Q1, which is partially explained by some significant catch up revenue related to a couple of renewals in the Q4 of 2022.

Speaker 2

We had no attrition this quarter. That said, we are experiencing a delay in our renewal with Puerto Rico that ended at the end of 2022. While we expect a renewal to ultimately get awarded, the annual revenue of the Puerto Rico deployment is over $2,000,000 And our revenue will be negatively affected if they are not permitted to start the new renewal on the original due date. Let me provide more details in the quarter and then I will share some thoughts around the balance of the year. 1st quarter revenues were slightly behind expectations at $20,600,000 Revenues less than Q1 of 2022, primarily due to one time catch up of approximately $2,400,000 from our lead subsidiary that was recognized in Q1 of 2022 versus the expected Q4 of 2021.

Speaker 2

Without that one time increase, our revenue from the Q1 of last year would have been approximately $18,800,000 resulting in this year's revenue being approximately 10% higher than Q1 of 2022. The additional $2,400,000 of revenue in Q1 of last year also positively affected gross margin, Net income and adjusted EBITDA as it had only about $600,000 of associated costs. You will see those impacts as I cover the rest of this year's financials versus Q1 of last year. Gross profit for the Q1 of 2023 was $11,300,000 or 55 percent of revenue versus $12,900,000 or 61 percent of revenue for the prior year period. As noted, gross margin for the Q1 of 2022 benefited from the additional $2,400,000 in revenue.

Speaker 2

We expect gross margin to improve throughout the rest of this year. Our adjusted EBITDA for the Q1 of 2023 was $2,900,000 down from $4,500,000 in the Q1 of 2022. As a reminder, adjusted EBITDA, a non GAAP financial measure, is calculated by taking our GAAP net income and adding back interest income, income taxes, depreciation and amortization, Stock based compensation expenses and acquisition related expenses. Turning to our expenses. Our operating expenses for the Q1 were $13,100,000 or 64 percent of revenues 1st is $12,500,000 or 59 percent of revenues in the Q1 of 2022.

Speaker 2

Operating expenses increases were primarily related to higher headcount and employee related costs. Breaking down our expenses, sales and marketing expense for the Q1 was $5,800,000 or 28 percent of total revenue versus $5,600,000 or 26 percent of total revenue for the prior year period. Our sales and marketing teams Continue to build our sales pipelines and expand our marketing efforts. We also continue to focus on maintaining high levels of customer satisfaction, which helps keep our attrition rates low. Our R and D expenses for the Q1 were $2,700,000 or 13% of total revenue versus $2,600,000 or 12% of total revenue for the prior year period.

Speaker 2

We continue to invest in increasing the functionality of all of our products. G and A expenses for the quarter were $4,600,000 or 22% of total revenue compared to $4,300,000 or 20% of total revenue for the prior year period. G and A expenses were higher due to headcount increase and other employee related costs. We expect our G and A expenses will continue to increase in absolute dollars as the company grows. Our adjusted net loss for the Q1 was $1,800,000 or $0.15 per share loss based on 12,300,000 Basic and diluted weighted average shares outstanding.

Speaker 2

This compares to adjusted net income of $488,000 or $0.04 per share based on $12,200,000 basic and $12,300,000 diluted weighted average shares outstanding for the prior year period. Adjusted net income, a non GAAP financial major is calculated by taking our GAAP net income and adding back acquisition related expenses. When accounting for acquisition related expenses, our GAAP net income was $387,000 or $0.03 per share of basic and diluted for last year's quarter. Deferred revenue at the end of the quarter was $37,500,000 versus $43,700,000 at the end of the Q4 of 2022 and the decrease was primarily related to the timing of renewals and related billings. We ended the quarter with $5,100,000 in cash and cash equivalents versus $10,500,000 at the end of the Q4 of 2022.

Speaker 2

The decrease is primarily related to $1,500,000 paid to the lead sellers for achievement of their 2022 earn out and payment of 2022 company bonuses during the quarter. During the Q1, we also repurchased 35,369 of our shares at an average price of $35.43 or approximately $1,300,000 As of today, we have approximately $10,000,000 in cash. We have no short or long term debt outstanding. And as previously discussed, we possess approximately $25,000,000 available in our line of credit if ever needed. Turning to our full year 2023 outlook.

