Axon Enterprise, Inc. (AXON) Earnings Call Transcript & Summary

Hello and welcome to everybody for joining us here at the Virtual Morgan Stanley TMT Conference. Very excited to have Axon in this time slot. Before we get started with the team from Axon, I do have a disclosure to read. For important disclosures, please see morganstanley.com/researchdisclosures. I should also say that if you're following along via the webcast, you can submit questions via the webcast directly to me, and I'll try to work them in. I've got literally a Joe Rogan podcast length of questions. We could talk for 3 hours, and so we're going to try to keep it under 30 minutes here. But if you do have questions, we'd be sure to try to incorporate those. So with the team from Axon today, we have Jawad Ahsan, the CFO; Andrea James, Senior VP of Corporate Strategy and Investor Relations. We also have Angel Ambrosio, who is the Senior Manager of Investor Relations and ESG; and finally, Bonnie Emmet, VP and Chief of Staff for Axon. And I guess as a preamble, I would say that I first became engaged with Axon probably 3 years ago, maybe a little more than that. And for me, I have the dubious distinction probably of having covered more companies than anybody at Morgan Stanley. And Axon easily is among my top 5 favorite companies independent of what our views on valuation, stock recommendation or estimates may be at any given point. I think that their mission that they're engaged in is highly important. The time frame that they're working in is very long and has a very extended life cycle. But -- and perhaps most importantly, the team that they've put together, starting with Rick Smith at the top and all the way down, has been at this for a long time, has shown their durability, and the rest of the team has been built with the endurance to achieve the mission. So with that, I'm very pleased to be able to host Axon today and dig into the things that they are doing, which I think ultimately will make a big difference in different parts of society, particularly as it relates to law enforcement and the like and improving better outcomes there. So maybe with that overly effusive introduction, Jawad, I'll start.

And I'll just say, from a 2-business standpoint, you guys have been somewhat unique as an example of a company that can differentiate in the market with a combined hardware-software offering. How does your position with TASER and body camera hardware improve the competitive angle you have in approaching the broader law enforcement market?

Yes. First off, James, thanks so much for the kind words. It means a lot to us. So that is very much by design. We're an integrated hardware and software company. And we think that our ability to offer hardware that works seamlessly together with itself but also with the software with the solutions that we've built is a competitive differentiator. And I think the best way to think about it or to really get a sense for it, if you look -- think about what an officer does when they arrive on a scene where they may need to deescalate a situation. If they withdraw their TASER device, well, that activates the body camera. And then the body camera has the ability to live stream so you can show other people back at command, maybe other officers that are rising -- arriving on your scene. There's this idea in policing today of situational awareness and arriving on a scene as informed as possible and understanding what's going on around that particular officer that's already there. Our body camera can provide that. And once the incident's been taken care of and it's deescalated, you now have a record that you need to write, a police report. And what better record of an incident than a video? And so now what we've done is we've also invested in technology that can help you take the audio from your video and transcribe and pre-populate your police reports so you're not typing away. We also have the ability to redact video. Typically, it takes multiple hours to redact your standard video from a police officer's shift. We've cut that down to about 20 to 30 minutes in time using technology that can flag incidents where, let's say, a weapon's withdrawn or there's swearing or yelling or fighting, right? We can flag certain things within a video. It all fits together. And now you also think about the new solutions that we've brought to market, like our version of dispatch, right, Axon Respond, and the ability to seamlessly integrate within Evidence.com. In a web browser, you can see where your officers are in real time with GPS location. You can seamlessly integrate with dispatch. Maybe dispatch fire and EMS if you need to as well. So it really is an ecosystem that we've built, and it's very much by design, and we think that's one of our key differentiators. James?

Oh, thanks for the reminder. If we take the example that you just gave where a TASER is unholstered and that starts the body camera -- you mentioned situational awareness. And some of the things that you've talked about in terms of product and the like that are beginning to roll out and you're beginning to introduce, including live streaming, et cetera, I think that's a really important part of the future policing. I mean I think body cameras by design give a very wide view. But if you're in that situation, the person and the people involved actually have a very narrow view. And so their ability to take in what's going on around them is severely limited, particularly in a high-stress, high-stakes environment. And so adding situational awareness and inputs and the ability to have inputs, whether it be from command or from other officers or other people just generally, is really important. Can you talk a little bit about what you're doing from a product portfolio perspective to evolve that situational awareness capability and the impact that, that could have?

Yes. Live streaming a really central part of that. And it's a technology that we've built with a customer need in mind, right? It wasn't just something -- we're not just not trying to foist this technology upon our customers. There really is a need for it. And you hit the nail on the head, James, as far as situational awareness. And I'll give you a couple of anecdotes. We had an incident where an agency had adopted live streaming. There was a school shooting, and they sent an officer to go respond to that. That officer had an Axon Body 3 with live streaming. And back at the command center, they were able to see the suspect had been subdued. There was no need for them to send the entire SWAT team. Typically, in that situation, if you're not able to see what's going on, the response to a school shooting is you send in the cavalry. In this case, they didn't have to do that because there was no one in harm's way anymore, and they were able to see that and make that resourcing decision real time. Another example is we had an officer that was in a scuffle, and their body camera was actually ripped off of them and was stolen by the assailant. Well, the body camera has GPS in it. And so we were able to see what that person was doing and located not only the camera but that assailant with the addition -- with the aid of the video. And it's just, again, now the officer can just let the assailant run away, like get themselves out of harm's way. It just -- it opens up avenues for policing that weren't there before. And so...

Sure -- go ahead. Go ahead. Sorry for interrupting.

Yes. And so what we're really trying to do now is to find ways to integrate that live streaming capability, again, seamlessly with our real-time operations platform so you can, in your web browser -- not just your web browser but on your mobile phone. If you're an officer that's on patrol and there's something going on in and an officer's dispatched to a particular scene and you're also on shift, you can see, just by pulling up your smartphone, what that officer is seeing and if they need help as well.

Got it. And what about -- I know you guys have now announced partnerships, and they have products, but what about adding additional points of view, whether -- and incorporating that? Like, where are we in that process, whether it be vehicle-mounted cameras, monitored drones? Like, what is that vision and opportunity set look like?

That is a big part of our strategy, James. What we want is for Axon and for Evidence.com to be the central way to ingest video no matter how you record it, whether it's on a body camera, a drone, a fixed camera, a police car, right? It doesn't matter how you record the video. We want all of that to funnel through Evidence.com. And that's why we've announced partnerships with DJI. We've got other drone companies in the works. We have our own in-car camera that we've developed with Fleet, but we've also opened up our APIs for us to be able to ingest video from companies like Milestone, for example. Milestone has a fixed camera solution. We want -- we have a partnership with them to be able to ingest that video into Evidence.com. Because once that video is in Evidence.com, there's a lot that you can do with it as far as all the downstream effects from police report writing, when you need to release a video to your prosecutors, to the community, to the media. It's just -- it's more valuable to you in Evidence.com, we believe. And so we've made that an essential part of our strategy.

So Jawad, you've mentioned Evidence.com a couple of times. And I think one of the things that investors, customers, the public at large doesn't really realize is -- like, it's one thing to put cameras in different places and have a range of views, et cetera, but actually managing that -- those raw video and extracting what's useful and pertinent is challenging. And even just storing it and filing it is difficult. So can you talk a little bit about what Evidence.com does? And then then we can start to visit other parts of the software stack, if you will.

