ShotSpotter, Inc.
Q4 2020 Earnings Call Transcript

Published: 27 Feb 2021

[Operator:]

Good afternoon, and welcome to ShotSpotter's Fourth Quarter and Full Year 2020 Earnings Conference Call. My name is Sachi, 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. Certain of these risks and assumptions are discussed in ShotSpotter's SEC filings, including its registration statement on Form S-1. These forward-looking statements reflect management's beliefs, estimates and predictions as of the date of this live broadcast, February 25, 2021, and ShotSpotter undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this call.

[Ralph Clark:]

Thank you for joining us this afternoon. I hope everyone on the call is doing well. I'm thrilled to have Alan back on this as my partner and our Chief Financial Officer. I want to personally thank Mary for her careful stewardship during Alan's absence. As usual, I'll do a brief review of Q4 results and discuss our agile response to what has been an eventful year. We'll then share our outlook and focus initiatives for 2021 and beyond before taking your questions. 2020 proved to be a challenging year for everyone, and our company and law enforcement agency stakeholder ecosystem was no exception. I'm extremely proud of how our company has been able to adapt and respond to those challenges throughout the year. We finished 2020 on a positive note, putting us on a solid start to a fast growth path for this year and beyond. We reported Q4 '20 revenue of $12.6 million, including some modest contribution from a partial quarter of LEEDS revenue. This represented 16% year-over-year growth from the $10.9 million of revenue we reported last year. During the quarter, we went live with ShotSpotter response, our acoustic gunshot detection service, formerly branded as Flex in 5 new cities, including marquee cities such as Cleveland and Fort Lauderdale, which represents our 6 and 14 cities deployed in Ohio and Florida, respectively. In addition, we expanded our footprint in a few cities, including New York City, St. Louis and Bakersville, California. We're entering 2021 with $46.3 million in annual recurring revenue in our core ShotSpotter business and are well positioned with a robust number of respond projects in our pipeline scheduled to go live in the first half of 2021, which we believe sets us up for strong growth in the second half of this year into 2022 next year. Among those projects are additional expansions in New York City and Columbus, Ohio, along with new city captures such as Mansfield, Ohio, which will be our 7th city in Ohio, Memphis, Tennessee, Detroit and Harris County, Texas. We're very excited by our early foothold in Texas, where we're able to go live on our pilot project in Houston in December of 2020. Houston is already producing promising results with respond, which we expect to formally document in an independent academic study supported by chief in Houston PD.

[Alan Stewart:]

Thank you, Ralph, and good afternoon, everyone. As Ralph mentioned, we went live in 5 new cities during the quarter and expanded coverage on several existing customers. For the fiscal year 2020, we went live on 13 gross and 10 net new cities was culminated in 62 gross and 49 net new miles live for the year. This also ended the year with 779 miles live with approximately 813 miles under contract. As we expand our product portfolio, to provide a broader suite of precision policing solutions, we intend to report on new response miles deployed at the end of each year rather than each quarter. We will continue to highlight the new cities added each quarter. Our revenue retention rate for the year was still excellent at 107% compared to 111% for 2019. Our current customers and potential new ones continue to have budget challenges. In spite of that, our attrition for 2020 was quite low and represented just over 1% of revenues, which is significantly lower than we expected at the beginning of 2020 and indicative of the value of our solutions. We're still cautious regarding 2021, though, and are estimating for attrition of up to approximately 3% to 4%. Let me provide more details on the quarter and the full year. Fourth quarter revenues were $12.6 million, a 16% increase, of the $10.9 million in the fourth quarter of 2019. Revenue increased as our deployed miles are up year-over-year, and we also recorded our first revenues from the Leeds acquisition, although contributed for less than half the quarter.

[Ralph Clark:]

Thanks, Alan, and welcome back. I'm more excited today than I've ever been about the prospects for our company. Our domestic pipeline remains strong, and we're hopeful that South Africa and Latin America will be able to pull through the pandemic, and will be able to soon reengage on critical public safety initiatives. We're excited about the TAM extension and traction we're seeing with ShotSpotter Connect and are confident about our ability to expand our product portfolio with the launch of ShotSpotter Investigate later this year. We're mostly grateful, however, to play an important role in how policing is being reimagined in its adoption of precision leasing strategies. Our expanded solutions suite fits perfectly into 21st century policing principles where data is transformed in a actionable real time intelligence that can help prevent, reduce and resolve crime with surgical precision. Our goal remains the same, and that is to continue our journey to be a trusted platform solutions provider to public safety agencies around the globe, helping them better serve and Protect communities. And yes, we want to continue to do great work that matters. We're now happy to take your questions.

[Operator:]

The first question is from Joseph Osha from JMP Securities.

[Hilary Cauley:]

This is actually Hilary on for Joe. And welcome back, Alan. It's great to hear your voice on the call. I just wanted thoughts -- at some point, we're going to start talking about coming back to being in person, on schools and work campuses. So I was just wondering if you could give us an update on if you're having any conversations there. And if we might see deployments at some point later this year on campus?

