SoundThinking Inc. Q1 2023 Earnings Call
Good afternoon, and welcome to sign the thinking.
First quarter 2023 conference call.
My name is Ali and I will be your operator for today's call.
Joining us are sound thinking 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 seven thinking 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.
May cause the actual results to differ materially from those stated or implied by those statements.
Certain of these risks and assumptions are discussed in sudden thinking SEC filings, including its registration statement on form S. Four.
These forward looking statements reflect management's beliefs estimates and predictions as of the date of this live broadcast.
<unk> 2023.
Seven thinking undertakes no obligation to revise or update any forward looking statements to reflect events or circumstances.
After the date of this call.
Finally, I would like to remind everyone that this call will be recorded and made available for replay via.
A link available in the Investor Relations section of the company's website.
Our thoughts so I'm thinking dot com.
I would now like to turn the call over to Simon thinking CEO .
Ralph Clark Sir. Please proceed good afternoon, and thank you for joining our Q1 2023 quarterly conference call and our first public earnings called at sound thinking we're very excited about our rebranding effort and the positive response, we've seen from prospects clients partners employees and many.
One of you our investors.
As I pointed out in my recent Investor letter, our corporate rebrand is an intentional effort to signal. The next phase of our growth journey as a platform play that not only includes the world's leading acoustic gunshot detection offering, but also other complementary and adjacent solutions as well.
The safety Smart platform is focused on digitizing and automating manual law enforcement processes and converting data into actionable intelligence.
Digital transformation will help accelerate law enforcement agencies of all sizes there'd be more efficient effective and equitable and co producing public safety outcomes.
We believe the opportunity remains extremely attractive and significantly underpenetrated.
And our go to market strength as a trusted adviser uniquely positions us to bring additional relevant capabilities that addresses the pressing needs of law enforcement agencies throughout the world not only today, but in the future.
Turning to financial performance. Our Q1 2023 revenues were mostly in line with our expectations with $26 million compared to Q1, 2022 elevated revenue of $21 $2 million due to some material catch up revenue from our leads division.
Adjusted EBITDA was $2 9 million or 14% of revenues compared to $4 5 million or 21% of revenues for Q1 2022.
Again, this was primarily driven by the catch up revenue from leads in Q1, 2022 that mostly flowed to the bottom line.
We went live and six new cities and delivered eight expansion projects with the Shotspotter solution this quarter.
This included approximately 22 miles of Detroit going live within the quarter, placing them as our third largest shotspotter deployment with approximately 30 square miles total.
We currently have over 80 contracted miles represented by 'twenty two projects in the process of being deployed over the next three months plus including 22 miles of the recently contracted stucco county, and a modest expansion in Cape Town South Africa.
Speaking of Cape Town, South Africa, we held a very successful press conference with the mayor he'll Lewis and Alderman J P. Smith, who is responsible for the security portfolio for the city of Cape Town and as fate would have it during the Q&A session. A shotspotter alert came in where they assemble pressed had the opportunity to.
To view live stream CCTV footage showing the tactical response to the scene within two minutes of the alert.
Beyond seen investigation led to to arrest and we subsequently learned that those arrested individuals' where on the land for prior murder charges.
We believe this extremely positive showing and press coverage has created strong momentum to drive discussions around a much needed and larger expansion opportunity in Cape town.
Just yesterday, the mayor of Cape Town publicly presented his budget request that allocates more budget dollars for additional shotspotter expansions along with other technologies that will help improve public safety.
We continue to build a strong pipeline of our investigative solutions crime tracer encase builder that we feel very good about.
The large department of corrections opportunity that we have discussed in previous calls has made another substantial positive step forward.
With a statement of work cloud agreement and service level agreement contract elements, all having been formally negotiated and documented.
This is expected to be a $16 million five year deal that includes professional services work and delivery along with an annual subscription and support fees.
Given the size and complexity of the deal we have been very intentional on ensuring the expectations and risk allocation, we're fairly negotiated and properly documented.
The proposed contract is now in the process of getting formally registered within the office of budget and management OMB as a part of this particular customer's procurement process.
We hope to be able to publicly announce the execution of this agreement by our Q2 2023 earnings call.
We're also very pleased to report that we had no recorded attrition. Despite the significant press coverage of the recent Chicago mayoral election that led to the election of Brandon Johnson.
<unk> Johnson publicly ran on a progressive platform that specifically called for the canceling of the Shotspotter contract.
