Q3 2020 Shotspotter Inc Earnings Call

[music].

Good afternoon, and welcome the shot Spotter third quarter 2020 earnings Conference call. My name is <unk> and I'll be your operator for today's call.

Joining us our Shotspotter C O Ralph Clark and interim CFO Mary has just please.

Please note that certain information discussed on the call. Today will include forward looking statements about future events and Shotspotter its 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 much.

Serially from those stated or implied by those statements.

These risks and assumptions are disgusting shotspotter CFTC filings, including its registration statement on form S. One.

These forward looking statements reflect management's beliefs estimates and predictions as of the date. That's life broadcast November nine 2020, and Shotspotter undertakes no obligation to revise or update any forward looking statements to reflect events or circumstances. After the date of this call.

Finally, I would like to remind everyone that this call will be recorded and made available for replay via a link available in the Investor Relations section of the company's website at IR Dot shot spotter Dot com.

Now I would like to turn the call over to shot spotter CEO Ralph Clark.

Sir Please proceed.

Good afternoon, and thanks for joining us today.

Hope everyone on the call is doing well.

Before we start I just want to let you all know that Alan is doing well.

Speaking to him regularly and I'm happy to report that is recuperation, it's progressing steadily.

I also want to take a moment to thank many of you that have reached out with positive thoughts and prayers for Alan.

I appreciate that and so all of US here at the company.

In the meantime, we're very grateful to have an experienced interim CFO, taking up the range during Alex Lee.

Mary Sanchez is an accomplished finance professionals, who has been a successful CFO at Yellowstone incorporated CBS interactive and pay Pal she's come up to speed very quickly in his guidance. The outstanding Gionee organization that we have built until alan's eventual return welcome aboard Mary.

As usual I'll give you an overview of the third quarter operation in a sense of how we see the year in shaping up the Mary will go into a bit more financial detail before we take your questions.

Financially the third quarter was very successful as we continue to rebuild momentum after the pandemic locked down that started towards the end of Q1.

We reported.

Quarterly revenues of 11.4 million up 14% from 10 million a year ago, and net income of 566000 or five cents per share versus 446004 cents per share in the third quarter 2019.

Adjusted EBITDA increased 44% to 3.3 million this quarter compared to 2.3 million in Q3, a year ago again, demonstrating the leverage in our model.

In addition to these strong financial results were also quite excited to announce that we entered into a definitive agreement to acquire Leach LLC the developer of crime Center.

And leading investigator case management system.

Ill discuss our strategic rationale in the market opportunity. We believe this opens up for our business later in my prepared remarks.

Operationally, however, we did experience some headwinds and our ability to get boots on the ground for our gunshot detection deployments I want to stress that these delays were driven by local pandemic response in the social unrest that many of our police department customers were facing that required their focus attention.

Our teams are fully resourced in ready to drive deployments as opportunities present themselves.

As a result, our go like cadence of three square miles this quarter was below our expectations.

In addition, we recognized the attrition of six square miles due to customer budget pressures not a total of minus three square miles this quarter.

That attrition included the lots of Piscataway, New Jersey, and a reduction of coverage in Brockton, Massachusetts.

Cumulatively this quarter's mileage loss combined with the minimal attrition, we recognized in Q1 and zero attrition in Q2 totals to less than $500000 revenue attrition year to date would offset with net price increases on some renewals as.

As we previously stated we are ahead of plan in mitigating attrition and are now targeting a revenue impact for 2020 to be well below our previous estimate of approximately $2 million.

We're very pleased that exit Q3, with a very healthy number of new customer capture and existing customer expansion projects in process totaling over 50 square miles. These include seven square miles.

Recently taken life in October and November representing two new cities Fort Lauderdale in Cleveland.

We believe that we'll be able to take another 18 to 23 square miles like before year end totaling at least 25 square miles for Q4.

The combination of new city go lives and expansions of existing deployment underscores the attractiveness of Shotspotter flux, especially during challenging times like these with increased gun violence beliefs.

Police chiefs routinely describe our services quote critical essential in something or department cannot do without inquire.

Once an agency experience is the impact that they can have in responding to done crime and building community Trust using our technology and our recommended that the practices we become indispensable.

It's no surprise that the value proposition and customer success experience that we deliver has catapulted us into the world class category of net promoter score NPS with a 70% attainment. This year up from 53% last year. This is remarkable and it uniquely positions us as a trusted partner with.

Law enforcement agencies and their strategies to combat violent crime.

Moving beyond our core flex product. We also saw encouraging progress from Shotspotter could not formally missions, which continues to build momentum. We went live with two new customers in Q3, and now count a total of 10 connect customers that are producing approximately $500000 in annual recurring revenue.

We continue to extend connects feature set to transform it into one or more but everyday patrol management tool that directs the deployment of limited patrol resources to be more impactful at deterring crime without over policing are oversaturated disadvantaged neighborhoods as.

As a result, we have a strong and growing pipeline of connect prospects.

Connect makes a natural extension of our flex client relationships, but it can also serve as a standalone solution for police departments that do not have flux.

