SoundThinking Q3 2024 Earnings Call Transcript

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November 12, 2024

There are 6 speakers on the call.

Operator

Good afternoon, and welcome to Sound Thinking's Third Quarter 2024 Conference Call. My name is Shamali, 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 for our 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 actual results to differ materially from those stated or implied by those statements.

Operator

Certain of these risks and assumptions are discussed in the Sound Thinking SEC filings, including this registration statement on Form S-one. These forward looking statements reflect management's beliefs, estimates and predictions as of the date of this live broadcast, November 12, 2024, and SoundSeqing 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. With that, I'll now turn the call over to Ralph.

Speaker 1

Good afternoon, everyone, and thank you for joining us today for Sound Thinking's Q3 2024 Earnings Call. We appreciate you taking the time to join us today as we discuss our Q3 financial results, provide an update on our strategic and operational progress and share our outlook for the remainder of the year. We're pleased to report a strong 3rd quarter with revenues of $26,300,000 up 10% from the same period last year. For the year to date period, we reported $78,600,000 representing an increase of 18% from the same period last year. The need for public safety technology solutions continues to be a compelling growth opportunity, and we believe the Safety Smart platform is uniquely positioned.

Speaker 1

As the landscape of public safety technology continues to evolve, we are not just keeping pace, but we are leading the charge. Following our recent strategic partnerships with Recore Systems and the rollout of our co branded PLATE RANGER ALPR solution, the Safety Smart platform now offers 6 data driven tools that leverage AI and machine learning technologies to enhance law enforcement operations. In addition to PlateRanger, the Safety Smart platform includes ShotSpotter, which is our proven and market leading gunshot detection system that improves police response to gunfire incidents and saves lives, Resource Router, our patrol management system that streamlines patrol operations to improve officer productivity and engagement Case Builder, our case management and investigative collaboration tool to help close cases Primetracer, the largest search engine platform for law enforcement that has over 1,000,000,000 criminal justice records to help accelerate investigations and lastly, SafePoint, which is our discrete AI based low friction weapons detection solution. The Safety Smart platform's unique value proposition lies in its ability to deliver a holistic unified client experience, offering a comprehensive suite of public safety solutions under one secure and scalable platform. We believe our Safety Smart platform strategy is gaining traction, empowering our law enforcement partners to deliver measurable, efficient, effective and equitable public safety outcomes in the communities they serve.

Speaker 1

Our flagship ShotSpot offering went live in 4 new cities in 1 university, as well as expanded in 8 current cities in Q3. We also booked a went live with over 10 new customers for our other Safety Smart platform solutions. Our ongoing market penetration is a testament to the effectiveness and reliability of our solutions in enhancing public safety. Domestically, we're on track to exceed 100 new ShotSpotter go live miles this year, including 5 new cities and 9 expansion projects in our current staff project pipeline expected to go live in Q4 of this year. Resource router is also performing above expectations and resonating in the market.

Speaker 1

We currently have 5 resource router implementations in the queue for Q4 go lives. We're very pleased with the strong demand we see for resource router, which answers the challenges many agencies have around structural staffing shortages. Our strategic partnership with Recor to integrate vehicle license plate recognition solutions into our Safety Smart platform is also another highlight of the quarter the year following the launch of Plate Ranger in September 2024. The Plate Ranger solution targets a $2,500,000,000 TAM that is growing at 15% CAGR. It was an attractive opportunity and while still in the early days, we're excited by the growing strength of the pipeline build and we look forward to sharing more updates on operational traction once we are fully underway.

Speaker 1

Case Builder, our comprehensive case management solution grew subscription based revenue approximately 1,000 percent for the Q3 year over year. We began recognizing $1,000,000 of maintenance ARR earlier in the quarter with the delivery of the 1st major application or use case of PREA, the Prison Rate Elimination Act, to be followed by use of force in

Speaker 2

trial divisions and then 8 other divisions within the DOC.

