Good afternoon and welcome to ShotSpotter's first quarter 2020 earnings conference call. My name is LaTanya 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 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 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 belief, estimates and predictions as of the date of the live broadcast, May 7, 2020 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. Please proceed, sir.

Good afternoon everyone. I want to start by expressing my hope that all of you and your families are staying safe and keeping well. Given the unprecedented circumstances we are facing, I will start this call to briefly update you on our response to COVID-19 and its impact on our business. I will then provide an overview on the quarterly results and our outlook before turning it over to Alan, who will delve into the numbers in more detail before we take your questions. I am extremely proud of how we have made decisions as a company that are consistent with our values and purpose during this challenging period. Early on, we made the call to prioritize the health and safety of our employees and to contribute our small part to help flatten the curve by implementing a shelter in place and travel ban in the first half of March. We are still maintaining that posture, while being guided by the State of California and local Bay Area shelter in place guidelines, which are scheduled to remain in effect through the end of May. Fortunately, we are prepared to operate remotely in the event of a disruptive catastrophe like the one we have experienced in this pandemic. Our investments in people, process and infrastructure have afforded us a great deal of resiliency and allowed us to continue to monitor our deployments as well as review and classify gunshots without any diminution of quality or performance of our service. This is critical as our customers depend on us more than ever and need to trust the fact that we continue to do our job in supporting them in the face of this pandemic. Needless to say, our reported results for this quarter and expectations for this year are significantly impacted by…

Thank you Ralph and good afternoon everyone. First, let me echo Ralph's thought that we hope you and your families are staying healthy and safe. It's been a very difficult period for everyone, but we are encouraged that the ShotSpotter team has adjusted so well to working remotely. Of course, the travel ban caused us to suspend substantially all project management and installation, which impacted our first quarter results, will impact our second quarter results and is the reason for the change in our fiscal year outlook. However, we did make progress in the quarter, completing the full deployment in Puerto Rico and ended with a total of five net new miles in the quarter after removing four miles for the smart city deployment in Atlanta, which was not renewed. In addition, we deployed two new Missions customers of the five announced last quarter. The good news is that we do expect to continue to grow this year and our goal is to remain profitable. Of course, we expect our growth rate to be lower than past periods as the world, the United States and in particular, our target customer base, police agencies and municipalities deal with the COVID-19 pandemic. For example, we had expected to deploy two new cities, along with a couple of expansions of existing customers in the first quarter but they have been delayed into Q2. Albuquerque, which was one of the Top 2 new cities, went live last week and one of the two expansions is expected to go-live next week. We are also pleased to report that the U.S. Virgin Islands has returned as a customer after an over two-year hiatus following hurricanes in late 2017. U.S. Virgin Islands will go-live later this year. We believe our lower fiscal year guidance takes into account…

Thanks Alan. Before we take your questions, I want to close by giving a special shout out, not only to our first responders, but all of the healthcare professionals on the front line and the many unsung heroes that are stepping up by driving buses, working grocery checkout stands, delivering online goods and doing sanitation pickup. We see you and we are so very grateful to you. Okay. I think we are now ready to take your questions.

[Operator Instructions]. Our first question comes from Joseph Osha with JMP Securities. Please proceed with your question.

Hi. I hope you guys are doing well. This is Hilary, on for Joe. I wanted to first kind of touch on your comments on the international markets and if you could just expand a little bit on your conversations with Brazil and Mexico and when we might see those actually go-live?

Sure. This is Alan. We have discussions are ongoing with potential customers. I think they are progressing as we would expect, given the challenges with the pandemic. That said, we feel sufficiently positive about them that we have formed subsidiaries in both Mexico and Brazil as the next step in that process. Time will, of course, tell how quickly we can get those contracts closed.

Okay. Great. And then for Missions, I understand that you can't really go-live with any of those new deployments until the travel restrictions and whatnot are lifted. But I was wondering if you could just give a little context for the overall demand you are seeing there and if we might actually see an increase in demand as some of the departments are looking to maximize efficiency?

Yes. So this is Alan, again. So Missions, in general, requires a lot of handholding upfront and personal interaction with the police department to set up the data sources. That's the one thing that is causing us delays right now with both the travel ban and the focus of the police agencies on their own response to COVID-19 pandemic. I would say though that we continue to see interest from new agencies and we do believe that the positive impacts of the Missions products with allowing them to manage their resources in a more effective way will hopefully continue to cause positive interest from additional agencies.

Okay. Great. That's it from me. Thanks for taking my questions and stay safe.

Thank you.

Thank you.

Our next question comes from Jeremy Hamblin with Craig-Hallum. Please proceed with your question.

Thanks for taking the question guys. So I just wanted to build back a little bit on the change in revenue guidance. I think at the midpoint now, since December, you have had about a $4.5 million change in the expectation. I think you ended last year with about $43 million in annual run rate. So I think, one, in terms of thinking about how things have changed versus your initial assumptions that you had at your Investor Day, in December, I think you expected $1.5 million, $2 million of international value added. What's changed in terms of that composition between your domestic miles and your international miles as well as any potential change that you might be seeing on the Missions side of things?

Yes. So this is Alan. The bottom line is things are sufficiently unclear right now that it's a little hard to say exactly how those buckets are going to be adjusted. What we did when we built this new revenue guidance is, say, okay, look, we ended last year approximately $43 million. At this point, the low-end of our revised revenue guidance would assume that the revenue that we get from contracts going live and projects being deployed would be offset by the exact amount of attrition. So we feel pretty good, but that would be the bottom of our expected revenue range. To the extent that we can add new miles quicker, both domestically and internationally, then that will increase this, move us up in the revenue range. The same factor, if the attrition is lower than that, then that will also move us up in the revenue range. So it's a little hard to say exactly how the buckets have changed. We have seen delays across the board, as you might expect.

Yes. And this is Ralph. Maybe I can just add a little bit. I think the one specific bucket that we can add some color around is the attrition budget. I think originally when we spoke about our business mile plan for this year, we assumed about $850,000 of attrition. And now, we are assuming closer to 5% given the COVID-19 crisis, which kind of puts us up closer to $2 million of attrition.

Great. That' helpful. And then just clarifying on the Missions portion of it. In terms of that business, I think you expected maybe an incremental $1 million this year. I am assuming that that's also partly being impacted in terms of your total change in guidance?

Yes. They have gone down, obviously, both international and domestic miles as well as Missions and security have all taken a haircut, but we are just not being, we are not trying to be overly precise about what the total percentages are across all of those buckets, with the exception of the attrition bucket.

Okay. Understood. I wanted to also ask you, I think there was a recent deal that you have won some approval on. And I think in getting that deal across the finish line, you changed the original kind of three-year contract proposal to reduce it, I think the total value by about 23% with almost all of that or I believe all of it coming in the first year, really to help with budgetary constraints, given the lack of visibility that states and municipalities are having on their budgets. Is that something where are you more willing to do that now to get deals across the finish line? And should we expect, because it's probably not going to resolve in the next six months, it's probably going to take longer to get the budgets straightened out. Should we expect more deals to come like that? Is that going to be a way that you are thinking about getting these deals? Because just getting mileage in the doors is more important long term?

Yes. So I would think the deal that you are talking about is a very unique situation in terms of our agreeing to be a little bit more flexible. That was the deal that we actually closed in December and actually had committed deployment resources and infrastructure to get that system up and live this quarter. And we made that investment. And in the course of them already seeking and getting city council approval, the deal was locked and loaded and done December, they had some funding pulled out from under them and came back to us to see if we would be willing to assist them in being more flexible, I guess, around our pricing. And so we had a choice to make. And given the fact that we had already invested all the infrastructure and the like, we could either decide to be a little bit more flexible or potentially walk away from the deal, even though contractually, that deal was already buttoned up and signed. I mean, so we would have been really putting in a position of having our attorneys argue with their attorneys. And so we decided in the spirit of partnership that we could be more flexible. I think the discount that you referred to, I think, normally, if you look under the covers and there's a lot of puts and takes here, I think that's definitely on the high side. We didn't discount like that and I won't go into any specifics really, but that's a little bit of an overstated discount, I would say. But we proved that we can be flexible and we are going to be a good partner. The good news is that today, actually, as we kind of started this call, we received the acceptance letter from that customer and they are actually live as effective today. So we will be counting those miles as a part of our revenue in Q2 because it's already deployed and ready to light up. We just needed to get their formal acceptance to be able to start the subscription period.

Yes. That would seem to be a wise way to go in this environment. I am sure they appreciate the flexibility. Just one other question, more clarifying. On the gross margin impact, customer success. The $200,000, is that kind of per quarter in terms of the rate? Or is that more of something that was kind of upfront loaded here in Q1? Or is that more of that's kind of the step-up that we have in your expected cost and that it's going to have a similar impact on an absolute basis for the remainder of 2020?

Yes. This is Alan. That is per quarter. It will be approximately the same amount per quarter. Fourth quarter, we indicated it will be about a 200 basis point adjustment and that's exactly what we have seen here.

Great. Thanks guys. Best of luck.

Thanks Jeremy.

[Operator Instructions]. Our next question comes from Matt Pfau with William Blair. Please proceed with your question.

Hi guys. Thanks for taking my question. I wanted to ask on the churn and the increased expectation there. Is this driven off of discussions that you have already had with customers? And if so, is it budgetary constraints? Or what are the other reasons around that increased churn? Or is it just you sort of looking out there and seeing the macro environment anticipating that you are going to see pickup in churn?

Yes. This is Ralph. Great question. It's much more of the latter. In fact, we are still closing renewals at a fairly healthy rate. But we are obviously pretty engaged in this municipal police department market and we are hearing what they are hearing in terms of a loss of tax-based revenues that's going to mean reductions in budget. So we are just anticipating there might be some pressure or a squeeze on police departments having to look across their budgets and make reductions. So we thought it would be very prudent to respect the fact that we are in a very unique situation. One we haven't seen, frankly, probably since 2008, where it would be prudent to take our attrition estimates a bit to reflect that budget pressure that we know is coming. And I would say partially offset potentially by federal stimulus dollars too. So it's a fairly cloudy situation, but we thought the appropriate thing to do was to reflect that budget pressure that we know cities are going to be under.

Got it. And then I wanted to dig in on the Virgin Islands coming back. Maybe to the extent you can give us a little bit of the history there, why they originally left? And then any detail around the decision of return to ShotSpotter?

Yes. This is Ralph again. The reason they left is they had a hurricane that took away their ShotSpotter deployment and they have been in the process of rebuilding the USVI back up. We are now in a position to bring ShotSpotter back as a part of that buildup.

Got it. Okay. That's all I had guys. Thanks a lot.

Great. Thank you.

Thanks.

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

Tyler, you may be on mute.

Can you hear me?

I think, yes. We can hear you.

All right. Cool. So you guys have talked in the past about kind of building up a new kind of go-to-market motion targeting those Tier 4 type cities. Could you kind of update us on where that's trending and kind of where you see that opportunity going?

Yes. Alan, you want me to take this? Yes. So it's actually going very well. We have hired an individual who will focus specifically on that market. I have actually been on a couple of calls, discovery calls, with that business development resource and the reaction that we have gotten is very positive. I would say, even in light of the pandemic situation, it's been pretty impressive to me how we have been able to capture some bandwidth of people's attention to take a look at what we are talking about here. And my expectation is, we are going to see some fairly nice momentum in that particular segment, although probably late in the year. I would think more in terms of late Q3, early Q4. But my expectation is we are going to see some nice forward traction there.

All right. Thank you. And then on the Houston trial you guys announced last quarter, any update on that? Is that deployed yet? Or kind of what's the time line on that, given the changes you have seen this quarter? Thanks.

Yes. Unfortunately, I mean, that has not gone forward, I mean, because of the pandemic situation there. We haven't been able to put any boots on the ground and make any, there's real material progress on the permissions front. The array is designed. We know where we need to go, get permissions. We just haven't had the ability to put boots on the ground to go make the permissions happen. So as soon as things kind of open back up, we will be ready to send folks back in there and get going on that project. But clearly, not going to happen in Q2, probably won't happen in Q3.

All right. That's all for me. Thanks guys.

Thank you.

Thank you.

Thank you. At this time, I would like to turn the call back over to Ralph Clark for closing comments.

Great. Yes. So thank you very much. I really appreciate you all dialing in and getting the update on where we sit as it relates to Q1 and looking forward to continuing to do our work and really getting back to work here really quickly and we will see you in about 90 days.

Thank you for joining us today. You may now disconnect and thank you for your participation.

Thank you.

Thank you.