We hope to expand connects market penetration to new prospects beyond our flex installed base in the upcoming year and we believe we can double annual recurring revenue to over $1 million.

By the end of 2021.

The growing interest in connect underscore shotspotter platform strategy, because our experience has shown that our gunshot detection technology is only a part of how police departments handle violent gun related crime.

Our goal is to become a trusted platform provider not only have the tools to respond to incidents as they happen, but also the tools to prevent such crimes before they happen and then be able to fully investigate and resolve such crimes. After they occur.

We took the first step toward building this platform based suite of tools with our 2018 acquisition of the Hunch lab technology assets that had become shotspotter cannot.

Now with the signing of a definitive agreement to acquire leads we're adding the third element to our precision leasing platform what their investigative case management solution branded as crime Center.

Crime Center has been driving investigative keeps management with a major metropolitan Police Department in the North East for the last five years and has transformed how their detectives track catalog and sure evident in data for ongoing investigation.

The tool simplifies.

Collaboration between teams and communications across inter departmental disciplines.

It is digitally transform a traditionally paper based management system and the results are impressive.

Data solutions do work.

Crime Center is expected to increase Shotspotter estimated total law enforcement addressable market in the U.S. by more than 45% not including additional potential market expansion international.

Every law enforcement agency is required to investigate document and in power. The prosecution of alleged crimes and we believe crime center does it in a new and better ways.

On a standalone basis crime center opens up new selling opportunities to local police agencies that are beyond our typical targeted flux prospects. We also see opening up large new business opportunities with state and federal agencies.

Our job is now leverage our relationships at key police department and build market penetration for this new extension to Shotspotter platform.

We intend to execute a go to market playbook. Additionally, focused on existing shotspotter flux customers that are increasingly adopting the crime done Intel center prestigious model that is focused on investigating shootings in shooters well.

With the addition of crime center to our product lineup of control management and gunshot detection solutions Shotspotter will offer the only complete end to end precision we see platform that enables data driven prevention response and investigation and resolution crime we.

We believe that our precision policing platform vision is exactly what those agencies are looking for today.

Kind of intelligence led prevention minded immune.

Community focus policing that our platform enables isn't the future it's the present.

Gunshot detection helps police respond faster and give citizens confident the cops care about the safety of Atlas neighborhoods.

Officers have accurate real time data from us. So they can go into each call with a greater situational awareness and confidence in our patrol management solution lets departments identify hotspot early allocate resources wisely and reduce risk the preventative measures rather than oversaturated shows a force.

And now with the addition of a post incident case management product. We can now help law enforcement increase their case close rate, thereby protecting residents by taking a benders off the street and providing resolution to the victims of crime.

Before I turn it over to Barry Let me conclude with how we're thinking about year end 2020, and provide our thoughts about 2021.

We're going into Q4 with positive operating momentum and we're on track for a strong year incentive.

Given our visibility to recurring revenues and our strong renewal cadence.

We are narrowing and slightly increasing our guidance to 44.5 to 45 million for 2020.

The mid point increases to 44.8 million.

Any additional Q4 revenue attributed to leads post closing would likely surpass the top end of our 2020 revenue guidance.

For 2021, we're targeting revenues at $58 million to $60 million, including approximately $10 million or projected revenue from Leeds, putting the combined entity on a re accelerate at 30% plus year over year growth at the midpoint for 2021.

Okay Mary's ready to go into a little bit deeper into our results. So I'll look forward to taking your questions when she's done Mary over to you.

Thank you Ralph and good afternoon, everyone I fervently worst Alan Speedy recovery.

At the same time I'm very excited to join Ralph on the Shotspotter team, so waters mission of preventing and reducing gun violence, and leveraging data to make communities campuses and facilities safer, it's such a worthy one I'm really pleased to be a part of this effort.

So let me get started.

First I will highlight the quarter's results and then I will provide some financial details on the acquisition of <unk>, which we announced today.

Overall, we're pleased with the financial strength of the quarter.

Right well deployment of additional mild we achieved record revenue as well as solid net income and adjusted EBITDA.

Adjusted EBITDA growth in Q3 was particularly strong at 44%.

We had comp was all a bit as Ralph mentioned with COVID-19 still impacting our business.

Social unrest continuing to distract our public safety customers.

These headwinds exacerbated the normal Lumpiness and go Ludmila that we've mentioned in the past.

During Q3, we went live with just three new mild which includes small the point <unk> in Albuquerque, North Chicago, Nelson Mandela Bay and secure campus.

This was offset by the scatter Wayne New Jersey, not renewing three miles and Brockton, Massachusetts shrinking their footprint from five to two mile.

Oh did he appointed to budget reductions as the reason for the change.

We are pleased however that we could work with brought them to reduce rather than canceled their deployment.

So we ended the quarter down three miles.

Since the end of Q3, we have deployed southern mild which are part of 50 miles and projects that are at varying levels of readiness to go live.

We anticipate being able to deploy an additional 18 to 23 miles in the fourth quarter.

For a total of at least 25 miles in Q4.

