Good afternoon, and welcome to ShotSpotter’s Second Quarter 2018 Earnings Conference Call. My name is Steve, and I’ll be your operator for today’s call. Joining us are: ShotSpotter 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, August 2, 2018. And ShotSpotter takes – undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this call. Finally, I’d like to remind everyone that this call will be recorded and made available for replay via a link available on the Investor Relations section of the company’s website at ir.shotspotter.com. Now I’d like to turn the call over to ShotSpotter CEO, Ralph Clark. Sir, please proceed.

Good afternoon, and thank you to everyone joining us today. Alan and I look forward to taking your questions after we provide a review of our Q2 performance. In a nutshell, it was another solid quarter for ShotSpotter, with continued strong financial execution and implementation of a variety of operational initiatives that we believe keep the company well positioned for continued growth in this large and untapped market space. Based on our near-term visibility and positive momentum, we’re tightening our revenue guidance for the full year of 2018 from $33 million to $34 million to $33.5 million to $34 million. The midpoint of the new full year guidance reflects an anticipated increase of 42% from 2017. Q2 revenue was $8.9 million, an increase of 53% from a year ago and 29% sequentially from Q1. Gross margin expanded to 56%, and we managed to come close to achieving breakeven with a net loss of only $369,000. This amount included expenses related to the write-off of three deployed indoor sensor installations. We see a larger opportunity in outdoor and have made the strategic decision to no longer include indoor coverage as a part of our service offering. However, we were recently awarded a patent on our indoor sensor technology, and we’re evaluating the most effective way to leverage that IP, which may include partnering with established indoor players to operate combined solutions where there is demand. Alan will provide the financial detail, but I want to stress how encouraged we are to be driving top line growth with expanding gross margin while tightly managing our operating cost structure. We’re ahead of schedule here, and we’re confident about our ability to cross over to GAAP profitability later this year. That confidence is a reflection of our growing sales pipeline, accelerated new bookings and…

Thank you, Ralph, and good afternoon, everyone. We’re encouraged to report another quarter of record revenue, again exceeding expectations. Revenue was $8.9 million, up 53% from $5.8 million in Q2 of last year, with 61 net new miles deployed in the quarter. We’re extremely excited to be so close to our goal of achieving GAAP profitability. In Q2, we realized a net loss of $0.03 per share. As Ralph mentioned, had we not had the write-off related to indoor sensor deployments, we would have been extremely close to breakeven. We’re therefore reaffirming our target of achieving our first quarter of GAAP profitability by Q4 2018. In addition, our solid execution and strong second quarter is allowing us to again tighten our full year revenue guidance. So let’s look at the details of the quarter. As I mentioned, revenue for Q2 was $8.9 million, an increase of 53% over second quarter of 2017, the sixth consecutive quarter that our revenue exceeded our long-term growth target of 35%. Revenue was driven by growth in the number of miles covered through expanded deployments for current customers and the addition of new customers. Also included in Q2 revenue was some catch-up revenue from contract renewals due in Q1, as well as a bit of NRE from our technology integration with Verizon. Gross profit for the quarter was $5 million or 56% of total revenue, up from 54% in second quarter 2017. We were particularly pleased with the gross margin, as it was negatively impacted by charges related to the write-off of the three indoor sensor deployments. Without these expenses, gross margin would have been approximately four percentage points higher. We’re still evaluating the disposition of the remaining indoor sensor inventory. That said, we still expect gross margins in Q3 to be slightly higher than…

[Operator Instructions]. Now our first question will come from Richard Baldry with Roth Capital.

Thanks and congrats on a great quarter. When I look at the mid-point in guidance and I back to your first half, it would imply essentially flat revenues for the next two quarters. So that’s out of pattern with the trend we’ve seen, so could you maybe talk about the magnitude of catch-up revenues in the quarter and NRE, nonrecurring engineering revenues in the quarter, so we sort of get a feel for how much that’s changing the seasonality versus years before? Maybe comparative to maybe just how conservative we think you’re being for the second half guidance?

Sure. Thanks, Rich. This is Alan. There was about $0.5 million in Q2 that was related to catch-up revenue and some NRE. So I think if you would normalize that, you take that out of that, it would probably normalize close to around 8.4.

