ShotSpotter, Inc. (SSTI) on Q1 2021 Results - Earnings Call Transcript
Operator: Good afternoon and welcome to ShotSpotter's First Quarter 2021 Earnings Conference Call. My name is Claudia 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.
Ralph Clark: Thank you. And good afternoon, everyone. And thanks for joining us today. I hope everyone out there is doing well. It certainly has been a challenging 14 months for all of us. And while significant progress has been made in the fight against COVID and it feels like things might be getting back to some form of normalcy, we recognize that is not the case everywhere. I would like to extend my well wishes to all of our families, friends, colleagues and customers that have been impacted by COVID. As usual, I'll start with a quick overview of the quarter and our operational outlook before Alan details the quarterly results. We will then take your questions. After a strong finish to year-end 2020, we've continued to build on our momentum with a fast start to 2021. We're very pleased with our first quarter results which exceeded our expectations both at the top and bottom line. We reported record revenues of $15 million, up 44% from Q1 of 2020 and had quarterly adjusted EBITDA of $3.3 million, up 53% year over year, once again demonstrating the unique operating leverage of our business. During the quarter we went live in six new cities with ShotSpotter Respond, including Detroit; Memphis; Harris County, Texas; Pompano Beach, Florida; McKeesport, Pennsylvania; and Mansfield, Ohio. We also expanded our deployments in five cities, including New York City, St. Louis, Worcester, Savannah, and Wilmington, North Carolina. Mansfield and McKeesport are examples of our tier four and tier five go-to-market initiatives. We're very pleased with the progress in this market vertical where our pipeline not only continues to grow, but it's also exhibiting shorter accelerated sales cycles. Even with a robust go live activity in Q1, we still enter Q2 with a solid number of new city and expansion projects in the ShotSpotter Respond deployment pipeline that we expect to go live in the next 60 to 90 days. As travel restrictions have eased, these impending projects are keeping our project and customer success teams happily busy introducing new customers to the ShotSpotter value proposition and helping grow the positive community impact of ShotSpotter Respond deployments with existing clients that are expanding their footprint.
Alan Stewart : Thank you, Ralph. We're very pleased with our performance in the first quarter. As Ralph mentioned, we added six new Respond cities this quarter. We're only seeing attrition from one small site secure deployment. We also had five Respond city expansions, achieved record revenue and record gross profit. It is noteworthy that there has been some abatement of the budget challenges for our current customers and potential new ones as federal stimulus has brought customers back to the table in early 2021. We are pleased with a minor Q1 attrition which continues the trend of lower than expected seen in 2020. While encouraging, ShotSpotter sales organization remains focused on generating new and expanding current programs to achieve growth targets, while offsetting attrition. As Ralph mentioned, we are expecting our actual attrition will come in well below our previous estimate of 3% to 4%.
Ralph Clark : Thank you, Alan. Before we take your questions, I would like to express my gratitude to my ShotSpotter colleagues, our customers and the communities they serve. You're all doing amazing work that is making our communities safer. Thank you. We're now ready to take your questions.
Operator: . Our first question is from Richard Baldry with ROTH Capital Partners.
Richard Baldry: Sort of curious how the sales and marketing or what were the drivers of the sales and marketing step up. It's up about ballpark 30% sequentially, which is a lot for you guys. Was it about commissions on large deals, headcounts coming in. think about where that step up came from.
Alan Stewart: This is Alan. It was increased in the actual personnel versus first quarter of 2020. And we have additional people in the sales and marketing – both sales and marketing side. There's also an expansion in the customer success, which a portion of that cost actually does hit sales and marketing as well.
Richard Baldry: Can you talk to me broadly about the pipeline of large deals, sort of the megacity deals? And whether this move back to an earmark world highlighted in the release, how you think that will play into some of those? Or do you think there's a potential that could be a sort of a gamechanger on the funding side?