Our shotspotter deployment represents $8 million of annual recurring revenue and the contract was recently extended through mid February of 2024 under our current mayor lifeboats administration.
We've taken measured steps to shore up our support among the city Council the Chicago Police Department and residents and we're encouraged with the more recent public position of Merrill Lynch Johnson, where he proper is a view that quote there might be better uses for funds currently going to shotspotter.
This pivots the public discourse around the value discussion and we're well equipped and experience and having to articulate and demonstrate our value to date, we've been very successful on this front, which as indicated by our high overall retention rate.
That being said, we felt we needed to adjust for a potential risk of cancellation of the contract before the end of its contracted term in February of 2024.
That adjustment combined with some recent contract renewal and payment issues in Puerto Rico have led us to reduce our full year revenue guidance to the range of $92 million to $94 million.
We still expect that our full year adjusted EBITDA margin will be in the range of 24% to 26% of revenues.
And with that let me turn the call over to Alan.
Thank you Ralph.
Pleased with our performance in the first quarter as Ralph mentioned this quarter. We went live with our Shotspotter gunshot detection solution is six new cities <unk>.
Band it ourselves, but our coverage in seven cities and one University. We also added two new <unk> customers and added a new state agency for our prime creative solution.
Revenue is relatively flat from Q4 to Q1, which is partially explained by some significant catch up revenue related to a couple of renewals in the fourth quarter of 2022.
We had no attrition this quarter that said, we are experiencing a delay in our renewal with Puerto Rico that ended at the end of 2022.
While we expect or are they able to ultimately get awarded the annual revenue of the Puerto Rico deployment is over $2 million and our revenue will be negatively affected if they are not permitted to start the new renewal on the original due date.
Let me provide more details on the quarter and then I will share some thoughts around the balance of the year versus.
First quarter revenues were slightly behind expectations at $26 million.
Revenue is less in Q1 of 2022, primarily due to onetime catch up of approximately $2 4 million from our lead subsidiary that was recognized in Q1 of 2022 versus the expected Q4 of 2021.
Without that one time increase our revenue for the first quarter of last year would have been approximately $18 $8 million.
Resulting in this year's revenue would be approximately 10% higher than Q1 of 2022.
The addition of $2 $4 million of revenue in Q1 of last year also positively affected gross margin net income and adjusted EBITDA.
As it had only about $600000 of associated costs, you will see those impacts as they cover the rest of this year so by their tools versus Q1 of last year.
Gross profit for the first quarter of 2023 was $11 3 million or 55% of revenue versus $12 9 million or 61% of revenue for the prior year period.
As noted gross margin for the first quarter of 2022 benefited from the additional $2 4 million in revenue.
We expect gross margin to improve throughout the rest of this year.
Our adjusted EBITDA for the first quarter of 2023 was $2 $9 million down from $4 5 million.
The first quarter of 2022.
As a reminder, adjusted EBITDA, a non-GAAP financial measure is calculated by taking our GAAP net income and adding back interest income income taxes depreciation and amortization.
Stock based compensation expenses and acquisition related expenses.
Turning to our expenses, our operating expenses for the first quarter were $13 1 million or 64% of revenues.
Versus $12 5 million or 59% of revenues in the first quarter of 2022.
Operating expenses increases were primarily related to higher headcount and employee related costs.
Breaking down our expenses sales and marketing expense for the first quarter was $5 8 million or 28% of total revenue.
Versus $5 6 million or 26% of total revenue for the prior year period.
Our sales and marketing teams continue to build our sales pipeline and expand our marketing efforts. We also continue to focus on maintaining high levels of customer satisfaction, which helps keep our attrition rates low.
Our R&D expenses for the first quarter were $2 7 million or 13% of total revenue versus $2 6 million or 12% of total revenue for the prior year period.
We continue to invest in increasing the functionality of all of our products.
G&A expenses for the quarter were $4 6 million or 22% of total revenue.
Compared to $4 $3 million or 20% of total revenue for the prior year period.
G&A expenses were higher due to head count increase and other employee related costs.
We expect our G&A expenses will continue to increase in absolute dollars as the company grows.
Our adjusted net loss for the first quarter was $1 8 million or <unk> 15 per share loss based on $12 3 million basic and diluted weighted average shares outstanding.
This compares to adjusted net income of $488000 or <unk> <unk> per share based on $12 2 million basic and $12 3 million diluted weighted average shares outstanding for the prior year period.