Okay. And on the 61 net new miles that’s, I think, the highest number that we’ve seen. Was that balanced sort of across the country? Are there are some areas that you think are moving faster? How much do you feel like that’s a sustainable level on sort of an annualized level versus maybe just a really good quarter and a bit of a standout?

Yes. So this is Ralph. Thanks for that question, Rich. I think it it’s fair to say that our Q2 go-live number was an exceptional one. And what we’ve tried to do is make sure that people understand that you can’t take out a single look at a single quarter, I would say, and then make general assumptions about what we could drive in future quarters. We tend to look at this on an annualized basis. That being said, I think we’ve got a great project manager team and installation crew. We have a pretty strong bookings backlog that we’re still adding new miles on. So we’re going to be living [ph] up miles certainly in Q3 into [ph] Q4.

I know you don’t like to talk about clients until they’re further down the path, but seeing a city like Toronto which most people think of as fairly safe, have an incident and then quickly have their city council pass funding for ShotSpotter implementation is a little bit out of the norm. Can you maybe talk about how much broader you think the market could address sort of non-typically less violent areas with sort of Toronto as a guidepost? I don’t think people would have thought that, that would be a typical customer opportunity.

Sure. I think we’ve always said that it’s really difficult to look at violent crime across an entire city. There’s a number of cities that in aggregate look quite safe. But when you look at three to four or maybe five square miles of any city, and I’ll just pick Seattle would be another example of one, where that three to 5-mile square area could look very much like a more high crime area that you’d expect to see in a place like maybe Baltimore, Philadelphia or Chicago and the like. So I think it’s a little bit of a misnomer to kind of think of cities being generally safe. Because everything city, or not every city but there’s a number of cities that do have these problematic areas that are at-risk neighborhoods that are suffering from gun violence, and Toronto is no different than that or any other city in that regard.

Great. Congrats again.

Your next question is from Tim Klasell of Northland Securities. Please proceed.

Hey, guys. A question, sort of a follow-on to their prior questions. What are you seeing with your sales cycle? I think you mentioned the word-of-mouth amongst the police chiefs and what have you. Are you beginning to see sales likely to shrink or maybe more of a pull action than a push action?

Yes. Great question. So we’re seeing certainly a lot more chatter, and I think as we said in our prepared remarks, the value of having strong advocacy of chiefs that are using the service and driving great outcomes is certainly helping accelerate our sales cycles. That being said though, this is still a complex sales cycle, and I don’t think we should expect sales cycles to collapse to anything, any period less than 12 months. I think that the model that kind of we’re looking at is really a 12-to 18-month sales cycle, which is a pretty big improvement over where we say two to three years ago, where the sales cycles could be more like two years.

Okay, great, great. And then, I think in the call, you were mentioning that you would hope to see something in the international by next year, which sort of reinforces what you just mentioned about the sales cycle. But as you look at those geographies and the conversations that you’re having, is there any stand-out differences in those contracts as far as the size, the pricing or anything else that investors should be aware of?

So I think we talked probably about the fact that we have a little bit more pricing leverage internationally, so the price points are higher. In the case of South Africa, Cape Town, I think our price is something like $100,000 per square kilometer per year. We know we’re probably going to have to come off of that a little bit, especially when we enter into longer-term contracts. The reason – one of the reasons that we can charge more in those international markets is the cost is a little bit more, but also we’re tending to deal with more federalized police departments. They’re a little bit more well-resourced and perhaps even you can say a little bit more sophisticated in terms of kind of taking on very large projects. So that enables us to price a little bit higher than what we do domestically.

Okay, great. And one final one. The sales force headcount, I know you added a little bit this time last year. Any plans in the near term that we should be aware of? Where would you like to expand?

Yes. So we’re continuing to invest in our customers’ success and onboarding organization there. That’s a complement to the direct field sales force. We feel that, that’s the best bang for our buck, if you will because again, kind of creating very strong advocates within the customer installed base is critical to our growth, and there’s a number of examples that we can point to where a very satisfied chief can have a conversation with another chief, has gotten them to consider ShotSpotter. And so we’ll continue to invest in that onboarding customer success organization. It helps protect our renewal rates, but then it also helps accelerate sales. And then we have enough sales, direct sales people, to go kind of execute those deals kind of once they bubble up to the top.