Speaker 1

The New York DOC leadership implementation will help improve compliance and operational efficiencies on these types of corrections investigations. As expected, we also went live with Orleans Parish in September and continue to have a healthy pipeline of new Case Builder opportunities headed into 2025. Our very successful deployment of Case Builder in 1 of California Department of Justice divisions is expected to create further opportunities for us within the agency. Primetrace, our investigative search engine, was successfully deployed with 6 new customers adding to the 250 plus customers currently leveraging CrimeTracer. We expect to continue to make significant investments to maintain and improve the performance of our solutions.

Speaker 1

To that end, during the Q3, we announced the availability of a major upgrade to our advanced weapons detection system called SafePoint Next Gen, which reflects our conviction and commitment to innovation in meeting the increasingly complex security needs of our customers. We're actively migrating our current customer install base to the NextGen platform and securing new customers who have been waiting for NextGen's new features along with SOC 2 and HIPAA compliance. On the operational front, we continue to make significant strides highlighted by the recently announced 3 year agreement with the Ministry of Interior of Uruguay to expand ShotSpotter's gunshot detection coverage in Montevideo by an additional 12 square kilometers, which represents a doubling of its current footprint in the capital city. We have 2 major contract renewals in process with NYPD, including ShotSpotter as well as the maintenance and professional services work performed by our Technologic division that provides critical ongoing enhancements and support of NYPD's on premises ERP system. Both contracts have successfully made their way through NYPD's Information Technology Bureau or ITB onto New York City's Office of Management and Budget, OMB.

Speaker 1

And late last week, we learned that the 3 year ShotSpotter renewal has moved on to final approval and it sits with the New York City Comptroller's Office. Given the criticality of these solutions and the strong support it has from NYPD leadership in the mayor's office, we're confident that both contracts will be executed by year end. As a reminder, our ShotSpotter service in Chicago operationally concluded in late September with a formal contract termination that will occur later this month. Comprehensive civic debates between the Mayor and the City Council on extending the service beyond this month are ongoing and entering the city's overall 2025 budget negotiation process. There continues to be strong support from a veto proof majority coalition of the City Council.

Speaker 1

Residents where polling data revealed that 70% of all Chicago voters strongly support or support Chicago's continuing use of ShotSpotter, as well as local press and the business community that have recently organized themselves to raise over $2,500,000 to help defray the cost of ShotSpotter. In addition, a very strong positive came in from the recent University of Chicago PRIME LAP study that statistically estimated that Chicago ShotSpotter deployment saves approximately 85 lives per year. In the meantime, the city has published an RFI due later this month intending to reimagine community safety by soliciting bids for First Responder Technology Solutions. In part, the RFI details requirements such as the ability to detect, locate and alert on gunfire within 60 seconds with exact positional data. In addition, the RFI also calls for the alert to include a forensic timestamp recorded snippet of the gunfire incident.

Speaker 1

Coincidentally,

Speaker 2

many

Speaker 1

of these requirements are among the same capabilities that ShotSpotter has operationally demonstrated in Chicago since 2012. In terms of market position, our strategic initiatives and product launches have strengthened our standing. We're leveraging our technological expertise and market insights to navigate the dynamic landscape and seize on new growth opportunities. Our strategic partnerships and product innovations are the driving force behind our operational excellence, which has resulted in another world class Net Promoter Score of 66%, moving up 2 percentage points from last year's 64%. As a reminder, a score of 60 or higher is considered world class in any industry.

Speaker 1

It is notable since 2020 to year to date, the company has added over 85 new ShotSpotter customers, executed 50 plus expansions and processed over 6 60 annualized renewals compared to only 15 non renewals, which effectively averages to 139 annualized renewals per year versus 3 non renewals per year. As a reminder, Chicago's non renewal has already been factored into our 2025 budget and 2024 guidance, which we are maintaining at $104,000,000 to $106,000,000 in revenue, with 18% to 20% adjusted EBITDA margin. We are confident in our guidance and believe we are well positioned to drive diversified and profitable growth into 2025 and beyond. In summary, our strategic initiatives, product expansions and ALTR reseller partnerships have positioned us for continued growth and operational efficiency. We're extremely excited about the opportunities ahead and remain committed to delivering innovative solutions that enhance public safety and community trust.

