Good afternoon, and welcome to ShotSpotter Third Quarter 2018 Earnings Conference Call. My name is Devin, 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 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, November 13, 2018. And ShotSpotter undertakes no obligations 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.

Thanks Devin. Good afternoon and thank you for joining us to discuss our third quarter results. After we review this quarter and our forecast for full year 2018, we will share our initial outlook for 2019. Alan and I will then be happy to take your questions. In short, we had another solid quarter performance and exceeded revenue expectations for the six consecutive time as a reporting public company. We are pleased with the solid progress we've made on both near term tactical execution, as well as long-term strategic goals which only increases our optimism about our ability to scale our unique franchise and have even a greater impact on helping reduce gun violence globally. Before I highlight some of those achievements, I want to briefly share my perspective on the public safety solutions marketplace and recent developments that formed the basis for our constructive view of in position in this large and growing market. As some of you may know, ICP or the International Association of Chiefs of Police puts on an annual conference where nearly 20,000 police executives and vendors gather to discuss relevant issues within policing and learn about solutions to successfully address many of those challenges. At this year's conference, several of the core themes discussed align directly with our mission. It is very clear that agencies are increasingly demanding technology solutions which help increase officers’ safety, promote community engagement, and provide for more precision oriented policing, with the overall objective of both preventing and decreasing violent crime. In fact, Chicago, which is our largest deployment, was highlighted for the progress the city has made in reducing gun violence. And although there's still much work to be done, we believe having our value proposition validated across so many different panels and workshops at this key industry…

Thank you, Ralph, and good afternoon everyone. We’re pleased that our third quarter again exceeded our revenue expectations, allowing us to increase our outlook for the full year. We still expect to be GAAP profitable in Q4 and our goal is to maintain profitability going forward. We went live on 36 new miles, added a new bank line of credit and completed our first post IPO acquisition. So again, it was another productive quarter supporting our long-term opportunity. Let's look at the details of the quarter. Revenue for the third quarter grew 35% to $9.2 million, which reflected deployment expenses in current cities as well as going live in three new cities, one new campus, and our first freeway deployment. Gross profit for the quarter was $5 million or 55% of total revenue, up from 50% in third quarter of 2017. As a reminder, in the second quarter of 2018, we decided to exit the indoor gunshot detection business. And in accordance to that plan, during this quarter, we wrote up our remaining indoor sensor inventory which had an impact on our margins. Without this charge, gross margin would have been approximately 58%. With all material charges related to exiting the indoor gunshot detection business now behind us, we expect gross margins will continue to increase going forward. In the third quarter, our loss was $1.4 million, an improvement from the $1.6 million loss in the prior year period. Adjusted EBITDA which is calculated by taking our GAAP net income and adding back interest, taxes, depreciation, amortization and stock-based compensation was $199,000, up significantly from the $156,000 loss in the prior year period. Operating expenses for the quarter were $6.6 million, a 58% increase over the prior year period. Our operating expenses are increasing as we pursue international sales, add…

Thank you, Alan. And thank you for all of you that joined us on the call today. We're very excited about seeing several of you tomorrow. We look forward to introducing you to some of our senior colleagues, driving our results, who provide insight to our TAM product roadmap and business model among other topics. Finally, attendees will have the opportunity to tour our incident operations center, which provides a unique understanding of how we provide real-time gunfire alerts and data to police departments across the country. We will now take your questions.

Thank you. At this time we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Tim Klasell with Northland Securities. Please proceed with your questions.

Yes I have two quick questions. First, as far as next year, it sounds like you really are putting, I think, for HunchLab into that guidance, so that guidance is just race is purely organic, right? And this is...

So this is Alan. No, we do have a moderate amount of revenues from the HunchLab product next year included in our current guidance.

Okay. And then the second one, you mentioned all sorts of good momentum with the current customers and with some new ones, new signings, congratulations. But on the international side, what are you seeing there? Obviously, you're investing. Do you think we'll see in that guidance for next year? Is that assuming some success there? Or is that maybe a little further out?