[Ralph Clark:]

Sure. This is Ralph. So yes, we have a fairly active engagement on the security part of our business that is not only talking to college campus opportunities, but also speaking the kind of corporate campus opportunities as well, particularly around -- you can think of big-box retailers that have locations that are in, I would say, neighborhoods or communities that are transitioning and have issues with not ongoing persistent gun violence, but more intermediate gun violence that they have to be concerned about. So we're hopeful that we're going to see some traction on the security front.

[Hilary Cauley:]

And then just kind of higher level. I know you kind of just did this LEEDS acquisition, getting a couple of other initiatives up and running. Just kind of when you look at the portfolio of potential skill sets that you might look at. Just any thoughts on what potential M&A opportunities might be interesting to you? And that's all I had.

[Alan Stewart:]

Sure. This is Alan. I would say, having just acquired LEEDS, we're very excited about what they're doing and what they bring to us in terms of adding our product portfolio, especially in the case management. It helps in numerous areas. It helps us in terms of looking at different potential customers, it helps us from expanding the TAM. So I would say at this point, we're not necessarily looking for adding any other companies right now from an M&A perspective until we're finally working well with what we've done with LEEDS.

[Operator:]

The next question is from Richard Baldry from ROTH Capital.

[Richard Baldry:]

When I look at, I guess, you'd call your backlog, the difference between contracted and deployed the 34-mile delta. That's about half of what you deployed for all of 2020. So I'm sort of curious what gates that deployment? Are there factors at the city level or COVID restrictions that will measure how fast that comes out or is that just a matter of you getting to it, so it could start the year on a faster pace than maybe we would otherwise expect?

[Alan Stewart:]

Yes. So our ex -- this is Alan. Go ahead, Ralph.

[Ralph Clark:]

Go ahead, Alan.

[Alan Stewart:]

No, go ahead.

[Ralph Clark:]

No, I was going to say, during our last quarter, we talked about there being 50 miles going live in the next period of time. We're probably halfway there. In Q4, we would expect some of that in terms of the stuff that's under contract right now will happen in Q1, but I think it's definitely true to say, Rich, like you said, in terms of versus 2020, we feel better about where we are and where we're positioned from a pipeline and go-live miles in 2021 than we thought at the beginning of 2020.

[Richard Baldry:]

And when you talk about churn was obviously very low this year, but could be back up to something like 3% or 4% next year. Is that something you see and you have awareness of spots inside of the renewals that are unlikely or is that just generic caution entering any year with uncertainties?

[Ralph Clark:]

So this is Ralph. I think it's much more the latter. We're just trying to be cautious. COVID-19 was not a 9-month or 12-month event. We're viewing it much more as a kind of 18- to 24-month event. And I think it's probably to use a maybe poor analogy, we're really in the fifth inning on this thing. So as good as we did in 2020 with respect to attrition management, we don't think that we're necessarily out of the woods yet. So that's why we thought it to be appropriate to estimate kind of a 3% to 4% attrition number, hopefully, with the idea that we can do much better than that. And it's encouraging, I think. We -- like I said, we did a great job last year, and I'm hoping we'll be able to do a really good job this year as well, but I think we do understand that it's still very much a challenged environment from a municipal budget point of view.

[Richard Baldry:]

And lastly, when we look into your OpEx, how much of that reflects LEEDS now? And maybe as a new sort of baseline to look at going forward or are there any fourth quarter onetime things that we should back out maybe related to your end bonuses, et cetera? Just sort of getting a baseline for spending starting 2021.

[Alan Stewart:]

So this is Alan. Great question. Look, we do have some revenue in Q4, but it's less than half the quarter from LEEDS. We also had that went along with the revenue, some expenses that would be included as well. You can also expect that we're going to have some amortization costs related to the actual transaction itself, that will be adding throughout 2021. So I would say, if you think about in terms of where our expense line items are going to be, we'll probably have a little more percentage spent in sales and marketing. R&D will be very similar. And G&A will be similar to what it's been in the past and probably even lower than Q4 because Q4 had all the M&A expenses associated with it.

[Operator:]

The next question is from Ryan Kimbrel from Craig-Hallum.

[Ryan Kimbrel:]

Ryan on for Jeremy Hamblin here today. Congrats on the nice quarter. You guys highlighted and made a lot of smaller deals over the past few months. Does this mark sort of a broader change in strategy in terms of letting some smaller cities try out the product on a trial basis or how is your overall viewpoint on that change in the last 3 or so quarters?