Speaker 1

I want to thank you for your time and continued support. I'll now turn the call over to Alan to discuss our financial results for the quarter and guidance for the year.

Speaker 2

Thank you, Ralph. Good afternoon, everyone. We're pleased with our 3rd quarter results. Our strong financial performance reflects the success of our ongoing strategic initiatives, operational efficiency measures and our commitment to delivering value to our shareholders. The 3rd quarter revenues were $26,300,000 representing a 10% increase of the $24,000,000 in the Q3 of 2023.

Speaker 2

Revenues were driven by new customers, expansion of existing customer coverage areas, additional cross selling including from Newport News which added our Prime Tracer and Case Builder solutions to complement already implemented ShotSpotter and Resource Router solutions. Bookings of all of our Safety Smart Platform solutions, some of which are multi year contracts are also growing healthily. Gross profit for the Q3 of 2024 was $15,200,000 or 58 percent of revenue versus $13,800,000 or 57 percent of revenue for the prior year period. We expect gross margins to be higher in Q4, ending the year near the 60% that we have indicated in previous quarters. Adjusted EBITDA was up approximately 5% from the Q3 of last year to $4,500,000 up from $4,300,000 Our adjusted EBITDA increase was related to revenue growth in all solutions.

Speaker 2

As a reminder, adjusted EBITDA, a non GAAP financial measure, is calculated by taking our GAAP net income or loss and adjusting out interest income, income taxes, depreciation, amortization and impairment, restructuring costs and losses, including on the related fixed asset disposals, stock based compensation expenses and acquisition related expenses, including adjustments to our contingent consideration obligations. Turning to our expenses. Our operating expenses for the 3rd quarter were $16,300,000 or 62 percent of revenues versus $15,200,000 or 64 percent of revenues in the Q3 of 2023. Q3 of 2023 had an approximately $100,000 adjustment for contingent consideration related to our Forensic Logic acquisition. Breaking down our expenses, sales and marketing expense for the Q3 was $7,200,000 or 27 percent of total revenue compared to $6,300,000 or 26 percent of total revenue for the prior year period.

Speaker 2

Our R and D expenses for the 3rd quarter were $3,400,000 or 13% of total revenue compared to 3,200,000 13% of total revenue, in line with the prior year period. G and A expenses for the quarter were $5,700,000 or 22% of total revenue compared to $5,700,000 or 24% of total revenue for the prior year period. In Q3 of last year, our G and A expenses included an approximately $100,000 reduction related to the change in the fair value of the contingent consideration related to the forensic logic earn out expectations. We expect our G and A expenses to grow less than our revenue on a percentage basis as our company grows. Our GAAP net loss was approximately $1,400,000 or loss of $0.11 per basic and diluted shares for the quarter based on 12,700,000 basic and diluted weighted average shares outstanding.

Speaker 2

This compares to a net loss of $1,900,000 or a loss of $0.15 per basic and diluted shares based on 12,500,000 basic and diluted weighted average shares outstanding respectively for the prior year period. Deferred revenue at the end of the quarter was largely in line at $49,500,000 compared to $49,400,000 at the end of Q2 of 2024. We ended the quarter with $15,300,000 in cash and cash equivalents versus $9,800,000 at the end of the Q2 of 2024. The cash balance is higher than the end of the second quarter even after we repurchased 294,790 of our shares at an average price of $14 for approximately $4,000,000 Currently, we have approximately $21,000,000 available on our line of credit as we have only approximately $4,000,000 in debt outstanding all on our line of credit. Now turning to to $106,000,000 We are expecting that Q4 revenues will be over $26,000,000 even after including the loss of approximately $1,200,000 from the loss of the Chicago contract in Q4, which is expected to end on November 22.

