SoundThinking Inc (SSTI) 2018 Q4 法說會逐字稿

Good afternoon, and welcome to ShotSpotter's Fourth Quarter and Full Year 2018 Earnings Conference Call. My name is Matt, and I will be your operator on today's conference. 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 the 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, February 19, 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'd 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'd like to turn the conference over to CEO, Ralph Clark. Thank you. You may begin.

Thank you for joining us to discuss our 2018 fourth quarter and full year results. This quarter was an exceptionally strong finish and a transformative year for ShotSpotter.

Q4 2018 revenues grew 49% to $9.7 million, which was beyond our expectations. And as our guidance predicted, we achieved our first ever quarter of GAAP profitability. We couldn't be more thrilled that we earned $302,000 of net income or $0.03 per share. Alan will provide more specific details around the quarter and the year, so I wanted to review our progress and achievements through the lens of our full year 2018 execution.

Revenues for 2018 increased 46% to $34.8 million. This was driven by a solid deferred revenue position and strong renewal execution along with 168 square miles going live in the year. This includes 24 miles going live with 0 miles of attrition this quarter.

As we said before, deploying new miles can be uneven on a quarterly basis throughout the year. As we ended 2018, we were deployed in over 640 square miles, up 35% from 2017. We now have deployments in 95 cities at year-end, including the addition of 2 new cities this quarter; Bridgeport, Connecticut; and Little Rock, Arkansas. Some notable new cities added to our customer roster this year include Baltimore, West Palm Beach and Jackson, Tennessee, among others, just to name a few.

We've also expanded deployments in 9 cities and reached a 3-year agreement with Chicago, worth approximately $23 million. ShotSpotter is also now deployed on 10 campuses and other sites such as our highway deployment near Richmond, California.

We're very excited to complete our first acquisition as a public company with the purchase in October of HunchLab, now rebranded as ShotSpotter Missions. We believe this puts us in the forefront of the nexus of predictive analytics, artificial intelligence and precision policing.

We're pleased with the early positive feedback from current ShotSpotter Flex customers and prospects as we build our deal pipeline. We see Missions as a critical platform extension for our solution with the potential to become over the long term, a growth and margin driver for our business. Missions will be an important focus for us this year as we invest to extend its market penetration and broaden its capabilities.

Our larger platform strategy ties directly to our increased investment in marketing this past year. We hired Sam Klepper as our Senior VP of Marketing and Product Strategy and have further expanded the marketing mandate to be able to execute on our product roadmap strategy as well as develop new lead-generation programs. The goal of these new lead-gen programs is to drive and qualify new leads at a faster rate, accelerate the sales cycle for existing prospects and free up critical bandwidth of our direct sales team. These programs include engaging directly with communities and cities that have significant gun violence issues.

In fact, with our recent example in Pleasantville, New Jersey of how citizens can drive the adoption of ShotSpotter, on election day, 70% of voters approved a small municipal task to fund a ShotSpotter deployment covering 90% of the city. Pleasantville was the first municipality in the country to put a ShotSpotter tax measure on the ballot, which we believe is the strong statement about how community members value the safety our solutions can help bring to their city. Our marketing efforts are also focused on creating a conversation around the impact of gun violence with leading trauma care hospitals. We believe that working with hospitals directly, not only creates an opportunity to improve gunshot wound victims' outcomes, but it can also help generate strong advocates and possible new funding streams for ShotSpotter deployment.

We also expanded our sales reach this year by executing a reseller agreement with Verizon to sell our Flex product, augmenting the Smart Cities initiative that we already have in play. We've completed the training of the Verizon sales force and have put in place a monthly sales team checking and deal pipeline process review. We see this collaboration as having an important and longer-term impact on our existing sales efforts and hope to begin to see initial traction in late 2019, helping us drive to our goal of adding approximately 100 new customers to our platform over the next 4-plus years. We also added resources to our international sales efforts and expect to see additional international revenues near the latter part of 2019. Indeed, our international expansion is already underway with the recent announcement of a new contract with the Bahamas.

While progress across the business and the company's financial success are very important, the reason we come to work every day is the positive role we've played in helping our customers reduce gun violence in their communities. Not only do larger cities, like New York City and Chicago benefit from ShotSpotter's gunshot detection technology as a critical factor in their reduction of gun violence, but so do midsized and smaller cities. For example, Bakersfield, California, with the population of approximately 380,000, went live with ShotSpotter in March 2018. In the first 9 months of use, the Bakersfield PD identified over 300 gunshot incidents that they wouldn't have known about, made 30 arrests and seized 27 guns. Overall, the city saw a 13% reduction in gun assaults, while ShotSpotter was active at Bakersfield in 2018.