[Ralph Clark:]

So this is Ralph. I think we've been pretty intentional around developing a sales and marketing -- targeted sales and marketing program going after the kind of Tier 4, Tier 5 market vertical for us. And we're finding that we're really demonstrating some success in that market. They're smaller deals to be sure. So it's really hitting more kind of singles and doubles versus maybe triples and home runs. But we like it a lot because it appears at least our early experience is that the sales cycles don't feel as long and complicated as what you might find in a larger city environment. And again, we're seeing from our work across a number of cities and agencies that there really is something interesting going on with respect to the uptick in violent crime. And violent crime, again, I'll just double down in the comments I made during our review, is that it's not limited to large urban cities. Those get reported a lot, but I mean we're seeing some very strong uptick in gun violence in smaller cities that are having kind of this 1-, 2-, 3-square mile challenges within their cities that we think we speak to pretty effectively. So I think it's -- it'll probably be more of that going forward. We're investing in it. We're getting some momentum going on there. And as we bring on Tier 4 and Tier 5 cities, again, we can bring that agency to become a net promoter, they then help us sell that next agency over because now the heart of the possible becomes a lot clearer when cities like Kankakee, as an example, are just showing success. Other smaller cities can say, "Hey, you know what, that might work for me, too." So we're pretty excited about it.

[Ryan Kimbrel:]

Great. And then can you -- as it pertains to LEEDS, can you give us an indication of what the cadence on that $10 million contribution will look like next year? And is it still too early to sort of dig into the overall, just on a high level, the LEEDS margin profile and how that sort of compares to the ShotSpotter business?

[Alan Stewart:]

Sure. This is Alan. And I'd say we talked about $10 million in LEEDS right now. It's really a couple of buckets there. There's about, as you heard from around $6.7 million in annual recurring revenue. The balance would be somewhere in the professional services. So for example, if you look in 2020, they had some professional services, which were a little higher than that, that they were able to get in 2019 and perform in 2020. So for us, when you look at that $10 million, we're trying to be reasonable in terms of where we think the professional services will be. There's always a possibility, it might be a little higher. Hopefully, we don't -- and we don't expect it would be lower than that. That's how we get to the $10 million for our current guidance.

[Ralph Clark:]

And then the margin profile. has the margin profile, too. And it's probably too early for us to get into details about the margin profile. Just to answer your second question, secondary part of your question.

[Operator:]

The next question is from Mike Latimore from Northland Capital Markets.

[Mike Latimore:]

Very nice quarter there. I guess you talked a little bit about the shorter sales cycles for Tier 4, Tier 5 cities. I guess how are the sales cycles generally for kind of your average customer now versus, say, 6 to 9 months ago?

[Ralph Clark:]

So I don't -- this is Ralph. I don't think we're -- I don't think we would change from our kind of traditional view of sales cadence of it being kind of 12 to 18 months. I think as we kind of entered into the pandemic and then saw the municipal budget pressures and then kind of deep on the police we had is really interesting. We had categories of 2 customers -- I mean, 2 categories of customers, I would say, some would say, "Hey, look, I'm really busy now kind of dealing with the social unrest and protest. I might have budgetary issues. I'm interested, but I'm going to be a little bit slower in kind of turning my attention to this." And then that's a little bit of the, I would say, wind in the face, so to speak. And then the wind at our back were a number of agencies that saw the uptick in gun violence, and that was enough to kind of compel them to act. So we saw a couple of deals that had much shorter sales cycles than our traditional 12- to 18-month sales cycles, I would say. And I think there are some other ones that are going to be a little bit farther because -- or a little bit longer because of all the things that are going on in that particular agency environment. So it's really been a mix of both. I don't know, Alan, would you see anything different or you want to add to that?

[Alan Stewart:]

No. I think you covered it pretty well.

[Mike Latimore:]

Great. And then on attrition, I guess we've had 2 months of 2021 so far, I guess, have you seen an uptick in churn rating so far or no major change yet?

[Alan Stewart:]

So this is Alan. I think we'll talk about the attrition that we would see at the end of Q1, but I would say, right now, we feel pretty good about how things are going. As Ralph mentioned earlier, we are counting on or at least expecting as high as 3% to 4%. Last year, only a little over 1% was fantastic. It would be our goal and our efforts to try to keep it as slow to that as we can.

[Mike Latimore:]

Got it. And then just last on LEEDS. So $10 million kind of reiterate that. That's all from 1 customer. So you're not building any new customer sales in this year, right?

[Ralph Clark:]

Yes, that's correct.

[Mike Latimore:]

Okay. And are there prospects for landing and recognizing revenue on new this year or is that really just going to happen kind of later?

[Ralph Clark:]

So we don't have it in our guidance, I would say. We are planning to launch ShotSpotter investigate later this year, say, early Q3. It could be the case, and this would be upside if we were able to generate some revenues from some early adopters jumping on that platform sooner versus later. We're not planning on it, though. So we're looking more to that from a planning point of view, really generating measurable revenues in 2022, but it is potential that it could happen late this year.

[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 e-mailing [e-mail]. I'd now like to turn the call back over to Mr. Clark for his closing comments.

[Ralph Clark:]

Thank you very much. I want to thank everyone for joining the call. We're looking forward to seeing many of you over the next month-or-so, one at our Investor Analyst Day, which will be at the end of March, and we're also planning to participate in the ROTH conference mid-March as well. So thanks, again. I hope everyone continues to stay safe and be well. Thank you.

[Operator:]

Thank you for joining us today for today's call. You may disconnect your lines now.