Good afternoon and welcome to ShotSpotter’s Third Quarter 2019 Earnings Conference Call. My name is Omer 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, November 12, 2019 and ShotSpotter undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this call. Finally, I would like to remind everyone that this call will be recorded and made available for replay via a link available in the Investor Relations section of the company’s website at ir.shotspotter.com. Now, I would like to turn the call over to ShotSpotter’s CEO, Ralph Clark. Sir, please proceed.

Thanks very much and hello to everyone on the call. As usual, I will provide a general overview of the business and Alan will cover our Q3 results in more detail before we take your questions. If there is a theme for this quarter, it’s the same theme we have been stressing since going public. ShotSpotter’s business is best viewed through a longer term strategic lens rather than from a shorter term quarterly perspective. We can experience lumpy results, especially when our deals get pushed out in time due to the bureaucratic procurement processes and contract negotiations to which our public agency customers are sometimes subjected to. This thing continues to be in play in Q3, as we’re on the cusp of securing a few, but material contracts that have had their final signings push forward for variety of reasons. As a result, we only added 20 gross miles for the quarter, which was below our original expectations. These miles were primarily driven by expansion projects in six cities and Piscataway, New Jersey as a new customer. We reported Q3 revenues of $10 million, a net income of $446,000 or $0.04 per share. We also generated positive cash flow from operations, again proving the operational leverage in our business. While this quarter’s results did not reflect our strong growth potential, ShotSpotter’s long-term business fundamentals remain strong. The pipeline for our core ShotSpotter Flex service continues to grow broader and deeper with expansion opportunities from existing customers and a growing number of deals being formally bid with new public safety agency customers. Additionally, our ShotSpotter Missions offering is gaining traction and nearing the point of making measurable revenue contributions to our financial results. We believe, given our first mover advantage and lack of any serious competition, ShotSpotter remains the only viable…

Thank you, Ralph. Good afternoon everyone. As Ralph mentioned, our third quarter revenue results were below expectations. We are again reducing our full year 2019 revenue outlook. We are disappointed in reduction in our revenue outlook. However, as Ralph stressed in his comments, the primary issue has been the elongation of sale cycle and delays in the final contracting process on a few material deals, which we view as a when not an if. Puerto Rico be an example of this, we are expected to sign that deal much earlier in the year and I am pleased to finally announce that we have or almost been awarded the contract and are aiming to sign it as soon as possible. Despite the lumpy growth this year, the leverage in our model has allowed us to maintain profitability both in the third quarter and year-to-date. And we continue to stand behind our guidance as to the full year 2019 profitability. Revenue for the third quarter was $10 million, an 8% increase from $9.2 million in the third quarter of 2018. Our year-to-date revenue growth was 19% over 2018. It’s also important to remember that the 2018 results reflect very large deployments in Chicago and New York that drove the 2018 mileage growth. However for 2019, we completed a large expansion of over 15 miles Miami-Dade County this quarter and have another large expansion of 17.5 miles under way in Las Vegas. These large Tier 2 city expansions are encouraging even as we pursue new Tier 1 contracts. The quarterly results were also impacted by delay in closing some deals and a couple of delayed renewals, which is not unusual in our third quarter. We added 20 gross new miles during the quarter, but lost 9 from three small customers who do not…

Great, thank you very much, Alan. I think we are just prepared to go directly to the questions at this point in time. So thank you very much for joining.

Thank you. [Operator Instructions] Our first question is from Matt Pfau, William Blair. Please proceed with your question.

Hey, guys. Thanks for taking my questions. First, I wanted to ask about the 2020 guidance and I was wondering if you can give us any sort of additional details in terms of what is factored into that guidance and how much visibility you have into that number, basically just trying to figure out if some of the delays that have sort of plagued you during 2019 have the potential to impact that 2020 guidance as well?

Sure, this is Alan. I think if you look at what Ralph just mentioned in terms of how we’re going to end 2019, we know we’re going to have about $43 million in annual recurring revenue at the start of the year. In addition to that, we expect to add somewhere between $4 million and $5 million in GAAP revenue between our new domestic go lives and Puerto Rico, assuming we can light up Puerto Rico as quickly as we believe we can. And then on top of that there is probably another $1 million in miscellaneous new in GAAP revenue related to Missions, security, some other projects we have. And then the balance will be filled in by international. So international at that point, somewhere around $1.5 to $2 million which is frankly less than we had started within our guidance last year and even though we have more proposals and more bids out there and are much more optimistic going into 2020.

Got it. Thanks for the additional detail there. It’s helpful. On the Puerto Rico deployment, I know you were you guys had a fairly sizable deployment there prior to the hurricane coming in a few years ago. Is this deployment reactivating in those same areas or is this in areas that you previously weren’t deployed in?

Yes, this is Ralph. Great question. So I think it matches up pretty well with our original deployment. It’s approximately 20 or so miles and again it’s a three year contract for us. So we are quite excited to get reengaged in Puerto Rico and to enter into another relationship with them, providing gunshot detection services.

Got it. Last one for me on the Missions product, you mentioned you are seeing some nice interest from non-current ShotSpotter customers. Do those customers that are showing interest have the potential to eventually use the core ShotSpotter solution as well for gunshot detection or are these customers that are just using Missions. Just trying to get an idea if this could be potentially a customer on-boarding tool for your core gunshot detection product as well?

Yes. So, great question again. So the interest is really coming from two types of gunshot ShotSpotter customers, those that will probably never be ShotSpotter customers because they may be lack concentrated violent crime in their areas. So they’re looking at that solution more as a property crime solution and then those customers that have both property crime and violent crime where they could potentially become ShotSpotter customers in the future. I think it does bear mentioning that our focus really is in these first set of customers that we are signing up and hopefully be deploying over the next few months that we are really focused on making sure they have an incredibly positive experience and represent net promoters that can help us bring on board the next set of customers. So this is something that’s relatively new for our company and frankly for customers that are using this kind of precision policing capability around kind of patrol management and the like so. We want to be very intentional around making sure we are kind of tracking the value that they are seeing from deploying that solution and kind of using that, that positive experience and bringing on the next wave of customers. So I wouldn’t expect us to really engage even though we are seeing interest from non-ShotSpotter customers, I think our first priority has to be on really working with this handful or two handfuls of customers that we’ll sign up between now and the end of the year.

Great. Now, that’s all I had. Thanks for all that guys.

Thank you.

Thank you.

Our next question is from Chris Van Horn, B.Riley FBR. Please proceed with your question.

Hello everyone and thanks for taking my call. I guess just on the margin front. It seems like margins are going to continue to expand and I’m wondering if there is a main driver there or if it’s just lot of different things you are doing, whether it’s pricing or cost controls and how do you feel about your kind of longer term goal of somewhere around $100 million in revenue and potentially 40% EBITDA margins?

Sure, this is Alan. I would say where – we continue to spend where it’s appropriate. I think we’re going to be increasing our spend as Ralph mentioned earlier, in our sales and marketing, as we have been ramping that up over the last year to 18 months. We’re not necessarily going to be increasing at the same rate of revenue in G&A and R&D, we feel pretty good about where our level of expenses are there. There will be selective investments there. So you see two things, you see control throughout the operating expenses, but you also see as the revenue grow, some of our semi-fixed cost and our cost of goods sold, aren’t growing as much as the revenue is. So the gross margins are going to continue to improve as well. So improving gross margins and improving – we’re controlling the operating expenses are going to lead to continued improving in our overall margins. And I would say on that path to that 100 million share, we still feel pretty comfortable about getting that 40% or $40 million in EBITDA when we hit that $100 million mark.

Okay, got it. Thanks for that detail. And from a competitive landscape perspective, we do our due diligence I think the more you dig into the core competitors that you have, there are some stark differences. And just want to confirm with you, maybe how you stack up, either from a pricing perspective or from a solutions perspective, now that there has been some chatter that the competitive landscape is ramping up?