Yes. I think, as we've said in other earnings calls that our expectation is that we wouldn't drive any material revenue from our international efforts until probably late 2019 of next year. And we're still holding to that. As you know, domestically, our sales cycles are 12 to 18 months. And we don't have any reason to believe that these sales cycles are going to be shorter internationally. In fact, they could possibly be a little bit longer. So we're just going to be very thoughtful about how quickly it is we're expecting to have any material increase to international revenues from our efforts, certainly, in Latin America and a renewed focus on seeing how we can expand what we're doing in South Africa. So the answer to that is, probably more likely, that would happen in late 2019.

Okay, that’s very helpful. Thank you.

Our next question comes from the line of Matt Pfau with William Blair. Please proceed with your question.

Hey guys thanks for taking my question and nice job on the quarter. Wanted to follow-up on the partnerships with the Verizon reseller agreement and maybe you can just talk about how this reseller agreement extends your sales reach. Are you targeting cities that you wouldn't have been able to previously, or is it a function of them just broadening and having more feet on the street?

Yes, so this is Ralph and Alan will jump in later. But we certainly see it as an opportunity to expand a number of feet on the street and have more conversations we wouldn't be able to have, given the very limited and focused size of our sales organization. So you can think of it more as being kind of a market generation capability. We know that we're still going to probably have to be involved in kind of getting deals across the line. And again, they're confronting the sale sales cycles that we are confronting in terms of a timing cadence. These systems are really 12-month to 18-month sales cycles due to the complexity involved in kind of getting customers on board. But the nice thing about this partnership is that they're reach is so much more pervasive and extensive than ours, so we're expecting them to churn up a lot of potential prospects that will have the opportunity to work with them collaboratively on getting across the line. But again, our – from a revenue contribution point of view, our expectation is really little to de minimus, happening maybe in 2019, much more likely that we begin to see traction there in 2020, again, just given nature of the sales cycles.

Got it. And then in terms of the commentary around sales and marketing expense seen the biggest increase of the operating expense line items for 2019, maybe you can just talk about where those incremental sales and marketing dollars are being invested.

Sure, this is Alan. We really start expansion of our marketing team midyear. So we're starting to see some of those costs come in to the sales and marketing numbers. We are still hiring in terms of marketing capabilities, lead generation, more things that are outreach to our potential customers and other stakeholders. Those are the types of things that are adding to our sales and marketing. Going into 2019, we'll probably be adding additional capabilities.

Got it.

Potentially as well as Verizon assisting as well.

Great. Last one for me. Just wanted to hit on the HunchLab acquisition, and maybe can just talk a little bit more detail about how you view the opportunity for this product. Is it something that could be used by all of your current city and municipality customers, or there's specific ones that it's more applicable to? And then is it potentially a customer generation tool as well? Or is it more of an up-sell to Flex customers? Thanks.

Yes, so I think it's much more the former that you stated. It's certainly a solution that's going to be very attractive to our existing ShotSpotter customer install base, and we've begun a number of conversations with several of those folks already. But it's also, as you suggest, an opportunity to have dialogue in relevancy with customers that aren't ShotSpotter customers today that have a need for a more efficient deployment of patrol resources. And although they might not have a significant gun violence problem at this point in time, they could use the solution offered by HunchLab, now renamed ShotSpotter Missions. So it's a, obviously, a pretty good way for us to develop new relationships with new folks outside of our current install base. So we think it's pretty exciting in that regard.

Great. That’s it from me guys. I appreciate it.

Thank you.

Our next question comes from the line of Jeremy Hamblin with Dougherty & Company. Please proceed with your question.