With our solution directing police to the precise location of gun crime, physical evidence can be more readily collected and witnesses can be located and interviewed. Our forensic data has been used in over 100 criminal prosecutions throughout the United States. And in 2018 alone, ShotSpotter expert witnesses have testified 25 times in support of their forensic findings. Forensic services will be an increasing area of focus for us in 2019 as we make investments to expand the applications for our unique data. It is still the early days for this part of our strategy, but look for further progress as the year unfolds as we continue to work to expand both our product portfolio and our addressable market.

Yet, we're still very much in the early days of addressing the U.S. market with our core Flex product with a market that has less than 10% of the domestic TAM penetrated. And while we'll never take anything for granted, we continue to see no real viable competitive alternative to our solution. Our strong competitive position is evidenced by our efficient $0.30 spend for each dollar of the annualized contract revenue added in 2018.

With large deployments in tier 1 cities, like Chicago and New York mostly complete, our focus this year, will be on adding more domestic tier 2 and tier 3 cities along with international deployments, while we continue to lay the groundwork necessary to capture the next step of tier 1 cities that make up the largest cities in the U.S.

Our strategy of maintaining a keen focus on customer onboarding and customer success is paying outsized dividend, as it enables us to maintain high rates of customer satisfaction as evidenced by a strong Net Promoter Score of 50, achieve very low rates of customer churn and help drive expansion. In fact, our revenue retention rate this past year was 118% if you don't include the Chicago expansion. If we include the Chicago expansion, the revenue retention rate is 139%. To be clear, we don't expect the revenue retention rate of 139% to be sustainable over time. As seen with the Chicago expansion, revenue retention rates can be materially impacted by the presence or absence of large expansions or attrition. However, if we successfully execute on our business strategy, we expect our revenue retention rates to stay above 100% for the foreseeable future.

So after a successful 2018, we have set a very aggressive growth agenda for 2019 and beyond, and we are energized to get at it. As reported in our earnings release, we are reaffirming our guidance for 2019 to grow revenues approximately 30% to a range of $45 million to $47 million this year, while achieving full year GAAP profitability. And most importantly, we want to continue to lead the way and helping law enforcement apply our solutions in addressing and reducing violent crime and position the ShotSpotter solution as a standard of care.

So that concludes my prepared remarks. I will now turn the call over to Alan, who will provide further details on the fourth quarter and full year 2018, along with our expectations for financial leverage and continued margin expansion in 2019.

Thank you, Ralph, and good afternoon, everyone. We entered 2018 on a strong note.

Revenues for the fourth quarter exceeded our expectations, increasing 49% from the fourth quarter of 2017 to $9.7 million. Our full year revenue increased by 46% to a record $34.8 million, which also exceeded the guidance we last updated back in November 2018, reflecting growth in the number of miles covered through expanded deployments for current customers as well as the addition of new customers.

Our revenue and gross margin were also positively impacted from a receipt of a payment of approximately $170,000 from the U.S. Virgin Islands for services provided prior to hurricanes, Irma and Maria, destroying their ShotSpotter system.

We added 24 net new miles in the fourth quarter. On top of this, our revenue retention rate ended 2018 at 139%. If the Chicago expansion were excluded, our revenue retention rate would still be in the 118%, which as Ralph mentioned, is close to inline to what with our expectations are for the future.

We're happy to announce our first quarter of GAAP profitability with a net income of $302,000 or $0.03 per share. Our stated objective was to reach this milestone by the end of 2018, and we are pleased to have achieved this goal.

So let's look at some of the details of the quarter and the year. Gross profit for the fourth quarter was $5.6 million or 58% of total revenues, up from $3.2 million or 49% for the fourth quarter of 2017.

For the full year, our gross profit was $19.2 million or 55% of revenue, an improvement from the $11.6 million or 49% of revenues for 2017.

Now turning to our expenses. Our operating expenses for the fourth quarter were $5.1 million, actually decreasing 5% from the fourth quarter last year, due to larger onetime expenses in the fourth quarter of 2017 related to certain legal and filing expenses, professional and other outside service fees.

For the full year, our operating expenses were $21.8 million or 63% of total revenue versus $15.9 million or 67% in 2017. The increase in operating expenses overall was primarily related to the growth in our business.

With our focus on the careful deployment of capital, our sales and marketing spend per dollar of annualized contract revenue was approximately $0.30 per dollar in 2018, down from $0.34 per dollar in 2017, while revenue retention rate of 139% was achieved for the full year.

Sales and marketing expenses for the fourth quarter were $2.2 million or 22% of total revenues versus $1.9 million or 29% of total revenues for the prior year period. As we stated, this increase in total dollars reflects our investments in marketing, international sales efforts and our customer success initiative.

Our R&D expenses for the fourth quarter were $1.3 million or 13% of total revenues compared to $1.1 million or 17% of total revenues for the prior year period. We continued to invest in R&D to add features and functionality to our Missions product, improve our analyst capabilities and conduct other initiatives.

G&A expenses for the quarter were $1.7 million or 17% of total revenues, which is a decrease from the $2.4 million or 37% of total revenues for the prior year period. Note that G&A in the fourth quarter of 2017 included higher legal and filing expenses, professional and outside service fees.

We are pleased that we are beginning to see operating leverage in all of our expense lines. We continue to believe that our ongoing investment in sales and marketing as well as R&D are prudent and helping us reinforce our leading market position.

Our GAAP net income for the fourth quarter was $302,000 or $0.03 per share based on 10.8 million basic and 11.7 million diluted weighted average shares outstanding. This compares to a GAAP net loss of $2.5 million or $0.26 per share during the prior year period based on 9.7 million basic and diluted weighted average shares outstanding. Again, we are so pleased that we achieved our first quarter of GAAP profitability on the timeline we laid out in early 2018 and on a much lower revenue base than most SaaS companies.

For the full year, our GAAP net loss was $2.7 million or $0.26 per share based on 10.6 million basic and diluted weighted average shares outstanding versus a loss of $10 million or $1.61 per share based on 6.2 million basic and diluted weighted average shares outstanding in 2017.

Adjusted EBITDA for the fourth quarter was $2.1 million, up significantly from the $1.2 million adjusted EBITDA loss for the prior year period. Adjusted EBITDA for 2018 was $3.6 million, also up significantly from the $5 million adjusted EBITDA loss for 2017.

We added 24 new go-live miles in Q4 of 2018 comparable with the 23 miles we added in Q4 of 2017, reflecting the normal lumpiness of our business. For the full year, we added 168 new go-live miles, an increase from the 114 go-live miles we added in 2017. We ended 2018 with approximately 670 public safety miles under contract, of which approximately 640 were live.

Deferred revenue at the end of the year was $24.2 million, up from $20.3 million in the previous quarter. Of this amount, $23.1 million was short term and $1.1 million was long term.

In general, we expect short-term deferred revenues to be recognized within four quarters. However, as always, we caution that you shouldn't read too much into the quarterly changes in deferred revenue as timing during the quarter of when new miles can go-live, can have a significant impact on deferred revenue. We consider this another metric that is more informative on a year-over-year basis versus on a quarterly basis.

We ended the year in a solid financial position with $10.3 million in cash. Cash flow used in operations for the year was $1.4 million, primarily due to working capital used as our accounts receivable increased to over $15 million by the end of the year due to billings to Chicago in connection with their expansion. Also contributing to the cash usage was our acquisition of HunchLab and the settlement of the contract litigation, as we previously discussed last quarter. While we have $10 million line of credit with Umpqua Bank, we've not yet used it and still have no short- or long-term debt.

We are reiterating our full year revenue guidance of a range of $45 million to $47 million. Our confidence in our full year outlook is based on the strength of our short-term deferred revenue, our historically strong renewal rates and new and expected contract awards that we expect to go-live before the end of the year. Of course, we'll update the guidance during the year if business conditions, contract wins or deployment schedules change.

We plan to continue our investments in 2019 with the goal of further penetrating this largely untapped market. We're investing to expand our marketing efforts, which proved very valuable last year, to accelerate our sales and add new clients and expand our efforts to grow internationally. We also expect to accelerate our R&D spend, primarily to add enhancements to our Missions product.

We expect operating expenses during 2019 to increase each quarter on a dollar basis in each category. Historically, our first quarter revenues tend to be flat from the previous fourth quarter. Therefore, with the increases we plan to make in our operating expenses in the first quarter of 2019, we expect to incur a moderate GAAP net loss during the first quarter. However, as Ralph noted earlier, we anticipate achieving GAAP profitability for the full year of 2019.

In closing, we entered the year with significant financial and operational momentum. We're excited and energized for our prospects in 2019 and beyond, and we look forward to sharing our progress with you throughout the year as we help communities reduce gun violence.

Now back over to you, Ralph.

Thanks, Alan. Before we open up the call to your questions, I want to thank the ShotSpotter team for their hard work, their commitment to reducing gun violence and enthusiasm in helping ShotSpotter to fulfill our purpose is truly inspiring. I look forward to another successful year with all of you. And to our customers, business partners, and loyal shareholders, thank you for your confidence and sharing this journey with us.

We're now prepared to take your questions.

(Operator Instructions) Our first question is from Matt Pfau from William Blair.

First, wanted to start off on the Missions product and maybe get some details there. So first of all, if you could sort of talk about, are you seeing any sort of trend in terms of types of cities or police departments that are most interested in the Missions product? And then what are you sort of anticipating or what's the initial feel in terms of sales cycle related to Missions? And then, Ralph, you sort of -- you hinted that there could be some changes with the product in terms of functionality and perhaps, on the sales front. So anything you can provide details on that would be helpful as well.

Great. So great, great question. And I'll start and Alan can jump in as appropriate. So I guess the first part of your question is, where are we seeing the interest? Our focus is really on existing ShotSpotter customers first and foremost, and then there are some ShotSpotter prospects that we've [engaged in] having some conversations with them. And the uptick has been actually quite, quite positive. We're building -- we're in the process of building the pipeline right now. We developed a pricing model. We have a product roadmap that we're working on in terms of improving the functionality and integration of the Missions product with our existing ShotSpotter Flex solution. So we're really quite encouraged by the uptick, at least we're seeing in terms of people's interest in that solution. And I think as we stated on a number of occasions, we're going to expect that revenue contribution to happen where it's on Missions specifically later in the year of 2019.

Okay. And then just a follow-up on that question, Ralph. So you sort of reiterated earlier in the comments that how ShotSpotter Flex can be used for both large and smaller cities as well. Are you seeing the same with the Missions product? Or is the interest primarily with perhaps, larger more sophisticated police departments?

Yes. So we're not really seeing to cut that away. I mean, we're talking to some very large customers of ours that have very large ShotSpotter deployments in our tier 1 cities. And we're also seeing interest in tier 2 and tier 3 cities as well. It's really across the board.

Got it. Okay, and last one from me. Just there's been some moving parts here early in the year that could have a potential impact on you guys. So first, in terms of the severe weather, there's obviously, in the northern parts of the U.S. been some pretty bad weather. Has that impacted deployments at all? And then the government being shut down for part of the year. Did that have any impact either on the deployments or contract signs?

Sure, a great question. This is Alan. Well, I think in general go-lives are just very lumpy by nature, and of course, they can be affected by items such as getting permissions, bad weather or other factors. I think maybe bad weather affected a little bit in Q4. But we also just generally expect less go-live miles in the winter months, especially for cities in the north. We haven't really seen an impact from the government shutdown, no material impact at this point. That doesn't mean that we won't see something in the future, if there is some effect on some of the agencies that occasionally provide funding to our customers, HUD, DOJ and things like that. It's a little too early to tell our impact, but we have not seen any at this point.

The next question is from Jaeson Schmidt from Lake Street Capital Markets.

I just want to look at 2019. Alan, you mentioned sort of the normal seasonal patterns here in Q1. But should we expect the normal seasonality to continue throughout 2019?

Sure. We do expect in general that Q1 revenues will be flat from Q4. We do expect that to occur as well this year. Generally, we also expect Q3 to be somewhat flat with Q2. Although we do expect to see that, it might be mitigated a bit this year and less pronounced than in past years.

Okay. That's helpful. And looking at the international opportunity, can you talk a little bit about how your customer engagement funnel has expanded over the past 3 months?

Sure. As you know, we hired a -- this is Ralph, we had a VP of International to focus on Latin America. And John has been quite busy in market, both in Central America as well as South America. And we continue to be very constructive around the idea that we would expect to see some additional international revenues that come about later this year, later 2019. As you heard on the call, which we typically don't do, we talked about a booking that isn't gone live yet. But we did talk about bookings in Bahamas, Nassau, Bahamas, which is an international client as well. So that's proceeding pretty nicely. We are also expecting to have some traction, additional traction in South Africa. We already have a deployment there in Cape Town, South Africa, which is very successful. And there's a number of cities in South Africa that have very similar gun violence issues to that of Cape Town. So between Cape Town potentially expanding and possibly another other city or 2 coming on board out of South Africa, is where we'd expect to see some revenue -- international revenue contribution outside of Latin America and Central America. And the Caribbean, I should say, if I'm going to include the Bahamas.

Our next question is from Chris Van Horn from B. Riley.

Just as a follow-up on the international deployments. Is there any difference in terms of pricing or investment needed. And then maybe if you could talk a little bit about how the Bahamas contract came about? Was it from a referral from another region in the U.S.? Or was it just an organic sales effort?

Sure. So on the pricing model, we do charge more for international sales. It's slightly more expensive to do business there. But we do charge more. And it's still the same contractual term in terms of it's an annual subscription fee, same kind of setup fee, configuration and the like. But the pricing is higher for international deployments because the cost -- one of the reasons is the cost is a little bit higher. And with respect to Bahamas, I don't think we can ever underestimate how network effects happen from successful deployments in the U.S. People look to what we're seeing in Chicago, New York, Miami and other places and they're paying attention to that. So I would say in the case of the Bahamas engagement, it's probably a combination of both kind of organic kind of feet on the ground, selling along with them kind of talking to various satisfied customers here in the U.S.

Got it. And then just a follow-up. On the guidance for revenues in 2019, does that include any Missions business or any Verizon reseller agreement business?

So this is Alan. I would say, just in terms of guidance for '19, we do have some Missions revenue that are expected to come in. As Ralph mentioned, the majority of those will be in the latter part of 2019. And in terms of Verizon, nothing specifically allocated to Verizon. However, we continue to joint sales calls with Verizon at this point. And some of those may be into our actual pipeline with some kind of a factor. But nothing that specifically allocated to Verizon per se.

Great. And then last one from me. You had a tremendous success with your existing customer line up, and I just was curious on the bigger customers, like Chicago or New York. How much more adoption or penetration do you kind of see in the pipeline for those customers as you look going out?

So this is Ralph. I would say with those 2 customers, I think they are fairly fully deployed at this point in time. And so our focus really this year, 2019, is to focus on a fairly robust pipeline we have with a number of tier 2 and tier 3 cities, as we kind of lay the foundational work to kind of bring on our next set of kind of tier 1 cities that aren't on the ShotSpotter platform today. But I think Chicago and New York are fairly well deployed at this point in time.

Our next question is from Jeremy Hamblin from Dougherty & Company.

I wanted to get into -- you had a comment about expanding your forensic capabilities in 2019. And could we just tie that into, maybe clarifying what you mean by expanding those capabilities, is that tied into ShotSpotter Missions revs? But maybe just a little additional color on that?

Great. Thank you for the question. So our thoughts are that we're going to be more intentional around kind of building a professional services revenue component to our business. Right now, for example, on the forensics side, we produce the detailed forensic reports and provide expert witness testimony and, frankly, are only charging people -- customers travel expense or the bandwidth in hours that we're spending on a witness stand in a court case. And so our belief is that we can kind of package up those services and charge more of a consulting rate for that time combined with what we're already doing with respect to training kind of -- let's see, what's the other one that we're doing, it's like training, forensic, services, integration services. So we have notification engine that we charge a subscription fee for that we can -- we think we can be much more intentional around kind of bundling up these services and kind of putting them under a professional services umbrella and really focus on that as a revenue contributor -- contribution to the company.

And I would just add, as Ralph mentioned, this is what we hope to be incremental dollars, which should basically drop to bottom line because these are things that we're already providing basically now but for free.

Okay. And just in terms of thinking about how your customer feels about that. It sounds like it does expand your TAM overall. Have you gotten the sense from customers? I'm sure you've had conversations with them about paying for that capability. Or are you just kind of making them aware at this point of time spent doing the investigation work and getting that data together to be used in that type of setting?

Yes. So this is Ralph. I would say in case of forensic services, one thing to note is that it's really coming from a different wallet. So typically, our core customers have been the law enforcement agency or police department. Oftentimes, we're engaged in expert witness testimony. It's really at the behest of a district attorney, which is a separate budget line item, and so we're very confident that, that business is within the realm of [the heart of possible]. They pay for expert witness testimonies of various types of forensics services, and so ours is really no different. I think we're just asking people to kind of value the real capability that we're bringing to the table and charging appropriately. And I don't want to mislead anyone to think that this is going to be, I mean, a huge revenue driver for us, although it is very nice margin business, as Alan pointed out. But you can just think of this as kind of being kind of incremental to what we're already doing from a revenue basis and just manage it in a way that is again much more intentional then having a real focus on monetizing basically 8,000 hours of capacity that's out there that could be -- that we could charge for to the extent that we can get them on witness stands and the like.

Yes, and I would just add, as we roll this out, we're going to be thoughtful about implementation. It's easy to start a new customer out paying right away, where we might have a different plan for customers that are used to some of these services that have been provided for free. So we're going to be thoughtful and, as always, customer focused when we implement this.

Is that something where you could foresee revenues in 2020 in that business line?

I think we're going to see it for 2019.

Oh, wow. Okay. And then the other thing I just wanted to get a little additional color on -- your G&A cost, I mean, incredible job on margins overall and operating expense. Your G&A costs on an absolute dollar basis were your lowest in Q4. And I know that you had the comparison from last year where you had a bunch of onetimers. But just in terms of putting some context around -- even though this, obviously, your highest revenue quarter, it was you're lowest on the G&A front. Any color you can provide just in thinking about that in context as we look forward in 2019?

Sure, this is Alan. I would say there are -- there's a couple things. We are being very thoughtful about our G&A expenses. I would also say that there are -- is just some aspect of certain areas that the accrual sort of maxed out earlier in the quarter. For example, a bonus accrual such that an accrual in Q4 might be slightly lower than accrual in Q1 where we would need to be starting over on that. There's little bit of an impact in there. But in general, we're not adding significantly to our G&A costs. And we're being very thoughtful when we do add them.

Okay. And just to confirm, your legal accruals, those are now done with from what you had the several quarters earlier in 2018 and 2017?

The -- I think, the legal accruals you're talking about is related to the litigation that we had with the contractors. Yes, that' been complete. We are still -- we still have one outstanding litigation that we can't really comment on. We don't have any accruals at this point related to that. We can't accurately measure what those might be. And when we can, then we'll evaluate any necessary accruals there.

Our next question is from Richard Baldry from Roth Capital Partners.

Can you talk maybe about how you see growth split in 2019 between expansions versus new cities or regions? Maybe trying to gauge how much visibility you have entering 2019 versus prior years?

Sure, and this is Alan. I guess, in general, we give our guidance in a way that we think is realistic and achievable, and we do have a lot of visibility in those revenues. I would say, if we were to look at a split as probably the majority of the new revenues are coming from new city captures as opposed to expansions. But I don't want to really give a percentage split in terms of 60-40 or 50-50 at this point.

Maybe talk about how you feel about the sales team. You've been adding selectively with the new Missions capability. Do you feel like you need to add more aggressively? Are the types of people that you think you'd need to have to sell changing or still very similar to what you've had in the past?

Yes, so this is Ralph. I mean, we feel really constructive on our kind of sales resources. They're very capable in scale. They get did a great job in 2018, and we walked through the sales pipeline with the direct sales team domestically and feel really good that we have the right resources and focus to bring about what we need to make happen to be successful this year. I would say with respect to Missions, I think, we probably are maybe a headcount higher in the future to kind of focus more on the Missions product. But we're going to be looking at kind of probably maybe bringing that person on more in a kind of customer-success role as opposed to more of a direct selling role. And I think I would just add again that, as we always do, that we shouldn't underestimate the benefit that our customer-success and onboarding team kind of brings to the sales effort. Although they're not quota-carrying folks, they're really quite instrumental in trying tried, very high customer satisfaction and kind of high Net Promoter Scores to our solution, which are so critical in getting that very strong word of mouth reference sales out there because that's how the market moves here in domestic public safety. People pay attention to successful chiefs. And if successful chiefs are incorporating our solution and driving outcomes, it makes it a lot easier for us to kind of sell that new prospect.

Our next question is from Joseph Osha from JMP Securities.

Sorry, I've got a bit of a cold. Just -- to return this to the previous question. I'm wondering if you can talk about what kinds of resources and what the engagement process looks like for the smaller Tier 2 customers that you're engaging now versus the Tier 1 customers?

Yes, this is Ralph. So that's an interesting question. I mean, it's very similar, I would say -- I mean, you're engaging the buying centers the same. The buying center tends to be the police department. What makes it a complex sales is that you have to get, I guess, engagement and alignment around people that are kind of sitting around the police department, be it elected officials or sometimes even community, to kind of get engaged. And we saw that process actually play out in Pleasantville. That's an interesting case study there. So I would say the process is very, very similar. The scale is different. Maybe larger Tier 1s cities are certainly a little bit more complex. It's a lot more people. You've got to get in a room and try to have a conversation with, to get them socialized to the idea of incorporating ShotSpotter Solutions as a part of their overall gun violence reduction efforts. But it doesn't -- it's really not that different. You might take a little bit longer. The dollars are bigger oftentimes, the square miles we're talking about or bigger. But it's basically kind of the same recipe, respecting and understanding that the buying center is the Chief of Police or Deputy Chief of Police, and that we need to kind of coordinate with that buying center along again with the people that are sitting outside the buying center to help influence that sale. And again, leveraging existing customers that are seeing great outcomes. We're seeing police chiefs talk about ShotSpotter and Mayors talk about ShotSpotter, so really, bringing that content to the conversation's important.

Okay. Part of where I was headed with this just think about 2019 is wondering whether these smaller customers perhaps have a more quick -- a more rapid close cycle than the bigger ones.

I think that's probably a fair assessment. And I think we're still looking at longer sales cycles, kind of 12 to 18 months. It could be the case that the Dominion -- the smaller sized cities might be kind closer to kind of 12 to 15 months versus more of the 15 months to 18 months or 20 months in terms of the very large Tier 1 city. But I think in fact, with the large Tier 1 cities, you can probably look at sales cycles longer 18 months, frankly. They can take up to 2 years. And that's why we try to impart on this call that at least from 2019, our expectation is that we're going to get there kind of hitting a lot of doubles with Tier 2 and Tier 3 cities while we're laying the foundation work that kind of capture those next 1, 2, 3 Tier 1 cities because those do take it a little bit longer to kind of bring about. But those will kind of bring it right. But those will probably be more of a 2020 opportunity for us versus 2019.

Okay, great. And then just on a related point, at your analyst meeting, you talked a lot about the notion of rather that just adding salespeople willy nilly, adding customer success people, retention people, sort of putting a wrapper around your sales force as opposed to expanding the number of direct sales. Does that still continue to be the thought process as you think about how 2019 looks?

Yes, certainly, very much so. But I think I would add to that we have a very powerful ally now, certainly in terms of lead regeneration in working with the Verizon on the reseller front. I mean, they just have a much kind of bigger footprint across the public safety market, at least domestically and so that I think is going to be quite an interesting lever far as that we're expecting to generate some interesting bookings opportunity for us later in the year.

And that kind of neatly anticipated my question, we really think of Verizon as a lead-gen opportunity that would feed into your existing business process not something that's adjacent necessarily

Yes, I think that's the way to think about it. I think, we're still going to be required to be very much intimately involved in the sales process. I mean, it's a certain skill and set of experiences to I think be successful in selling this type of solution to public safety customers. And I think Verizon is going to want to leverage our expertise and experience in that matter. So I think we're going to very much involved, I think, in the sales process with them. But I think they can help bring us to the party in several places where we otherwise might not be able to be just because of their reach.

Okay. And then the last one from me, any just quick update on the uptake or general efficacy of NIBIN and how that's being utilized?

So anecdotally, this is Ralph, I mean, we continue to see very, very strong evidence that agencies that engage in the NIBIN process, and for those of you in the phone that aren't familiar with what NIBIN is, you can think of it as essentially a kind of fingerprinting database for gunshot shells, so what we're asking customers to as a result of a ShotSpotter alert, kind of getting a cop to a dot, they're more likely to recover the shell casings and then once they run into the NIBIN system, being able to do the network analysis to figure out the movement of a crime gun, which then helps them respond to and identify those very few shooters that are driving most of the gun violence problems in these very small at-risk communities. And so that strategy has proven to be very successful. We see anecdotes from this -- of this all over the place. And as one chief of police says, if you want to predict tomorrow's homicide, investigate today's shooting, and that's what we enable: ShotSpotter on the front end combined with NIBIN on the back end. It's a very strong combination.

Our next question is from Tim Klasell from Northland Securities.

Sort of a follow on your marketing comments and what you said earlier. We've noticed a lot of press, in particular, around talking about some of the benefits of ShotSpotter shell casings and what have you that he mentioned. Is that showing up with your customers? Are your sales guys walking in and talking to a potential customer, and are they further long in understanding the value proposition now? Do you think that will sort of shrink that sales cycle down a bit here and going forward or -- I'll leave it at that.

Yes, so we lean in pretty heavily on the idea of NIBIN and what they call prime gun intelligence centers, because that's a very clear measurable benefit that customers get when they deploy ShotSpotter. Our assumption is that at some point in time, the ShotSpotter solution will become the standard of care where it's just something that you do as a part of having an agency, just as you would have a nonlethal or body-worn cameras that you would want to have a ShotSpotter in the event that you were dealing with violent crime in your city. I think it's fair to say we're not there yet. We're still kind of expecting, frankly, that we're looking at 12- to 18-month sales cycles. When we do reach the tipping point, our expectation would be that those sales cycles would shrink pretty rapidly, and then we're dealing with a whole different kind of go-to-market strategy. But I don't think we're anticipating that happening, certainly in 2019. But hopefully it'll happen sooner versus later. But we're not planning or depending on it to happen for this year.

Okay, then a quick follow-up. You mentioned obviously, the Bahaman win. That's congratulations. U.S. Virgin Islands may -- made a payment to you -- how about Puerto Rico. Any thoughts there about them potentially coming back to life? Or is that still a ways out?

Sure, this is Alan. We're hopeful that Puerto Rico returns as a customer, right? So we do have them in our pipeline. And the pipeline in general has different probabilities assigned to those. So when we give our guidance, we do a weighted average on those. So Puerto Rico was and continues to be on our prospective pipeline. We have seen some movement there, but it's still honestly too early to tell exactly when something might happen.

Our next question is from Jeff Kessler from Imperial Capital.

I recently was at a safe city, secure city's conference. And one of the things that they talked about in terms of funding various programs was a catalyst, something to kind of tie the various services together, around which the public/private partnerships could actually agree on funding. And my question to you is, do you think that you -- in your relationships with companies like Verizon, are you able to get that mind share in which these -- well, let's just say these groups will be able to get mind share around you, too? Taking on, essentially, you being the brand name that they use to go out to the community and try to get funds for, not just ShotSpotter but you serving as a catalyst for other types of safety and public safety measures. In other words, that builds up your value proposition as well.

So this is Alan. I would say that we're still cautiously optimistic about how large providers of smart cities, smart communities like Verizon, GE and others, can you ShotSpotter as a launching platform, which I think you're saying is, sometimes there might be a city that isn't necessarily ready to do a full smart city or smart community deployment where Verizon or someone else might be able to say, well, let's get started with something like this and sort of primed to pump. I think that is possible. We have seen very little movement there, frankly, in terms of how fast they move on these deals, but we are certainly hopeful that, that can and will occur either later on this year or into 2020 and beyond.

All right. Second question is have you ever considered the marketing of ShotSpotter to places where there are guns which are in place already? Military bases, protective areas like Brink's centers, things like that in covering Brink's, there's from time to time some violence in some of these depots. Do you market commercially at all? Or is it all municipal city related?

Yes, this is Ralph. I would say the vast majority of our marketing efforts and focus really is on municipalities and police departments. That's where the low hanging fruit is certainly. We've seen some kind of interesting things come over the transom. I think you're familiar with our freeway project, which is a little bit different type of a model for us. Certainly, our SecureCampus solution is an example of a slightly different variant to our kind of law enforcement focus. But I think our focus really kind of fits under those umbrellas like kind of thinking doing more kind of commercially oriented things like protecting banks or Brinks or things like that. That's maybe out there. But I think we just have too much low hanging fruit for us to go pick at before we get fancy and elude our focus to those other things.

One final question. At the last ASIS conference, and obviously, you will see the ISC West conference. There's a lot of companies that do have technology for inside, and they've been trying to develop something that works out of doors. Clearly, they have not made any dents in the road. Can you talk a little bit about where the competitive landscape, meaning is there -- you're essentially a brand name, a standard at this point. Are there any companies that you see out there that are -- that essentially would be of either concern or of interest to you if they were to become big enough?

So -- yes, this is Ralph. So we try not to take anything for granted, to be perfectly honest with you. But honestly, we have not seen any real strong viable direct competition to our outdoor kind of wide area franchise. I think what we do is extremely difficult and challenging. We've got a lot of intellectual property kind of built into our solution and certainly a lot of experience curve attributes and benefits. And I think it would be extremely challenging and difficult for new entrants to kind of come into the space and execute at the high fidelity that we've trained the market to expect in terms of quality of service. Now I'll also quickly say that you can't take anything for granted because, who knows, tomorrow somebody could come on to the scene, but we've seen a little bit of chatter. We haven't seen any real deployment that make us particularly concerned or worried at this point in time.

Your next question is from Will Power from Robert W. Baird.

Alan, maybe first with you -- I think you talked about the investment cost or OpEx rising through the year. Any color on gross margins. Should we expect that to tick up, any seasonal factors to be aware of there?

Sure. I would say, in general, we expect our gross margins to increase as well. Don't expect any real seasonality related to that. It is something that we would certainly expect the end of next year Q4 to be higher than Q4 this year. And I can't say it will be a straightline increase, but generally, upward and to the right.

Okay. And then just more broadly, as you look at, what are still a number of Tier 1 opportunities out there. Are there any common areas of pushback or barriers that you're running into? And I guess, kind of as a follow-up to that, as I think about some of the earlier forensics commentary, has that been something that some of the cities that you don't have maybe are looking for that can maybe push you over the edge to help win some of those contracts? I guess, really trying to figure out what gets you over the line on some of these other Tier 1 cities? Or is it just you gain the right advocates in place over time?

Yes, so this is Ralph. Every single one's different. I would say, we have kind of serious active pursuits in a number of these Tier 1 cities where we're not deployed now, and each one has its own kind of unique story or narrative. And so I can't really begun to boil it down to a singular kind of use case or thing friction point that is kind of preventing us from getting here to there. I think it's really important that we are impatiently patient about some of these new pursuits engagement because, at the end of the day, it really does take a prepared mind to adopt this technology and use it the right way to drive positive outcomes. And so I think my personal feeling is, I would rather wait until we have everybody aligned, buying in, [leaning] in and wanting to deploy and use this technology in the right way to drive great outcomes versus kind of forcing a transactional sale where maybe a customer is not ready. And the nice thing for us is that there are so many opportunities out there for us in kind of Tier 2, Tier 3 land for now that we can afford to be persistently patient until we can get 1, 2 or 3 of these other Tier 1 cities to decide to lean in and adopt the solution. Because what we do know from experience and there is a similar use case, our case study relative to Tier 1 usages. Once that Tier 1 agency comes onboard and starts using the technology, they tend to expand and become very, very big, important customers for us. So that would be the way, I guess, I would answer that question. Hopefully that is helpful.

This concludes the question-and-answer session. I'd like to turn the floor back to Mr. Clark for any closing comments.

No, I want to thank everyone very much for dialing in and listening in to our earnings call. As I mentioned in my earlier comments, we are super excited about 2019, and we're also incredibly grateful for all the hard work that went in to 2018 on behalf of the team and myself at ShotSpotter. So thank you very much and looking forward to chatting with you all again in 3-or-so months and updating you on our progress in early 2019. Thank you.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.