Okay, great. Thank you very much.

Your next question is from Saliq Khan with Imperial Capital. Please proceed.

Great, thank you. Hi, Ralph, hi Alan. Just a couple of questions from my end. The first one being is with the gross margins being improved and being well above what my estimates were, should we continue to expect the gross margins to keep up the trajectory for the remainder of the year? Or should I expect it to be tapered back the back half of the year?

Saliq, great question. This is Alan. So in Q2, a larger portion of focus was actually customer deployment as oppose to sensor maintenance. So with 61 go-live miles, there are a lot more deployments. So when we do the deployments, that actually adds more costs that get combined and depreciate over five years as opposed to straight sensor maintenance costs which expense during the period. So although I would say it would fluctuate a bit, we are ahead on our gross margin percentages. And I think as I mentioned in the call, we do expect Q3 to be even slightly higher than Q2 was.

Perfect. Then, you guys have done a recent S-3 filing for a $50 million shelf offering. And today, you had talked about the company’s intention to no longer be in the Eagle [ph] solution business. So how should I be thinking about the best use of the overall capital that you have? And over what time can we expect it to be used?

So this is Alan. I think when we filed the shelf, it was based on, we think, excellent advice as good corporate governance to do so. I would say to the extent that we do need cash or need it in – outside of our operating cash that we have on board, it would be related to some sort of an acquisition, a tuck-in acquisition as well. That will be the primary use of cash outside of operations.

Got it. And the last from my end is one of the things noted to other folks and I believe I have noted to you as well, is that I think being in the drone business to be many meaningful. And one of the things that I noticed recently was Taser, or Axon as they are known now, they announced a partnership with DJI to be able to equip the police officers with a lot of the drones and a lot of the analytical capabilities. How do you think about that? Is that a threat? Is that a potential opportunity? How do you view that partnership, and could we expect something similar from you guys as well?

So, no comment on that specific partnership. But I will say that we’re finding the UAV integration with ShotSpotter space a very interesting one. I think you might be aware that the city of Louisville had applied for a Bloomberg philanthropy grant to basically test the idea of combining our ShotSpotter alert with a UAV response, where you could basically put eyes on target in the day time or in the evening time. So we’re pretty excited and bullish on that and are looking forward to working with the Louisville PD on that implementation.

Great. Thank you guys.

Your next question is from Jaeson Schmidt with Lake Street Capital Markets. Please proceed.

Hi, guys, thanks for taking my question. Wondering if you could update us on how the rollout in Chicago is progressing?

Sure. This is Alan. The rollout in Chicago is complete at this point. There’s over 100 miles that have been deployed. And we’re actually currently working on a multiyear contract with Chicago, which we think will be quite interesting when it gets executed. It will not only increase our deferred revenue significantly once it’s executed by both parties, it’s already been fully negotiated. We’ve signed it and we’re just waiting on counter signatures. That contract is for three years with the two 1-year base periods on top of that and has a price in excess of $20 million.

Okay. And how should we think about the NRE fees going forward? I know you mentioned there was about $0.5 million in Q2. Is that going to remain somewhat consistent in future quarters?

The NRE is periodic in nature. It’s related to the Verizon technology integration. You may recall last year, we had a similar integration with GE. So it is not going to be something we’re going to see every quarter.

Okay. And the last one from me and then I’ll jump back into queue, I know grants such as Baltimore have been increasingly visible. Can you just talk about – if you’re seeing increased inbound interest from these sources of funding?

Oh, from philanthropy funding? Is that your question?

Yes.

Oh, I’m sorry. This is Ralph. I think we’re increasingly seeing more collaboration amongst agencies and kind of the private sector to fund ShotSpotter implementations. We’ve had some recent successes in getting local trauma hospitals, as an example, to defray some of the cost of ShotSpotter because they see the value in helping the police departments be more responsive to incidents of gun violence. It also happens to be where a lot of their employees live in some of these at-risk neighborhoods. So as a corporate citizen, good corporate citizen role, we’re seeing people having much more interest, or institutions, much more interest in helping fund ShotSpotter deployments.