Ralph Clark: This is Ralph. I'll start now and, Alan, jump in. We're seeing a nice complement to our mix of both small, medium and large cities. And I always say we shouldn't discount the medium cities because they can grow into being fairly substantial deployments of over 15 square miles. We have a number of examples of non-tier 1 or tier 0 cities stepping up to that level, Las Vegas, Birmingham, Washington, DC, etc. As I mentioned in my prepared remarks, we're seeing some very encouraging movement on tier 4 and tier 5. The deals are smaller, but they seem to be happening quicker. And we're building the pipeline there. And we're also seeing some really interesting, I'll call it, kind of geographic tipping points. I think you've heard us talk about geographic tipping points that we've seen in Ohio. We're really constructive around what we're seeing in Florida. We think there's a lot of activity in Florida that we can build on previously successful deployments there. And of course, we have our pilot program that's going very well in Houston. And we think Houston could be the gateway into Texas, which would represent a very large opportunity for us. With respect to earmarks, earmarks are making their way back. Previous, when I joined the company back in mid-2010 when earmarks were available, we got more than our fair share along with our customers of kind of earmark activity. So, we're really quite encouraged by earmarks coming back because it is an additional funding stream that our customers can use to be able to deploy or expand ShotSpotter. We've got a number of plays in process now with existing customers and prospects on the earmark front. So, we're really encouraged by that.
Richard Baldry: Last for me, can you talk a little bit about the sales cycle around the Connect offering now that it's been in place a little bit? Seems like you've had some early successes and deployments to come up soon? How do you feel about your marketing processes behind that and the sales cycle itself, how it's changing, targeting the right sort of municipalities, etc.?
Ralph Clark: We're very much on a learning curve there. And I won't say that we have it 100% figured out, but we've made a lot of progress over the past, I would say, 9 to 12 months. And as I mentioned in my prepared comments, we seem to be hitting our stride. We're really excited about the notion of kind of taking our kind of marketing engine and pointed it to potential prospects that aren't already existing customers. And that's going to be really quite exciting. And again, we're seeing some really strong traction within our install base of Respond deployments. And we think as those customers get some experience and kind of start the virtuous cycle of kind of reference selling, which has really been key to our success in Respond, that we should see that business accelerate. So, all good news in ShotSpotter Connect. But, again, I won't say that we've got it completely dialed in. I think we could definitely still learn some things and do even better. But we're excited about the progress we've made to date.
Operator: Our next question is from Will Power with Baird.
William Power: I guess I'll try a couple of here. Ralph, it's nice to see what appears to be improving momentum with ShotSpotter Respond. I wonder if you could just update us, given the trends you're seeing, the funding environment, how you're thinking about the overall growth opportunity for Respond in just the US over the next couple of years, say, two or three years, any changes in outlook there?
Ralph Clark: I think we've become more positive. I think kind of going back nine months or so ago when we're kind of coming – just being presented with the pandemic, I think there's a lot of concern around the funding environment, which has changed dramatically of late, more positive than I think it's ever been since I've been actually with the company with all the federal stimulus dollars being pointed at local law enforcement or local municipalities that are allocating some of those dollars to their police departments. That's probably stronger than it's ever been. And then you throw earmarks on top of that, that's quite encouraging. So, that's kind of gone from, gee, we might be a little bit concerned, given the recession and the pandemic to wow, we're really positive. I think early on, too, if you go back kind of nine months or so ago, with calls to defund the police and social unrest, there were some concerns around, like, how that can play out. Kind of some of these organized powers, were they going to effectively freeze police departments from kind of moving forward using technology to provide better public safety outcomes. And in fact, the opposite of that has been true. I think a lot of these calls for defund the police ultimately evolved into reforming police and asking police to be more efficient, effective, and equitable – really important on the equitable piece – in how they apply their law enforcement resources to coproduce public safety outcomes. That's very consistent with the message that we've been on for a number of years. We're just not kind of creating the message to respond to the time. We've always been on the notion that technology can be a very powerful tool to help police departments better serve at-risk, underserved communities, particularly around gun violence. So, that thing has changed like 180 degrees from, say, nine months ago. We're seeing good success, again, in tier 4, tier 5. I think our plans have probably gone as good or even better than we expected when we originally hatched the idea of focusing very specifically on smaller agencies that might have a one or two square mile problem and package up something that could be relevant for them. And now we're beginning to see some of the tipping points play out there from a vertical point of view. So tier 4, tier 5 police departments and their respective chiefs kind of tend to collaborate and talk to one another. So, we think as we get more traction in some of these smaller cities, that should accelerate. And then, my last point will be, again, not to underestimate the regional tipping points that are in play because I think those in in toto really do represent multiple kind of tier 1 cities, when you aggregate a bunch of medium sized cities. Say, in the State of Ohio, it could represent something fairly big and significant. Again, we're really, really encouraged by what we're seeing in Florida, more to come there. And again, we're still in the very nascent stages of working in Texas through our Houston pilot. But the word back and I think they probably talk about some of the results that they're generating in Houston. Very, very positive there. And I think if we can break open the Texas market, there's a number of very, very interesting cities and police departments in Texas we can partner with on ShotSpotter – I'm just talking about ShotSpotter Respond, by the way, domestically.