Speaker 2

We are maintaining our full year 2024 adjusted EBITDA margin guidance at 18% to 20%. For our 2025 guidance, even with a loss of approximately $8,500,000 from the loss of the Chicago contract, we're expecting our revenue to increase to a range of $107,000,000 to $109,000,000 We are also expecting our adjusted EBITDA to increase to a range of 19% to 21%. Overall, we are pleased with the progress we have made on our strategic initiatives and the performance of the business. With that, we're now happy to open the call for questions. Operator, will you please open the call for Q and A?

Operator

Thank you. We will now be conducting a question and answer session. Our first question comes from the line of Richard Baldry with Roth Capital. Please proceed with your question.

Speaker 3

Thanks. The RFI is fairly specific on the Chicago side. I'm very curious if you run into an RFI of that

Speaker 1

Yes

Operator

Yes. So we've had

Speaker 1

a chance to dissect the RFI and it does look quite familiar to us. We've seen similar RFIs or RFPs. I think in one particular case, there was RFP from an agency in New Jersey that we successfully bid on and won twice. So we're pretty encouraged by the list of requirements that were listed in that RFI. But do understand that this is an RFI, not an RFP.

Speaker 1

So they're basically trying to get input on ideas. And so that's where that whole process is in Chicago.

Speaker 4

And

Speaker 3

could you drill into sort of SafePoint for a minute on you've got a major upgrade now out in the market. How is the pipeline looking? Are early closed deals? Any feedback on the upgrade to think about that one heading out of the year and into 2025?

Speaker 1

Yes. So the pipeline looks very strong. It continues to grow and build. I think people are really keen on the next gen platform and additional features and capabilities we're providing to contactless weapons detection. So we're pretty excited.

Speaker 1

And there's a number of deals that we're looking to close in Q4 going into 2025 with the wind at our back with respect to SafePoint. So we're pretty pleased with that business and how it's developing.

Speaker 3

And then sort of building on that, when we think about your 2025 guidance, how much change sort of year to year does that assume for go lives for either short ShotSpotter, so your legacy offering for gunshot detection and SafePoint for weapons detection?

Speaker 2

Yes. So this is Alan, and Ralph can add it correct. We were still expecting our ShotSpotter to be around 100 miles plus, might be higher than that as well once we add in some of the international opportunities that we have. So that's on the ShotSpotter side. On the SafePoint side, to be clear, as Ralph mentioned, the pipeline is strong there.

Speaker 2

And just to give you some stats that I think are really important, we added in terms of bookings, now those some are multi year, but about $500,000 in Q1, north of that in Q2, over $1,000,000 in Q3 and already over that in Q4. And that's for SafePoint alone. So when we look at guidance, it's not just ShotSpotter, which is going to continue to grow, but the other solutions that we have are adding significant bookings across the board and helping our diversification, help our revenue grow.

Speaker 3

And last for me, on the SafePoint side, as you see that ramp, what would be any friction to growth for that segment? Are most of the components sort of common off the shelf? Are there custom things that could challenge growth if something larger contracts were to come through sort

Speaker 4

of earlier than you expected?

Speaker 1

Yes. So this is Ralph. We are looking at some potential supply constraints that we think will open up in the beginning of 2025. Part of the next gen SafePoint solution includes some AI work being done at the edge. There's a box at the edge that's connected to a 3 d camera that is has some little bit of supply constraint around the NVIDIA chipset.

Speaker 1

So we're currently getting those kind of shipped in a fairly sufficient quantity to support our ramp of next gen go live for 2024 for the remainder of this year. But as that ramps up, we're going to have to see that supply significantly increase to kind of meet the projections that we have in mind for SafePoint. And we think we'll be fine there, but we are looking at it fairly closely.

Speaker 3

Great. Thanks.

Operator

Thank you. Our next question comes from the line of Eric Martinuzzi with Lake Street. Please proceed with your question.

Speaker 5

Yes. I just wanted to size up the Chicago impact on 2024. I know you said $8,500,000 annualized, but based on the 2024 guide, what is the actual expected revenue contribution in 2024?

