Good afternoon, and welcome to SoundThinking's First Quarter 2023 Conference Call. My name is Ali, and I will be your operator for today's call. Joining us are SoundThinking'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 SoundThinking'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 SoundThinking'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, May 9, 2023, and SoundThinking 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 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.soundthinking.com. I would now like to turn the call over to SoundThinking's CEO, Ralph Clark. Sir, please proceed.

Good afternoon, and thank you for joining our Q1 2023 quarterly conference call and our first public earnings called as SoundThinking. We're very excited about our rebranding effort and the positive response we've seen from prospects, clients, partners, employees and many of you, our investors. As I pointed out in my recent investor letter, our corporate rebrand is an intentional effort to signal the next phase of our growth journey as a platform play that not only includes the world's leading acoustic gunshot detection offering but also other complementary and adjacent solutions as well. The SafetySmart platform is focused on digitizing and automating manual law enforcement processes and converting data into actionable intelligence. Digital transformation will help accelerate law enforcement agencies of all sizes to be more efficient, effective and equitable in co-producing public safety outcomes. We believe the opportunity remains extremely attractive and significantly underpenetrated. And our go-to-market strength as a trusted adviser uniquely positions us to bring additional relevant capabilities that addresses the pressing needs of law enforcement agencies throughout the world not only today but in the future. Turning to financial performance. Our Q1 2023 revenues were mostly in line with our expectations with $20.6 million compared to Q1 2022 elevated revenue of $21.2 million due to some material catch-up revenue from our LEEDS division. Adjusted EBITDA was $2.9 million or 14% of revenues compared to $4.5 million or 21% of revenues for Q1 2022. Again, this was primarily driven by the catch-up revenue from LEEDS in Q1 2022 that mostly flowed to the bottom line. We went live in 6 new cities and delivered 8 expansion projects with the ShotSpotter solution this quarter. This included approximately 22 miles of Detroit going live within the quarter, placing them as our third largest ShotSpotter deployment with approximately 30…

Thank you, Ralph. We're pleased with our performance in the first quarter. As Ralph mentioned, this quarter, we went live with our ShotSpotter gunshot detection solution in 6 new cities, expanded our ShotSpotter coverage in 7 cities and 1 university. We also added 2 new CaseBuilder customers and added a new state agency for our CrimeTracer solution. Revenue is relatively flat from Q4 to Q1, which is partially explained by some significant catch-up revenue related to a couple of renewals in the fourth quarter of 2022. We had no attrition this quarter. That said, we are experiencing a delay in our renewal with Puerto Rico that ended at the end of 2022. While we expect a renewal to ultimately get awarded, the annual revenue of the Puerto Rico deployment is over $2 million, and our revenue will be negatively affected if they are not permitted to start the new renewal on the original due date. Let me provide more details on the quarter, and then I will share some thoughts around the balance of the year. First quarter revenues were slightly behind expectations at $20.6 million. Revenue is less than Q1 of 2022 primarily due to onetime catch-up of approximately $2.4 million from our LEEDS subsidiary that was recognized in Q1 of 2022 versus the expected Q4 of 2021. Without that onetime increase, our revenue for the first quarter of last year would have been approximately $18.8 million, resulting in this year's revenue being approximately 10% higher than Q1 of 2022. The additional $2.4 million of revenue in Q1 of last year also positively affected gross margin, net income and adjusted EBITDA as it had only about $600,000 of associated costs. You will see those impacts as I cover the rest of this year's financials versus Q1 of last year.…

Thank you, Alan. We want to publicly acknowledge the tragic sacrifice of Chicago Police Officer, Areanah Preston. Our thoughts and prayers go out to her family and the Chicago Police Department. She wanted to help make the world a better place and do work that matters. We'll now open it up for your questions.

[Operator Instructions] Our first question is coming from Brian Ruttenbur with Imperium Capital.

You talk about adjusted EBITDA being maintained in the 20s. Is there something that happened in the first quarter where you're going to make up that core or that underperformance in terms of adjusted EBITDA in the second, third or fourth quarters to make up for kind of for that delta?

Yes. This is Alan. I'll go ahead and start, and then Ralph, you can add as well. Well, we have had a little bit of reduction in terms of the first quarter revenue related to Puerto Rico. That is still costing us in terms of depreciation. We -- hopefully, that will get improved as we go forward. The other thing though is we've already added costs significantly to our sales and marketing, R&D and G&A already through the first quarter. We're not going to need to add a significant amount of any of that for the rest of the year. So as revenue continues to go up as we hit closely to our revenue guidance, the operating expenses are going to be relatively flat, although up a little bit. All of that's going to increase our adjusted EBITDA.

Great. Will it be weighted than just a follow-on weighted to the third and fourth quarters? Are we going to see a dramatic improvement in second quarter versus first quarter? How should we be thinking about that adjusted EBITDA margin expansion?

Yes, great question. It is more weighted than third and fourth quarter primarily, although we are going live in a lot of miles. That's going to help us. The majority of the revenue increase is most likely going to come in third and fourth quarter, especially as we get the Department of Corrections contract that we'll talk about potentially more in the Q&A, finally exercised and ramping up.