William Power: It just feels like a more encouraging environment there. I guess second question, great to see Investigate launch. Any color just on where you are from a capability standpoint? Is it kind of so-called fully baked, you have the pieces you want? Or is there more to continue to build there? And then, maybe just update us or remind us kind of the go-to-market strategy for that now that it's available?
Ralph Clark: Alan, do you want to take that one? And I'll jump in.
Alan Stewart: Basically, we are ahead of schedule on Investigate versus where we thought we would be at the end of last quarter. So, that's good news. We are looking at potentially selling it based on the number of agencies or the number of police in each agency, and the pricing will differ based on that. So, if you have someone that has a small number of police, they could get a – Investigate might be as low as $50,000. Could be significantly higher than that, as we mentioned before, for larger cities with the greater number of police in their agency.
Ralph Clark: It's very much a direct selling effort. And we have recently brought on some specific headcount to have a vertical focus going specifically after case management opportunities. That new hire just literally started in the past 30 days or so. So, we're being pretty intentional around it. And I think from a feature point of view, we think this is a fully featured, very strong case management solution. This is something that we have a lot of experience with through our colleagues at LEEDS that had a number of years supporting a case management solution at a very large tier 1 or tier 0 police department agency that has effectively been using a very intentional case management solution to drive better outcomes in terms of case closure. So, we think we have something really interesting, compelling and unique to offer this marketplace. We're already seeing a little bit of inbound chatter, just based on our early press release this morning. This is something that the market really wants because there's not a police department that's out there that isn't under some amount of pressure to do better on closing cases because closing cases is what allows you to have victim resolution, and really, frankly, kind of put these perpetrators that probably drive most of the violent crime problem, or just crime problem in general. They drive most of the crime problem. So, the extent that you can be super focus and get to interventions that then lead to convictions is very important. And so, we think we're on point with our case management solution version 1.0.
Operator: Our next question is from Mike Latimore with Northland Capital Markets.
Michael Latimore: You mentioned the sales cycle improving a little bit. Was that that kind of broad content across all categories here? Or is it specifically like tier 4 or 5 cities, that sort of thing?
Ralph Clark: My comments were very specifically focused on tier 4, tier 5, smaller miles, smaller dollars because we're dealing with smaller miles. And it's just less bureaucracy when you're kind of dealing with smaller agencies, from what it appears like. Again, we're really quite encouraged. I think the larger deals in larger agencies, a lot more people have to be involved and nod their head yes to move forward. We're finding that to be less true in the tier four to tier five segment, which then reduces the sales cycles.
Michael Latimore: Did you give miles added in the quarter? Or do you have that number?
Ralph Clark: No, we did not.
Alan Stewart: No, we didn't. But, obviously, we have mentioned that the acceleration of our core businesses is going well. And we added six new cities to the quarter. That's the first time we've done that in a long time. So, we're hoping if that sort of tells the story of what we're seeing.
Michael Latimore: And then, on the case management offering, how complicated is the implementation? Is it sort of easy to do and to get it in a month or is it a several quarter implementation?
Ralph Clark: We don't have any direct experience with that yet. But our expectation is this is going to be much more of an enterprise of solution set. We'll probably need to integrate it with RMS systems and the like. So, it will probably be somewhat similar to what we've experienced in ShotSpotter Respond or ShotSpotter Connect where there's definitely some work that needs to be done to kind of integrate our technology into existing systems and move forward. But it's not too heavy of a lift, we believe. And we don't think that it would slow us down from being able to have successful deployments.
Operator: Our next question is from Matt Pfau with William Blair.
Matthew Pfau: Nice results. I wanted to ask about the lower churn expectation. And is this driven by the fact that you got over some renewals that you thought were potentially at risk to churn? I know you mentioned one customer that ended up renewing and expanding that was a potential at-risk customer or is it more driven by just the conversations you're having with customers that are up for renewal this year have improved?
Alan Stewart: This is Alan. Basically, there's a couple things. As Ralph mentioned, the funding is a lot better than it was in the past, which is excellent. Obviously, even in 2020, we had less than 1% of attrition, still expected that the budget challenges might continue into 2021. So far, what we're seeing is that things are working out pretty well with that. So, we did say that we expect to be much lower than we had mentioned last quarter, which was less than 3% or 4%. It could be significantly less than 3% or 4% based on what we're seeing now. So, it is to the budget as well as what our sales team is seeing in renewals.
Ralph Clark: And I think if I could just maybe add a quick macro comment too. I think we're just finding that our solution is very compelling to customers that once they get it deployed and using it, it's really, really difficult for them to walk away from that. Kind of once they see the unseen, it's really hard. Not to say that it's 100%, but I think it's a very sticky solution to be sure.
Matthew Pfau: Just last one for me. Wanted to ask if the supply chain issues and chip shortage are having any impact on your ability to source components or go through this 3G refresh?
Alan Stewart: This is Alan. No. And it's mainly because we've been planning for this for a couple years. We have actually worked with our supplier of sensors and all the parts that go into that in pretty much over a year now. So, we did order some things in advance. And that's turning out to have been excellent decisions there.
Operator: Our next question is from Ryan Kimbrel with Craig-Hallum.
Ryan Kimbrel: Congrats on the momentum and strong quarter. You touched on it in your prepared remarks and there's obviously been some buzz around the American Rescue Plan and $130 billion going to state and local municipalities. But do you guys have any visibility around how much of that might go to local police forces? And if possible, could you quantify the benefit you think you might see from that?
Ralph Clark: That's a tough one to answer. I think where we have an interest, i.e. existing customers or prospects, we're feeling good about our customers and prospects being able to tap into those dollars, to the extent it's needed, because I think for many of our customers, they have existing resources that can be applied either to as a new prospect or as an existing customer that wants to renew or expand. So, I don't know that I'd be in a position to comment on the more macro perspective on how municipalities are using those dollars for police versus non-police. I do have an observation of general municipal budgets. Police departments tend to be a significant portion of any city's budget. You can think of in terms of kind of 30% to 50%. Public safety in general, you want include fire in there. So, they tend to get a fair share of resources when they're applied because they represent fairly big portions of any city's budget.
Ryan Kimbrel: On the lead side of things, can you tell us some of the things you're working on, whether it be technological advancements, new capabilities, or even from a sales perspective? Are you doing to push the word out there and gain traction with new customers?
Alan Stewart: In terms of LEEDS, we feel pretty good with the large customers they have right now in terms of keeping those amount of services that they're providing there. Hopefully that grows over time. Some of the things that LEEDS does provide, though, is potentially available or might be good for other cities as well. One of the key things there is why we launched Investigate. The Investigate was a product that was originally worked on by LEEDS, and using that taking that case management. We believe that to be the best way that we'll be able to expand to other cities with the new product.
Operator: . Our next question is from Brian Ruttenbur with Imperial Capital.
Brian Ruttenbur: A couple of quick questions. One on funding and two on competition. In terms of federal funding coming down and the upcoming stimulus packages, what do you see as set asides? And do you see set asides for your company?
Ralph Clark: Just so I'm clear on your question, when you say set asides, do you mean specific dollars allocated to acoustic gunshot detection? Is that what you mean?
Brian Ruttenbur: Well, it's not going to be that specific. So, what you see maybe set asides as a – I've been doing this a long time. I shouldn't have said set aside. Funding coming down from the federal government that will go to local and state law enforcement that you will be able to be a part of. How's that?
Alan Stewart: As Ralph had said earlier, we do know that the dollars are getting through some of the states and some of the cities. We're not 100% sure exactly how that is going to end up in the police departments. Although based on the information that we are seeing in our existing customers and new cities, it does seem to be some of it flowing there. But, again, as Ralph mentioned earlier, it's a little too early to know for sure. But so far, things seem pretty positive.
Brian Ruttenbur: So, you don't have any dollar amounts, as in $100 million that you see flowing down that you could be part of that you could get funding from directly or indirectly. There's no numbers that you have floating around out there on that.
Ralph Clark: No, because it's all done at the city level. It's all done at city level. The city decides how to allocate those dollars once they get it.
Brian Ruttenbur: Hopefully less of a dumb question on the next one will be competition. And if you could just talk about what you see. And I think it has been brought before, but with Alarm.com, others out there moving into the space, I know, Alarm.com is doing things on indoor shot detection, but anything that you see out there in terms of gunshot location in the competition coming up. Anything new?
Alan Stewart: Yes. Basically, in terms of the gunshot detection, our normal Respond, we really don't see any other competition that's been significant, certainly in the outdoor side. And we have been focused on the indoor gunshot detection for quite some time. We do expect that there might be some competition against us in the Connect and the Investigate once they're ramped up. Certainly, Connect, there might be some. Investigate, we'll find out more as we start actually selling the product.
Brian Ruttenbur: And where would that competition be coming from? Would that be the large guys like a Motorola or would that becoming from an Axon? Do you see out there as up and comer or the big guys?
Ralph Clark: I think on ShotSpotter Investigate, the form of competition we would expect to see are folks that provide a record management systems that have built features – I call them light features, non-intentional features around investigative case management. So, for some clients out there, that very well could potentially address their needs around case management. We think there's a very large market opportunity of customers that require a much more, I would say, kind of intentional, robust case management solution that is really feature rich that provides for a lot of digitization, automization, collaboration between various investigative units and the like. And unless you've really kind of built it that way from the ground up, I think it's challenging for an existing RMS provider that's really focused on record management systems to go off and do that. But we're kind of going into this market with our eyes wide open, and probably the biggest competitor is kind of do nothing, although we think we have some very compelling features to offer an agency to get them off and to do nothing to be able to do something that would allow them to drive much higher closure rates. And we think that's just a direct ROI case that, frankly, we haven't even had in ShotSpotter Respond acoustic gunshot detection. It's very clear to us that if you can measurably improve closure rates from X percent to Y percent, you're going to get people's attention. And so, we feel pretty good about what we built. And again, we have a lot of experience through our leads collaboration and designing, developing and supporting a case management solution that, again, a large tier 1, tier 0 city police agency is using with a great deal of positive outcomes and effect. They've got one of the higher closure rates out there. And it's probably in part due to the integrated case management solution that they are using, built by the LEEDS organization that we're now using that same kind of processor capability for our ShotSpotter Investigate platform.
Operator: Our next question is from Jeff Kessler with Imperial Capital.
Jeffrey Kessler: We're tag teaming on this. A lot of questions have been asked about a lot of money slogging around out there that could potentially go to the cities. And I'm just wondering, instead of me looking forward a little bit, looking backward and looking at some – a couple of the where you've lost some mileage over the last several years. Have you been – with more money to be spent out there at the city level. And number two, with a fuller set of solutions for cities, have you been contacted by any former clients that they want to see you again or want to hear from you again?
Ralph Clark: This is Ralph. I think we mentioned, again, during our prepared remarks, there was one customer that publicly stated that they were not planning to renew ShotSpotter as a result of these funding streams coming in. They not only reversed their position and are now renewing their ShotSpotter deployment, but they're also planning to expand their ShotSpotter deployment. I think there's a case of another customer again.
Jeffrey Kessler: I want to know whether there's others that are out maybe out there.
