Good afternoon and welcome to ShotSpotter's Third Quarter 2022 Earnings Conference Call. My name is Sarah 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 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 8, 2022 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 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.

Thank you and good afternoon to those of you joining us today. I'm very pleased to be able to report on the progress ShotSpotter is making toward our strategic objectives and helping drive the digital transformation of local law enforcement agencies globally. ShotSpotter has assembled a compelling set of precision police solutions that help address the critical challenges facing today's law enforcement profession. We are committed to help agencies become efficient, effective and equitable in delivering positive public safety outcomes to the communities they are sworn to serve and protect. Financially, we reported revenues of $18.8 million, up 29% from $14.5 million in Q3 of 2021. Our quarterly adjusted EBITDA grew 37% to $3.1 million from $2.2 million last year. Overall, ShotSpotter Respond had a very strong go-live cadence this quarter. We went live with 7 new customers, including; Aurora, Illinois; Mobile, Alabama; Rancho Cordova, California; Homestead, Florida; Warrensville Heights, Ohio; along with Richland County and West Columbia, South Carolina. We also went live with 6 expansions of existing customers, including a 9 square mile expansion in U.S. Virgin Islands. As a part of our security solutions, we were also very pleased to have added the Illinois State Police as a customer with 8 linear miles covering the Dan Ryan Expressway. Our ability to detect and alert on freeway shootings represents a significant technology innovation and TAM extender as the state and highway patrol agencies deal with the increasing scourge of freeway road rage and gang shootings. We believe we can deliver approximately 120 domestic respond go-live miles this year, not including any additional security-based freeway models. This would represent the second year in a row we've achieved over 100 domestic go-live miles in the year. There are several respond projects that are currently staffed and in process to be…

Thank you, Ralph. We're pleased with our performance in the third quarter. As Ralph previewed during this quarter, we went live with 10 new customers which included 7 Respond cities, one investigate agency and 2 security customers of which one was a school and one was a highway project and also expanded Respond in 6 current cities. Our only attrition in the third quarter was a small security customer. We continue to see an increase in the interest of all of our solutions. In addition to the above, we already have 40 new Respond miles under contract and are awaiting final contract executions on over 20 additional new Respond miles, a new 8-figure multiyear investigate customer and 2 new security contracts, of which the first is an expansion at a current university customer and the second is a multiyear deal that we obtained through a new reseller partnership focused on colleges and universities. For the second quarter in a row, this is the highest level of new miles and bookings that we have had since going public. Let me provide more details in the quarter and then I will share some thoughts around the balance of the year. Third quarter revenues were $18.8 million, a 29% increase over the $14.5 million in the third quarter of 2021. Positive revenue were customer expansions and deployed miles are up year-over-year. That said, almost $700,000 of expected revenue for the quarter will shift to Q4 because some of the renewals that we were hoping to receive are still awaiting final customer execution. As many of you may know, this happens frequently in the third quarter and is not concerning. Additionally, the professional services in our Leeds division continued to be very lumpy quarter-to-quarter and was over $1 million lower in Q3 than Q2.…

Great. Thank you very much, Alan. I'm very pleased with our Q3 results and I'm extremely proud of my work colleagues here at ShotSpotter who continue to execute across the business. As a company, we are all extremely grateful for the partnerships we formed with our customers and the difference we know we're making in saving lives and helping improve public safety outcomes. I think at this point now, we'll be ready to take your questions.

[Operator Instructions] Our first question comes from Richard Baldry with ROTH Capital.

Can you talk about historically, have you seen any change in buying patterns in sort of post-election environments? Is there any sort of stalling out while Congress has turned over. So I'm curious how much of the funding backdrop which seems pretty benevolent right now is locked into existing legislation or could be changed, though, it does seem like both sides are trying to push the support for police message. So maybe there's really not a lot of risk there.