Adjusted net income a non-GAAP financial measure is calculated by taking our GAAP net income and adding back acquisition related expenses.
When accounting for acquisition related expenses, our GAAP net income was $387000 or <unk> <unk> per share basic and diluted for last year's quarter.
Deferred revenue at the ended the quarter was $37 $5 million versus $43 7 million at the end of the fourth quarter of 2022.
The decrease was primarily related to the timing of renewals and related billings.
We ended the quarter with $5 1 million in cash and cash equivalents versus $10 5 million at the end of the fourth quarter of 2022.
The decrease is primarily related to $1 $5 million paid to the lead sellers for achievement of their 2022 earn out.
And payment of 2022 company bonuses during the quarter.
During the first quarter, we also repurchased 35369 of our shares at an average price of $35 43.
We're approximately $1 3 million.
As of today, we have approximately $10 million in cash.
We have no short or long term debt outstanding and as previously discussed we possess approximately $25 million available in our line of credit if ever needed.
Turning to our full year 2023 outlook, we are reducing our full year 2023 revenue guidance to a range of 92 million to $94 million.
Representing approximately 15% year over year growth.
At the midpoint compared to 2022.
Primarily related to the delay in our Shotspotter renewal with Puerto Rico, and also factoring in any potential risk of a change to our Chicago contract before the current end date of February 2024.
We are reaffirming our expectation for adjusted EBITDA to be approximately 24% to 26% of forecasted revenue in 2023.
Now back to Ralph for some final thoughts and then we'll be happy to take your questions.
Thank you Alan we want to publicly acknowledge the tragic sacrifice of Chicago Police Officer Arianna Preston.
Our thoughts and prayers go out to her family and the Chicago Police Department.
She wanted to help make the world a better place and do work that matters.
We will now open it up for your questions.
Thank you at this time, we will be conducting a question and answer session.
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One moment, please while we poll for questions.
Thank you.
Our first question is coming from Brian Rotenberg with Imperial capital.
Sir you May proceed.
Yes, thank you very much.
Talk about adjusted EBITDA being.
Maintained in the in the twenties.
Is there something that happened in the first quarter.
Where are you going to make up.
<unk> core are that underperformance in terms of adjusted EBITDA in the second third and fourth quarters.
To make up for that Delta.
Yes. This is Alan I'll go ahead and start and then Ralph you can have as well well we have had a little bit of reduction in terms of the first quarter revenue related to Puerto Rico that is still.
Expansion is still costing us in terms of the depreciation.
We hope the hopefully that will get improved as we go forward. The other thing, though is we've already added cost significantly to our sales and marketing R&D and G&A.
You know already through the first quarter, we're not going to need to have a significant amount of any of that for the rest of the year. So as revenue continues to go up as we hit closer to our revenue guidance. The operating expenses, we're gonna be relative.
Relatively flat, although up a little bit all of that's going to increase our adjusted EBITDA.
Great will it be weighted then just a follow on weighted to the third and fourth quarters are we going to see a dramatically improvement in second quarter versus first quarter, how should we be thinking about that adjusted EBITDA margin expansion.
Yeah, Great question. It is more weighted in third and fourth quarter.
Primarily although we are.
Going live in a lot of miles that's going to help us. The majority of the revenue increase is most likely going to come in third and fourth quarter, especially as we get the department of corrections contract that we'll talk about potentially more in the Q&A.
Finally exercised and are ramping up.
Great. Thank you very much.
Thank you. Our next question is coming from Richard Baldry with Roth and can you May proceed.
Thanks, maybe to follow up on that then on the department of Corrections deal as it sits today can you talk about the types of deliverables timing deployment cycles things like that that would help us understand sort of what that revenue recognition would look like whether it's.
Alright equal weighted annually front end loaded on implementation backend loaded on recognition just so that we have an idea of how you expect that to play out over a multiyear period.
Yeah.
You want to take that one.
Yeah sure. So this is Alan.
I guess the good news is as we've said the last couple of quarters. The total amount has continued to increase we know that at this point.
The contract will be approximately $16 million, which is the highest we've mentioned before out of that there is approximately $6 million of that a little bit more than 6 million, which is professional services.
Five year contracts, but those professional services, we expect will be complete within the first probably two to two and a half years. So that'll ramp up relatively quickly we think that will add a significant amount of revenue for us in Q3 and Q4, the remaining balance of the $16 million, which is basically now.
Million dollars as a subscription.
That is a little lower in year, one and then almost doubles in year, two three and four and five.