Good evening. Thanks for taking the questions and congrats on the very strong results. Wanted to start by just getting underneath the G&A reported in the quarter. You noted a couple of items: one, acquisition costs related to closing the HunchLab deal; and then also, you noted some legal costs, I think, from the law suit. Was wondering if you could just give me the component parts to those two things that's concluded in the…

Sure this is Alan. The total costs for those amongst some other like minor onetime things were approximately $1.4 million. We are under a confidentially agreement in terms of the actual terms of the settlement, but the majority of that was related to settling the outstanding litigation. A couple hundred thousand dollars of that was directly related to legal and banking fees associated with the HunchLab acquisition.

Okay. Got it. And then I wanted to come back to the commentary around sales and marketing. It sounds like you're making incremental investments, in that not only currently, but looking forward into next year. Can you give us a sense for, as this business scales towards $50 million in annual revenues and beyond, how will that sales and marketing component of your financial model leverage? Is that something where as we look into next year, we can assume you're still going to get nice, solid leverage on that revenue growth that you are expecting?

Yes this is Alan. And I would say that we are expecting leverage as we go forward. If I were to characterize a couple of the building years, 2017 and 2018 were building primarily in the sales force side of things, although we've have continued to do that into the end of 2018 and 2019. 2018 and 2019 is primarily into the marketing side of things. By the time we get to the end of 2019 now, we should be fairly stable in terms of a lot of the headcount related to those sales and marketing activities and only adding incremental at a much lower rate than our top line revenue growth. I would expect, as we get closer to the $50 million to $70-plus million range, that our sales and marketing spend as a percentage of revenue would be done in the low to mid-20%.

Okay, great. And then just another question about the core technology and applicability of it or opportunities for it. As we think about large events, and you noted the success right away in West Georgia campus of being able to identify shots. As we think about things really larger that's coming up, like the Olympics in 2028, the World Cup coming here, how are you approaching opportunities for those large gathering type of events? How is this technology able to be applied? And is there interest, as you talk to the organizing bodies, of using something like this to improve overall safety?

Yes, so this is Ralph. And that is a great question. I think the good news is that the core technology in terms of the center platform, the communications, back-haul networks, the backend infrastructure required to be able to detect, locate on alert on gunfire is exactly the same. But what we're talking about is a slightly different buying center and certainly a slightly different use case. And we've got great examples of kind of being able to make that pivot as a part of our security business. When you think about the nine or so college campuses that don't have persistent ongoing gun violence the way a urban city might, but they are concerned about the more, I would call, occasional gunfire, are certainly protecting themselves against the more rare, but certainly impactful, mass shooting event. And we know from our deployments in those environments that we are detecting gunfire from time to time. Another great example, and this is what we got an inbound is, somebody had the problem of dealing with sniper fire off of a freeway and have a creative idea to approach us, and say, hey, is this a technology challenge that you guys can perform through, which we were happy to jump on board and be able to show and prove that we can. We've also applied the technology out in the Kruger National Park. This is more of a proof-of-concept basis. But we like challenging ourselves around what's possible in terms of our possible with applying our core technology and so fundamentally, different security problems. And we've actually been successful in the Kruger even though we've only had a tiny, tiny, deployment where we've detected, and actually caught as a result of those detections, some rhino poaching. You probably have seen, it's not really a part of our business per se, but our Founder, original Founder, Dr. Bob Showen had the notion of taking the core technology, adapting a little bit more from the use cases I described previously, but adapt new technology to be able to deploy it in the ocean to be able to potentially address the issue of fish blasting, which is a very big concern for many countries in Southeast Asia that where the core reap is being deployed. So there’s a lot of different opportunities to go take this core technology, apply it to different security problems, and we're excited about pursuing those to the extent that it makes sense.

Great. Thanks so much guys. And good luck the rest of the year.

Thank you.

[Operator Instructions] Our next question comes from the line of Joseph Osha with JMP Securities. Please proceed with your questions.

Hi guys this is actually Hillary on for Joe. I was just hoping to jump into the HunchLab expectations just a little bit more. I know you said that…

Your question?