Speaker 2

Yes. So this is Alan. The actual revenue in 2024 was about $9,200,000 So it's definitely less than the $8,500,000 because we did have some revenue that we recognized before we got the 8.5 $1,000,000 contract in January February of this year.

Speaker 5

Okay. And one of the things that you talked about last quarter was a sales cycle elongation just really due to more education and constituent deliberation that was impacting the pipeline conversion specifically on ShotSpotter. Any further color you can give us there? Is that elongation flexed at all? Or is it pretty much it was captured in the Q2 comments?

Speaker 1

Yes, this is Ralph. I think it stabilized. It's pretty much where it was in Q2. We're looking at kind of 12 to 18 month of sales cycles still with respect to ShotSpotter. But offsetting that, which is kind of interesting, we're seeing much more closed sales cycles for SafePoint, kind of given it's a different buying center on the commercial security side versus the kind of public safety, public government side.

Speaker 1

So we're pretty encouraged by the mix of sales cycles we see across the portfolio with things happening a lot quicker, I would say, on the SafePoint side and kind of still these kind of 12 to 18 month sales cycles on things like ShotSpotter. Now we put kind of Plate Ranger expectation as Plate Ranger is going to be something kind of in the middle because it is a defined category that has defined budget dollars associated with it. I think people pretty much understand the ALPR space pretty well.

Speaker 5

Got it. Thanks for taking my questions.

Operator

Thank you. Our next question comes from the line of Trevor Walsh with Citizens GMP. Please proceed with your question.

Speaker 4

Great. Hi, team. Thanks for taking my questions. Just piggybacking a little bit off the SafePoint and the Plate Ranger commentary from last couple of questions. Ralph and or Alan, could you just give us a sense of sort of I understand the pipeline is strong, but

Speaker 1

could you maybe give us a sense of

Speaker 4

kind of where the rev rec as those deals sort of flow in, kind of what that looks like just from a timing perspective, if it's kind of takes some time to deploy, if it's similar to kind of what you see similar to the ShotSpotter type of deals or I guess how in the context of the 25 guide you see those revenues kind of flowing in once you actually do win those deals?

Speaker 2

Yes. So this is Alan. Go ahead, Ralph.

Operator

No, no, go ahead. Sorry, you go ahead.

Speaker 2

Okay. So the short answer is, normally with like a ShotSpotter, it takes about 3 to 4 months after contract is signed till we go live. We're finding a much shorter cycle for that for Safepoint. When we get a contract signed, provided the customer is ready to go, we can get things as low as 6 to 7 weeks and go live. So that's actually when we get the bookings and as I mentioned, we've already gotten over $4,000,000 in bookings in SafePoint this year.

Speaker 2

Those are going to come in and help achieve the revenue a little faster than what a ShotSpotter would.

Speaker 4

Great. Thanks. That's helpful. And then also around that 2025 preliminary guide, it looked nice kind of above expectation around EBITDA size of the house. Can you just maybe give us a sense from kind of where you're seeing some of that leverage kind of heading into next year as we think about modeling kind of going forward?

Speaker 2

Yes, sure. This is Alan again. So there's several things that are going on. Number 1, as we've said in other quarters, some of the last couple of acquisitions we did, we're still investing. The new technology acquisitions, we're still investing.

Speaker 2

And as the revenue grows with them, the actual profitability grows as well. So we're starting to see that. If you just talk about 4 of them, not even counting PlayRanger, having almost $7,000,000 in bookings already helps us grow each one of those. And I said that $7,000,000 is what we've had in 2024. We're going to have additional $25,000,000 So that's going to help.

Speaker 2

We've also had some reductions in some costs that were appropriate. We thought actually quite small, but that's going to add a little bit as well. So revenue is going to grow, costs and actual expenses are going to go down a little bit in those categories. That's how the adjusted EBITDA is going to improve.

Speaker 4

Great. Thanks, Alan. I appreciate it. And maybe one last one for me, Ralph, for you. You guys put out a press release last month, maybe a couple of months ago now actually around a study you did in conjunction with the City of Oakland around just product efficacy.

