Description

Soundthinking (SSTI), formerly known as Shotspotter, offers a suite of SaaS offerings to make law enforcement more effective and efficient.  Trading at 2x sales with a $200 million market capitalization, Soundthinking is cheap for a SaaS company with a history of 15% annual growth and huge operating leverage.  The company boasts 60% gross margins which are rising as the company rolls out more Shotspotter cities and leverages its already built out operations centers.  The company has two Shospotter operations centers, one on the West Coast and one of the East Coast, that monitor Shotspotter alerts and determine whether they are gunshots or not.  These centers can handle much more volume so as revenue grows, the cost of sales remains fairly fixed.  Management thinks it can get gross margins up to 70% over time and get to 40% EBITDA margins, as well.  My model has revenue growing at 15% over the next three years and gross margins ramping to 63% with EBITDA margins growing to 32% by 2026.  This would result in multiples of 1.5x sales, 4.6x EBITDA, and a 7.4x P/E ratio.  Obviously, these multiples are untenable, and I think the stock can trade for 20x EBITDA then or $74 per share for 360% upside from current prices.

Shotspotter was the original product of the company.  It is an acoustic gunshot detection system which triangulates gunshot sounds and gives a precise location of where shots were fired from.  The company provides the sensors and charges the cities on the number of square miles of coverage for a recurring revenue stream.  The average city has 6 square miles covered but the biggest cities are Chicago with 110 square miles and New York City with 70 square miles.  Chicago represents about $9 million of recurring revenue.  The benefits of the Shotspotter system are fourfold.  First, officers usually get to the scene faster than relying on 911 calls which often never come in.  Second, if there are people with gunshot wounds at the scene they are treated much more quickly and often lives are saved.  Third, it aids in investigations as officers are much more likely to find shell casings given the exact location of the guns being fired.  Finally, officers often respond quickly enough to make arrests of the shooters.  The system is very well regarded by the police forces that use it and has an NPS (Net promoter) score of 62 which is very high.  I spoke with the former head of the NYPD and he told me that they love the system and it has been very effective for them over time.  Last year was a record year for Shotspotter with over 155 square miles added.  This year is expected to be more normal with about 120 miles added.  Penetration of Shotspotter in the US remains pretty low with many large and medium sized cities still not using the technology.

There has been some political controversy over Shotspotter the past few years where some left-wing minority members saying that Shotspotter leads to over-policing of black and brown neighborhoods.  Given the proven benefits of the product this should not be an issue but since the defund-the-police initiatives following George Floyd’s death it has become someone of an issue in a few cities.  The current opportunity in the stock is partially due to the situation in Chicago.  Brandon Johnson, the Chicago mayor, ran on a platform of discontinuing the use of Shotspotter in his city and when the contract came due last month, he canceled it while keeping the system in place through November to cover the summer months and the Democratic National Convention.  This cancellation came in the face of pushback by the police superintendent and many of the city’s aldermen who are in favor of continuing its use.  The most recent update is positive for the company.  The city counsel is set to vote on a bill that would give control of the Shotspotter contract in each ward to its alderman, most of which are in favor of keeping the system.  This is an unprecedented move and we will see how it shakes out.  At the company’s recent analyst day CEO Ralph Clark put up a slide showing the company can grow ARR 5% this year even if the Chicago contract is canceled.  This will ratchet up to 15% if Chicago stays in the fold.

Last year Soundthinking acquired an intelligent weapons detection technology called SafePoine.  This product is used to unobtrusively detect weapons as people pass through its sensors.  These sensors look like the low cylindrical poles used to block cars from driving into buildings and are placed 10 feet apart to allow many people to pass through at once.  In combination with cameras the sensors can detect who is carrying a weapon and the incident center can then dispatch security guards to deal with these people.  This product is ideal for banks, hospitals, corporate offices, and any other locations where you want the detection capabilities without the hassle of metal detectors constraining how many people can go in at once.  This product opens a whole new addressable market for Soundthinking and the company recently hired additional salespeople to market it.  The quota for these salespeople works out to $12 million in ARR this year but the company is only modeling $5 million to be conservative.

The next product in the Soundthinking suite is CaseBuilder.  This product creates a digital case file where all the information about a case can be stored.  This digital case folder also links to other digital folders to show linkages between different cases and often helps solve cases faster and more reliably.  The folder also helps get cases ready for the courtrooms for trial.  The company recently won a blockbuster $18 million CaseBuilder deal with the New York City Department of Corrections.  This deal is very important on its own and can also lead to deals with other prisons in other cities. 

The next product in the suite is CrimeTracer.  CrimeTracer is a powerful law enforcement search engine and information platform that enables law enforcement to search data from agencies across the US.  This information can be used to link cases and enable leads which would not be possible without it. 

ResourceRouter is another product that guides law enforcement to position officers in a manner to maximally reduce crime.

There is an international opportunity for the company as well.  Its Shotspotter product was recently implemented in Montevideo, Uruguay and Brazil and Mexico are targets as well.  SafePointe can also be sold internationally. 

I think the management at the company is very smart and can execute their plan to expand margins and grow revenue over time.  Both the CEO and CFO are Harvard Business School graduates and I have been very impressed with them in our discussions.  I was also very impressed with the company’s head of sales who I met at its analyst day last month.  Even if Chicago defects there is still a meaningful growth story going forward and if Chicago stays on I think the stock would quickly return to the $40 level it was at before the new Mayor of Chicago was elected. 

Catalyst

Resoltion of the Chicago situation and better than expected growth with Safe Pointe.