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ShotSpotter, Inc. (NASDAQ:SSTI)
Q4 2019 Earnings Call
Feb 18, 2020, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, and welcome to ShotSpotter's Fourth Quarter and Full-Year 2019 Earnings Conference Call. My name is Devin, and I will be your operator for today's call. 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 and 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 its regulation -- its 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 18, 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 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 CEO, Mr. Ralph Clark. Thank you sir. You may proceed.

Ralph A. Clark -- President and Chief Executive Officer

Thank you for joining us this afternoon. Alan and I will do a review of Q4 results and recap the highlights of 2019. We will also share our outlook for the year ahead and then take your questions.

Before I formally begin, I want to personally thank the ShotSpotter team for the grid and resilience they showed in pushing through the take in 2019 with a solid Q4 performance that puts us in a strong position to increase our growth in 2020 and beyond. I'm gratified by this performance, but not surprised. I think many of you know that ShotSpotter is more than just a business for everyone here at the Company.

It is also our deeply held sense of purpose to reduce gun violence, improve public safety and help rebuild trust between communities and police that inspires the work that we do. We've always understood that creating and leading the whole new market category would present challenges. In 2019, we successfully worked through those challenges, and we believe positioned the Company for even stronger growth in revenues, adjusted EBITDA and net income in the coming year.

Specifically in Q4, we went live on 34 net new miles, which included the expansion of Las Vegas plus three new cities in Puerto Rico as well as Dayton, Ohio, all with zero attrition for the quarter.

Reported revenues came to $10.9 million, another record for us, and we delivered $0.11 per diluted share compared to $9.7 million in revenue and $0.03 per diluted share a year ago. Las Vegas became our third largest customer deployment, with 24 total miles just behind Chicago and New York City. We are very pleased that we've been able to leverage existing in-place permissions combined with some early prep work in order to go live in Q4 with 16 of the 21 miles in Puerto Rico ahead of schedule.

Dayton is now our fifth customer in Ohio. This is a perfect example of the viral nature of our solution when customer adoption tips in geographic clusters as police chiefs share success stories from their ShotSpotter deployment with their peers in nearby jurisdiction.

For the full-year 2019, we reported $40.8 million in revenue and net income of $1.8 million or $0.15 per diluted share. We published more than 140,000 gunshot alert and finished the year with approximately $43 million in annual recurring revenue.

Our international pipeline remained strong with opportunities distributed between South Africa, the Caribbean, and Greater Latin America. We expect international to contribute approximately 4% to 6% of our 2020 revenue.

In addition to our core Flex solution, ShotSpotter Missions, our precision-policing platform is playing a critical role in our diversified growth strategy. Missions represents an ideal way for us to deepen relationships with our public safety customers. The more intelligence we can provide to law enforcement agencies to help them execute precision policing, the more valuable we are to them as a strategic partner.

In 2019, we booked five Missions contracts and expect to be fully deployed on those opportunities in the next 90 days. Beyond our unique technology and extraordinarily strong market position, we also continued to take active steps last year to position the Company for sustainable profitable growth. We have scaled our direct go-to-market capacity by adding two new VP positions in our sales organization. Our new product sales VP owns product sales responsibilities and has three dedicated sales executives representing Flex, Missions and security.

Our territory sales VP owns the sales [Phonetic] exec at the account level, and will be launching a new initiative to focus on Tier 4 cities in jurisdiction. Our Tier 4 sales initiative will be staffed by two inside sales reps combined with marketing programs to feed them Tier 4 leads, helping us penetrate this largely untapped market. These headcount adds give our executive team more bandwidth for long-term strategic planning and key executive account relationship building.

Customer success and positive client outcomes continue to be important strategy for our long-term profitable growth. Customer success drives efficient viral customer acquisition, which is demonstrated by our impressive sales and marketing spend of $0.43 per dollar, new annualized contract revenue. It is also critical in minimizing attrition and maximizing upsell and expansion opportunities.

We were successful in this regard as well by achieving a revenue retention rate of 111% in 2019. We know the client outcomes are just more than the result of our specialized solution working as prescribed. It is also our consultative engagement that assists law enforcement executives in the customer development and application of gun violence reduction strategies and agency training and execution that drives measurable positive results.

I'm happy to report that the Company's net promoter score increased to 53 in 2019. We believe we can take that to the next level with the recent hire of a VP of Customer Success that reports directly to me and is engaged with the entire senior leadership team on enhancing the customer journey.

Our customers continue to talk about the positive results they are seeing with our solution. I would like to share just two of the many examples of positive outcomes making the difference within our customer base. In just the last year, Greenville, North Carolina Chief of Police Mark Holtzman reported that his city has seen a 33% reduction in gunshot injuries since ShotSpotter Flex was installed in February of 2019.

The Chief of Surgery at the Regional Promise Center even tweeted that deploying ShotSpotter has been, and I quote, an incredible injury prevention success story in this national epidemic of gunshot death, end quote. And in Toledo, Ohio, Police Chief George Kral said that ShotSpotter Flex is, quote, a game changer that is turned into one of the most important cog in our wheel of addressing gun violence, end quote. In just the first six months of going live in Toledo, the system has led to 50 arrest in 36 firearm recovery. These outcome illustrate not only the value of ShotSpotter's technical proficiency, but also what is possible when our technology meets intentional ongoing best practices.

Two last points before I turn it over to Alan. We will be opening a ShotSpotter office in Washington, DC later this year. This office will not only bring us closer to national law enforcement opinion leaders and decision makers, it will also give us a way to tangibly demonstrate our technology to potential clients and influencers because this new office will house a Satellite Incident Review Center.

In addition to providing some amount of back-up resiliency to our headquarters-based Incident Review Center, this office will also include a portion of our forensic services and product marketing teams. We are very excited as our Washington, DC presence will also enhance our nascent federal government relations efforts. Case in point, we've been advocating for the creation and adoption of a House authorization bill, H.R. 5385 that in short would direct the attorney general to carve out $10 million per year for fiscal years 2020 through 2023 for a gunfire detection technology grant program. This is one of the few bills related to gun violence prevention that has bipartisan support in Congress with the co-sponsorship of representatives Robin Kelly and Jim Sensenbrenner.

Lastly, after carefully assessing the dynamics and history of gun violence in Houston, America's fourth largest city, we are convinced that our system can positively leverage police efforts there in addressing gun crime and serve as a regional catalysts to help more quickly penetrate the large Texas market. Houston PD is led by Chief Art Acevedo who also happens to be the President of the Major Cities Chiefs Association. Given the very unique circumstances this situation provides us, we have agreed to offer 5 square miles of ShotSpotter to Houston on a trial basis. This is based on the condition that Chief Acevedo directs his department to fully embrace our proven best practices. Chief Acevedo has further agreed that the department is happy with the result of the deployment. They will transition to a paid subscription after the trial program and potentially expand the system over time. Although we do not anticipate this will produce any revenues for 2020, we firmly believe that we will again prove the value of our system in one of America's most challenging cities just as we've done in Chicago, Oakland, New York City and elsewhere and that we can gain a strong advocate in Chief Acevedo.

Texas is a market that is traditionally conservative and naturally skeptical. Modern policing technologies can be slow to gain acceptance there. We believe we can overcome that skepticism with our actionable high-value gunfire detection intelligence. And we believe the very small financial risk of this creative experiment is minimal compared to the potential market penetration in Texas along with other member cities that are part of Major Cities Chiefs Association.

So, that'll do it for me. I look forward to take your questions after Alan reviews our financial results. Over to you, Alan.

Alan R. Stewart -- Chief Financial Officer

Thank you, Ralph, and good afternoon, everyone. We ended 2019 on a solid note. Our progress in many areas contributed to our performance, including completing the Las Vegas expansion, finalizing our contract in Puerto Rico, and the initial deployment in three cities and the island as well as the addition of our fifth city in Ohio, which is a great example of the tracks we are seeing in certain markets. We went live in 34 net new miles in the quarter, adding a total of 98 gross and 82 net new miles for the year.

Even with continued investment to expand our leadership position, we were profitable for both the fourth quarter and the full year, while adjusted EBITDA increased significantly, especially for the full year. The leverage in our business model was a highlight for the year, and it will continue to drive profitability in 2020. Revenue retention for the year was 111% compared to 139% for 2018. Note the 2018 rate included a large Chicago expansion. Our revenue retention rate is now more in line with our current and future expectations.

Let's look at the details of the quarter and the year. Revenues for the fourth quarter were $10.9 million, an increase of 12% over the fourth quarter of 2018. Our solid conclusion to the year helped drive to record topline for the full year of $40.8 million, a 17% increase over 2018, reflecting growth in the number of miles covered through the expanded deployments for current customers as well as the addition of new customers. Note that we ended the year with an annual recurring revenue of approximately $43 million. We accomplished this goal by rapid deployment of the first 16 of the miles under contract with Puerto Rico, which offset ARR associated with Cape Town as we continue to wait for the formal renewal of that deployment.

Gross profit for the fourth quarter increased 21% $6.8 million or 62% of total revenue versus $5.6 million or 58% of total revenue in the fourth quarter of 2018. We saw even greater expansion in the gross profit for the full year. For 2019, gross profit increased 27% to $24.3 million or 60% of revenue compared to $19.2 million or 55% of revenue in 2018.

In accordance with evolving accounting best practices regarding the accounting treatment of customer success costs, starting in 2020, we will be allocating the majority of our customer success costs, the cost of goods sold. This will result in lower operating costs and sales and marketing, but will also increase our cost of goods sold, reducing our overall gross margin by approximately 2% on an annual basis. The net effect of shifting these cost to cost of goods sold from sales and marketing will result in no change to overall operating income.

Adjusted EBITDA for the fourth quarter, which is calculated by taking our GAAP net income and adding back interest, taxes, depreciation, amortization and stock-based compensation, was $3.2 million, up 50% from $2.1 million in the fourth quarter of 2018. For the full-year 2019, adjusted EBITDA was $9.4 million, up a dramatic 162% from $3.6 million in 2018.

Now turning to our expenses. Our operating expenses for the fourth quarter were $5.6 million or 51% of revenue versus $5.1 million or 53% in the fourth quarter of 2018. For the full year, operating expenses were $22.7 million or 56% of total revenue compared to $21.8 million or 63% of total revenue in 2018. Of note, our cost of goods sold and operating expenses were positively affected in the fourth quarter and the year as a whole because our Company bonuses were ultimately over-accrued relative to final revenue growth that we achieved. Partial reversal of this accrual in the fourth quarter reduced compensation expenses in both cost of goods sold and operating expense.

Our sales and marketing spend per dollar of annualized contract revenue was approximately $0.43 per dollar in 2019 versus $0.30 per dollar in 2018. We continue to make strategic investments to increase our customer success efforts and expand our sales and marketing programs among other outlays. In addition, even at this higher level, we believe our spend per dollar is significantly lower than most SaaS companies as we continue to enjoy the benefits of targeting one specific vertical with little viable competition.

Now breaking down our expenses. Sales and marketing expenses for the fourth quarter were $2.5 million or 23% of total revenue versus $2.2 million or 22% of total revenue for the prior year period. This increase reflects the cost of some of the programs such as expanding our sales and marketing programs that I just discussed. Our R&D expenses for the fourth quarter were $1.3 million or 12% of total revenue compared to $1.3 million or 13% of total revenue for the prior year period. We continue to invest in the functionality of our Missions platform, improving our software algorithms, our customer applications, and expanding our analytics capability. G&A expenses for the quarter were $1.7 million or 16% of total revenue compared to $1.7 million or 70% of total revenue for the prior year period.

Our GAAP net income for the fourth quarter was $1.3 million, or $0.12 per share based on 11.4 million basic and $0.11 per share based on 11.8 million diluted weighted average shares outstanding. This compares to a GAAP net income of $302,000 or $0.03 per share based on 10.8 million basic and 10.7 million diluted weighted average shares outstanding for the prior period. As I noted above, we are very pleased to achieve profitability for the full year. For the full year, our GAAP net income was $1.8 million or $0.16 per share based on 11.3 million basic and $0.15 per share based on 11.8 million diluted weighted average shares outstanding versus a loss of $2.7 million or $0.26 per share based on 10.6 million basic and diluted weighted average shares outstanding in 2018.

We added 34 net new go-live miles in the fourth quarter, up from 24 added in the same period a year ago, with no attrition. For the full year, we added 98 gross and 82 net new miles for a total of 730 miles live at the end of the year. In Q4, we went live in four new cities. And as of year-end, ShotSpotter was deployed in 102 cities. At the end of December, we had approximately 760 miles under contract.

Deferred revenue at the end of the year was $27 million versus $21.3 million at the end of the third quarter. During 2019, we repurchased 257,824 shares of our stock, deploying approximately $6.7 million in cash. After this use of cash, we ended the quarter with $24.6 million in cash and short-term investments, down slightly from the $26.1 million at the end of Q3. As a reminder, we have no short or long-term debt.

A few other items before I turn the call back to Ralph and we take your questions. The price increase we have discussed went into effect on January 1st, increasing our base rate from $65,000 to $70,000 per mile for domestic customers. Note that we don't expect any revenue impact until later in the year as most deployments over the next couple of quarters would have been sold last year at the lower rate, but we do expect the change to contribute several hundred thousand dollars and contribute to increased profitability for the full year.

Also, I did want to follow up on the comment I made last quarter about the potential cost impact of replacing our 3G sensors over the next few [Phonetic] years. We've now learned that the 3G networks will not be turned off until early 2022, so we don't currently expect to incur any material costs related to 3G sensor upgrades in 2020, unless we note material degradation in our deployed networks.

Now turning to our guidance, we are expecting 2020 revenues of $48 million to $50 million. As we have discussed, we still expect this to include a contribution from new international markets this year. We expect revenue to largely follow our normal cadence, Q1 flat with Q4, an increase from Q1 to Q2, flat again to Q3, and an uptick in Q4.

While we continue to invest in our growth and to expand our leadership position, we expect to maintain profitability as we benefit from the leverage in the business and see further improvement to adjusted EBITDA. We plan to continue our investments in 2020 to further our leadership and penetration of this growing market. We are continuing to invest to expand our customer success, and sales and marketing efforts, to support our efforts to grow internationally, and to accelerate our R&D programs among other initiatives. As a result, operating expenses will continue to increase on a dollar basis across all categories.

Now back over to you, Ralph.

Ralph A. Clark -- President and Chief Executive Officer

Thank you very much, Alan. We believe the momentum we are seeing in our business, not only instill customer confidence, but inspires our confidence as well. We're extremely positive about the path that we're on and feel great about the difference we're making along the way. We want to thank all of you for your feedback and help. And now we're ready to take your question.

Questions and Answers:

Operator

At this time we will be conducting a question-and-answer session [Operator Instructions] Our first question comes from the line of Matt Pfau with William Blair. Please do with your question.

Matthew Pfau -- William Blair -- Analyst

Hey guys, thanks for taking my questions and nice quarter. Wanted to first start on the Latin America opportunity, and just wondering if you've received any feedback on some of those initial proposals that you put out, I think the four countries that you were targeting?

Alan R. Stewart -- Chief Financial Officer

Great, thank you very much for that question, Matt. We have not heard anything definitive back in a way that we're prepared to share today, but we feel very constructive about the pipeline that we're building, not only in Latin America, but also in the Caribbean and South Africa as well. And I think as we stated on our prepared remarks, we're looking for international to contribute somewhere between 3% and 5% above revenues, I'm sorry, 4% to 6% of our revenues for 2020.

Matthew Pfau -- William Blair -- Analyst

Got it. And are some of those Caribbean opportunities -- newer that proposals that you put out there?

Alan R. Stewart -- Chief Financial Officer

Yes, that's correct.

Matthew Pfau -- William Blair -- Analyst

Okay. And then the Houston trial is pretty interesting, maybe can you just give us some insight into if everything goes well, and they're satisfied with the solution and want to move over to a paid customer. What does that process look like in terms of budgeting? I guess how difficult is it for them then to get that approved, with whoever allocates the budget or is that something that's already sort of pre-negotiated with this trial? And then as you've had discussions with other large cities has this sort of trial basis been pitched and is it something that's of interest to other large Tier1 potential customers that are out there?

Alan R. Stewart -- Chief Financial Officer

Yeah, great question. So I think with respect to Houston that's a very, very unique situation, given its size, it's the fourth largest city here in the US, it has a very large police department with a very large gun violence problem that is spread across a very large city, that also happens to be in a state that we believe has a lot of opportunity for us. That, combined with Art Acevedo being the very unique Chief that he is, he is a very well renowned and respected Chief of Police inside of law enforcement, certainly being the President, major city chiefs speaks a lot to his credibility. So we felt all those things kind of came together in a way that gave us an opportunity to really be creative and try to move something forward in Houston and not have to wait. And for us that involve this trial concept that we're prepared to march forward with Chief Acevedo in Houston on under the [Indecipherable] that he is going to direct his officers to apply our proven best practices because we know typically when those best practices are applied, good results happen. And his statement to us is a good results happen and we're satisfied with this deployment, I'm happy to move forward on being a paid subscriber to the system and even potentially look at expanding.

We tried to be very clear to folks. So they don't bake that into any kind of revenue guidance that will have zero revenue impact for us in 2020 even if we're successful, I would look at this much more as a kind of 2021 opportunity, if we're successful to have some revenue contribution there, but it's not going to have any impact to our revenue for 2020, but it is a very important signal we think to the marketplace, specifically in Texas and also specifically to Art Acevedo peers that are Chief of Police of other major cities where we haven't been deployed to have his support and really building him into a net promoter, which we plan on doing it and I think we're going to be successful doing that.

Matthew Pfau -- William Blair -- Analyst

Got it, OK. I'll pass it on. Guys, but thanks for taking my questions and nice job on the strong finish to the year.

Ralph A. Clark -- President and Chief Executive Officer

Thank you.

Operator

Our next question comes from the line of Richard Baldry with ROTH Capital. Please due with your question.

Richard Baldry -- ROTH Capital Partners -- Analyst

Thanks. It sounds like you have a few mission deployments to go live. Can you may talk through the revenue recognition behind that, and how that -- is it more upfront, is it more recurring, when does that time versus the actual deployment versus wins or contract signings?

Alan R. Stewart -- Chief Financial Officer

Sure. No, the revenue recognition -- very similar to what we have in Flex. There might be a small upfront or deployment charge, but then the subscription fee will be recognized ratably over the year, for the period, very similar to our Flex deployment.

Richard Baldry -- ROTH Capital Partners -- Analyst

Okay. Then aside from Houston, can you offer any more update on for Tier 1 city discussions -- your thoughts for possibility to add any of those in 2020 or beyond?

Alan R. Stewart -- Chief Financial Officer

We haven't really stipulated any other specifics another Tier 1 cities. We continue to have discussions with the ones that we've talked about in past earnings calls, we do believe that this Houston deployment might spark some additional discussions as well, but we continue to work on the other Tier 1s.

Richard Baldry -- ROTH Capital Partners -- Analyst

With -- some cost I guess assumed by yourselves while the Houston goes up. Does that weigh even moderately or slightly on the gross margin side, or is that somehow capitalized until it is determined whether that's successful initiative or not?

Alan R. Stewart -- Chief Financial Officer

No, it will be held on the balance sheet as basically cost in progress at that point. So it won't translate to the income statement until it ultimately goes live and is revenue producing.

Richard Baldry -- ROTH Capital Partners -- Analyst

Thanks. And last one would be any updates on development with partners [Indecipherable] on smart streetlights, smart street signals, that you've won a while ago for the smart cities initiatives. Anything you think more traction or trending better heading into 2020 or beyond? Thanks.

Alan R. Stewart -- Chief Financial Officer

Yeah. So really nothing new to report there.

Richard Baldry -- ROTH Capital Partners -- Analyst

Okay, thanks.

Operator

Our next question comes from the line of Jeremy Hamblin with Craig-Hallum. Please do with your question.

Jeremy Hamblin -- Craig-Hallum Capital Group LLC -- Analyst

Thanks. And I'll add my congratulations on the strong finish. I want to come back to missions for a second. You came up with a creative opportunity to expand the network for missions and through an offer of free Flex mile. In terms of the learnings that you've had with that, I would say marketing tactics, what have you learned how have cities responded to that? And how do you expect that to drive your business not just in 2020 for mission, but beyond that, into 2021 is that something we have accelerated [Phonetic] that particular offer.

Ralph A. Clark -- President and Chief Executive Officer

Yeah, thanks for that question. This is, Ralph. So I'll take a stab at answering at least part of it and Alan jump in as appropriate or necessary. So I think our missions marketing program is really great example of our ability to be very creative and adapt very quickly to market considerations. We had some amount of interest in missions, but to really kind of push people across the line. We felt it would be appropriate and useful to offer effectively a free mile as a part of that for a year. And I think at the end of the day what we will get is mission customers, paying mission customers because they are paying for missions currently. And then a year from now that mile that we've deployed, I'm predicting a high percentage of those will continue on as paying customers for that extra mile. So effectively what we've done is kind of front load a little bit of expense for deploying of free mile for an existing customer, as a way of signaling the strength of the partnership.

And our goal really is with these first five to so customers is really get useful information about how missions is making a difference to their precision policing efforts and then use them as reference selling objects really to kind of go get that next five to 10 to 15 customers within our -- within our customer base. So it's a way for us to kind of accelerated or kind of juice the market adoption, so we can really quickly learn not only again about how they use -- how they're using missions, but frankly, we're going to get some very valuable feedback on enhancements we can make to missions to make it even more valuable to those existing customers and then prospective new customers as well. So I think it's a really positive thing we're pretty excited about it here within the company.

Jeremy Hamblin -- Craig-Hallum Capital Group LLC -- Analyst

Great. And then at the end of last year you had some really remarkable success stories. You mentioned some of them on the prepared remarks, but certainly great PR out of your largest customers in Chicago and New York, with very public statements about the reduction in gun violence and homicide rate and really kind of a stark contrast to let's say other large cities like Philadelphia that has seen five, six straight years of increased violence using a competing system. Has that helped in terms of inbound inquiries? Are you seeing an acceleration, when you get such good PR like that here kind of early in 2020?

Ralph A. Clark -- President and Chief Executive Officer

Well, I think -- this is Ralph, again, I think customer success and positive customer outcomes are very critical to our ability to acquire customers on the efficient basis in which we do. I mean our sales team is fantastic, we've got some really great strong sales executives within the company. But I don't think we can discount the impact that a net promoting chief has with respect to selling to his or her peers how ShotSpotter made a difference in those efforts. And you actually see that I think again in my prepared remarks around this kind of concept of regional tipping point, when you get some successes like out of a Cincinnati how that can bring to other cities within the Ohio region. And we talked about, Ohio, but the same thing could be said for inland California, the same thing can be said for South Florida as well, certainly New England as well.

And so I think customer success and positive outcomes and people standing up and saying how ShotSpotter has made a difference in their violent crime reduction efforts is very critical to what we do and that's why we continue to invest in our customer success organization, but we often kind of get into a discussion with folks about why don't you have more salespeople, we feel like we have the right number of sales people to go after the market opportunity, but we will continue to invest and grow and enhance our customer success organization because those -- that organization is primarily responsible for helping create those net promoter customers that are also part of our virtual sales team.

Jeremy Hamblin -- Craig-Hallum Capital Group LLC -- Analyst

Great, thanks. And then, just one to wrap up with a couple of clarifying questions on the margin commentary. The first is just 3G impact, in terms of thinking about 2021, Alan could you give us some clarification on what you think the comprehensive impact of that might be on gross margin for 2021? And then secondly, just clarifying for 2020 and the adjustment including the accrual -- over accrual you mentioned for compensation having a positive impact than before? And then kind of the allocation in terms of accounting procedural between cost of goods sold and sales mark, just any clarification on where you think you might need to be here in 2020?

Alan R. Stewart -- Chief Financial Officer

Sure. I'll go ahead and start with the 3G. So we continue to swap out sensors that are 3G with new sensors -- just part of our normal maintenance cycle. We still do expect at some point, most likely in 2021 and 2022 to have to still swap out the remaining ones. The cost will be somewhere between $4 million and $6 million, but they will also most likely just be starting over the depreciation cycle of those sensors as they -- as they get replaced. So it's most likely not going to be an all in one-time expense. In most cases it will be sensors that have already been fully depreciated, starting their depreciation over again.

In terms of the margins, I did mention that we're shifting some of the customer success cost now that we have a formal VP in charge of that organization, but some of those costs are going to be shifted up in into cost of goods sold and that will tend to increase the cost of goods sold and reduce the gross margins by approximately 2% or 200 basis points. And you'll see a likewise reduction in the sales and marketing expense, such as the bottom line. In terms of operating income, there will be no -- no change there.

And then lastly, I would say when we did the adjustment to Q4, we had an estimate change on the company bonuses that were based on our original performance metrics. So that did positively impact Q4 and also the year as a whole. We will begin 2020 accruing at the higher rate again to be tied to the performance metrics that are set out for 2020.

Jeremy Hamblin -- Craig-Hallum Capital Group LLC -- Analyst

The company bonuses, what was the total impact in Q4?

Alan R. Stewart -- Chief Financial Officer

There is about $400,000 reduction in expense.

Jeremy Hamblin -- Craig-Hallum Capital Group LLC -- Analyst

Great, thanks so much for taking the question guys. Good luck.

Alan R. Stewart -- Chief Financial Officer

Thank you.

Operator

Our next question comes from the line of Chris Van Horn with FBR. Please do with your question.

Christopher Van Horn -- B. Riley FBR -- Analyst

Good afternoon and thanks for taking my call. I wanted to know with the Dayton, Ohio win, congratulations there and I imagine it was a competitive bid, anything to highlight in terms of your competitive advantage in that process?

Ralph A. Clark -- President and Chief Executive Officer

Yeah, this is, Ralph. So I'm not quite sure how to answer that question other than to say that we feel really good about our competitive position. I mean we continue to create promoters like Dayton, Ohio, Greenville, North Carolina, Columbia, South Carolina, etc. And we're, continue to make enhancements in our technology to make it cheaper, better, faster for us. And we've yet to see any successful deployment of anyone claiming to do gunshot detection. We're obviously very curious about the Canton Ohio situation. We don't know or haven't seen at least probably that they have successfully deployed their yet, although I guess they booked at some time in November of last year there about some. So we're still waiting to see that, but we -- we think we're in a very, very strong competitive position and the market is one that we feel that we've created and pretty much own for right now and so we're continuing to kind of focus on kind of bringing new customers into the fold and making sure that once they come on the platform they're going to get value out of the service.

Christopher Van Horn -- B. Riley FBR -- Analyst

Okay, great thanks, thanks for that color. And then we've heard of some of the prosecuting offices or the DA's starting to influence some of the buying decision around ShotSpotter. I was curious, is that a trend that you're continuing to see or is it a little bit more one-off and any trend or commentary there.

Ralph A. Clark -- President and Chief Executive Officer

Yeah, so this is, Ralph, I mean, this is very much a complex sale where a lot of folks can potentially weigh-in to make a ShotSpotter decision a positive decision including DA's. We have a great track record in working with not only local prosecutors, but federal prosecutors as well. They understand the value that our precision alerts can provide in their prosecutorial efforts and they can be very big influencers because oftentimes politically they're very well connected. Sometimes they actually bring budget to the opportunities well, which could be very helpful. But we don't want to leave out the growing influence we see from executives at local trauma care centers that are also beginning to see the benefit or feel the benefit of a ShotSpotter deployment and wanting to get involved in helping a city, an agency fund and deploy ShotSpotter.

So there's a lot of people in the mix and that's what makes our sales organization, we think just a premier sales organization because they know how to coordinate all those interested parties in a way to kind of get people to yes. And although it can frustratingly take a long time, we've always talked about long sales cycles in our business, that's just the nature of it because they have to really kind of coordinate all of those players in the mix and kind of get them all shaking their head, that this is something they want to do. And again, our sales organization is really skilled, they have being able to do that. Okay, got it. And then last from me, it looks like capex was down year-over-year anything driving that and is there a level we can think about for 2020?

Alan R. Stewart -- Chief Financial Officer

Yeah, this is Alan. So I would say, if you look at 2020, it's probably going to be similar to 2019. And the reason for the reduction in 2019 versus '18 was at the beginning of '18, we had a large amount of capex going to do the Chicago deployment. And it was frankly just a lot more expensive to deploy. So that was what drove the capex to be so high in 2018.

Christopher Van Horn -- B. Riley FBR -- Analyst

Okay. Thanks for the time, and congrats on the quarter.

Ralph A. Clark -- President and Chief Executive Officer

Thank you.

Alan R. Stewart -- Chief Financial Officer

Thanks.

Operator

Our next question comes from the line of Joseph Osha with JMP Securities. Please proceed with the question.

Joseph Osha -- JMP Securities -- Analyst

Hello, gentlemen.

Ralph A. Clark -- President and Chief Executive Officer

Hey, Joe. Hi, Joe.

Joseph Osha -- JMP Securities -- Analyst

So, I hope a year from now we're hearing that you under accrued for bonuses. A couple of questions for you. First, a thematic one. It's interesting hearing about the ramp of Missions. I'm wondering as you look at the other skill sets that are adjacent to what ShotSpotter does now, are there any obviously nothing near-term -- are there any other skill sets that you think might be additive to what you're able to do right now?

Alan R. Stewart -- Chief Financial Officer

So, this is Alan. I would say that we feel pretty good about the skill sets we have right now in terms of what they're doing to make our Flex solutions better. And there's a lot of things going on behind the scenes in terms of apps that the customers use, internal tools that we use. So, our team does a lot of that behind the scenes. In terms of what we're doing in Missions, I would say that our Early Adopter Program has been incredibly important for us in finding out, as Ralph mentioned, what the customers want. And some of those things by themselves are somewhat unique and a bit challenging from a technical side, but also we will add a lot of high value. So, I would say the team that we have is going to continue to do that and there might be some outgrowth of that into peripheral project -- products or things that just allow us to do more with what we already have. I don't know, Ralph...

Joseph Osha -- JMP Securities -- Analyst

I guess, maybe that was an overly MBA-ish way of asking whether you see any other plans for diversifying. Let me ask the question that way.

Ralph A. Clark -- President and Chief Executive Officer

Yeah. This is Ralph. I mean, so nothing that we'd be prepared to talk about on this phone call I would say. I mean, when you look at our kind of core business Flex, we're under-penetrated in the market. We basically own a 100% of, right. We're just in north of 100 cities and we talk aspirationally in terms of domestic TAM of 1,400 cities. So for us, really on Flex, which is our kind of core solution, which is driving most of the revenues is kind of wash, rinse, repeat. I mean that -- we just got to keep hammering away at that and it's really all about getting new customers on the platform, making sure they're onboarded appropriately, they're driving good value add, they become net promoters, and then help us sell that next contingent layer of agencies.

We've done some things -- you haven't asked the question about the Tier 4 program. But I think you're seeing us again get very creative about how to kind of slice and dice the market and get at other under-penetrated markets within that kind of 1,400, maybe 1400 plus cities that we're doing, but that's basically using the same technology platform.

And I think Missions is slightly different I think as Alan alluded to. I think there we're going to have to really probably exercise our product management skills, because as you know with Flex, it's really about putting a dot on the map and we kind of invented that 20 years ago. And yes, there's things we've done to improve it over the years. But fundamentally, it's the same thing. It's always been, which is when someone fires the gun, put a dot on the map in a highly reliable precise way within 30 to 45 seconds of that trigger being pulled not much new stuff to put around that. I think the Missions solution is something that's a little bit has a broader aperture, I would say. There is a lot of different things, a lot of different directions that we could go into.

So, I think we're going to have to be very disciplined and focused around prioritizing all the great input that we're going to get from our first five set of customers in our next set of five to 10 customers we're getting and prioritize things that can have big impact broadly, but hopefully, doesn't cost a lot of money to implement. We think we're pretty well resourced on the engineering side to be able to do some amount of kind of version enhancement to Missions over the next several quarters.

And I think we're pretty happy with where we are now and don't really have to look outside of kind of ShotSpotter Flex, Missions and security which we basically added a brand new headcount reporting into our VP of product sales to just go focus on the security solution. Again taking the same technology, but applying it in a slightly different use case around campus security or corporate security and the like.

Joseph Osha -- JMP Securities -- Analyst

Okay, thank you. A couple of more granular ones. You had previously shared sort of thoughts about a rough annual cadence that you might be able to sustain. Would you care to put another marker out there for the next couple of years in terms of miles added?

Alan R. Stewart -- Chief Financial Officer

I think we're still looking at getting to that $100 million revenue mark in the next, let's call it mid-term, which we've always referred to as 4-ish years. And that would imply a CAGAR growth rate somewhere around 20%. So, I think we feel pretty comfortable with that. We also feel comfortable that as we continue to grow and leverage the expense that we put on the EBITDA and adjusted EBITDA will continue to increase. We have said that at that $100 million mark, we expect our EBITDA margins to be approximately 14% [Phonetic]. I think we still feel comfortable with that. So, we're heading in the right direction. Hope you can see that through the financial results that we've had that we just reported in terms of where our adjusted EBITDA is and the significant increase over -- even last year as well as the expense control that we've been able to use through a disciplined approach.

Now, we are going to continue to add expenses appropriately, internationally customer success, sales and marketing and the other opex categories as well. So you are going to see more dollars being spent there, but that doesn't change our basically expectations of where we're going to be at that $100 million range.

Joseph Osha -- JMP Securities -- Analyst

Okay. And did I hear you say Alan at one point, 760 miles under contract. So, that would imply that you're coming into the year here with 30 miles contracted, but not yet deployed.

Ralph A. Clark -- President and Chief Executive Officer

That's correct. And I always say approximately because we don't say exactly, but, yes, you're correct.

Joseph Osha -- JMP Securities -- Analyst

All right. And then last question, is it fair to assume, following up on one of the earlier questions on capex that we're kind of between $45,000 and $50,000 a square mile for new deployments. Is that still a reasonable number to you?

Ralph A. Clark -- President and Chief Executive Officer

So, we've never said exactly how much it cost us to deploy, but you're certainly in the ballpark.

Joseph Osha -- JMP Securities -- Analyst

Okay. Thank you so much, guys.

Operator

Our next question comes from the line of Will Power with Baird. Please proceed your question.

Charlie Erlikh -- Baird -- Analyst

Hey, guys. This is Charlie Erlikh on for Will. Something you could talk a little bit more about the international expectations in 2020, that 4% to 6% of revenue, which customers are you far this along with right now, and what would have to happen for you to end up at the high end or the low end of that 4% to 6%?

Ralph A. Clark -- President and Chief Executive Officer

Yeah. So this is, Ralph. I think there is really strong demand across all the three major geographies that we spoke about, South Africa, Greater Latin America and the Caribbean. I would say one interesting slight advantage may be that the Caribbean and South Africa has is some very kind of recent customer experience there in South Africa with Cape Town of course and then with the Caribbean with the Bahamas. So, that's kind of interesting in terms of how that can maybe lead to other folks within those geographies kind of tipping over on the platform. But I've been really quite impressed with the level of discussions we've had in Latin America.

And again, just to remind folks of the countries that we're focused on because we had to focus on a specific number of countries. There is four that we're really looking at. And that's, Mexico, Brazil, Colombia and Panama and all very interesting and valuable in their own right. And so, we expect that between those three big geographies, Latin America, the Caribbean and South Africa that we will be getting to that 4% to 6% range to get to the bid point of our guidance.

Now what can happen to make that number be closer to 6% versus 4%. It really gets down to timing -- its size and timing, right, and timing really does matter. And so, getting a call it on the ARR basis. Being able to go live on say kind of $1 million ARR deal in July 1 has the opportunity to produce $500,000 of GAAP revenue. If that for some reason slides to September or October 1, that $500,000 becomes $250,000, but it's still $1 million dollar ARR deal and very strategically important to us. So, I think the way I would ask people to help us think about or we would encourage you to think about our international opportunity is it's not a question of if, it's a question of when. Very similar what we were trying to communicate last year around our opportunity in Puerto Rico. I mean, we are very confident that we were ultimately going to get Puerto Rico back on the platform again. Again, it took longer than we thought. We knew it was going to happen, but -- and it wasn't a question of if, again, it was a question of when. I think that's the same for international.

Charlie Erlikh -- Baird -- Analyst

Great. Now that makes sense. And also, could you talk a little bit about the early reception to the increase in prices that you rolled out at the beginning of the year? And are you conservatively forecasting any increase in attrition-related to those price increases or have you gotten any sort of push-back so far, I know it's early, but any early reads on reception from customers on that?

Alan R. Stewart -- Chief Financial Officer

Yeah. So, this is Alan. I think in general, most of our customers expect some type of increase for most of their vendors around this range. So although we've gotten some comments, I don't think we've gotten any push back that we feel overly concerned about and certainly not that would cause us to increase the amount of attrition that we expect for the year, which is generally somewhere between 2% and 3%. So, so far, fairly smooth sailing there.

Charlie Erlikh -- Baird -- Analyst

Okay, great. And just one quick housekeeping question. Did you guys say how many security customers you had in the quarter?

Ralph A. Clark -- President and Chief Executive Officer

We did not. We did not add another new -- any new security customers.

Alan R. Stewart -- Chief Financial Officer

Yeah.

Charlie Erlikh -- Baird -- Analyst

Okay, great. All right. Thanks guys.

Ralph A. Clark -- President and Chief Executive Officer

Thank you.

Operator

[Operator Instructions] Our next question comes from the line of Jeff Kessler with Imperial Capital. Please proceed with your question.

Jeff Kessler -- Imperial Capital -- Analyst

Thank you. How are you doing guys?

Ralph A. Clark -- President and Chief Executive Officer

Well, thank you.

Jeff Kessler -- Imperial Capital -- Analyst

One of the questions I wanted to ask was somewhat about the cadence of revenue and the timing because clearly, there was -- what you had to go through with Puerto Rico and with, let's say, no large cities coming on, left the impression that all of a sudden your business is slowing. Can you talk a little bit about where you think the -- I'm not going to say the backlog, but the pipeline looks like now relative to where it look perhaps a year ago when you had a lot of business to do, but it wasn't as big as the business that you have already installed? It sounded like over the course of the late fall into December, you became -- you sounded a lot more optimistic about the pipeline. And I'm wondering if that optimism has increased significantly since the middle of the year up until now.

Ralph A. Clark -- President and Chief Executive Officer

Yeah. So, this is Ralph. I'll maybe start with a way to think about that is kind of think about how we entered the year with respect to our book of business related to annual recurring revenue. So, we're starting the year with approximately $43 million of annual recurring revenue. To the extent that we're able to kind of hold on to that in terms of getting a very high renewal rate, you would expect that we would need to add another $6 million or so of GAAP revenue over the course of the year to get to the $49 million.

And I think early in our Analyst Day presentation, we kind of thought broadly -- we presented broadly a pathway to get to that kind of $6 million plus. Actually, it was like $7 million because I think we put $1 million -- we assume like $1 million of attrition there.

Jeff Kessler -- Imperial Capital -- Analyst

All right. Great. Also can you talk a little bit about improvements in your sensors in terms of size being able to and [Phonetic] placement? And what happens -- is that going to be part, while it's not directly related to -- is that going to be part of the 3G upgrade, a slightly smaller design and things like that?

Alan R. Stewart -- Chief Financial Officer

So, this is Alan. We don't anticipate large changes in the form factor of the sensors themselves. That said, we do continue to make incremental modifications to things like address wind noise and things like that as we continue to do more deployment and learn about those. But the actual shift from 3G to 4G LTE is not going to involve a large form factor change.

Jeff Kessler -- Imperial Capital -- Analyst

Okay. Last question. And looking at your Latin American opportunity, what -- and that includes getting back into Puerto Rico as well. What types of -- what types of cities are you looking at in addition to the largest -- which you use as the capital city of those countries? Is there a second tier of cities that goes along with the marketing that you're going to be doing there?

Ralph A. Clark -- President and Chief Executive Officer

So, this is Ralph. I would just point out that we consider Puerto Rico, by the way, to be a domestic customer, not a international customer, just -- so, we're on the same page there. With respect to the cities within those geographies, there's really a mix of, I would say, smaller cities, medium-sized cities and some very large cities that you might be familiar with, was [Phonetic] probably the vast majority of the demand, if I just kind of go through my head, I would say they're probably more medium to small-sized cities actually across those three geographies that we spoke about.

Jeff Kessler -- Imperial Capital -- Analyst

All right. And the last question I guess is regarding Brazil. Unfortunately for better or for worse, Brazil has become notorious in the last two or three years. Is there a specific type of marketing program that you have for those countries where violence has just overwhelmed the law enforcement capability?

Ralph A. Clark -- President and Chief Executive Officer

I mean, no. It's basically on the ground, belly to-belly selling with all of the cohorts within those specific regions that have an interest in addressing gun crime and getting them kind of familiar with ShotSpotter. As you might imagine, we're not necessarily a household name down there. And so, our focus really is not only in Brazil, but frankly Mexico and Panama and Colombia, is to kind of get one or two kind of reference site, there they're up and successfully deployed that we can kind of point to as a reference customers and then kind of build off of that. We don't feel like we have to kind of boil the ocean on our first foray into Brazil as an example, just getting one or even two cities in Brazil will be a fantastic start to our efforts there in that, which is very large by the way, and has a very large gun violence problem.

Jeff Kessler -- Imperial Capital -- Analyst

Okay, great. Thank you very much, and great quarter.

Ralph A. Clark -- President and Chief Executive Officer

Thanks, Jeff.

Operator

Our final question comes from the line of Tyler Wood with Northland Securities. Please proceed with your question.

Tyler Wood -- Northland Securities -- Analyst

Hi, guys. I'll add in my -- congratulations on the quarter and the foothold in Texas. Going back to the international opportunity, once we start seeing cities actually get signed, how long should we expect between deal signing and go-live? Since you haven't done as many deployments internationally, should we expect it to be longer than domestically or pretty much the same? Thanks.

Ralph A. Clark -- President and Chief Executive Officer

Yeah. That's hard to know. I think it really depends on the specific geo that we're talking about. I think I have a sense that things will probably move a lot faster in South Africa just because we have some experience there and possibly move faster in the Caribbean, because we have some experience in kind of dealing with the infrastructure players down in that region. But for planning purposes, I mean, I wouldn't assume anything less than four months. And I would say probably, if you want to be conservative, maybe six months or so in those other geos, but I think things can happen faster in the Caribbean and South Africa.

Tyler Wood -- Northland Securities -- Analyst

All right. Thanks. That's helpful. And then one more, going back to the security side of the business, it sounds like you've got some new kind of leadership there. Could you kind of talk to us about how you're thinking about that strategically going into 2020? Is the focus still mostly on campuses? Or any changes on that side of the business we should expect? Thank you.

Ralph A. Clark -- President and Chief Executive Officer

Yes, I think this is Ralph again. So there's kind of two major focus areas for us. It's kind of campus security has kind of represented by higher ad [Phonetic] college campuses and the like. And also, we think there is an opportunity in corporate securities, while corporate campuses as well. We do have our freeway project that I think many of you are familiar with. And we've actually -- believe it or not, sadly, have actually some detected some gunfire along the highway corridor that we're protecting. That's another very interesting area for us to kind of reference sell-off of kind of infrastructure -- critical infrastructure protection i.e. being freeways that have [Indecipherable] issues with gun violence. I would say that would probably be a potential third leg of the stool. Plenty of stuff for us to do though in that market.

Tyler Wood -- Northland Securities -- Analyst

All right. That's all from us. Thanks.

Operator

At this time, this concludes our question-and-answer session. If your question was not taken, you may contact ShotSpotter's Investor Relations team by emailing SSTI@gatewayir.com. I'd now like to turn the call back over to Mr. Clark for his closing remarks.

Ralph A. Clark -- President and Chief Executive Officer

Great. Thank you very much again. We really appreciate folks partnering with us on our journey. This isn't a sprint for us at all, but it really is a journey and we're in it for the long-term to make a impact globally. So, thank you very much for your support. And with that, I think we can end the call. [Speech Overlap]

Alan R. Stewart -- Chief Financial Officer

Thanks again. Now I just want to say thanks as well.

Ralph A. Clark -- President and Chief Executive Officer

Yeah.

Operator

[Operator Closing Remarks]

Duration: 63 minutes

Call participants:

Ralph A. Clark -- President and Chief Executive Officer

Alan R. Stewart -- Chief Financial Officer

Matthew Pfau -- William Blair -- Analyst

Richard Baldry -- ROTH Capital Partners -- Analyst

Jeremy Hamblin -- Craig-Hallum Capital Group LLC -- Analyst

Christopher Van Horn -- B. Riley FBR -- Analyst

Joseph Osha -- JMP Securities -- Analyst

Charlie Erlikh -- Baird -- Analyst

Jeff Kessler -- Imperial Capital -- Analyst

Tyler Wood -- Northland Securities -- Analyst

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