We're very pleased that the programs, we implemented to reinforce our value proposition and maximize renewals appear to be paying off.

Despite downward pressure on municipal budget, we expect to end the year with attrition of approximately 1% down.

Down from the 5% we estimated last quarter.

Let me provide more details on the quarter.

Then I will share some thoughts around the balance of the year and provide a high level look at our expectations for 2021 as well as provide some thoughts on the financial impact of the lease acquisition.

Third quarter revenues were slightly ahead of expectations at 11.4 million, a 14% increase over the 10 million in the third quarter of 2019.

Although we had a net reduction in miles in the quarter revenue increased as our deployed miles are up year over year from 696 in Q3 of 29 team.

The 758.

End of Q3 2020.

Gross profit for the third quarter of 2000 26.4 million or 57% of revenue.

6 million or 60% of revenue for the prior year period.

Gross profit was impacted by two items.

First went.

[laughter] getaway didn't renew we had to write off the related equipment sales.

Again, we had a backlog of regular maintenance work that was delayed when COVID-19 restrictions may travel impossible.

As a result, we had to use more expensive resources to catch up.

Without these costs.

We estimate that gross margin would have been approximately 60%.

We expect our maintenance efforts to continue in Q4, but to a lesser extent.

We saw significant improvement in adjusted EBITDA for the third quarter, which was 3.3 million a 44% increase from the 2.3 million in the third quarter of 2019.

As a reminder, adjusted EBITDA is calculated by taking our GAAP net income and adding back interest taxes, depreciation amortization and stock based compensation.

Now turning to expenses.

Our operating expenses for the third quarter were 5.8 million or 51% of revenue versus 5.6 million or 56% of revenue in the third quarter of 2019.

We continue to gain operating leverage across the business.

In addition, with operation slowed we did benefit from lower travel expenses as compared to the prior period.

Breaking down our expenses.

Sales and marketing expenses for the third quarter were 2.4 million.

Or 21% of total revenue.

First is 2.4 million or 24% of total revenue for the prior year period.

Our sales and marketing teams continue to focus on building sales pipeline and expanding our marketing efforts.

Our sales program had a direct impact on increasing retention and minimizing attrition. So we couldn't be more pleased with our investment.

R&D expenses for the third quarter were 1.4 million or 12% of total revenue.

Parents 1.4 million or 14% of total revenue for the prior year period.

We continue to invest in increasing the functionality of our connect platform along with expanding our analysis capability as we evaluate applications for our data and forensic support and litigation.

C N expenses for the quarter were 2 million or 18% of total revenue.

Compared to 1.8 million or 18% of total revenue for the prior year period.

Our GAAP net income for the third quarter was 566000.

Or five cents per share based on 11 point.

4 million basic shares.

And five cents per share based on 11.7 million diluted weighted average shares outstanding.

This compares to a GAAP net income of 446000 or four cents per share based on 11.4 million basic shares and four cents per share based on 11.9 million diluted weighted average shares outstanding for the prior year period.

In Q3, we ended the quarter with 758 miles lot with approximately 770 miles under contract.

Deferred revenue at the end of the quarter was 20.7 million versus 22.4 million at the end of Q2 2020.

We ended the quarter with 28.7 million in cash and cash equivalents first.

First is 25.8 million at the end of Q2.

In Q3, we did not repurchase any shares and have $6.7 million remaining in the $15 million Board approved repurchase program, we announced in May of 2019.

We have no short or long term debt outstanding and as we discussed last quarter. In August 2020, we increased our available line of credit to $20 million to improve financial flexibility.

Now turning to the leaves acquisition.

Under the terms of the agreement, we will pay $17 million with $15 million in cash and 2 million shares of shot spotter common stock.

In addition, there was a potential earn out of up to $5 million over the next two years.

The deal is expected to close in November and is subject to customary closing condition.

Leaves LLC will become a wholly owned subsidiary of thoughts about it.

The company has been intentional in its efforts to extend shotspotter beyond acoustic gunsight detection to further enable precision policing.

With the acquisition of me, we add investigative case management software because the sweetest shop waters law enforcement Lisa.

This means we will be the only complete end to end platform solution that enables data driven prevention response, and no investigation of crime, providing capabilities not available to law enforcement today.

The acquisition of lead also opens up many new potential customer opportunities.

Which in turn expands our total addressable market.

In the market in the United States alone stuck Butters Pam grows by approximately $300 million as a result of the acquisition of late.

We anticipate that the acquisition will increase our top line growth.

So, let's turn to our outlook for Q4 and next year.

We are narrowing our full year 2020 revenue outlook and now expect revenue in the range of 44.5 million to 45 million per.

From our previous outlook of 43.5 million to 45.5 million.

Which result in slight increase to the midpoint of the range.

This revision reflects visibility into the timing of renewals and adding new miles in Q4.

At the midpoint of our guidance our revenue growth will be approximately 10% for the year.

This guidance excludes the potential contribution from late.

Depending on the timing of the close revenue generated by the acquisition of lead cool I was to exceed the high end of our range.