Yes. So this is Ralph. Great question. I think at this point in time, it is just a bunch of chatter. I mean we haven’t seen any successful deployments of any kind of scale in any other customer situations. Of course we all saw the recent news with canton that decided not to renew their ShotSpotter solution because they are going to try another solution, which we haven’t actually seen deployed anywhere. I think architecturally, I think it’s important to note that the folks that are out there claiming to do gunshot detection are doing it on a proximity based sensor basis which is a very challenging thing to do at scale. One of the significant architectural advantages we have is using kind of multiple sensors and using our really robust machine classification in human review classification to make sure that we are delivering not only fast but precise alerts right, precise in terms of location, and precise in terms of really minimizing false positives things that claim to be gunshot that aren’t gunshots, which is difficult for proximity based sensor to figure out and also reduce false negatives as well, things that you don’t claim gunshot that actually are gunshots. And so our ability to deploy kind of multiple sensors over a square mile working together along with our machine and human review classification, we think builds a best of breed solution. So we’re going to be watching very carefully at least this Canton implementation to see in fact how closely the vendors claims match up to reality. We’ve seen other attempts at some of these proximity based sensors companies to try to do things they haven’t been very successful. In one particular case, we’ve really kind of gone behind this one particular vendor in three cities at least kind of cleaned up I guess their original deployment, if you will. So we’ll continue to kind of focus on doing what we do and kind of watch these competitors to date, but we really haven’t seen much pressure at all from them at this point because they don’t have any successful deployments.

Okay, got it. Thank you for that commentary and thanks for the time.

Yes, thank you.

[Operator Instructions] Our next question is from Joseph Osha, JMP Securities. Please proceed with your question.

Hello. This is actually Hillary on for Joe. I just wanted to kind of circle back to the sales headcount I know you guys had the one new hire this quarter. I was just kind of wondering kind of thoughts on if you’re comfortable with your current headcount or if we might see you bring on another one or two salespeople as you look to pursue some of these different growth strategies?

Yes. So, great question. So we did bring on a VP of Sales that our current five territory sales directors are reporting to that individual. And we are formally building out a sales overlay organization taking one of our very successful sales directors and promoting him to the VP role, where he is now going to build out an overlay organization that will have kind of very precise skill sets around selling Flex services, our security solution and so most importantly, our Mission solutions and working collaboratively with the sales organizations on kind of pushing those solutions through the respective territories. We’ll continue to invest in and build out our customer success organization. I think in many ways that’s a little bit of the secret sauce around how we do what we do in terms of really building these loyal net promoter customers out there that then really help us from a kind of referenceability point of view, helps sell other customers. That’s a critically important process for us. We’ll probably grow that headcount even faster than what we’re going to do on the direct sales, because I think in this particular market other chief’s of police pay attention to the chiefs of police that deploy ShotSpotter. So we want to make absolutely 100% sure that when a customer deploy ShotSpotter, they’re having a positive experience. And I think I would point no more recent than the Las Vegas press release if you have an opportunity to look at that, you can see what a loyal committed customer implementing best practices that we help bring about with our customer success organization. How they talk about that ShotSpotter solution, what difference it’s made in their particular city, in this particular case, Las Vegas that’s, marketing and sales goal. And so that’s the area that we’re focused on mostly that customer success organization.

Okay, great. And then just secondly, when we are in Chicago, we spent some time over at the [indiscernible], I was just wondering if you could provide some color thoughts around how that might play into your growth strategy over the next couple of years?

Great. Yes. So we are always this is Ralph again. I mean we’re always better when a customer adopts our solution and it’s integrating it with other technologies and bring about other processes. It’s literally kind of two plus two equals five. For those of you on the call that aren’t familiar with NIBEN, you can think of it as there ATS kind of fingerprinting of shell casings. What’s make this NIBEN so critical in the prevention and reduction of gun violence is ShotSpotter is getting cops the dots and because the vast majority of gunfire events go without a 911 call, we’re able to help police departments recover much more physical forensic evidence in the form of shell casings. Those shell casings then get processed by NIBEN and then you could literally connect the dots. You can see, the movement of a crime gun in various parts of the city. That combined with the additional intelligence that ShotSpotter is bringing about because now you’re able to interview witnesses and you are able to see the cadence of gunfire, you more quickly able to identify the very few serial shooters that drive, most of the gun violence problem. So there’s overall concept out there called Crime Gun Intelligence Centers and it’s basically the philosophy of combining ShotSpotter along with NIBEN and taking a very robust intentional approach to investigating all shootings. Just not shootings that result in a homicide or gunshot wound victims, but even shootings that just don’t have a physical blood trail, but they might leave a shell case in which can be critically important in your investigation, in stopping that serial shooter before they ultimately shoot and hurt or kill someone. So it’s a great, great question and we love NIBEN and we love to be integrated with that because it makes it more sticky, it makes it more valuable to the customer. That’s going to combine those technologies and processes.