Just on HunchLab, and I said you expecting some contribution here later in 2019. But if you could give any thoughts or commentary on how you expect that ramp into 2020?

Yes. I don't think we'd be prepared to comment on that. This is a fairly new area for us. I mean, we're, again, in the process of kind of developing our marketing position. We're getting the sales organization trained up, prioritizing where we're going to invest in the platform to kind of bring it forward. The thing that we've only decided at this point in time is that we know that it will be sold on a subscription-based business [Audio Dip] city. That's kind of the way we're looking at this.

Okay, great. And is it going to be…

And we’re very excited about [Audio Dip] the predictive [Audio Dip] I'm sorry, your question. I didn't hear your question.

I'm sorry. It’s just a little bit of bad service on my end. I apologize. In terms of the sales effort, is this going to be kind of going in conjunction with the current business? Or is it going to be a separate offering, just kind of thoughts and how customers are going to be receptive to adding this on as a separate offering?

Yes. So it's going to definitely be a different skew would, again, kind of a different price point and slightly different pricing model, although the business model is going to be the same recurring revenue business model. The initial reaction in the marketplace and customers that we have talked to has been extremely, extremely positive. So we think this is something that makes a lot of sense. As you probably know, if you've been around the company a little bit, we've really foreshadowed in many ways, our interest in trying to explore how to move into adjacent markets where there's good operating synergy. We've always said, anything that we're going to do on the acquisition side was going to be more customer-led or customer pull-driven versus us trying to go out and do some fancy financial reengineering think. That's just not what or who we are. And this fit the bill perfectly. And it's really something that customers, in fact, there were a couple of customers that we’ve talked to, a couple of our larger customers, I would say, that were exciting and ecstatic that we acquired those assets because they know that the culture of this company is really about kind of quality and innovation. And the fact now that we have some resources to smartly invest within in terms of kind of moving that really amazing robust platform forward in a way to add more value around how agencies are using it to prevent and reduce gun crime, violent crime in particular, is very exciting.

Okay, great. Thank you.

Thank you.

Our next question comes from the line of Saliq Khan with Imperial Capital. Please proceed with your question.

Hi, guys. Just a couple of quick questions on my end. The first one was could you talk about the ergonomics and the form factor? I found it to be pretty important when it comes to sensors and production capabilities. And I recall you guys being at the fourth generation, I believe, of those sensors. So can you kind of talk about your anticipation of having to upgrade those sensors and what those costs could potentially look like?

This is Alan. I would say, at this point, we have sensors deployed that are both 3G and LTE sensors as well. We do continue to do improvements on the sensors, more minor ones. But it's generally more in terms of the firmware, things that we can do. In terms of the hardware and the actual costs, we will, at some point, have to swap out the 3G sensor [Audio Dip] near the end of 2019. We're now working with our carriers, namely Verizon, AT&T, where the extension of that swap out can go all the way into 2022. And one thing that we do know is that when we start expanding some of our international deployments as well, they're still on 2G. So some of the sensors, as long as they're serviceable, when we pull them out, the 3G ones may be able to be used internationally as well. So although there will be some costs related to that swap up over time, we're still evaluating and working with some of the partners to mitigate that cost going forward.

And then, Alan, my anticipation is that when it comes to the work you guys are doing in campus safety that there does not to be a rehash or some sort of an upgrade or different types of reform factor for the sensor then, correct? Especially since that's so important. Is that what you have currently?

Correct, yes. We use the same sensors, same technology for our campus and site deployments.

Got you. And on the same point, campus safety department, these guys are used to buying cameras in lots, not necessarily gunshot detection services. So I've looked at it as a bit of a different sale. Can you kind of talk about what that market opportunity looks like for you? And do you have a dedicated sales person concentrating on this opportunity?

And so we have an overlay sales resource of a couple of folks from pre-sales, actual sales. And they work collaboratively with our field sales organization. They’re mostly focused on cities. But we find that there's a lot of synergies with the work that our sales directors are may be doing in a location that can then be leveraged or applied to a campus security or campus police setting. The really powerful use case for us is we found that in the process of deploying these guns of protections or rays across the campus, we're extending the coverage out of few blocks beyond the campus. And that happened somewhat accidentally, actually to be perfectly honest, in the early stages, as most of the people were concerned or customers really were concerned around protecting students on campus against a potential active shooter mass-shooting situation. What we’ve found is that going just three to four blocks off-campus, many of these campus are in transitional neighborhoods. We weren't getting mass shootings or active shootings, but we were getting the occasional gunshot events that are happening in these neighborhoods where there's kind of gun crime that takes place. And I mentioned this specific example in the brand-new deployment we had at University of West Georgia. I think it's probably well done. We've had a couple of shooting incidents here in the west – on the West Coast, where they’ve been able to capture trigger pullers there. I know in the case of some of our Southeast deployments, there's probably more than a little bit of frequent shootings that take place just off campus. So this is an extremely possible use case. And I think just from a anecdotal point of view, if you're just in and ever around a campus, at night especially, just…

Also, that's incredibly helpful, but I'll sneak in one last one. Regarding the international opportunity, you guys were pretty hot when it came to South Africa. Can you kind of highlight the work you guys are doing there? And how should I be thinking about internationals? I'm thinking about projections for late 2019?

Yes. So again, as we stated several times – this is Ralph, we're incredibly excited about the international opportunity. We have a little bit of pricing leverage there. We've had a great deployment in Cape Town specifically that is a strong power user. They actually have a need to expand. There's no question about that. We believe we're going to expand our footprint, at large, in South Africa. And we've invested in bringing on Jon Magin, who is our VP of Sales, focus on Latin America. He's been very, very busy, having a number of constructive conversations, not only with customers, but with go-to-market partners, integrators and alike. If you read anything in The Wall Street Journal or Economist, we think we have gun violence problems in this country. I mean, go to Brazil, go to Columbia, well, Columbia is a bit better now these days, but Mexico, Brazil, they're having a number of challenges there. There's been a couple of elections down that area. I think, certainly, the new President of Brazil is a little bit more law and order like. So we're pretty constructive on the long-term of very interesting possibilities in international, not only South Africa where we're already deployed, but some number of countries in Latin America as well. But again, these sales cycles aren't going to be – they're not going to be magically 6-month, 12-month sales cycles, they're 12- to 18-month sales cycles, and if we're lucky, internationally. But when they come, they'll have a little bit of an outsized footprint from a revenue per square kilometer, revenue per square mile basis. So I think – we think we're approaching this the right way. We're investing the right amount and have the focus on this, and we just ask people to be patient. We're not going to promise you something that is not going to happen. Late 2019 is the way we're thinking about it.

This is incredibly helpful, Ralph, and looking forward to seeing you tomorrow then.

Yes, good. I'm excited about seeing you tomorrow as well. Thank you.

Our final question comes from the line of David Swank with Hood River Capital Management. Please go ahead with your question. David, your line is live. You may ask your question.

Hi, thanks for taking the question. Regarding the HunchLab's acquisition, you mentioned that you included a moderate, I think, you said amount of revenue in 2019 guidance. Could you be any more precise on how much HunchLab is in 2019? So it's still possible to calculate an organic growth rate? For instance, is it a few million bucks or can get us any closer?

So this is Alan. I think, at this point, the moderate amount is less than a few million dollars. I think that's all we'd be comfortable saying.

Okay, sounds good. Thank you.

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 all very much for dialing in and participating in our third quarter earnings call, and looking forward to seeing many of you tomorrow in person. So we can show off what we do and certainly happy to introduce the rest of our team that works all hard to make these amazing results happen. So thanks again.

Thank you for joining us on today’s ShotSpotter's third second quarter 2018 earnings call. You may now disconnect and have a wonderful day.