Okay. Thanks a lot guys.

Thank you.

Your next question is from Jeremy Hamblin with Dougherty & Company. Please proceed.

Hey guys, my congratulations on the strong results. I wanted to start out by asking you to confirm on the sales and marketing, R&D, G&A, I think what you indicated was we’ll see some sequential dollar growth in each of those categories the remainder of the year. Did I catch that correctly?

That’s correct, yes.

Okay. And then in terms of kind of phenomenal performance here and profitability improvement, on the sales and marketing side, you saw a pretty solid jump there on your total dollars spent. How much of that was increased staffing levels versus, let’s say, incentive compensation going along with getting 61 net new live miles?

So, this is Alan. I would say that there is a mix. So we have added to our sales and marketing staff, both in the direct sales side over the last year. We’ve also added, which goes into that number on the customer success side over the last year, as well as adding to the marketing team as well. So all three of those who roll up into the sales and marketing and there are associated compensation or commissions that do go along with some of those as well.

Okay, fantastic. And in terms of the marketing efficiency that you are seeing, you’ve seen a significant improvement. I think you measure that on a kind of per dollar of revenue generated. And I know it has kind of ranged in the $0.28 to $0.34 of sales and marketing spend. How has that been tracking the first half of the year or maybe Q3 specifically – Q2, excuse me?

This is Alan. We don’t track it by quarter. I would expect by the end of the year to be similar.

Okay. And then what about in terms of installation costs? You obviously had a lot going on here in the last few months. You noted on Q1 that you had seen a little bit of a decline in your install costs, in particular, telecom costs. What are you seeing now? I mean, we’ve seen – started to see some inflationary pressures in other pockets of business. What have you seen on that side of your operations?

Yes, great question. This is Alan again. We are seeing that our costs are being – we’re actually being more efficient in not only on the deployments themselves, the partners we work with, but some of the actual telcom costs are going down as well. So that is also benefiting us from a gross margin perspective. We do expect that to continue. At some point though, it will probably hit a limit where the efficiencies are going to be all what we’re going to get.

Understood. And in terms of just coming back to the gross margin, the assumption would be your gross margin should track at least at Q2 levels the remainder of the year, but possibly a little bit better. Should our assumption be that sales and marketing, you’re going to see some deleverage in Q3, and then maybe not as much deleverage in Q4? Because last year, you had a kind of a one-off much higher number in Q4?

I would say that we’re going to see smaller overall increases on a percentage basis in all of our operating expenses pretty much from here on out. We will have marginal dollar increases in each of those but less than we’re seeing our revenue increasing.

Okay. And then last question. In terms of this bogey of kind of a $10 million quarterly revenue run rate that I think you’ve indicated that you would expect profitability at that level, has that number changed at all in terms of that bogey of where you would expect profitability? Has it come down? Or has it gone up at all in terms of operationally what you need to get to profitability?

That’s an excellent question. This is Alan. We were – we almost hit profitable this quarter, got profitability. So I would say, in our estimation, that number has come down slightly.

Great. Thanks guys, and good luck for the rest of the year.

Thank you.

The next question is from Joseph Osha with JMP Securities.

Hello, gentlemen.

Good afternoon.

So, I wanted to go back if I could to this question of the composition of business. We talked about Chicago a bit. Was Chicago pretty much the source of all the existing customer growth that we saw this quarter or was there someone else? And I’m kind of factoring into a broader question here, which is if you can give us some sense as to the new versus existing customer breakdown on the quarter?

So, this is Ralph. I think in the prepared remarks, we talked about adding two new cities as a part of that 61 miles going live, Baltimore and Calumet City. The rest were expansions from a combination of Chicago, New York City and Miami and a little bit of Springfield.

And would it be fair to say that those two new cities are probably pretty small, kind of 3- to 5-mile type of thing?

Yes, that would be very fair to say that.

Okay. And I believe as we’ve spoken in the past that you guys have said that you would expect over time this business to swing a little bit more back towards new customers as a percentage of the total, as you move through the remainder of this year and into next. Is that still true?

Yes, I think that’s a fair characterization.

The next question comes from Rob Stone from Cowen and Company.

I just wanted to start with a clarification question for Alan. I think you mentioned that the combination of catch-up and NRE in the quarter was about $0.5 million in total. But am I correct in assuming that the bigger portion of that, that was catch-up as opposed to NRE? And NRE is not anything like – it’s not $0.5 million, correct?

No, you’re correct. Less than half of that was NRE.

Okay. And on the subject of the Smart Cities, do you have a sense of sort of the decline or what other milestones we should be looking for? When do Smart Cities’ deployments start to become visible for you?

Yes. So this is Ralph. So we had our first smart city deployment with GE Current in Atlanta, and we see a lot of activity with GE Current also with Verizon. We’re obviously working with Verizon integrating our sensor technology into their Smart City, Intelligent City infrastructure. So this is an area where there’s a lot of, I guess, marketing chatter. We don’t have, in our current thinking in our plan, any real revenues associated with that for this year. But my hope and expectation is that we would see some amount of revenue contribution from Smart Cities in 2019 and beyond.

This is Alan. I would just add that we are seeing an increasing amount of activity from all of our Smart City partners. So although we remain cautiously optimistic, I think it’s more cautious in timing in terms of when that’s actually going to produce teaming relationships, actual contracts and revenue.

That was going to be my follow-up, which I guess this is to a large extent, with the exception of Atlanta I guess, it’s all breaking new ground. And I would imagine you could have a situation where the infrastructure gets deployed but the decision on turning on the ShotSpotter services is maybe on a separate parallel path with different timing and different hurdles to cross. Is that fair?

Sure. I mean, I think that’s one path. But frankly, I think another path and Atlanta is a great example of this, is we are the tail kind of wagging the dog, I think, from a Smart City infrastructure point of view. That was the application that the city was most interested in. So I think it can happen either way.

Okay. And just to remind us, the deployment cost in a Smart City context is what in proportion to when you have to put up a sensor network without any infrastructure being deployed for a Smart City? I’m not looking for an exact number. I just need a proportion.

Sure. Yes, this is Alan. And I think what we’re finding, as we even scope out additional potential Smart City projects, is there is going to be a varying number of the Smart City-enabled nodes versus the ShotSpotter sensors. So to the extent that there’s more sensors that are required to have adequate acoustic coverage, the cost will be more similar to our current Flex deployments. To the extent where there’s much less or maybe only one or two, then the cost would go significantly down because we wouldn’t be deploying a lot of the infrastructure. It would be the Smart City vendor.

Great. So we’ll look forward to more on that next year. On the indoor sensors, I think the press release mentioned that you’re evaluating what to do with the remaining inventory. If you were going to seek a partner for this stuff, is that something you could potentially pass along to someone that way?

Sure. This is Alan. We are looking at partners in that, that are focused on the indoor sensor. The Shooter Detection Systems is one company that we are looking at. Really, it will be when we are asked to provide, not just the outdoor coverage but let’s say they also want indoor coverage, that’s when we would bring someone else along. We haven’t seen a lot of that. But if that were to be presented to us, we would look to partner with someone like them.

Okay, and one last kind of housekeeping question. You mentioned that OpEx was going to be up in dollars in each of the subcategories. But G&A was actually down sequentially from Q1 and a bit. Any color there?

Sure. Yes, it’s – in Q1, we had some G&A costs that were related to the ongoing litigation. We have reached what we would call our retention amount at this point, so those costs are no longer flowing through our income statement.

At this time, this concludes our question-and-answer session. If your question was not taken, you may contact ShotSpotter’s Investor Relations team at ssti@liolios.com. I would now like to turn the call back over to Mr. Clark for his closing remarks.

Great. Thank you very much, everyone, for joining us on this quarterly earnings call. We’re enormously grateful for all the support we’re getting from our investors and analysts covering the company and trying to understand the business that we’re in. And we’re also grateful to do the work that we do with these policing agencies throughout United States and helping them address gun violence in our most vulnerable communities. So looking forward to seeing you all on the next earnings call. Thanks.

Thank you for joining us today for ShotSpotter’s Second Quarter 2018 Earnings Call. You may now disconnect.