Yes. So this is Ralph. I'll maybe start and Alan jump in and add on or correct as appropriate. But as we said on several calls, the funding environment has probably been the most constructive that it's ever been for at least my time at the company which has been over 12 years. We're seeing fairly robust funding opportunities at the federal state and even local levels to support police and addressing violent crime. And I think as you hit it, it's very much a bipartisan issue. So it's not about Republicans or Democrats. I think all of them are getting on message from a policy and a budget authorization point of view to be able to support police that are extremely challenged. I think in our last earnings call, we mentioned the fact that's been reported on that we're seeing a lot of churn inside of law enforcement agencies in terms of personnel resources. A lot of people retiring early, a lot of chiefs that are getting turned out. We're not seeing a lot of folks coming into the profession because it's a less popular profession. And that's putting a tremendous amount of pressure on policing departments to be able to kind of keep pace with an increasing crime wave that's happening across the country, both small, medium as well as large cities. And we believe that technology is probably one of the only things that can bridge the gap. So unfortunately, I think we're in a very constructive environment over the next 3 to 5 years, certainly, from a funding point of view to help support police dealing with protecting and serving communities.

Okay. And I think one of your security wins was noted as to come with a new partner. Could you broadly discuss who that partner is, what type of reach they have, what potential that could have to follow on from an early win?

Do you want to take that one, Alan?

Yes, sure. I don't think we'd necessarily say the name right now but we literally just started with them but it's starting quite well. They were able to get a 3-year contract with a brand-new college. So it's not only helpful that we're starting to find someone who has other relationships, it doesn't necessarily cost us much either. It's a great partnership. And based on what they were able to do with the very first deal, we're feeling pretty positive about what could come in the future there.

Okay. And maybe the last for me, the buyback authorization being new. Can you talk about sort of thought process behind that, behind the cadence on it, using cash flow versus balance sheet resources, sort of how to think about that over what period of time?

Sure, this is Alan. I'll start and then Ralph can add as well. For those of you who followed us for a while, you may realize we put in a $15 million stock repurchase program in 2019. We literally just finished that in Q2 of this year. So it does take a bit of time to do that. So with the larger programs, $25 million, it is possible that it does take us a couple of years to do that as well. We are limited based on how many shares we can repurchase per quarter. I think we will do it based on our availability of cash which continues to be quite nice and as well as seeing how the market responds to our stock. I mean if we think that the market is not understanding or properly evaluating where we're going it's likely that we would consider doing a repurchase or a buyback.

Last one for me, heading into 2023. Could you talk a bit about how you feel you're staffed up properly for go-to-market, what you think headcount expansion and things throughout '23 to get to '24?

So maybe I'll start, Alan, you can fill in the detail. So I mean we're very much still investing in growth, although a substantial amount of investment that we've made in growth, particularly sales and marketing have been done in previous years. So we think we're appropriately staffed up. And I think when you look at our model going forward, both expenses above the line as well below the line are going to increase albeit they'll increase at a lower rate than what we're expecting to drive top line revenue.

Yes, this is Alan. I agree with Ralph. I would say the only thing that might be interesting to that. As he said, we're already done in sales and marketing, some of the stuff that we're doing and you heard us refer to an 8-figure deal which is an investigate deal. It's possible that we're going to need to continue to add personnel in the R&D and development side to make sure that we continue to expand that product which is already quite nice but to continue to expand even more to get the large deals.

Our next question comes from Mike Latimore with Northland Capital Markets.

On this highway deal, it's kind of interesting, I think you said it was 8 linear miles. Can you talk a little bit about that? What was the catalyst for that deal? What kind of pricing do you get on that relative to, I guess, square miles and maybe the TAM that you might see for this over time?

Yes. So from a use case point of view, we're seeing across the nation, a fairly measurable uptick in what I would describe as kind of road rage shootings and gang activity that's happening on freeways, highways and just off freeways and highways. This is our second freeway deployment. From a pipeline point of view, we're seeing a lot more interest than we have seen previously. I would say, from a technology innovation point of view, what we're doing is really quite interesting because if you think about a lot of the kind of ambient noise that happens in and along freeways and the fact that these deployments are linear versus typically kind of square miles. It does represent some really interesting and kind of cool technology things that we have to do using our kind of core technology. We didn't have to do a lot to tweak the hardware or anything like that. But just from a software and deployment point of view, there's definitely some things that we are bringing to the table that makes this a viable solution. I think pricing-wise, you can think pretty much along the lines of the linear mile kind of more or less equaling a square mile of deployment. So it's pretty attractive. I think from a deployment -- operational deployment point of view, these things are pretty interesting because I think the permissions process to get infrastructure to deploy the centers is a little bit more straightforward typically than what we find when we're deploying a square mile because there's a lot of infrastructure in and around the highways that we can place our sensors on. So once we get the go ahead, to get a deal on a freeway. These are pretty rapid, I would say, kind of time-to-value deployments relative to our more kind of traditional kind of square mile deployments. Alan, would you add anything to that? Or…

No. No, I think you covered it really well. The pricing is very similar to what we do in a square mile just slightly lower but not much.

You did just see the margin expansion in fiscal '23. Can you talk a little bit about gross margin? Are you expecting that to expand the fiscal '23 as well? Or if so, can you give any guidance on that?

Yes, this is Alan. So we do expect gross margin to go up. We're in the high 59% roughly percent by the end of this year. We do expect it to be at least 60%. Our expectation is that some of the cost that is causing a little bit of the gross margin to not go so much higher than that is related to the 3G sensors that, by the way, are completely replaced at this point over 5,000 sensors. A little bit of that increases the actual COGS but it gets added back in terms of the adjusted EBITDA number. So even though that does affect it was closer to the 60%, maybe 61% gross margin, it gets added back and gets us closer to that guidance of the 24% to 26% adjusted EBITDA.

Our next question comes from Matt Pfau with William Blair.

Wanted to first ask on the revenue guidance for 2022. Can you maybe discuss what drove the slight reduction in the high end? And then for the 2023 revenue guidance, how do you feel about the visibility entering 2023 relative to 2022? Because I think if I look at the ARR relative to your original guidance for 2022, it seems to be similar visibility. I wanted to know if that's correct or if it's more or less?

Sure, this is Alan. I'll go ahead and start and Ralph go and add it correct along the way. Honestly, there wasn't much of a change in our actual guidance. We still expect it to be 40% growth year-to-date. From last year. The 2 things that might be related to that, as you heard in Ralph's original script. The delay in the large investigate contract which moved from a 7-figure deal to an 8-figure deal, we had originally expected to get that a little earlier in the year. If that were early in the year, it would have added to revenues to us in this year. And then the only other thing related to that would be related to the actual go-lives which always move around a little bit and make a little bit lumpiness into it. Other than that, it's really been quite positive. So when we look at '23, having that large investigate deal come in is giving us more confidence in exactly where we're going to end in '23. I don't know, Ralph, you have above the thoughts there.

Yes. No, I completely agree with everything that you said, Alan. I think I would just add to that. I think it's probably worth pointing out that the Detroit deal that we recently won and recently just got contracted on and are moving forward with. Frankly, this is something that we expected to happen in kind of Q1 or Q2 of this year versus Q4. But I think as by those of you that followed the company and kind of followed our progress in Detroit, that deal got delayed several months. But we're really happy with where we are now and are looking forward to getting that deployed and operational for the citizens of Detroit in early Q1 of 2023. So I think that had a bit of an impact as well on the revenue for this year. That was a deal, a fairly significant deal that we thought were going to happen that we expected to happen earlier in the year versus later in the year.

Great. And then one more for me. On the $17 million of that $80 million ARR that is coming from non-gunshot detection products, how would that look in 2022, trying to figure out as a percentage of ARR, how much that has grown over the past year?

Yes. So this is Alan. So when we looked at the change there, the $63 million that we originally had start of the year did not include any Forensic Logic. So if you think about the Forensic Logic that does add some into the ARR, the starting point for '23, there's roughly $6 million of it is there. The balances related to the other growth that we've had in the miles when you think about us going live in 120 miles this year, that adds a significant amount of ARR that is outside of the -- that's part of the original. The balance is related to the Leeds and the Forensic Logic and some expansion into connect and start of some of the investigator products.

[Operator Instructions] Our next question comes from Jeremy Hamblin with Craig-Hallum Capital.

This is Jack Cole on for Jeremy. My first question is just on the rollout of some of these contracts that you guys recently won. So contracts like Detroit and Cleveland, is it still about 6 to 9 months to go-live from when the Council approves it to when you start generating revenue and kind of related -- how does that timing compared to, say, Suffolk County who is just reactivating coverage?

Yes. So this is Ralph. I'll start and Alan jump in. So I think it's important to note there's a couple of steps in the procurement process before we start actually working on a deployment strategy with the customer. In the case of Detroit, we were awarded the contract and then we successfully negotiated and executed that contract which is enabling us to begin the work in Detroit. And we expect that to be fairly fully deployed, I would say, in Q1 of 2023. In the case of Cleveland and Suffolk County which were both really -- we're both we're excited, excuse me, about both of those particular deals. Those deals have been awarded but we still haven't put ink to paper on the contract yet. And so our expectation is that those will hopefully get contracted over the next 30 to maybe 45 days and we would start to work on them late this year, possibly early in the quarter 2023. So I think Suffolk County which I think publicly as reported, they're looking at coming back on to the ShotSpotter platform with 20-plus miles in Cleveland is a 10 square mile expansion, I think we can think in terms of those miles being deployed in late Q1, probably early Q2 based on how quickly we can get the contracting. So awarding is an important step but doesn't get us all the way there. We got to go work on the contract now.

Right, that's great color. Kind of switching gears then. In terms of the legal costs you guys saw from the Vice Media lawsuit, just an update, are those costs completely behind you? And if so, when can we expect to see that fully flow through the EBITDA margins?

Sure, this is Alan. I'll start with the answer there, too. Our cost for legal last year were over $2 million. This year, they're about $1.5 million so far year-to-date. So they have started to go down we expect Q4 to be lower than both Q2 and Q3. So that's a good thing. It is related to the device media. Now that, that has been dismissed, the costs related to that have gone down to basically 0. We still do have some other legal-related costs related to increased subpoena activity, things that are pretty normal with our business but have gone up a little bit in the last year. Overall, though, we are expecting to answer your question directly, will less in legal costs next year than we've had in '22. That's going to help our go down in that particular category which is also going to help contribute to the increase in adjusted EBITDA.

Awesome, great. And then maybe if I could just squeeze in one more. Could you guys give any update on -- maybe just talk a little bit more to the Forensic Logic, those delays in those expected contracts and just overall how Forensic logic and Leeds have been tracking and maybe some. Just their contribution to revs?

Do you want to take that, Alan?

Yes, I'll start with that. So we originally during the year, said that Forensic Logic would produce about $6 million in revenue for us this year. It's actually a little north of that. We had hoped originally that we would have a couple of other larger contracts which if you add them together, represents several million dollars to already be under contract and to start producing revenue. The good news is none of those have gone away, I guess, if there is bad news is that they have been delayed a little bit. So that's primarily why we haven't increased too much more in Forensic Logic for 2022. We do expect Forensic Logic to have a couple of million dollars of increase in revenue into '23. It's one of the reasons that we feel pretty confident about getting to our guidance range of the $94 Million to $96 Million.

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'd now like to turn the call back over to Mr. Clark for his closing remarks.

Awesome. Hey, thank you very much. We really appreciate everyone joining us today on a midterm election day. I trust everyone is going to exercise their civic duty today if they haven't already. But to summarize, I mean, we continue to view our profitable growth journey as a positive one. We're proving our value every single day and helping law enforcement and our police customers protect help and protect -- help, protect and serve the communities that they're obligated to. So, thank you all very much and looking forward to talking to you over the next several weeks.

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