Speaker 2

We are reducing our full year 2023 revenue guidance to a range of $92,000,000 to $94,000,000 representing approximately 15% year over year growth at the midpoint compared to 2022, Primarily related to the delay in our ShotSpotter renewal with Puerto Rico and also factoring in any potential risk of a change to our Chicago contract before the current end date of February 2024. We are reaffirming our expectation For adjusted EBITDA to be approximately 24% to 26% of forecasted revenue in 2023. Now back to Ralph for some final thoughts and then we'll be happy to take your questions.

Speaker 1

Thank you, Alan. We want to publicly acknowledge the tragic sacrifice of Chicago Police Officer, Arianna Preston. Our thoughts and prayers go out to her family and the Chicago Police She wanted to help make the world a better place and do work that matters. We'll now open it up for your questions.

Operator

Thank you. At this time, we will be conducting a question and answer Thank you. Our first question is coming from Brian Ruttenberg with Imperium Capital. Sir, you may proceed.

Speaker 3

Yes. Thank you very much. You talk about adjusted EBITDA being Maintained in the 20s, is there something that happened in the Q1 Where are you going to make up that poor or that underperformance in terms of adjusted EBITDA In the second, 3rd or 4th quarters to make up for kind of for that delta?

Speaker 4

Yes, this is Alan. I'll go ahead and start and then Ralph you can add as well. While we have had a little bit of reduction In terms of the Q1 revenue related to Puerto Rico, that is still It's still costing us in terms of depreciation. We hope the hopefully that will get improved as we go forward. The other thing though is we've already added costs significantly to our sales and marketing, R and D and G and A Already through the Q1, we're not going to need to add a significant amount of any of that for the rest of the year.

Speaker 4

So as revenue continues to go up, as we hit closer to our revenue guidance, the operating expenses are going to be relatively flat, although up a little bit. All of that's going to increase our adjusted EBITDA.

Speaker 3

Great. Will it be weighted then just a Follow on weighted to the 3rd and 4th quarters, do we see a dramatically improvement in 2nd quarter versus 1st quarter, how should we be thinking about that adjusted EBITDA margin expansion?

Speaker 4

Yes, great question. It is more weighted in 3rd and fourth quarter, Primarily, although we are going live in a lot of miles, that's going to help us. The Majority of the revenue increase is most likely going to come in 3rd Q4, especially as we get the Department of Corrections contract that we'll talk about Potentially more in the Q and A, finally exercised and ramping up.

Speaker 3

Great. Thank you very

Speaker 5

much.

Operator

Thank you. Our next question is coming from Richard Baldry with Roth NKM. You may proceed.

Speaker 5

Thanks. Maybe to follow-up on that then. On the Department of Corrections deal as it sits today, can you talk about the types of deliverables, Timings, deployment cycles, things like that, that would help us understand sort of what that revenue recognition would look like, Whether it's sort of equal weighted annually, front end loaded on implementation, back end loaded on recognition, just so that we have an idea of how

Speaker 1

Do you want to take that, Alan?

Speaker 4

Yes, sure. So this is Alan. I guess the good news is, as we've said the last couple of quarters, the total amount continued to increase. We know that at this point, the contract will be approximately $16,000,000 which is the highest we've mentioned before. Out of that, there's approximately $6,000,000 of that, a little bit more than $6,000,000 which is professional services.

Speaker 4

It's a 5 year contract, but those professional services we expect will be complete within the first probably 2 to 2.5 years. So that will ramp up relatively quickly. We think that will add a significant amount of revenue for us in Q3 and Q4. The remaining balance of the $16,000,000 which is basically $9,000,000 is a subscription. That is a little lower in year 1 and then almost doubles in year 2, 3, and 4, and 5.

Speaker 5

Great. And on the Puerto Rico renewal, you've had a history of sometimes these things push out. Is there anything unusual about this Renewal negotiation process makes you think it's more risky than others or is it really just a matter of Timing, getting right documents in the right place.

Speaker 1

Yes, this is Ralph. I'll make that one. Sorry, you want to go, Alan?

Speaker 4

Go ahead, Ralph.

Speaker 1

Yes. So I think this does represent a slightly different risk profile because in this particular Ace, the comments that are being made by the customer are that even if they were to renew and we have every expectation that they will We know at some point in time, they might have a difficult time kind of going back retro to compensate us for the services we delivered to date. And so that's the reason that we're making the adjustment that we are typically customers even though they might renew late, We always are able to kind of go back in and start the term at the point in time that the contract ended even though they renewed 3 or 4 months later, and that's what kind of represents some of that lumpy catch up revenue from time to time we experienced. We're going to be negotiating pretty hard with And making sure that we're going to be compensated for services that have been delivered as of the beginning of this year. Yes.

Speaker 5

So that I guess creates the one question, which is if they were to pay for that, do you think in the future you've got to build a contract It's got firmer terms around if deals aren't concluded on time, you have to actually cancel the service immediately so that You're not left in a position where you've been providing a service that's not compensated for, maybe play a little harder ball with these people. Thanks.

Speaker 1

Yes. So I mean, I think this is a fairly unusual conversation. We haven't confronted this before, and it's still yet to be resolved. So I think, we're not giving up on it just yet. I think it's going to be a matter of negotiation.

Speaker 1

But to be very clear, if the customer chose not to renew and then obviously not compensate us for the services that We've already delivered. That's a $2,000,000 hit to us. It represents about $2,000,000 of ARR and because the contract

Speaker 5

Okay. Thanks.

Operator

Thank you. Our next question is coming from Jeremy Hamlin with Craig Hallum. You may proceed.

Speaker 6

Thanks for taking the question. And I wanted to come back to just understanding what's embedded within the revenue guidance for the year. If we look at getting to the midpoint of your guide for the remainder of the year, I think it's about $24,000,000 a quarter for Q2, 3, 4. I think you said that you've got about 30 contract miles Expected to go live in Q2 and if we were to assume roughly that $75,000,000 I'm sorry, dollars 75,000 per square mile run rate that you typically have, that would be about With $2,250,000 on an annualized basis. I'm just trying to understand, in terms of what's embedded in that guidance, Are we including catch up revenue for Puerto Rico?

Speaker 6

And then kind of I guess what are we assuming on this on the $16,000,000 5 year deal in terms of what's embedded in 2023 guidance?

Speaker 4

Yes, great question. This is Alan. I'll go ahead and respond to that. I think if you just took a look at what we did in Q1 And just multiply that literally just by that times 4, you're about $82,500,000 in revenue. What I can tell you is and we haven't given actual miles that have gone live, but the additional revenue that were Our GAAP revenue that we're going to see from go live miles this year is over $4,000,000 more.

Speaker 4

So you can do the calculation yourself And realize how well things are going in terms of new miles. In the Department of Corrections, we do expect it will be several million. So by the time you add all that together, you're pretty close to 90. The balance is things like international, forensic logic expansions, Case Builder expansions, leads expansion in terms of additional professional services that we know are coming. And lastly, we're actually going to have some new revenue this year again in our labs.

Speaker 4

So you add all that together, it's pretty easy to get to our guidance.

Speaker 6

Got you. That's helpful. And then the other question I want to follow-up on With a follow-up here around gross margin, and it sounds like you're going to see a much bigger ramp In the second half of the year, just in terms of thinking about kind of the current run rate in the last few quarters, we've Kind of more in that mid-50s gross margin range. Can you just help walk us through in terms of Thinking about that level versus kind of the high 50s level, and I think you're probably looking in The 59% range for the year, which would imply back half got to get to like 60% plus. But I was hoping for a little bit more color around that.

Speaker 4

Sure. This is Alan. I'll go ahead and give some information, Ralph can add as well. A couple of things. First off, Q1 actual gross margin was a little lower because we did have a little bit more in terms of Appreciation and actual maintenance and repair costs that were really more one time of nature in Q1, Primarily related because last year we were doing all the 3 gs replacements.

Speaker 4

So we had to catch up in some of the maintenance and repair. That was kind of a one time cost in Q1. So actually gross margins are going to should go a little higher with that alone. The other aspect of that is, We are seeing a bit more cost. Some of it is related to the ramp up of some people that we have set up for the revenue growth.

Speaker 4

Some of that actually flows up into cost of goods sold related to customer success and some operational allocations that were up there as well. We firmly believe that our gross margins are going to improve. Certainly, by the time we get to Q3 and Q4, Where the revenues are coming in and we've already hired the people that are going to be involved in that.

Speaker 6

Got it. That's helpful. Thanks. Last one, I just you went through it quick, but I think you noted You bought back maybe like 35,000 shares. What was the average price per share on that?

Speaker 6

And Where you have cash balance now, how are you thinking about that in terms of potential capital allocation moving forward?

Speaker 4

Yes, great question. It was a little over $35 per share, so a little north of where we are now. But even after doing that, paying bonuses and paying out the leads earn out that They earned. We still ended the year or ended the quarter slightly north of $5,000,000 in cash. Today's cash balance is

Speaker 5

We close to $10,000,000

Speaker 4

So we continue to do very well in terms of cash. I would say that the Board did approve A $25,000,000 share repurchase. Historically, we've looked at what the market has thought about our stock, and It would not be surprising if we did use some of that to repurchase more shares.

Speaker 6

Got it. Thanks for the color guys. Best wishes.

Speaker 4

Thank you.

Operator

Thank you. Our next question is coming from Jaeson Schmidt with Lake Street. You may proceed.

Speaker 1

Hey, guys. Thanks for taking my questions. Just curious with things such as the Department of Corrections contract and sort of This delay in Puerto Rico, if maybe the cadence of this of the year doesn't follow traditional seasonality, do you think that's the case this year?

Speaker 4

Yes, this is Alan. I'll go ahead and say, absolutely. Last year was a little odd because Q1 Well, it's odd because we had $2,400,000 rolled into Q1 that hopefully and should have come in, into 20 'twenty one, have we got the contract in time? Basically, what that made 'twenty two look like was pretty much flat throughout the year. You're going to see pretty much the exact opposite As we look into 'twenty three.

Speaker 4

'twenty three, we start here. We would expect to see the cadence of revenue increase Into each of the following quarters and significantly going up in Q3 and Q4.

Speaker 1

Okay, that's helpful. And apologize if I missed it, but how should we think about OpEx trending the remainder of this year?

Speaker 4

Yes. This is Alan again. Well, we have been investing significantly in sales and marketing Basically, the last 2 years, we still are adding some costs related there for things that are wise. R and D this year will go up a bit We are adding more capability in terms of personnel, particularly related to having 4 software products now, Although it's not going to be significant, G and A will go up a bit, but should be relatively flat as well. So I mentioned earlier that we have already invested in all three of those categories.

Speaker 4

So even though they are going to go up a bit, they're going to go up less than the amount of revenue Continues to go up.

Speaker 1

Okay, got it. Thanks a lot guys.

Speaker 4

Thank you.

Operator

Thank you. Our next question is coming from Willow Miller with William Blair and Company. You may proceed.

Speaker 7

Hi, guys. Thanks for taking my questions. Just a clarifying question first. How much of the guidance revision To revenue is driven by Chicago versus Puerto Rico. I know you mentioned Puerto Rico could be as much as $2,000,000 if that contract is not renewed.

Speaker 7

So any color there That would be really helpful.

Speaker 1

Yes, this is Ralph. I'll take that one. So the total exposure, if Chicago were to cancel a contract as of July 1, even though technically we're contracted through mid February of 2024. And if Puerto Rico were to not completely renew nor to catch us up On the services that we provided them, essentially for Casta, that total Approximately $6,400,000 in GAAP revenue. And so we're basically kind of factoring in on a combined risk basis $2,000,000 across board.

Speaker 1

It isn't a useful exercise for us to kind of do it 1 by We kind of pull all the risks together and decided that we don't think it's 0 exposure nor do we think it's $6,400,000 of We felt like the appropriate number to use on a risk adjusted basis was $2,000,000

Speaker 7

Okay. That makes sense. And then my next question is, last quarter you called out strong performance in the Tier 4 and Tier 5 cities, just based on one salesperson and you were looking to And how is that initiative going? And do you believe you can expand beyond the 4 reps that you called out previously?

Speaker 1

Yes, terrific question. So we made really good progress there. Currently, we now have 3 reps that are 100% focused on Tier 4, Tier 5. I think hopefully you've heard in our this call, I mean the success that we had in lighting up new customers. I think It's I mean, 6 customers is pretty impressive work.

Speaker 1

I didn't mention the cities, but I'll maybe just call them out now for folks. Cleveland, Ohio, Hawaiian Gardens, Holyoke, Manchester, near Bellaca, Florida. And we actually in some of the expansions that we had, there were a couple of Tier 4, Tier 5 customers that actually expanded their initial footprint as well. So that initiative for us is going very well. I think you've heard us talk Previously about the shortened sales cycles that appears to take place there.

Speaker 1

So we're very excited and are still anxiously looking for that 4th Tier 4, Tier 5 sales rep to round out the team.

Speaker 7

Sounds great. That's great color. Thanks for taking my questions.

Operator

Thank you. At this time, this concludes our question and answer session. If your question was not taken, you may contact Sound Thinking's Investor Relations team by e mailing ssti at gatewayir.com. I will now hand it back to Mr. Clark for any closing comments he may have.

Speaker 1

Great. Thank you very much. Just very excited to be in this opportunity space. We know we're making a difference and thank you all very much

Operator

Thank you. This does conclude today's call. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation.

Powered by Quartr