Our next question is coming from Richard Baldry with ROTH MKM.

Maybe to follow up on that then. On the Department of Corrections deal as it sits today, can you talk about the types of deliverables, timings, deployment cycles, things like that, that would help us understand sort of what that revenue recognition would look like, whether it's sort of equal weighted, annually, front-end loaded on implementation, back-end loaded on recognition. Just so that we have an idea of how you expect that to play out over a multiyear period.

Do you want to take that, Alan?

Yes, sure. So this is Alan. I guess the good news is, as we've said the last couple of quarters, the total amount has continued to increase. We know that at this point, the contract will be approximately $16 million, which is the highest we've mentioned before. Out of that, there's approximately $6 million of that, a little bit more than $6 million, which is professional services. It's a 5-year contract, but those professional services we expect will be complete within the first probably 2 to 2.5 years. So that will ramp up relatively quickly. We think that will add a significant amount of revenue for us in Q3 and Q4. The remaining balance of the $16 million, which is basically $9 million as a subscription, that is a little lower in year 1 and then almost doubles in year 2, 3 and 4 and 5.

Great. And on the Puerto Rico renewal, you had a history of sometimes these things push out. Is there anything unusual about this renewal negotiation process that makes you think it's more risky than others? Or is it really just a matter of timing, getting right documents in the right place?

Yes, this is Ralph. I'll take that one. Sorry, do you want to go, Alan?

Go ahead, Ralph.

Yes. So I think this does represent a slightly different risk profile because, in this particular case, the comments that are being made by the customer are that even if they were to renew, and we have every expectation that they will renew at some point in time, they might have a difficult time kind of going back retro to compensate us for the services we delivered to date. And so that's the reason that we're making the adjustment that we are. Typically customers, even though they might renew late, we always are able to kind of go back and start the term at the point in time that the contract in that even though they renewed 3 or 4 months later. And that's what kind of represents some of that lumpy catch-up revenue from time to time we experienced. We're going to be negotiating pretty hard with Puerto Rico and making sure that we're going to be compensated for services that have been delivered as of the beginning of this year.

Yes. So that I guess creates one question, which is if they were to pay for that, do you think, in the future, you've got to build a contract that's got firmer terms around, if deals aren't concluded on time, you have to actually cancel the service immediately so that you're not left in a position where you've been providing a service that's not compensated for, maybe play a little harder ball with these people.

Yes. So I mean I think this is a fairly unusual conversation. We haven't confronted this before. And it's still yet to be resolved. So I think we're not giving up on it just yet. I think it's going to be a matter of negotiation. But to be very clear, if the customer chose not to renew and then obviously not compensate us for the services that we've already delivered, that's a $2 million hit to us. It represents about $2 million of ARR and because the contract term was to start at the early part of this year, it would represent $2 million of GAAP revenue, sits at risk.

Our next question is coming from Jeremy Hamblin with Craig-Hallum.

I wanted to come back to just understanding what's embedded within the revenue guidance for the year. So if we look at getting to the midpoint of your guide for the remainder of the year, I think it's about $24 million a quarter for Q2, 3, 4. I think you said that you've got about 30 contract miles expected to go live in Q2. And if we were to assume roughly that $75 million -- I'm sorry, $75,000 per square mile run rate that you typically have, that would be about what $2.25 million on an annualized basis. I'm just trying to understand, in terms of what's embedded in that guidance, are we including catch-up revenue for Puerto Rico? And then kind of -- I guess what are we assuming on this -- on the $16 million 5-year deal in terms of what's embedded in 2023 guidance?

Yes. Great question. This is Alan, and I'll go ahead and respond to that. I think if you just took a look at what we did in Q1 and just multiply that literally just by that, times 4, you're about $82.5 million in revenue. What I can tell you is -- and we haven't given actual miles that have gone live, but the additional revenue that -- GAAP revenue that we're going to see from go-live miles this year is over $4 million more. So you can do the calculation yourself and realize how well things are going in terms of new miles. In the Department of Corrections, we do expect it will be several million. So by the time you add all that together, you're pretty close to $90 million. The balance is things like international, Forensic Logic expansions, CaseBuilder expansions, LEEDS expansion in terms of additional professional services that we know are coming. And lastly, we're actually going to have some new revenue this year again in our labs. So you add all that together, it's pretty easy to get to our guidance.

Got you. That's helpful. And then the other question I wanted to follow up on was a follow-up here around gross margin. And it sounds like you're going to see a much bigger ramp in the second half of the year. Just in terms of thinking about kind of the current run rate, in the last few quarters, we've been kind of more in that mid-50s gross margin range. Can you just help walk us through in terms of thinking about that level versus kind of the high 50s level? And I think you're probably looking in like the 59% range for the year, which would imply back half got to get to like 60% plus. But I was hoping for a little bit more color around that.

Sure. This is Al, and I'll go ahead and give some information. Ralph can add as well. A couple of things. First off, Q1 actual gross margin was a little lower because we did have a little bit more in terms of depreciation and actual maintenance and repair costs that were really more onetime of nature in Q1, primarily related because, last year, we were doing all the 3G replacements. So we had to catch up in some of the maintenance and repair. That was kind of a onetime cost in Q1. So actually, gross margins are going to -- should go a little higher with that alone. The other aspect of that is we are seeing a bit more cost. Some of it is related to the ramp-up of some people that we have set up for the revenue growth. Some of that actually flows up into cost of goods sold related to customer success and some operational allocations that were out there as well. We firmly believe that our gross margins are going to improve, certainly by the time we get to Q3 and Q4, where the other revenues are coming in, and we've already hired the people that are going to be involved in that.

Got it. That's helpful. Last one, I just -- you went through it quick, but I think you noted you bought back maybe like 35,000 shares. What was the average price per share on that? And then where you have cash balance now? How are you thinking about that in terms of potential capital allocation moving forward?

Yes. Great question. It was a little over $35 per share, so a little north from where we are now. But even after doing that, paying bonuses and paying out the LEEDS earnout that they earned, we still ended the year -- end of the quarter slightly north of $5 million in cash. Today's cash balance is actually close to $10 million. So we continue to do very well in terms of cash. I would say that the Board did approve a $25 million share repurchase. Historically, we've looked at what the market has thought about our stock, and it would not be surprising if we did use some of that to repurchase more shares.

Got it.

Our next question is coming from Jaeson Schmidt with Lake Street.

Just curious with things such as the Department of Corrections contract and sort of this delay in Puerto Rico, is maybe the cadence of this -- of the year doesn't follow traditional seasonality. Do you think that's the case this year?

Yes, this is Alan. I'll go ahead and say absolutely. Last year was a little odd because Q1 was odd because we had $2.4 million rolled into Q1 that hopefully -- and should have come in into 2021 have we got the contract in time. Basically, what that made '22 looked like was pretty much flat throughout the year. You're going to see pretty much the exact opposite as we look into '23. '23, we start here. We would expect to see the cadence of revenue increase into each of the following quarters and significantly going up in Q3 and Q4.

Okay. That's helpful. And apologize if I missed it. But how should we think about OpEx trending the remainder of this year?

Yes, that -- this is Alan again. Well, we have been investing significantly in sales and marketing for basically the last 2 years. We still are adding some costs related there for things that are wise. R&D this year, it will go up a bit because we are adding more capability in terms of personnel, particularly related to having 4 software products now, although it's not going to be significant. G&A will go up a bit but should be relatively flat as well. So I mentioned earlier that we have already invested in all 3 of those categories. So even though they are going to go up a bit, they're going to go up less than the amount of revenue continues to go up.

Our next question is coming from Willow Miller with William Blair & Company.

Just a clarifying question first. How much of the guidance revision to revenue is driven by Chicago versus Puerto Rico? I know you mentioned Puerto Rico could be as much as $2 million if that contract is not renewed. So any color there would be really helpful.

Yes. This is Ralph. I'll take that one. So the total exposure, if Chicago were to cancel a contract as of, say, July 1, even though technically, we're contracted through mid-February of 2024, and if Puerto Rico were to not completely renewed nor to catch us up on the services that we provided to them essentially for past stuff. That's totally exposed us a little bit about $6.4 million -- approximately $6.4 million in GAAP revenue. And so we're basically kind of factoring in, on a combined risk basis, $2 million of cross-border. It isn't a useful exercise for us to kind of do it one by one. We kind of pull all the risk together and decided that we don't think it's 0 exposure nor do we think it's $6.4 million of exposure. We felt like the appropriate number to use on a risk-adjusted basis was $2 million.

Okay. That makes sense. And then my next question is, last quarter, you called out strong performance in the Tier 4 and Tier 5 cities just based on one salesperson, and you were looking to expand. How is that initiative going? And do you believe you can expand beyond the 4 reps that you called out previously?

Yes. Terrific question. So we've made really good progress there. Currently, we now have 3 reps that are 100% focused on Tier 4, Tier 5. I think, hopefully, you've heard in our -- this call, I mean, the success that we had in lighting up new customers, I think it's -- I mean, 6 customers is pretty impressive work. I didn't mention the cities, but I'll maybe just call that out now for folks, Cleveland, Ohio; Hawaiian Gardens; Holyoke; Manchester; and [Palatka], Florida. And we actually, in some of the expansions that we had, there were a couple of Tier 4, Tier 5 customers that actually expanded their initial footprint as well. So that initiative for us is going very well. I think you've heard us talk previously about the shortened sales cycles that appears to take place there. So we're very excited and are still anxiously looking for that fourth Tier 4, Tier 5 sales rep to round out the team.

At this time, this concludes our question-and-answer session. If your question was not taken, you may contact SoundThinking's Investor Relations team by e-mailing ssti@gatewayir.com. I will now hand it back to Mr. Clark for any closing comments he may have.

Great. Thank you very much. Just very excited to be in this opportunity space. We know we're making a difference, and thank you all very much for dialing in and asking some really good questions about the business. Looking forward to the one-on-one calls here in a bit.

Thank you. This does conclude today's call. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation.