Yahoo Finance
Oct. 31, 2024
Q2 2024 Data
Price: $11.00, Shares: 12.78m, Cap: $140m.
Summary
(1) A unique gunshot detection technology company with almost no competition has enjoyed fast growth for many years.
(2) There have been anti-surveillance and pro-equity movements against the company since 2021 which created very negative publicity for the company. This caused it to lose some contract renewals and the stock price has been down significantly.
(3) The doubt about the accuracy of the gunshot detection is valid. However, the product has been proven to be very valuable to the communities that are using it.
(4) The current valuation of the company is less than 15x of its real earnings. It is a very attractive price once it recovers from the temporary setback.
Business
(1) History
(1) History
The company was founded by Dr. Robert Showen in 1996. He invented the technology to track gunshots by using acoustic microphones. Gary Lauder, the grandson of Estee Lauder, liked the idea and invested through the years to support the adventure. The company didn't do well financially in the early years. In 2010, Ralph Clark joined the company as the new CEO. He transformed the business into a SaaS-based model. Since then the business took off and generated over $12m in revenue in 2015.
It achieved around $24m in revenue in 2017. By then it had raised around $70m from private investors including $20m from Gary Lauder. It IPOed in the same year and raised $32m at $10/share which valued the company at over $100m.
It grew very well for the next several years, especially during the pandemic, also partially due to the help of some government funding.
Since 2021, there were several negative reports of the company appeared. Mainly question the accuracy of its gunshot detection, concentrated deployment of its sensors on black and color communities, and privacy concerns. Despite this, it still did quite well and achieved over $90m in revenue in 2023.
In May 2024, Houston's mayor declared it would not renew Shotspotter's contract, which expires in 2027. Currently, the city pays SSTI $700k/year.
In Sept. 2024, Chicago's major officially canceled the city's contract renewal with SSTI which will cost it to lose around $9m in revenue annually. The service ended in Sept. 2024. There were quite some fights between the mayor and the city councilors over whether to keep the service.
(2) Product & Services
ShotSpotter gunshot detection:
It uses multiple acoustic microphones to track the same gunshot and triangulate the location of the gunshot. Once a gunshot alarm is triggered, it will be sent to the local police department and processed by the police force.
False Positive: The system triggered a gunshot alarm but actually it is something else like a firework sound or a backfire of a car.
False Negative: There is a gunshot within the system geographic but the system failed to trigger a gunshot alarm.
According to the company, the accuracy of the system is defined as real gunshots identified( total alarms-false positive) divided by (all alarms + false negative). It usually has a guarantee of 90% accuracy in its contracts.
In the main investigations done by the critics of the company, they found over 80% of the company's alarms lead to a dead end. The police can't find any evidence of a gunshot and file no case. They argue that the system is not working and wastes police resources.
There are also concerns about the concentration of its audio censors on black and color communities which causes over-policing in those areas. To a lesser extent, there are worries about it being able to record people's conversations.
Revenue from ShotSpotter usually is charged by sq. mile. The price ranges from $65k to $90k per sq. mile. The cost of equipment deployment per sq. mile should be less than $65k, Currently, ShotSpotter counts for around 73% of its total revenue.
SafePointe:
Weapons Detection using metal detectors that won't slow down traffic. Acquired in 2023 for $25m( $11m in cash + $11m in stock + $3m in earnout). Revenue for safepointe is charged on a per-lane basis. At the time of the acquisition, it generates around $3.6m ARR on around 200 lanes. Indicates an $18k/lane price. It expects to generate $7.6m ARR for SSTI in 2024 which indicates over 400 lanes will be under contract. However, it stated there were only 158 lanes under contract at the end of Dec. 2023. At the end of Q2 2024, there are 179 lanes under contract.
CrimeTracker( Originally called COPLINK X from Forensic Logic):
Crime search engine. Acquired in 2022 for $4.9m cash + $14.3m in stock + $20m in earnout for 2022&2023. None of the earnouts were paid in those two years because the targets weren't met. Currently, CrimeTracker contributes less than 10% of its total ARR.
Case builder(Originally called CrimeCenter from Leeds, LLC. Shown as Technology Solutions below):
Investigative case management software was acquired in 2020. Paid 14.6m cash + $2m in stock + $5m earnout.
(4) Seasonality
It has no obvious seasonality.
(5)Employees
2. Management
(1) Management
Ralph Clark: CEO. Previously he had led several businesses as CEO or CFO and did very well.
(2) Ownership and Compensation
Gary Lauder: 2.25m shares, 18%
Ralph Clark: 690k shares, 5%
All major shareholders and insiders together own around 55%.
3. Financial data
Notes: debt
Debt: Debt is around 7m in Q2 2024. It paid down another $3m after Q2.
Notes: Share Data
10m shares at IPO time of 2017. Raised some smaller amounts through the years. Current shares outstanding 12.8m.
Options: 1.8m. Average price $26.
RSUs: 1.1m.
4. Valuation and comments
(1) The chance for police to find evidence in a non-victim gunshot event is low by nature. Its real false positive rate might be somewhere below 50%. It might sound bad, but compared to the false positive number, the false negative number is even more important. The missing of catching a real gunshot is worse than the waste of police time investing in a false alarm.
(1) The chance for police to find evidence in a non-victim gunshot event is low by nature. Its real false positive rate might be somewhere below 50%. It might sound bad, but compared to the false positive number, the false negative number is even more important. The missing of catching a real gunshot is worse than the waste of police time investing in a false alarm.
(2) There are 3 major benefits of the gunshot detection system: a) Enables the police to investigate gunshot events while no one calls the 911. b) The alarm is triggered earlier than 911 calls. c) It provides the accurate location of the gunfire. In many cases, the system has helped to save the lives of gun victims.
(3) The fast response from the police most of the time makes people feel safer. The privacy and over-policing concerns are exaggerated. Overall the system is welcomed by the communities that adopted it. Although the police procedure of handling the gunshot alarm could be improved.
(4) The data collection of its system is not good. The company could do way a better job of improving it and providing independent research reports on its system's accuracy.
(5) The 3 acquisitions are quite expensive. I feel they didn't perform as well as the company had wished. SafePointe might be the only one that has some potential. As they account for close to 30% of total revenue, they provide some hedging against the revenue concentration risk of ShotSpotter.
(6) Currently, the company is trading around 1.4x of its annual revenue and less than 15 times its FCF. It is acceptable if the company can maintain existing revenue and profit levels. Obviously, the market is expecting it will get worse.
5. Risk
(1) The negative publicity will affect the company's business for quite some time. It is unknown how bad this could turn into. It is very unlikely but is still possible that it might lose its NYC contract as well.
(2) There could be more investigations and accusations of its system. If the system is proven to be very inaccurate, it sure will lose customers' confidence.
6. Conclusion
This company has been managed well and its product is valid and useful. The current price is very acceptable if it can navigate through the headwind. The risk of going downward further shouldn't be overlooked. It should be monitored very closely.
7. Links