Ralph Clark: I think a lot of what we're feeling is kind of embedded, hopefully, in the way – our confidence that you're hopefully hearing about how we executed the Q1 and how we're thinking about the rest of the year, I think we're fairly carefully, thoughtfully kind of bullish on what we see. And I think we try to lay out the factors that are kind of supporting our thesis and supporting the idea that we raise guidance. Again, we're ahead of plan on ShotSpotter Respond. We see a number of projects there in the near term, ShotSpotter Respond pipeline from a go-live point of view, where the timing is very attractive, kind of happening in – obviously already Q1 and then soon to be Q2 and then early Q3 that drives GAAP revenue growth. We're seeing lower attrition that we talked about. Originally, we estimated 3%. I think we've been pretty clear that our expectations is we're going to come in well below that. And we're also just seeing a very strong attach rate, if you will, to ShotSpotter Connect within our existing install base that is looking very positive and good. And we're hitting our stride there. And we're talking about kind of opening up the kimono, so to speak, to go drive pipeline for ShotSpotter Connect outside of our traditional install base of 120 or so customers that are using ShotSpotter Respond. We just talked about we're ahead of plan on announcing ShotSpotter Investigate, our case management solution. And this is now a demonstrable and installable solution by customers. So, we can start the pipeline development process for ShotSpotter Investigate. So, all those things together are making us feel pretty good, combined with the overall funding environment. And for police departments and police departments that are really rethinking how they go about the business of protecting and serving their communities, which is kind of causing them to maybe stop in their tracks a little bit and look to solution providers like ShotSpotter and others, frankly, that can help them be more successful.
Jeffrey Kessler: And one final question. I know you alluded to this, but with regard to Connect, and perhaps – and this probably touches the other parts as well. You have invested in analytics code writers. And I'm wondering if you could open your kimono a little bit and just perhaps talk about some of the direction that these analytics are trying to take you? What type of value proposition and what types of solutions do you think you can add through the use of more code writing?
Alan Stewart: I think we know in terms of Connects really what we're doing there with the patrol management, the capability that we are providing for the customers there and the future customers is something that they're all looking for. I do think that there's probably some additional R&D that we could do and would continue to do to make sure that as the cities use them, they say, 'hey, could you do this, we'd like this as well.' Those are things we can continue to add to the technology. I think Investigate, we have a pretty good product that's almost 100% ready there. But we'll see the same thing as we start selling that too. And we do have an R&D team, both at LEEDS and in ShotSpotter that has significant number of people that can help us build new things for the products as well.
Jeffrey Kessler: It's a virtuous circle. You provide them with a solution and they find – and your customers, if they like it enough, they may come back to you and ask you for things to do that you're going to have to obviously – that you're going to have to derive from some more analytics. And then, that could provide some more value to what you can charge.
Ralph Clark: No question. Not to comment on the charging piece, but I think data science is core to what we do. And I'm hoping – we're not going to be waiting for customers to tell us what they want. I think we're going to hopefully be offering them, based on what we see, value added solutions. Data science really kind of started a lot with our machine learning capability around our ShotSpotter Respond solution, where we're applying machine learning data science to be able to drive much more efficient classification of these pops, booms and bangs that we're converting to gunshots if, in fact, they are gunshots using data science and machine learning to do that. Certainly, as Alan pointed out, that's really core to ShotSpotter Connect. And in the future, it can be core to frankly ShotSpotter Investigate. You can imagine it doesn't take a great deal of imagination to see, once you start collecting a bunch of data and begin to see patterns and things, you can offer up recommendations about how to pursue a case based on watching a really productive investigator closed cases and then be able to apply that to maybe less experienced or less productive investigators to kind of bring them up to par to make everybody a fantastic detective. Wouldn't that be awesome using data to be able to do that? There's a there's an amazing opportunity to kind of move the ball forward there. And that's why it's so exciting to be so focused on case management. It's like we don't have to be distracted with RMS, the way other folks are. They're thinking about adding features to RMS that might be case management. We're all in 100% on case management. We think that's going to allow us to innovate going forward to not only drive a much more competitive position, but as you suggest, possibly being able to charge more down the line as we as we add more capabilities to the solution set.
Operator: 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 emailing ssti@gatewayir.com. I'd like to turn the conference back over to Mr. Clark for his closing remarks.
Ralph Clark: Thank you very much. Really appreciate everyone's questions and their support over the past several quarters. We're really quite anxious to kind of get back to work and close out what we think is going to be an outstanding year for the company in working with police departments throughout the world hopefully to help them drive better public safety outcomes. Thanks again.
Operator: This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