Great.
On the Puerto Rico renewal, you've had a history of sometimes these things push out or is there anything unusual about this renewal negotiation process that makes you think.
More risky than others or is it really just a matter of timing and getting right documents in the right place.
Yeah.
Yes. This is Rob I can take that one.
So you want to go out go ahead Ralph.
So I think this does represent a slightly different.
Risk profile because in this particular case the.
Comments that are being made by by the customer or that even if they were to renew and we have every expectation that they will renew at some point in time, they might have a difficult time kind of going back retro to compensate us for the services, we delivered to date and so that's the reason that were.
Making the adjustment that we are typically customers, even though they might renew late we always are able to kind of go back in.
And start the term at the point in time.
The contract and that even though they renewed three or four months later and Thats, what kind of represents some of that lumpy catch up revenue from time to time, we experience, we're going to be negotiating pretty hard with Puerto Rico, and making sure that we're going to be compensated for services that have been delivered.
As of the beginning of this year.
Yeah. So so that's great.
Craig's going question what does.
If they work to pay for that do you think in the future you've got to build a contract that's got firmer terms around the deals arent.
<unk> concluded on time, you have to actually cancel the service immediately so that you're not left in a position where you have been providing a service that is not compensated for maybe play a little harder ball what these people. Thanks.
Yes, so I mean I think this is a fairly unusual conversation we haven't we haven't confronted this before.
And it's still yet to be resolved so I think we're.
We're not giving up on it just yet I think it is going to be a matter of negotiation, but to be very clear if the customer chose not to renew and then obviously not compensate us for the services that we've already delivered that's a $2 million hit to us represents about $2 million of <unk> because of the contract term was.
To start at the early part of this year it would represent a $2 million of GAAP revenue.
That's right.
Okay. Thanks.
Thank you.
Our next question is coming from Jeremy Hamblin.
With Craig Hallum You May proceed.
Thanks for taking the question I wanted to come back to just understanding whats embedded within the revenue guidance for the year. So.
If we look at getting to the midpoint.
Of your guide for the remainder of the year.
It's about $24 million a quarter for Q2, three four I think you said that you've got about 30 contract miles are expected to go live.
In Q2, and if we were to assume.
That $75 million I'm, sorry, 75000.
Square mile run rate that you typically have.
That would be about.
With $2 million to $5 million on an annualized basis I'm just trying to understand.
In terms of what's embedded in that guidance are we including catch up revenue.
Puerto Rico.
And then.
Kind of.
I guess what are we assuming on this on the $16 million five year deal.
In terms of what's embedded in 2023 guidance.
Yeah, Great. Great question. This is al and I will go ahead and respond to that I think if you just took a look at what we did in Q1 and just multiply that literally just by that times four.
Your body 82 $5 million in revenue.
What I can tell you is and we haven't given actual miles that have gone live but the additional revenue that were a GAAP revenue that we're going to see if we can go live miles. This year is over $4 million more. So you can do the calculation yourself and realize how well things are going in terms of new miles the dip.
<unk> of corrections, we do expect it'll be several million dollars. So by the time you add all that together you're pretty close to 90, the balances things like international forensic logic expansions.
<unk> built our plant expansions.
Leads expanse in terms of additional professional services that we know are coming and lastly, we're actually going to have some new revenue. This year again in our labs. So you add all that together.
Pretty easy to get to our guidance.
Gotcha that's helpful.
And then the other question I wanted to follow up on was.
With a follow up here around gross margin.
It sounds like.
Youre going to see a much bigger ramp in the second half of the year.
Just in terms of thinking about.
The current run rate in the last few quarters, we've been kind of more in that mid fifties gross margin range can you just help walk us through in terms of.
Thinking about that level versus kind of the high <unk> level.
And I think youre, probably looking in like the 59% range for the year, which would imply back half gotta get to like 60% plus.
But I was hoping for a little bit more color around that.
Sure. This is Alan I'll go ahead, and give some information Ralph can add as well.
A couple of things first off Q1.
Actual gross margin was a little lower because we did have a little bit more in terms of depreciation of the actual maintenance and repair costs that were really more one time of nature in Q1.
Primarily related because last year, we were doing all of the three G.
Replacement, so we had to catch up in some of the maintenance from repair that was kind of a onetime costs in Q1, So actually gross margins and then it should go a little higher with that alone the other aspect of that as we.
We are seeing a bit more cost some of it is related to the ramp up of some people that we have set up for the revenue growth.
Some of that actually flows up into cost of goods sold related to customer success, and some operational allocation, but well up there as well.
We firmly believe that our gross margins are going to improve.
Certainly by the time, we get to Q3 and Q4, whereas the other revenues are coming in and we've already hired the people that are going to be involved in that.
Okay.
Got it that's helpful. Thanks.
Last one just you went through a quick but I think you noted.
You bought back maybe like 35000 shares what was the average price per share on that and then where you have cash balance now how are you thinking about that in terms of potential capital allocation.
Moving forward.
Mmm is coming from Jason Schmidt.
With Lake Street.
Proceed.
Hey, guys. Thanks for taking my questions just curious with things such as the department of corrections contract or the this delay in Puerto Rico, if maybe the cadence of this of the year doesn't follow traditional seasonality do you think that's the case this year.
Yeah. This is Alan they'll go ahead, and say absolutely last year was a little odd because Q1 was odd because we had $2.4 million rolled into Q1 that hopefully and should have come in in the 2021 have we got the contract.
Basically what that May 22 looked like it was pretty much glad throughout the year, you're gonna see pretty much the exact opposite as we look into 23.
Twenty-three restart here, we would accept expect to see the cadence of revenue increase and to each of the following quarters and significantly going up in Q3 two four.
Okay. That's helpful and apologize if I missed it but how should we think about opex trending the remainder of this year.
Yeah. This is Alan again, well, we have been investing significantly and and sales marketing for basically the last two years, we still are adding some costs related there for things that are wise R&D. This year will go up a bit because we are adding more capability.
In terms of personnel, particularly rated related to having you know for software products now, although it's not going to be significant G&A will go up a bit but it should be relatively flat as well so uhm I mentioned earlier.
Earlier that we have already invested in all three of those categories. So even though they are going to go up a bit they're gonna go up less than the amount of revenue continues to go up.
Okay got it thanks, a lot guys.
Thank you.
Thank you next question is coming from Willow Miller with William Blaring Company you May proceed.
Hi, Thanks for taking my questions just to clarify in question first.
The guidance revision to revenue is driven by Chicago, Puerto Rico, and now you mentioned, Puerto Rico could be as much as 2 million at that contract is not renewed so any color there might be really helpful.
Yeah. This is Ralph I'll take that one so the total exposure if Chicago word to cancel the contract as of today July one even though technically we're contracted mid February of 2024 in Puerto Rico or to not completely renewed nor to catch us up on the services that we provided.
Essentially for for the past.
<unk>.
About $6 for approximately $6.4 million and gap and gap revenue.
And so we're we're basically kind of factory combined risk basis $2 million across bore with it isn't a useful exercise for us to kind of do it one by one we kind of pool all the risks together and decided that you know we don't think it's zero exposure nor do we think it's six $4 million of exposure, we felt like the appropriate.
Number to use on a risk adjusted basis was two $2 million.
Okay that makes sense and then my next question is last quarter, you cut out strong performance and like Pier Foreign Tara five cities just based on one person and you were looking to expand how does that initiative gowan and easily you can explore.
Beyond that <unk> that you called out Uhm previously.
Yeah terrific questions. So we made really good progress. There currently we now have three reps that are 100 per cent focused on tier four two or five I think hopefully you've heard in our this call I mean, the success that we had and lighting up new customers. I think you know, it's I mean six customers is pretty.
Pretty impressive work I didn't mention the city, Bob maybe just out.
Now upper folks.
Uhm believe in Ohio.
<unk> Gardens Holyoke Manchester nearby.
Florida, and we actually in some of the expansion that we had there were a couple of three or four two or five customers that actually expanded their initial footprint as.
As well so that that initiative for us is going very well I think <unk>.
<unk> about the shortened sales cycles that appears to take place there. So we're very excited.
Still anxiously looking for that fourth two or four two or five sales rep to round out the team.
Right that's great color. Thanks for taking my question.
Thank you at this time. This concludes our question and answer session. If your question was not taken you may contact some thinking investor relations team by Emailing S. S. T I at Gateway I R Dot com.
How 'bout Manhattan back to Mr. Cook for any closing comments he may have.
Great. Thank you very much I'm, just very excited to.
Be in this opportunities space, we know, we're making a difference and thank you all very much for dialing in and asking some really good questions about the business looking forward to the one on one calls here in a bit.
Thank you. This does conclude today's call you may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation.