SSTI - SoundThinking Faces Revenue Risks In 2023

2023-06-21 17:45:43 ET

Summary

• SoundThinking, Inc. reported its Q1 2023 financial results on May 13, 2023.
• The firm provides gunshot detection systems for law enforcement agencies worldwide.
• SoundThinking has completed a rebrand from its previous name of ShotSpotter as it seeks to expand its total addressable market.
• 2023 has top-line revenue growth risks, so until we learn more about its expansion plans, I'm on Hold for SoundThinking stock.

A Quick Take On SoundThinking

SoundThinking, Inc. ( SSTI ) reported its Q1 2023 financial results on May 13, 2023, missing both revenue and EPS estimates.

The company provides gunshot detection hardware and software to government entities and public & private infrastructure operators in the U.S. and overseas.

Given the current year’s potential revenue risks and until we learn more about expansion plans, I’m on Hold for SSTI.

SoundThinking Overview

Fremont, California-based SoundThinking, Inc. was founded as ShotSpotter in 1996 to provide law enforcement agencies with integrated gunshot detection hardware and software solutions.

The firm is headed by Chief Executive Officer Ralph Clark, who has been with the firm since 2010 and was previously CEO of GuardianEdge Technologies before its acquisition by Symantec.

The company’s primary offerings include:

• Gunshot detection

• Investigative tools

• Patrol management

• Forensic services

• Highway security

• Corporate security

• Campus safety.

SoundThinking acquires customers through its direct sales and business development efforts as well as through partner referrals.

SoundThinking’s Market & Competition

According to a 2022 market research report by Allied Market Research, the global market for gunshot detection systems was $580 million in 2021 and is forecast to reach $1.2 billion by 2031.

This represents a forecast CAGR of 7.9% from 2022 to 2031.

The main drivers for this expected growth are a rise in urban crime and a surge in adoption by law enforcement agencies tasked with "doing more with less."

Also, the gunshot detection market by application growth is shown in the chart below:

Major competitive or other industry participants include:

• 3XLogic

• Alarm Systems

• AmberBox

• Databuoy

• QinetiQ Group

• Raytheon Technologies

• Safe Zone

• Shooter Detection Systems

• V5 Systems

• Tracer Technology Systems.

SoundThinking’s Recent Financial Trends

• Total revenue by quarter has plateaued recently; Operating income by quarter has dropped further into negative territory:

• Gross profit margin by quarter has trended lower; Selling, G&A expenses as a percentage of total revenue by quarter rose in the most recent reporting period:

• Earnings per share (Diluted) have been volatile in the past 24 months:

(All data in the above charts is GAAP.)

In the past 12 months, SSTI’s stock price has dropped 13.47% vs. that of the iShares Expanded Tech-Software Sector ETF’s ( IGV ) rise of 26.89%, as the chart indicates below:

For the balance sheet , the firm ended the quarter with $5.5 million in cash, equivalents and short-term investments and no debt.

Over the trailing twelve months, free cash used was $0.9 million, during which capital expenditures were a hefty $10.6 million. The company paid $8.6 million in stock-based compensation in the last four quarters, the highest rolling twelve-month figure in the last eleven quarters.

Valuation And Other Metrics For SoundThinking

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha.)

Commentary On SoundThinking

In its last earnings call ( Source - Seeking Alpha ), covering Q1 2023’s results, management highlighted its rebranding as a signal that the firm will be expanding into "other complementary and adjacent solutions" in the future.

The company went live in six cities and expanded eight existing systems during the quarter.

Management did not disclose any company, customer or dollar retention rate metrics, only characterizing them as "high."

Total revenue for Q1 2023 fell 2.8% year-over-year, and gross profit margin dropped 5.5 percentage points.

Selling, G&A expenses as a percentage of revenue rose 4.7 percentage points, a negative signal of worsening efficiency while operating losses continued to deteriorate into negative territory.

Looking ahead, management reduced its full year 2023 revenue guidance to $93 million at the midpoint of the range, which would represent revenue growth of 14.8%.

This reduction is due to the potential for cancellation of its Chicago contract as well as ‘some contract renewal and payment issues in Puerto Rico.’

The company's financial position is reasonable, with some cash, no debt and a small cash burn over the trailing twelve-month period.

From management’s most recent earnings call, I prepared a chart showing the frequency of key terms mentioned (or not) in the call, as shown below:

Analysts questioned company leadership about its U.S. Department of Corrections contract prospects, which management indicated was now at a potential $16 million total value over five years.

Regarding valuation, in the past twelve months, the firm's EV/Sales valuation multiple has fallen 28.3%, as the chart from Seeking Alpha shows below:

A potential upside catalyst to the stock could include no cancellation of its Chicago contract.

While gross margin should increase as the rest of 2023 plays out due to front-loading certain costs into Q1, SSTI’s revenue clouds continue to exist between Puerto Rico and Chicago.

Although management referred to ‘complementary and adjacent solutions’ that it wishes to pursue, no further details were provided.

Given the current year revenue risks and until we learn more about expansion plans, I’m on Hold for SoundThinking, Inc. stock.

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