In the fourth quarter, we expect expenses will increase nominally in absolute dollars and we will again be profitable.

Our current expectation is that revenue for the full year 2021 would be in the range of 58 million to 60 million, including 10 million in revenue from the acquisition of late.

At the midpoint of our revenue guidance for both years, the combined business will grow at 32%.

And we expect to remain profitable in 2021 by taking advantage of the opportunities ahead of us even as we continue investing in the build out of our platform.

Now back to Ralph for some final thoughts and then we'll be happy to take your question.

Great. Thanks, Mary excellent job in conclusion, our pipeline remains strong domestically and is also increasing internationally.

That's part of the product suite has expanded beyond real time gunshot detection to include patrolled management would shotspotter connect and now also includes hosts incident investigation with a revenue producing case management solution as a result of our lease acquisition.

We're thrilled to be able to offer additional capabilities that can drive impact and bring about more effective community engagement through precision policing technology.

Our goal is to become a trusted platform solutions provider to public safety agencies around the globe.

We'll now take your questions.

We will now begin the question and answer session to ask a question when they press Star then one on your Touchtone phone.

If you are using a speakerphone please pick up your handset before pressing the keys Chile.

Withdraw your question. Please press Star then two Oh.

First question today comes from that how with William Blair.

Hey, guys. Thanks for taking my questions first just wanted to start off with a with a change in the in the White House anything we should think about in terms of impact on your business because of that.

Yeah, I think it's too early to tell I think a lot of our business is somewhat independent about what happens inside federally at the White House I mean, our engagements typically are at the state and local government level. They do oftentimes depend on funding from the federal resources, we talk.

Got in the past, but those those resources tend to be fairly set in place and doesn't really change very much from administration to administration or at least that's been our experience over the past 10 plus years.

Great and then on the EPS.

The acquisition.

Do you need to hire additional resources or make any changes to the sales force to go to market with this product and then when we think about that 10 million contribution for 2021 is that just revenue you're acquiring or is there also some sort of levels are anticipated to additional sales worked into that number.

Thanks.

Yeah, So with respect to leads on the commercial go to market of lead. So we're definitely planning on investing not only in sales and marketing resources, but we also believe we're going to need to invest a little bit more on the engineering front to really integrate that platform into the shotspotter. That's.

Solution into the Shotspotter platform, so that will be an area combine that will definitely be investing there.

Well with respect to the $10 million up you can think about leads a revenue we have very good visibility on that $10 million by the way and it comprises really three buckets of revenue. There is recurring revenue base on the maintenance and support of the crime Center solution at this large metropolitan agency, we spoke about there.

Also some I teach services or professional services that leads US provides that metropolitan Police Department and we also expect to have some modest revenue contribution from the commercial sale of lead outside of that particular agency.

Great. Thanks.

Thanks, guys appreciate it.

Our next question comes from Charlie or Lake with Baird.

Hey, guys. Thanks for taking the question I'm actually just following up on that last one on Lee Congrats on that acquisition I'm. Just wondering you know what's the decision to buy them driven by you know your existing customers asking for a solution like that or or is this more in a your vision for the market and then I also love some color if you're able to provide it.

How fast they are growing revenue currently and the level of profitability on a standalone basis. Thanks.

Sure. So this is ralph and not marry a jump jump in of course I'm. So we've always viewed this as a very attractive emerging opportunity.

No we've been working very closely with a number of agencies that are adopting the Sci direct model, which is the crime gun Intel Center model, where you're investigating shooting event and shooters and as powerful as that process is the ceded process, we've observed how frustrating and challenging it could be for agencies really to embrace it fully in <unk>.

Automated in digital away a lot of their profit feeds where I would say stove piped and manual to a large degree. So I think if you paid attention to what al and I have talked about previously on a number of calls we talked about how we thought about kind of tuck in acquisitions and extensions of the platform I think we tend to.

Very much to the idea that we're really interested in terms of what happens after a shotspotter alert gets a cop two a dot how does that investigation process kick off and the thing that we were really excited about with leases in a very similar fashion to our hunch lab.

Acquisition, we shared a common customer so it's very easy the diligence the efficacy of the crime Center solution within this particular agency and we also share common values, which is very important for us being its purpose driven as we have so we think there's a lot of opportunity I think they've done a really good.

Good job I think on the technology platform, I think where we can add some some sizzle. If you will is our relationships and how we can take this commercial product to market.

Given our relationship so we're really quite excited about it with respect to revenue, where we're not really speaking on that right now we're in the process of getting their financials audited and so once those financials become audit and of course, I think will be a much more I guess transparent without what what's there in terms of rate.

Avenue, but I can't emphasize enough were were pretty strong on our visibility to the $10 million of guidance that we put into our 2021 I know Mary would you add anything to that or do you have any other thoughts.

No I think you got it once we have their GAAP revenues on it it will be able to provide a lot more color on you know not only the revenue, but more within their business model.

Great. Thanks, and if I can just squeeze one more in there I'm just looking for an update on the recent price increases and how they've been received by existing customers. It seems like you know the attrition levels better than anticipated, which is good how should we think about attrition going forward, especially given the price increases.

Yes, I think we've done.

Yes, I'm sorry go ahead sorry.

So at the.

Beginning of the year or incident at the end of last quarter, we talked about expecting attrition of up to 5% as we have less visibility as we move through the.

The impacts of coal bed, you can see now that we're expecting our attrition levels to be much less and in that regard what we see is that our attrition none of our price increases is yielding for us.

A positive outcome, that's well below the 5% that we had previously.

Highlighted so you know overall, our customers aren't looking for price increases, but what we're finding is that we're able to incorporate them and still retain the business because our attrition levels happened you know been impacted dramatically as a result, you want to add something wrong.

No I think you answered it perfectly I think well just maybe I can at this is that there's two types of price increases there is price increases that are related to renewals and then there's probably because there is the price increase that we implemented as a part of new miles going forward going from $65000 per square mile per year to $70000 per square mile per year.

And we haven't seen much pushback with respect to to that our bookings. This year are somewhat backend loaded unfortunately, but we've seen a very strong uptick in bookings activities and are looking forward to kind of talking about some of those booking activities going live in Q4 and all.

So Q1 of next year.

Great. Thank you.

Our next question comes from Joseph Osha with JMP Securities.

[noise] Oh, Hello, there first and foremost my on my best wishes to our I O I hope it recovers quick wit.

Hi couple of questions for you first just backing out the 10 billion for next year that implies kind of mid point to mid point, you know kinda kind of 12% your organic growth rate for the existing business.

Is that something that you regard as kind of a reasonable marker going border or do you believe that that number is still the depressed relative to what the potential of the of the flex franchises.

Do you want to take that Mary or do you want me to take it.

Sure sure I can take it.

So ask me you don't keep in mind this year.

We are bookings earlier in the year, we're not as significant as a result of a.

COVID-19, and so you know given the nature of our business a recurring revenue business or you don't see the level of growth in it.

2021, so that what we book in 2021 has.

How much more nominal impact.

On our growth and so therefore, what you're going to see is that there's still opportunity, but it won't be as significant in light of the bookings we had this year.

Okay. So that doesn't make sense you would argue that once we we kind of work through this period of disruption that there. There is a case to be made for a return to a higher level of organic growth in the flex business.

Yes, I would.

Yeah, and I would say I would say one of the things that would be going on underneath the covers would ads international emissions contribute more to the revenue growth that's going to basically juice the growth as well because there are growing much faster, albeit on a much smaller levels, but they are growing much faster and so as those revenues begin.

Accumulate they'll a blend into a overall a healthy growth rate, we believe and I'll just add to that you know timing does matter for us I think this year. It was really challenging to drive for growth given the fact that we only I think booked nine square miles and.

Q1, and I think 26 in Q2 that only booking nine square miles in Q1 kind of sets the table for what your growth is we have really good visibility we believe into not only what we're booking in Q4, but things that weren't able to book in Q4 excuse me go live in Q4, but as well.

We are able to go live on a healthy number of miles hopefully in Q1, and then Q2 that makes a very big difference to the GAAP revenue number.

It's material got miles in Q1 are much more relevant to GAAP revenue, then maybe more miles potentially late in Q4.

Sure you know that in calendar <unk>.

That makes sense, if I look at Leeds. It's interesting you you all have gone from sort of a gun shot detection franchise to.

A I'll call to your computer aided dispatch franchise to now sort of trying to push more into the precinct and it seems to me, though correct me if I'm wrong that that the unifying theme behind all of this is still gun crime is that correct and if so can we expect to see this sort of footprint continue.

To build out or around that theme I'm I'm trying to just sort of put the lead steel and strategic context.

Yeah, I think you're on the right track, but I would just baby gently push back in terms of not being to limit. It to just look at gun data gunfire data I would say that our our franchise is really about taking data and translating that data into actionable processed meats. So our original franchise.

Of course is the gunshot data that were producing a as a part of Shotspotter flux right, but then when we moved into a missions now shotspotter connect we're not only taking the shotspotter data, but we're taking RMS data were taking whether data, we're taking a location of schools and liquor stores and all that stuff data and we're putting that.

Into a data model and using data science to basically create a I'll describe it as a ways and petrol right. So it was just taking that machine you know taking that data in applying a lot of machine sales are or data science to it and making a patrol officers much more impactful.

For the limited time that they are in these communities. So it's really about having impact without over policing over saturating neighborhoods I think in the same true. If you look at the extension and case management because we've been so involved on the front end of CJ, we're getting cost the dots, where they're having those interviews recovering physical forensic evidence in the form.

Shell casings and the like but then we lost a lot of visibility in terms of what happens to the case and it was challenging for a lot of agencies frankly to kind of take that data and integrate it and make make detectives very successful or they had the opportunity to be much more successful I would say if they could digitized and automate a that data.

Which is not only shotspotter data, but also forensic data that they're recovering as well as other RMS data in CAD data et cetera.

What's so exciting for us in this regard is that underneath even all the data relationships is our and we can't overemphasize. This enough. We have very strong relationship capital with agencies. We are truly a trusted partner that's reflected in our net promoter score, 70%, which I'm excited extraordinarily.

Out of the way the team has been able to kind of come together and have that kind of impact even in the face of a pandemic and deepen the police et cetera. The police departments really do rely on us and trust us. So we're in a great position, we believe to bring kind of new capabilities to bear and we've proven ourselves in terms of helping.

Agencies be much more effective so they are much more willing to give us give a space to be able to recommend new ways of doing things were just you know just leaders in that regard so I.

I hope, we can I hope, we get folks to agree or see US go beyond you know gunshot detection to be something much more broader around you know precision policing to drive impact without over policing.

Okay. Thank you and then one quick final one like any good analyst Im going to ask a question asked earlier, a different way and see if I can answer that looking at Leeds understanding that you can't say that much yet would it be fair to assume that its probably kind of a higher gross margin higher opex model relative to your existing business.

Thank you.

Yeah be patient with us we're going to share all that in due course.

Okay. Thank you.

Thank you.

As a reminder, if you have a question. Please press Star then one to join our Q.

Next question comes from Jeremy Hamblin, with Craig Hallum Capital Group.

Thank you and Oh also pass along my well wishes to Alan.

I wanted to come back to the 50 miles under development and just make sure I understood that a little bit better first is that is that kind of a firm number where you have a deal signed for 50, new miles in development that likely would be deployed over the between Q4 and Q1.

And then include.

Included within that 50, new miles what portion of it would be a international.

So I'll answer that question. So it's a mix of deals that are booked.

And deals that we believe are highly confident and getting above including a couple of expansions, where we have ongoing relationships with the customers and so they're to be trusted and one of the things that we're able to do in support of those customers is to kind of get going sooner before the deal.

Actually gets booked and kind of treat treating it much more as a parallel process as opposed to a serial process. So we can get them up and running sooner versus later and that's particularly important in a couple of situations, where we're looking at a fairly sizeable expansions about cities that are really dealing with some very significant.

And uptick in a gun violence.

And those miles are a 100% 50 50 miles that we're talking about are 100% domestic.

So international would be on top of that.

Okay, great, but I'm on the international side, then we're not quite there on the visibility.

And timing and I'm sure that there are still a correct.

Some spokes in the fire Okay, Yeah, and then just coming on the expense side of the equation. You did have you help sales and marketing flat year over year on your G.N.A. I'm was also only up modestly is the primary driver of that just due to the lower travel costs.

Has there been anything else that's been changed from an infrastructure perspective, due to co bid or budget tightening at all that.

Just that.

That number those numbers could be a little bit lower even as we get into 21 and the end of this year and perhaps there's a little bit more travel.

So I'll take that one our numbers within our expense structure are relatively consistent period over period as you highlighted a as we move forward.

We'll see those numbers stayed pretty consistent although there might be a little more DNA costs associated with things like the.

The acquisition and so forth the costs, where you'll see the most changes are really in our cost of sales line item versus our.

<unk> expense line items as you know the business continues to grow and so forth.

Got it so sales, we expect sales and marketing you know, we're going to maintain that span.

We're focused on you know keep in mind, our sales are focused on new business as well as maintaining our current business.

Marketing side of the house, it's pretty consistent and the DNA Weve, probably we will not increase our travel to any great degree until we see the restrictions lifted and so you know right now we're at a level of travel that really is tour.

Essential travel in order to enable deployment.

Anything that can be done remotely is being.

At this point and we don't expect that to really ease up through the end of the year.

And I would I would just add structurally it's interesting that I'll be very thankful and grateful when.

Things get better from a pandemic that point of view, but I think it's fair to say that we've we've learned that we can do some things that don't require someone jumping on a plane and traveling somewhere primarily in our customer success organization, which been that's been conducting a number of our annual recount account reviews, which we think is pretty critical to driving our net promoter score.

Our process, we've been doing it buys zoom and its worked really really really well and I think I would also add too, but correct me if I'm wrong Mary here too, but I think there was some reallocation of sales.

Sales and marketing expenses that had to do with the formalization of the customer success organization. That's now moved up a portion of that a significant portion that moved up in the Cogs.

Yeah and that happened at the beginning of the year. So that should be you know consistent from Q1 through Q4 of this year so that will continue.

Yeah, Hi, Ricky I was comparing it to compare it to 2019 when you look at it kind of year over year Q3 to Q3 19 mid Q3 20, the the customer success organization within sales and marketing.

Yes, it wasn't even a moved up into.

Comps in Q4 as well.

The person I want I guess I wanted to just ask a couple of questions also on the Leeds deal and just make sure I heard you did the $22 million a acquisition costs. You said, that's a I did I hear 20 million in cash and $2 million in stock.

That's correct, but keep in mind that 5 million of the cash is associated with an earn out.

Got it okay. So the $5 million is not on top of a 22.

Correct No Ah Okay, and then you know if I wanted to I know you haven't obviously audited financials it.

It does sound like a decent portion of their business is that what kind of customer concentration risk do they have here it sounds like maybe more than half of their revenues. If it's tied to one agency that they're serving any color that you could share on that.

Yes, I think it is fair to say a substantial I would say a substantial portion of the revenues are concentrated into one customer relationship yes.

Okay, and then and then in terms of the $10 million.

Our guide for next year I know it sounds like you have great visibility on that does that assume any growth.

For the fourth of the leads business next year.

Yeah, I think you're going to have toned down numbers.

Yeah.

I'm, sorry, yes, sorry.

Once we have the full GAAP numbers will be better equipped to answer that question.

So it's a little premature to say just yet.

Got it okay. Thank you so much for taking the questions and best of luck.

Thank you. Thank you.

Our next question comes from Jeff Kessler with Imperial capital.

Thank you it's good to be back on the call and I also wish Alan a quick recovery. It's it's it's because the tough a tough last six months.

One of the things that I'm interested in is is given the fact that youre that leads is mainly focused on maybe focused on one the one customer right now.

How have you and this was this helps me with trying to put out a year end a.

A year end planner for different tabs and various various industries to that but I do from a year and a security report how do you see given that it is this a is this a good a good beta test how is this going to show how the Tam is given that you can.

See it on a in there you can see it on the <unk> research or marketing study, obviously, but what types of evidence have you gotten in the real world and in talking to the people who.

Or looking at what you're doing what you may do with leads in terms of integrating into your company that gives you the.

It gives you the a little closer to the optimism that the Tam goes up to two that much and increases your potential market that much.

Yeah. So Jeff this is Ralph so thank you for that question I think is very straightforward I think with respect to gunshot detection or even our shotspotter admission flash connect solution. Those were basically kind of new capabilities that were really kind of training or getting police departments to think about.

When things in a different way so I mean acoustic gunshot detection, you know who would have sunk so to speak with respect to case management that that is something that every police department has to do in some kind of form and it's just a question of whether or not they do need to consider automating there not to be much more effective so it's.

Much more of a category or thing as opposed to us kind of creating a new category gunshot detection was a category that we created it didn't exist and told there was shotspotter.

You know full stop I think with respect to control management I think the same thing could be said as well that that wasn't anything or a category and we're now in the process of making it a category case management is a category no question about it every police department has the obligation to investigate.

Gather evidence and hopefully it would lead to a successful prosecution our work with a number of agencies just around the very narrow specific investigation of gun crime showed us how frustrating in manual and stove pipes.

That process can be so case in point.

If you don't have an integrated solution to do case management someone investigating a gun crime and then you have another crew of detectives or maybe investigating armed robbery right. Those two things could be potentially related they could lever off of what you want to.

They could leverage each other's investigative process fees, if they had the ability to have all that data in one place and be able to link it and share et cetera, and collaborate it's virtually impossible to do that if you're any kind of agency size, where the number of detectives in a number of case, you can't do that with pen and paper.

Aren't you can but then your case closure rate is going to be 30% or 40% I mean, if you want to achieve very high case closure rates you have to figure out how to automate that you have to figure out how to collaborate with other investigations and then there's a big productivity save with respect to how you package all this.

To the most important step in the investigation that's actually after you've identified made arrest now you want to prosecute being able to turn that package over to a D.A. to have better cases with better outcome is critically important I mean, there's a there's a greenfield opportunity here, we believe to make that process a lot.

Got more effective and the nice thing about the lead the acquisition is we could see the impact that that crime Center solution has had in this one particular agency that has a version of it and this agency is known to do a pretty good job with respect to their case closure rates and I said, yes.

And with regard to with me with regard to.

Pressure on local budgets.

Yeah, obviously, it's it it's hard to see what goes on in the a and the deliberations that are the ppas that precede somewhere like this go away or Brockton cutting back on you.

What is your two obviously that we're going into a tougher period before it's going to get better.

Are you able are you able to have any visibility into this just by way of of tough talking to your existing customers.

Getting a feel for what their level of fear is in terms of being able to continue funding.

Or being able to or needing to cut back a little bit I mean are these the types of things that you can you can always never predict 100%, but can you predict this with 25%, 30%, obviously bounces around but you're obviously in touch with your existing customers, particularly some of the smaller towns.

In a tough tough budgetary period.

Yeah. So we're obviously not really good forecasters of it because you know earlier. This year. We you know we estimate a $2 million would attrition and now it looks like it's going to be close to $500000. So I would say our estimation skills were maybe a little bit off and what we learned in that process is that you know shotspotter is a lot more.

Critical and sticky than even we would have thought now that being said you said something very important that I would just double down or double click on and emphasize on is that although we had great success in 2020, we're not out of the woods yet I mean, we have to go into 2021 I wouldn't sit here, we don't have a number today, but you know the fact that we could kinda back.

Average attrition to be like $500000 in 2021 would not be something that I think we would necessarily sign up for us because we're you know this is a tough environment and we're we're not out of the woods, Yeah, Theres still going to continue to be budget pressure. Some of that budget pressure is going to be offset by hopefully some stimulus money.

From time to time and what we also found in our work with agencies is that when they're being asked to cut their budgets and the ones are being asked to cut their budget significantly they can't get from here to there fooling around with you know cutting out Shotspotter, you know $200000 and $300000 I mean, they're they're being asked to cut millions of dollars out of there but.

Just in the vast majority of the police departments budget is head count so the only way they can get there is by reducing head count, which then kind of creates a circular effect that says hey look I have reductions in headcount, but its not like their mandate shrinks along when it's not like they say, okay. We're cutting your head count you are cutting headcount by 20.

<unk> percent, you can make 20% less arrests or follow up on 20% less 911 call I mean that that isn't the case. So technology has to be a part of the solution going forward to help these agencies continue to do more with less and we believe precision policing.

So a critically important to police departments, even in the face of a budget cuts. So we're really constructive but we're also very realistic as well to recognize that you know you know a pandemic induced a budget pressures are real and it's not like they're going to go away or at the.

End of this year into 2021, so we have a we have a lot of work to do and we'll continue to work really hard to put up really great.

You know low attrition numbers, it's possible, but it's still going to be a bit of a challenge okay.

If I could just quickly throw a a last question I know you mentioned that the addition of leads gives you essentially an integration that nobody else has obviously, there's some <unk>. Once you start getting into that area of leaves of case management you begin to start knocking heads with some other companies obviously.

Super.

Figuring out, which you know companies they are pretty quickly, but I'm wondering if you know if you have you have that what gives you the confidence that the area that you were the three parts of your of your plan here that you were in is going to distinguish you.

Yes.

It's unique in the industry and absolutely. The your value proposition is just absolutely needed. So that you can keep the margins and don't have to start competing on perhaps on price. When it comes to the leads part of the equation. If leads is ultimately completely integrated into the company its.

Clearly a different a different either but some other companies are going to see what we can do that too.

Sure. So I would say, we have a very differentiated and unique value proposition as it relates to.

The specific investigations of violent crime gun crime, yeah, just because of what we're doing with shots by reflects so that that goes without saying I think the other differentiation that this.

Acquisition provides us is the.

Long term experience.

A pretty smart agency using this over five years I mean, this thing has really been honed to incorporate a number of features and watch how those features are being used to drive higher case closure rates. That's real world. It's not kind of experimental is not a product managers sitting back.

They're on a whiteboard trying to figure it out I mean this thing is ground tests that with a with the agency I think we that gives us a little bit of a running start I would say and where you know we think by the way the way that we go to market and the relationships that we formed in our existing kind of core business are going to be.

Be quite leverageable assets kind of going forward to carve out a reasonable part of this market, but I think I would acknowledge your point that there are there is competition out there, which is very different than maybe what we know and gunshot detection, but I would say most of the competition frankly is.

Manual paper based processes, and that's really straightforward to compete against those so we're excited right great. Thank you. Thank you very much and again I'm I'm glad you did I'm glad to be back [laughter] with you guys again.

Thank you.

Thank you.

Okay.

Our next question comes from Mike Latimore with Northland capital.

Hi, This is on behalf of Michael after more can you provide some color on the opportunities that you will see in the verticals such as schools and corporates.

Yes, so if Mary I'll I'll take that I apologize, but so really quite interesting. We this past quarter Q3, we did a light up a secure campus deployment, we've had some inbound activity from.

More corporate campus interest a pretty interesting powerful analogy is as I think a lot of us it's kinda witness a lot of the kind of social unrest that's taken place over the past few months and you have individuals homeowners in the like kind of going out and buying guns.

To protect themselves you also have kinda corporations kind of rethinking their security apparatus and platform and so we've had some interesting inbounds from.

Some corporate entities that might have liked distributed assets out in the world and are Sunni I'll be United States, primarily and often times. These you know fees. These assets. These physical locations are in areas that are maybe transitional areas that could experience maybe not ongoing persistent gun.

Right, but you know gun crime in and around their particular campus locations and the like so we're encouraged is still a bit early but we're encouraged about the interest and I'm, hoping we'll be able to share more on that in future earnings calls.

Alright, alright, and Oh, What'd bookings Sunday biplane like how or what percentage often just coming from new wins on how much is coming from the upsells.

Yeah, I don't think we get down to that level of detail do we I mean, okay.

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Alright, alright fine.

Button. Thank you. Thank you. Thank you.

This concludes our question and answer session. If your question was not taken you may contact shot spotters Investor relations team by Emailing, <unk> T.I. Gateway I, our dotcom I'd now like to turn the call back over to Mr. Clarke for his closing remarks.

Awesome. Thank you so much and really appreciate everyone. Joining us today. We appreciate your support and then just again another word about Alan I mean, he's doing extremely well and he wants you to know that he is very excited to kind of come back he's involved who want to me to share with you all that he was involved in the accident, but his recovery is remarkable.

Paul and Mary is doing a great job in the meantime, but we're gonna be excited to get that Alan back.

As soon as he is able so thank you all very much again, and we will be chatting soon.

The conference is now concluded. Thank you for attending today's presentation you may now disconnect.