Yes, for sure. So at its basic level, Evidence.com stores in the cloud video that you record on your body camera shift. Or if you've got Axon Fleet, it records that video as well, and it stores it in the cloud and allows you to access it, share it within the agency, like I said, with prosecutors, with other related bodies that need to see it. And the thing that is sort of different for each agency is -- are their retention policies. So some agencies, for a traffic stop, maybe they need to retain that video for, I don't know, 2 years. Some agencies, maybe it's like 6 months. So the -- how long you want to keep that video really depends on your own policies, but we want to be flexible enough for agencies to be able to store video however long they want, which is why we've worked with Microsoft in Azure to be able to provide unlimited storage. So it just -- it takes one more decision point out of the agency's thought process. So this -- we saw this with VieVu, right? One of the reasons we were able to acquire VieVu, like they hadn't invested in that cloud infrastructure. And I think many body camera competitors made their bet on on-premise, and they were assuming that agencies were going to do their own hardware, IT management, which was initially the way that, that market was going. But very quickly, they switched over to cloud because agencies quickly realized we're not in the business of managing server farms and having to do all that storage, cold storage versus hot storage, et cetera. So we've taken that on and just made it seamless for the customer.

So how has that impacted kind of your selling motion and pricing on that? For example is the -- I remember I went to one of the -- one of your user events, and there was a city talking about their use of body camera, and at the time, it was the original body camera. And this is like a big city. And I'm not going to name what it was, but they were actually doing all of the offloading manually themselves, editing it and then storing it in Google Docs, like literally, right? And just like the expansion of that, like just all the ways that, that constrains them is huge. And so clearly, there's a path there for incremental services and the like, but how does that change the business model as you go into battle into the cities, et cetera?

Yes. It's one of the reasons, James, that we've very much focused on integrated bundles. Officer Safety Plan is the one that we -- it's our flagship bundle. We've got different tiers of it. And the highest tier, the one that we love selling the major cities, that's seen a lot of adoption, has -- at $239 per officer per month, has a TASER, a body camera and Evidence.com license. It's got unlimited storage. It has Records. It has a lot of the software add-ons like transcription. It has -- VR is now included in the top-tier model as well. That's another one that we've built in response to a customer need for greater empathy training. But that's really informed our -- what you described, right, that's informed our strategy to sell these integrated bundles because, increasingly, what law enforcement wants are solutions for deescalation. They want more transparency, right? That's a big wave of what you're seeing now with police reform, which, frankly, was in play prior to last year, right? Last year's event brought it, I think, to a point and really shined more of a light on it. But the reality is I've been at Axon for 4 years and I've been hearing from police agencies and from officers from major city chiefs for multiple years now about this need for more transparency, for more deescalation tools, for technology that works together seamlessly, that's integrated. We've taken a cloud-native approach. So all of our software products were built with the cloud in mind from the ground up. They're seamlessly integrated together. And this is, I think, also been one of our differentiators because we are cloud first, right? We haven't cobbled together our solution to acquisitions and then tried to migrate them over to the cloud. So that's really informed our go-to-market strategy.

So the software -- within law enforcement, the software market is highly fragmented. There's lots of players. A lot of them have been around for a long time. The reality is, as a -- on a whole, they're not growing very quickly. I mean it's really tied to budget. So I guess the first question is, can you run through kind of what the additional software capabilities that Axon is delivering and is looking to roll out beyond just this evidence archiving and registry functionality that you described?

Yes. So I talked about transcription as one, right? That's a really key one. And we've now made that easier. We have -- the $239 a month package that I just described has unlimited transcription in it. So you don't have to think about it. So previously, what you had to do if you wanted transcription on your video, you'd have to go through some steps. You had a certain bundle of minutes that you'd buy, and you'd have to figure out do I have enough minutes to redact this -- or sorry, to transcribe this video. We've made that all seamless. Your video, if you bought this package, as soon as you upload it into Evidence.com, automatically starts the transcription process, and you've got the record there for you to edit and do what you need. Again, just trying to make things more seamless and painless for our customers. Redaction Studio is another -- or sorry, Redaction Assistant, again, where you have -- agencies would typically take several hours to redact a video. We've now simplified that so you can very quickly pinpoint the key instances in the video that you need to highlight. So you can redact a video and highlight the key aspects of it within 20 minutes. Citizen for Communities is another one that's really important as agencies are looking to really capitalize on the rise of smart cameras, right? Like if something happens, then typically, there's video of it instantly, video, pictures, et cetera. Like, the jet -- the America -- or sorry. The jet that had the cowling fall off, right, within minutes, there was a video of it, of the jet flying with the engine exploding and the cowling falling, right? What we've done now is built a tool, an ingestion tool, for agencies to reach out to the community and say, if you've got video or pictures or whatever, send it through this secure platform. And that also uploads in Evidence.com. So you now have everything working together seamlessly.

And what about -- what are some of the others? Like, dispatch seems like it's important, Records, et cetera. Like, where are we in development and rollout of those? And I guess the easiest way to talk about that is inning of development and inning of adoption by customers.

Yes. So Records, we're now thinking in terms of productivity, a suite of productivity tools. And the reason for that is, what we're finding is that Records has a very long buying cycle. And it's also a heavy lift for an agency to replace their entire records product that is largely on-premise today. and has probably been there for 25 years, which is why we've -- we're now thinking about it as a suite of productivity tools. Standards is a flagship one, right? Standards in like your use of force, for example, reporting, that's a module that almost everyone needs. And what we've done is we've allowed agencies to adopt that and use their current record solution in conjunction. And the idea is that we're going to add more functionality to that over time. Or we got the modules if you want to buy them, right, so that you can eventually supplant your existing records solution and migrate that to the cloud over time, right? And we've opened up our APIs. We don't have a walled garden approach. We've very much decided to we want to work with other vendors. For example, if you've got a certain module of your records software that we don't offer -- well, we want to work with that vendor so you can integrate their hardware. Dispatch, as you mentioned, is another one, what we now call real-time operations, so decision-making and communication tools that support that real-time decision making. That's just -- that's really important again for the model of policing where it's heading for greater situational awareness. And the fact that you can integrate with your records solution, right, it all just seamlessly works together where you have not only the ability to see where your officers are but to dispatch them. It just -- it all seamlessly fits together.

No, that makes sense. And when we look at it, this fragmentation, like you said, there are existing vendors in certain aspects like records, et cetera. If we juxtapose like last year, there was a lot of uncertainty around budgets and the like. What have you seen play out? And are customers or municipalities able to find need for funding the technology? And if you're looking at ultimately replacing an incumbent vendor, is the funds for rip and replace justified through the improved efficiency? Or are you tending to have to wait that contract out and then try to step in on renewal, et cetera?

Yes. The first thing I'd say is that the increase in some of the dollars that are out there today, like, it's again driven by the greater need for police transparency. We've been, like I said, building these solutions for a number of years. So in a lot of ways, it feels like we're built for this moment to capitalize on the increased desire for police reform and for greater technology. We think of ourselves as a force multiplier, right? Like if you can save officers' time, whether it's through police report writing -- basically, we want to try to get -- officers say they spend about 2/3 of their time writing reports, and We want to automate as much of that as possible so it effectively increases the time that you have officers patrolling streets and keeping their communities safe and try to reduce that administrative burden. That's really been the core focus of what we've tried to do. And from a budgetary standpoint, we haven't -- what we've seen is that the larger cities are not very price sensitive. That's why we've -- our top-tier OSP bundle has been climbing up in price because we added a lot of value to it, and it's selling really well with the major cities. With the smaller cities that are more price sensitive, we have offerings for them. We have body camera-only offerings. We have TASER-only offerings. We've got different tiers of storage. You don't have to buy all the add-ons per se. The idea is we really want to build and offer products that -- and bundles that serve both ends of the market.

And then we focused a lot around municipalities, et cetera. What about incremental markets? Part of the things that we have seen is a much faster uptake and development of federal opportunities in cases. International is also growing. And then there's also probably, at least from a device standpoint, some opportunity even in the private sector. So where are you focused? And where are you seeing development opportunities on incremental markets?

We're focused on all those areas that you mentioned. That's one of the things I think is most exciting about the company today, is that the products and the feature sets that we've built have applicability outside of law enforcement. And we're finding that in some of the early wins in the federal space. So federal has been great for us. We've had some early wins there. There's more to come. We're -- we made the investment in the business to be FedRAMP certified at a moderate level. We're now going for the FedRAMP high certification. Beyond that corrections, fire and EMS, those are all adjacencies to law enforcement. They expand the TAM. They add to the number of users. Those are all markets where, certainly, there's a need for body cameras, in some cases, for TASER as well. So that's another one we've made an investment in as far as building out those teams. The enterprise space, you think about -- and it's actually -- a lot of that, James, is inbound interest. We've heard from delivery and logistics companies, from construction companies, real estate companies they're very intrigued by the idea of putting body cameras on their folks for various use cases. Private security is another one. That's one that's sort of adjacent to law enforcement, very similar use cases where it could be both body camera and TASER. We put out a press release a couple of months ago about a private security agency that's like a nationwide chain in Canada. We're looking to unlock more of those. And then the last one I'd say is consumer. The consumer market is one that we think is underserved today from a less lethal standpoint. And it's an exciting one for us because we have a brand name there. TASER is a very powerful and well-recognized brand name. We have an existing business. We just really needed to supercharge that with some additional marketing, which is what we've been doing. But all those areas I mentioned, what I love about it is it's expanding and diversifying the company, pushing beyond core law enforcement.

Yes. It's interesting. Like, your comment around construction and other areas where perhaps safety and employee behavior as it relates to safety could be really important and not really something that I think most investors, including myself, have really considered. So talking about TASER and the business and how your driving value for the customers, et cetera. TASERs that are sold as a subscription have increased. Is there a way to migrate the entire TASER base just to subscription offerings over time? Or will there always -- do you think, always be customers that will just purchase upfront and then worry about the back end separately?

Yes. I think it's going to be the latter, James. There are always going to be customers that have asset forfeiture funds or maybe some dollars they need to spend at the end of the year, and they may buy on a one-off basis. But the business, by and large, is shifting more towards subscription. And it's just -- it's an easier procurement cycle as well when you're an OpEx line item in the budget versus like a big capital expenditure. We're not asking these agencies to go out and spend $100 million on like radio towers or whatever, right? This is a -- it's -- whatever the case is, $199, $229 a month per officer, and it's something that -- it's easy for them to add on to, right? What we see, in a lot of cases, our contracts are 5 to 10 years on average. Many of them don't go the full length because they end up renewing early, and the agency will add features or they'll add users. And it's easy to do that when you're already in this -- in the subscription OpEx model.

So let's talk about the financials and -- that is your job, right? Like, you don't just get to talk about product all the time. You got to make it -- Jawad, you got to make it happen in dollars and cents. So look, what is the operating model that you're kind of working towards? How are you balancing profitability and growth? And look, we know that you've only given specific guidance for this year, but what are the margin and growth profile that you think Axon should be able to achieve and sustain?

So long term, what we've guided to is 70% gross margins and 30% EBITDA margins. All right. So that's the answer to your question. But just to step back a little bit. When I first joined Axon, one of the things that really excited me about the business and why I joined was we have -- even at the time, 4 years ago, we had a fairly diverse portfolio. We had an established TASER business that was generating a ton of cash. It was very profitable. And then you had this nascent body camera and software business that was increasingly looking to make bigger and more audacious bets. And what I saw was that we can walk and chew gum at the same time, so to speak, right? Like we can grow our top line, but we can also be more disciplined and try to drive some leverage on the bottom line. And that's exactly what we've done over the past few years, right? We've turned around the margin -- like, our margins we're heading south in 2017. We've gotten more disciplined. And we could be at a 30% -- we could beat those long-term targets I told you. We could be there tomorrow if we want it to be. We could be there today if we want it to be. But what we're doing is we're very consciously investing back into R&D because I think what's allowed us to be competitive is the fact that we are very innovative, and we want to invest to stay ahead of the innovation curve. I think the day we stop that, we give up our competitive advantage. So what we do every year is try to figure out how to put together an operating plan that allows us to make those investments to stay ahead of the innovation curve but to also grow the top line enough and allow some of that to fall to the bottom line as leverage. And we're generally pretty conservative with our guidance, both top line and EBITDA. But ultimately, what we're trying to deliver for investors is a business that is both growing top line and on the bottom line. I think Rule of 40 is a really great way to think about the business. Generally, that's what we're striving for.

So speaking of margins, they've expanded over time. But on a quarterly basis, there's been more volatility in those margins. What are the factors that investors need to be aware of around that volatility? And is there a way over time to build more consistency? Or is that just going to be kind of one of the realities for the foreseeable future?

I think it is going to be one of the realities for the foreseeable future, and that's one where I think long term -- if you're long Axon, then our goal is to make you really happy. The quarterly fluctuations, there's not a lot we can do there. And there's a couple of reasons for that. One is we have some major customers, some very large customers that are on refresh cycles. So with the body camera, they get a refresh at the midpoint of their contract and at the end of their contract. And then when they renew, they're constantly going to be in the cycle where they're upgrading every 2, 2.5 years. And in 2020, we had a couple of such customers that were -- they got some favorable pricing just for us to get in the door. And when those refreshes happen, that impacted our margins. So when those refresh cycles happen, that will likely be another dynamic. And then conversely, you had -- in the fourth quarter, we had a large international deal that shipped for TASERs, very high margin, and that's part of what went into our margin upside in the quarter. So I think it's going to, unfortunately, be a little bit of that lumpiness. But longer term, we are driving towards those margins I mentioned.

And in the last couple of minutes here, one question for you, and I'm going to -- we'll do a lightning round for you and the IR team. But acquisitions. Like, M&A has never really been core to Axon. You've done some. You mentioned VieVu earlier and that kind of thing. How do you think about acquisitions today? And where does it make the most sense to partner or acquire? And how -- what kind of input or element is -- are valuations having in that decision right now?

Yes. We -- so we have a very strong, world-class corporate strategy team under Andrea. I think you'd be surprised at how, a, big that team is; and b, how talented they are; and then c, how big our pipeline is of deals that we look at. And we say no to pretty much everything just because we've got a very, very high bar for us to make an acquisition. It's got to -- in my opinion, it's got to outperform our ability to -- the investments we're making organically, right? The investments we're making organically are beyond -- they're beyond exciting to me, right? When you think about Records and productivity and dispatch, all the things we talked about earlier, those are all organic plays. If we just run those and attack those investments in those markets, the business is going to grow really nicely. So for us to now throw an integration into the mix -- M&A is hard, right? I've done quite a bit of it over the course of my career. It's really difficult to integrate not only the companies but the cultures, et cetera, which is why you've seen more investments from us, right, in companies like Flock Safety. This past quarter, RapidSOS was one we're really excited about. We are not totally averse to M&A, but it's got to meet our high bar.

So last question and just for the benefit of particularly incremental investors that may be looking at Axon. In basically a sentence -- I'll start with you, Jawad, and then we'll go to Andrea and Angel. What is kind of the one sentence or one thing that you think the investor community is not understanding about Axon?

I would say our runway is a lot bigger than people think. I think we have, again, as I mentioned earlier, the ability to expand and diversify the company beyond law enforcement, and that's exactly what you're going to see from us in the coming years.

Andrea?

Thanks, James. I'm put on the spot. I have to think that there's a macro point to be made that we're going to see the confluence of public and personal safety over the next decade. And I think Axon's going to be at the forefront of driving that and a big part of the value creation and value capture in that trend.

Angel, anything you would add?

You know what? I think they've both nailed it. I think it's just -- it's really exciting to see what we're doing, and stay tuned for all the fun things that we have coming up.

Just to plug what Angel has been working on, though, I do think that we will start to unlock more pockets of ESG capital. So there's maybe a perception out there that we're a weapons company. Much to Angel's credit, we've been focusing a lot on ESG. So I do think that there is continued opportunity, particularly among the European investor base, to awaken those pockets of ESG capital as a social investment as well.

Yes. All you don't need to do is listen to RIck for like 3 minutes and you realize that you're an anti-weapons company, so. The team at Axon, thank you very much for joining us. Really enjoyed the work, obviously -- or think that the work that you're doing is very important. And wish you all the best, continued success there. And thanks to all the investors for joining us today, and have a good one. Goodbye.

Thanks, James. Thanks for having us.