Great. Thank you.

Our next question is from Will Power, Baird. Please proceed with your question.

Hey, guys. This is actually Charlie Erlikh on for Will. Thanks for taking the question. I just wanted to ask on Puerto Rico, what exactly is still left between where we are now and getting that completely across the finish line and starting to generate revenue?

So, this is Alan. As we mentioned we received the formal award document. We are in communications with them now to take the next steps to actually go down there and do the negotiation to the final contract. Hopefully this time it will be a little faster than last time, the RFP did contain a sample contracts. So both parties are already at least cognizant of what most of the terms and conditions are going to be. That said, it is Puerto Rico things sometimes do take a little longer than we might expect. We certainly expect and hope to have that completely signed and executed before the end of the year with an opportunity to even start some of the go lives.

Great. And then I also just wanted to ask generally on the international pipeline, how close are we to the finish line on some of these other international deals and how might they compare to Puerto Rico in size?

Yes. So this is Ralph. I’ll answer the second part of your question first. So in terms of size because we have the pricing leverage that we have internationally. These deals are sizable you can think in terms of anywhere from on the low side of $500,000 of annual recurring revenue and as much as like $2 million on a kind of reasonable sized deployment of international customers. So they tend to be very large and chunky. We’re super constructive about the size and depth of the market I would say. We’re seeing an increased amount of interest. Just to remind folks in Latin America, we’re focused primarily on four countries Brazil, Mexico, Colombia and Panama and then we’ve been able to be successful in the Caribbean with the Bahamas, which came on I think this year. We also had a very long-standing relationship with the customer in South Africa, Cape Town who publicly discuss their need for expansion of ShotSpotter. They continue to have a really tough time with gun violence and they also have a budget to address the issue. So we’re feeling quite constructive about it, but I think one lesson learned, if you will from kind of 2019, this year is that as good as we’re feeling about the size and depth of the market, I think we’re being a little bit more intentional about the timing characteristics of what it actually takes to get a signed executed contract because they’re resembling much more kind of I will call it Puerto Rico behavior than maybe say even for an existing customer like Cape Town that has talked about expanding, that knows us, that we have an existing contract with, it’s still very, very difficult from a procurement, logistics point of view to kind of get paper across the line. So we’re hopeful expecting – we’re hopeful and expectant of getting some amount of international revenue contributing to our GAAP revenue contribution in 2020. And we like the way the pipeline is developing.

Great, that’s really helpful. Thanks guys.

[Operator Instructions] Our next question is from Reed Motulsky, Imperial Capital. Please proceed with your question.

Hi guys. Last quarter you guys talked about price increases starting next year. Have you guys made any progress negotiating them and has there been any push back or is that going along smoothly?

Yes. So, this is Alan. We have talked about and are still intending to implement a base price increase from $65,000 per year per square miles to $70,000 per year per square mile. That will go into effect January 1. It will be phased in basically all new miles that are sold will be at that price. If customers have price points that slightly below that from historical ones they’ll have a call increase until they reach that price. We haven’t gotten any substantial push back and it is something that’s still on the docs to execute on.

Yes. And I would just add, it’s not like we have been increasing prices every year. We haven’t had a price increase in what for four years. So we were due.

We have had [indiscernible] increases in many cases, but would not a broad-based price increase to our standard price per mile.

Got it, great. And I know you guys have a lot of strong data on the success of ShotSpotter Flex impact and now with the growing footprint of Missions have you guys started to compile data on how it impacts the community and the policing there and if it’s positive or not?

Yes. So it’s too early for that just yet, because we just recently deployed our first customer. And again, we have another, I’d say, kind of three to six that we hope to deploy over the next – in the next few months. But that’s very much on our roadmap is to provide that kind of narrative to help people understand the value and the various use cases of our Mission solution.

Alright, great. Thank you very much.

Thank you.

Our next question is from Tyler Wood, Northland Securities. Please proceed with your question.

Hi, thanks for taking our questions. First on the lengthening sales cycles, you have talked a bit about how the international sales cycles are turning out longer than you expected. But what are you seeing domestically and if you are seeing sales cycles get longer domestically, what’s driving that? Is there any impact you’re seeing from competition getting more active on those? Thank you.

Yes. So, this is Ralph and Alan jump in of course, but we are not seeing any real impact from competition. Just to remind folks, the vast majority of our sales are sole source deals we are basically going direct to the customer and they are not even issuing RFP. In other cases where RFP is issued oftentimes we’re the sole bidder on an RFP, the first RFP for Puerto Rico. In a couple of cases, there might be another respondent as again as in the case of Puerto Rico, but oftentimes it’s not I guess technically as strong as our solution in the pricing isn’t there. So I think from a competitive point of view, we’re feeling really quite good. I think from a domestic sales cycle point of view, I think we’re still feeling like this is a long sales cycle 12 months to – 18 months. We’re seeing transactions bounce all around that kind of time frame. With respect to our 2019 performance, I think some of that can really be – not some of it, but I would say a material part of that really is the delay of some existing relationships. So Puerto Rico being a big, big example of that along with delaying of going live with Las Vegas is already sold, already deployed to some degree, but our ability to kind of go live in a timely fashion cost us some GAAP revenues. So I don’t think we are quite prepared to draw any conclusions about lengthening sales cycles at this point in time domestically. Outside, international, I think there we would have to acknowledge that it’s taking longer than we originally anticipated. And that those are big numbers too. So it has, it has quite an impact potentially to – certainly had an impact to our revenue performance in 2019 and for 2020 as a part of our guidance.

Thanks. That’s helpful. And then on that 2020 guidance, have you updated your goals for new go live miles? And can you just kind of give us all part what the – what you would need in that new go live in 2020 to get till you’re targeting on revenue? Thanks. That’s all for me.

Yes, this is Alan. I think the amount of information – I think we want to really break it out into is what we gave earlier in the Q&A in terms of adding between $4 million and $5 million of GAAP revenue, of which we already did say that about a $1 million plus of that’s going to come from Puerto Rico. Other than that, we haven’t really given any more guidance in terms of actual go live miles.

Alright. Thank you.

Yes. And maybe if I can add, Alan, if it’s okay, because it’s really a matter of just not the number of go live miles, but when the miles go live. So timing is very, very important. So 25 miles going live in Q1 is worth more than 50 miles going live in kind of Q4 for next year’s revenue, yes, for GAAP revenue.

Alright. That’s helpful. Thank you.

[Operator Instructions] Our next question is from Matt Galinko, National Securities. Please proceed with your question.

Hey, thanks for taking my questions. A couple for you. First of all, just been on capital allocation, you did buyback some stock in the quarter which was I think the first for you. On the other hand, it sounds like you have some capital needs with respect to the 3G sensor replacement cycle. So I’m just curious how you are thinking about capital allocation looking out into 2020? Thank you.

Sure, this is Alan. As you mentioned, yes, we did start repurchasing some of our shares this last quarter. I would anticipate that we might be in the market again, if we continue to see our price below where we think the intrinsic value is. The $4 million to $6 million that I mentioned in terms of capital work for 3G replacement although it might start, it’s going to start slowly and extend over a couple of years. So that’s not necessarily going to be materially affecting our cash spend. So I think from that perspective, we feel pretty good about where we sit. This last quarter we generated cash, only went down about net $1.3 million, after spending $3.5 million in repurchases as well. So we feel good about that and we continue to grow and put more money toward the bottom line, which is also going to improve our cash position.

Got it. Thanks. And I guess just a follow-up question about guidance, with respect to the price increases we talked about earlier in the Q&A, I wasn’t sure if you had factored that into the 2020 guidance? Thanks.

Yes, this is Alan. We have in terms of that new domestic GAAP revenue, although it’s important to understand that the miles that are being sold right now are booking through the end of the year are being sold at a $65000 price tag or price point. So as those get deployed throughout the first – it is called first half of the year, those are still going to be at the lower price point until the ones were sold at 70 start getting deployed more toward the second half of next year.

Got it. 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 by e-mailing ssti@gatewayir.com. I would now like to turn the call back over to Mr. Clark for closing remarks.

Great. Thank you very much and thank you all for joining this conference call. We’re looking forward to getting reengaged in Puerto Rico, hopefully here very soon, and continuing to do the work of helping agencies and communities prevent and reduce gun violence. See in about 90 days or I guess we’ll see you before then at our investor conference. So thank you very much.

Thank you for joining us today for today’s call. You may now disconnect.