Speaker 4

Just wondering kind of is that kind of part of the your kind of maybe new or revised PR playbook of just kind of getting ahead of where you see potential kind of more political city type of questioning of the tool or some other purpose of that study being put out there? Just curious kind of what the, I guess, overall strategic kind of rationale was for doing that? Thanks.

Speaker 1

Yes, thank you very much for that question. It's a great question. Yes, so we're trying to be a lot more intentional around helping our law enforcement agency partners tell their story about the efficacy and value that the acoustic gunshot detection technology delivered by ShotSpotter provides them as a first responder agency getting to the scenes of gun crime. I think fundamentally, it's really important that people understand that 80% to 90% of criminal gunfire goes unreported. And if it wasn't for an acoustic gunshot detection technology like ShotSpotter, these incidents would have no response.

Speaker 1

And so we're enabling a quick fast response that are getting first responders to these scenes. They're finding victims and able to get victims to trauma care centers to save their lives. They're recovering evidence. They're seeing improved community engagement because now these communities see police responding very quickly and precisely to these events. And it gets lost in the shuffle sometimes.

Speaker 1

So what we're trying to do with our agency partners is helping them kind of get in front of those city council meetings by kind of gathering those gathering that data and developing the narrative and story around the value and why people should be paying attention to it. And it worked very well for us in Oakland. We're really proud of the fact that we got almost unanimous approval from the city council. And Oakland is a fairly progressive city. There's a little bit of noise coming from, I would say, large small group of activists, small but loud group of activists that were trying to challenge ShotSpotter.

Speaker 1

But at the end of the day, when we were able to get those facts out there, the city council, we think, made the appropriate decision with only one dissenting vote in a place like Oakland. So that's hopefully a good harbinger of things to come in other places as well, getting that renewal cross line with that playbook of helping agencies tell their story better.

Speaker 4

Great. Thanks, both. Appreciate the questions.

Operator

Thank you. We have reached the end of the question and answer session. I'll now turn the call back over to Ralph Clark for closing comments.

Speaker 1

Thank you to everyone who joined us today and thank you to my sound thinking colleagues, clients and partners for their support. In summary, we're pleased with our quarter's performance and excited for the opportunities heading into 2025. We have an outstanding company and we'll continue to be focused on maximizing shareholder value. Thank you all for your insightful questions and for joining us today on this earnings call. We appreciate your continued interest and investment in Sound Thinking.

Speaker 1

We look forward to sharing our progress with you in the coming quarters. Thank you.

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Key Takeaways

  • Sound Thinking reported Q3 revenues of $26.3 M (up 10% YoY) and YTD revenues of $78.6 M (up 18%), maintaining 2024 guidance of $104–106 M in revenue and 18–20% adjusted EBITDA margin, with 2025 projecting $107–109 M and 19–21% adjusted EBITDA.
  • The Safety Smart platform expanded with six AI-driven tools including the newly launched PlateRanger ALPR via a Recor partnership, achieving four new ShotSpotter city go-lives and over ten new customer wins for other solutions in Q3, while targeting over 100 new ShotSpotter miles and five Resource Router implementations in Q4.
  • Case Builder delivered approximately 1,000% subscription revenue growth YoY, recognized $1 M of ARR for a PREA application in New York DOC with further divisional rollouts and an Orleans Parish go-live, underpinning a healthy pipeline into 2025.
  • SafePoint Next Gen, the company’s AI-based weapons detection system with SOC 2 and HIPAA compliance, went live this quarter, driving accelerating bookings (>$1 M in Q3) and faster deployment cycles (6–7 weeks), though management is monitoring potential NVIDIA chipset supply constraints for 2025.
  • Operational highlights include a three-year expansion of ShotSpotter coverage in Montevideo (Uruguay) doubling its footprint, progress on NYPD contract renewals pending Comptroller approval, and the formal Chicago termination with an RFI underway amid strong civic support and potential reinstatement.
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