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

Hi, everybody. Welcome to the 49th Annual JPMorgan Technology Media and Communications Conference. Thank you very much for joining. My name is Mark Strouse. I cover applied and emerging tech here at JPMorgan. Very happy to have Rick Smith, the CEO and Co-founder of Axon joining us today. I will begin our fireside chat with some questions and bringing in questions from the audience throughout the session. If you would like to ask a question, please click on the Ask A Question function within your Zoom. With that, let's get going. Rick, welcome. Thank you very much for joining.

Thanks for having me here today.

Great. So just going to assume that there's a few folks that are new to the Axon story. Can you just spend a few minutes giving us a brief overview of what Axon is all about?

Definitely. So we are a technology company that approaches the eradication of violence, which is, of course, the inverse of safety as a technology problem. We started out as a company called TASER International. You may well know, our ubiquitous yellow nonlethal weapons that are continuing to grow in their usage around the world. Our mission here is to make the bullet obsolete, meaning to create nonlethal alternative so good that, police, military or even people defending themselves no longer have to resort to the awful act of killing a person. We took some of our inspiration there from something I keep in my office, which is a replica of the TASER from Captain Kirk, where we can see it in science fiction already. Like the Captain Kirk whipping out a 9-millimeter and blowing holes in a cling on is crazy, right? We look at that and we say, that just doesn't fit in a vision of the future that is so advanced. In fact, in my world, I can't believe we're still sitting here with a state of the art independent yourself is firing a lead ball, just like we fired at the British on the battlefields of New England hundreds of years ago. So that's our first core mission is to create tools that enable people to protect themselves without killing or injuring another person. We then expanded into 2 other areas: The first is our sensor business, things like the body camera, the AB3 I'm holding here. These are hardware sensors that originally started from the perspective of trying to answer questions about when police use a TASER or a gun or any use, of course, there's always a concern about was it being used appropriately, was it being misused. And so we created the body camera industry a little over a decade ago with this idea of electric core and what police are doing so we can: number one, understand how the government is using force against its citizens; hold police accountable and hold people accountable who might be assaulting police or filing false claims against them. And from the body camera in the sensor business, we've grown to a multitude of sensors now we have in-car sensors, in-car video systems, we've partnered with various drone providers and we're continuing to look at additional types of sensors that we can feed into our network. But the real [ test ] is so much in the hardware, but all the software capabilities it enable. And that's our third category. So in the software space, we started out effectively creating a digital evidence management platform. In very simplistic terms, if you think back to the late 1990s, there were tons of MP3 players, music players. But the iPod, when it came along, the integrated hardware-software experience just made it wonderful for the average user not to have to go figure out all the complexities of how to get music on and off your device. Really, it's a very similar problem we've solved here, except the flow is inverse. Instead of how do I get music on my device, it's how do I get all this video information off secure it with a chain of custody that meets all the legal requirements required to go to port and how do I do it to find NYPD with over 20,000 users uploading cameras every day. So we've built the software back end in the cloud to be able to handle that. And as such, we've become really a clear market leader from the London Met to the LAPD. And we've been continuing to then build off that digital evidence management into extending new software productivity tools because we really are the first major mover in the cloud in local government space. And so we had 2 additional sort of software categories. One is what we call productivity. And those are all the software tools to help with business process flow. So you could think of that like a records management system. There's tons of bespoke subsets of these record systems like the use-of-force management system or things like using transcription, which is really where we can bring unique value because we can now transcribe all the videos coming off a body camera, integrate that information into your report so the police officers aren't spending literally half of their time as data entry clerks. And then the other major category of productivity is in real-time operations. And that's less about business process flow, and it's more about how do I match my resources to the critical demand. So when somebody calls 911, the person who answers the phone can quickly know which officers are available, who's closest, how do I route them there, what information do those officers need to know about what's happening, what do I need to know as a dispatcher, so I know if I need to send more types of resources, whether it's medical, whether it's mental health, et cetera. So all of these back end systems, your local police departments tend to be pretty, let's say, old school software, moving it to the cloud and integrating our sensor network is both automating workloads and bringing just incredible new capabilities. One very simple one is we now have an agency that is live streaming, everybody camera direct to a dispatcher. So instead of the dispatcher trying to guess what's happening by listening to some cryptic missions over the radio, they're watching it in high-definition video as it's happening. And that the first agency that did that is a medical center out of Texas. And they're telling us it's been pretty transformative. We see those types of capabilities much like we're doing this over Zoom, it's much richer than if we were just on a conference call. We think the same thing is true for any type of communication, especially for critical first responders. And so we're building out this network of devices, software and engagements or weapon capabilities that together, we believe are making the world a safer place.

Yes. Okay. Excellent. Okay. So let's dig into the Software and Sensors segment. And going back to the kind of building block you're talking about with body cams and digital evidence management that you started a decade ago -- a little over a decade ago. Just give us an update, how penetrated is this market? And can you break that down to the U.S. market and some of your Tier 1, Tier 2 international countries?

Yes. So when we launched the TASER weapon, I was interested, these devices really penetrated first in the smaller agencies. And then the bigger agencies sort of came later in the cycle. With body cameras, we've seen the reverse. It started in the bigger cities, where there tends to be just more complexity of our managing huge police force more concerns about the types of violent incidents that may happen in a larger city. So I'd say we're seeing pretty good penetration in the major cities, a lower penetration in places like the Sheriff's offices, which tend to be more rural in the smaller police departments. And then statewide police agencies are actually pretty low penetration. Most state patrols have had in-car video and really we're just now starting to see a real uptick in the state patrols adopting body camera video. And then federal, you know, federal law enforcement agencies are really just starting to come online. We've seen just really robust growth in the federal markets, which includes U.S. Department of Justice to the military, to the FBI, to the TSA and other federal agencies. So in net, we believe in the U.S., we're maybe 50% penetration of municipal law enforcement. In federal, really just getting started. And then internationally, like in Europe, we're really under 15% penetrated. So we see a lot of upside in the rest of the world to continue to grow as we continue to work on the back half of the municipal agencies here in the U.S.

Okay. Okay. And then as you look out over the next few years, just specific to this kind of subsegment, I guess, can you talk about what your expectations are for growth? Is it coming from that penetration number increasing, more agencies signing up? Or is it more a function of going back to those existing customers and selling them more features, more bells and whistles?

Well, let me start by first talking about with the Axon flywheel, one great thing about the software sensors business is that it really does create a feedback that continues to add value for our customers. So really, the more devices, like as we get out into the field, the more data that we're able to manage together with our customers, which means we can use that data to help train better AI solutions around things like transcription or redacting faces or reading license plates, right? When you're in the AI business, having access to more training data, then allows you to create better capabilities -- better differentiated capabilities, if you can go back and sell to get more users and getting more users, of course, creates more data, going to keep the cycle going. So in general, we're still in the early innings, I would say, while our hardware is fairly -- is getting to a decent penetration, all the premium things we can do with that. We're really in the early innings of being able to sell things like our transcription product that really just went live last year or like our license plate reader, which basically uses a video camera in a vehicle to be able to read every license plate, whereas the officers are literally driving and typing it in on their dashboard, on their MDTs so while I'm lecturing my 17-year-old daughter not to text while she's driving and every police agency tells their officers not do it, but the fact is to do their jobs, many times they are typing while they're driving. So we see that continued automation and improved software and AI capabilities is key. In the international markets, we see really a white space. So in the U.S., mostly its officers today carry a dynamic TASER weapon. But America candidly is a gun culture compared to the rest of the world. In most other countries, we don't see that they are carrying both devices. And last year, I wrote a book called The End of Killing where I've laid out our mission is actually not to just become one tool on the belt, we want to become the #1 tool. And we'll do that by being both the most effective and the safest because any police officer anywhere in the world, their job is to stop threats while hurting -- while protecting as many people as possible. We are on the verge, and what I know we will do it this decade where we'll get to a point where we are comparable in the effective take down power to a 9-millimeter pistol with a fraction, like 1,000 of the risk of death or serious injury. And I believe that will really unlock the international market. So just to pick on one, pick France, Germany, Denmark, Iceland, most European countries, they wear guns today. Yet, they're not really in a nation that has a lot of gun violence. And pistol is nowhere near, I think, is relevance to culturally or even to their day-to-day jobs. If we can give them something that's close to as good and doesn't cause death, I believe we will flip to the point where we're going to start to see international agencies standardized on the next few generations of TASER weapons is their primary device. And once we have them with the TASER as a customer, then we have the ability to add things like body cameras and premium services. The TASER is completely a unique capability to bring us into a customer base and then expand with premium services. There's things like federal agencies that, again, we're really just beginning to tap over the past couple of years. We're the only FedRAMP approved digital evidence management system, meaning if you want to take the body camera video or photos or other things and be able to put them in the cloud and be able to share them across agencies, for example, the AUSA, the federal U.S. attorneys, all use our Axon Evidence platform for federally authorized digital evidence sharing. And we believe that's going to really continue to accelerate our federal growth. And then finally, I would just say, we are continually helping our customers solve new problems. So our net revenue retention has been just a hair under 120%. So customers are not only not leaving the system, they are upgrading. And typically -- let me actually use a helpline from Andrea. I can't remember the number. When the customers are actually upgrading just sort of 120%, I believe, is our -- across the whole universe net revenue on. But during the upgrade cycle, what's the range we're typically seeing?

Yes, up to 400%. So it's not uncommon for a customer to triple their annual spend with Axon, including their software spend as they take advantage of those premium services.

Got it. So new customers, new markets, we see the TASER moving from sort of boutique weapons to the primary. We think it opens up a bunch of new markets. And then once we're in, we believe as those markets mature, we'll see what we're seeing now in the large municipal cities in the U.S., which is the significant upgrades to our additional software and sensor capabilities.

Yes. Okay. Okay. So within body cams, you had a first-mover advantage with in-car video, that's a market that you are disrupting. So can you just -- can you give us an update -- I mean, you kind of touched on it already, but with Fleet 3 -- Fleet 3, it's harder than it should be to say. Fleet 3, when is that coming out? And you touched on the ALPR, the automated license plate reading. Can you kind of compare and contrast that to some of the other technologies that are out there? I believe there are other companies that have ALPR that's not just manually entering in the information.

Sure. Sure. So let me first start with that last piece. So traditionally, ALPR has been done using dedicated hardware platforms, typically infrared cameras that are purpose-built to basically reflect off the reactive services on a license plate. Those systems will cost typically close to $20,000 per patrol to put one of those ALPR systems in place. Now as you can imagine, when it's $20,000 a car, they're only put on specialty vehicles, which has a number of downsides, you don't get nearly as much coverage, and then civil rights advocates have concerns that where are those cars going? Are they being used to overpolice certain neighborhoods versus other neighborhoods? And then there's fixed license plate readers, which have typically been using these more extensive bespoke hardware systems. We have rebuilt our in-car system with a 4K color in maturity using AI processing to be able to read the license plate so that now we can do ALPR instead of $20,000 just for that dedicated system, we can do it for on the order of $30 to $50 a month of incremental spend as a service. So it's just a fraction of the cost. Now that's when you layer it on top of our Fleet 3 hardware, which is cost competitive with the rest of the industry. So the whole system ends up at $208 per month per vehicle, and that includes all of the hardware, all the software, the storage, we're able to do live streaming, we're able to do so much with this capability. Now of course, we're not the only ones doing this. Some of the incumbents in the space have obviously also seen this coming. In fact, the leading company in ALPR infrared cameras was acquired along with the leader in the in-car video space. I would say, I think we've got a leap on really integrating those 2 capabilities together candidly because we were unconstrained by having to support large existing infrastructure that you got to pull together. So we built from the ground up, an integrated in-car system really optimized to do this. And it's in the field right now. We're in late field trials. It will launch in the back half of this year. And what we're hearing from customers is really, really positive. I would say this is our third in-car third-generation. So early on, when we were selling body cameras, some of our customers began to ask us, well, wait a minute, we have in-car systems. We also want to have those in the same -- we don't have 2 different systems, one for body camera, one for in-car. And we originally have looked to partner with all the various in-car vendors. And we just found that in the industry, there was not a lot of interest in partnering. There are still a lot of people skeptical about the cloud. And so we moved quickly, and our first 2 generations of in-car cameras were really based on repackaging our body camera for an in-car use. And one thing we learned was just that our customers actually do have some pretty high demands for an in-car camera system. So we've gone back and now designed it from the ground up. And I'm sharing that story because on a unit basis, I think we've been #1 or #2 with the market leader with what was clearly not the industry-leading hardware. And we got to that position because of our software capabilities and network. What's really exciting about Fleet 3 is we will take what is clearly the industry's best network in digital evidence management capability, and we will be adding the industry's best dedicated in-car hardware and I think we're going to do really well as Fleet 3 rolls out because I think we'll be leading across the board in those categories in terms of the innovation and the capability.

Okay. Very helpful. Can we kind of transition to the records management that has been commercially available now for about a year, 1.5 years maybe. Can you just give us an update on the customer counts? You have like a trial version of this capability that's available. How many are -- how many agencies are trialing this versus how many are fully implemented? Yes. And then, I guess, I mean, I don't know, how many angels are on the head of a pin. But I mean, how do we think about additional agencies over time?

Yes. So we have more than 40 agencies that are using some version of our RMS system today, and there's close to 2 dozen that are deploying the broader record management system. So when you think about records management, it can be either a focused application like a use-of-force reporting system, where it's focused on only the use-of-force report or it could be broader covering a much wider number of reports and capabilities. One thing that we've done is we've created what we call our Officer Safety Plan, which is kind of like the equivalent of Amazon Prime, where we allow our customers for 1 price to be able to access effectively all of our software and our latest hardware with built-in upgrades. And we're getting -- we have hundreds of customers on the Officer Safety Plan. Now many of them are not yet using certainly the full record system because the deployment friction is higher when looking at deploying -- it's kind of like deploying an ERP system. There's an existing system that has to be displaced. The data has got to be migrated and so that's one of the reasons that we had a strategy of also creating very lightweight versions. So Axon Standards, for example, is a subset of records that focuses on use-of-force reporting. And that's really a strength for us because of our TASER weapon and our experience there. And so with standards, an agency can deploy with very little need for integration, very little need for data migration and the lift for our professional services team is quite low, and it's a great way to get agencies to be able to try out our records management software and then be able to upgrade down the road. And if they're on one of our bundles, then -- particularly the Officer Safety Plan, then they don't even really need to go spend any more money. They've already paid for that capability. Now part of our strategy, in general, is we think that the core records experience is almost like an operating system that allows us the ability to sell premium services on top of the things like transcription, again, where we can transcribe body camera video or other fees and take that information and integrate it right into the record, either by transcribing it and topping that information in or even better is linking the full multimedia with the transcript into the records experience. So we think that's -- so for example, we're now beginning to accelerate significantly our sales of our transcription service. And we believe that when you've got Axon Records and Axon Evidence, the transcription layer linking the 2 is really especially valuable. So we believe that the right focus for us is not to overly focus on trying to sell and monetize records itself as a separate software product, but really to make it broadly available to our customers so that they can then begin to purchase it, and we can monetize some of our investment in those other services that's on top of records.

Okay. So I've been following your company for a very long time. And over that time, you've been very selective in your M&A activity. You recently made 2 fairly decent-sized investments, though, in a company called RapidSOS and another one called Cellebrite. Can we just talk about those 2 companies? What do those capabilities bring to your overall ecosystem? And just give us an update -- or just the decision on buy versus build?

Yes. So at Axon, we really do want to become the public safety network that helps connect the public and public -- meaning the citizen rate and their police and their other first responders and helps to just make those interactions more transparent, and more effective. So we also look at partnerships, right? Obviously, no one company is going to build everything needed in the ecosystem. So we've really been putting a lot of more effort into partnerships and in that respect, RapidSOS, I'll talk about them first. Basically, if you call 911 from your house, your house, your address has to be registered so that the phone company can give your address to the 911 dispatcher. Well, with the rise of cell phones, these are not one location. They're out and about. What RapidSOS has done is they basically built a software capability, and they've integrated with Apple, with the Android system, with folks like Uber. So that any time there's an alert going from your device, they're providing to them the vast majority of the 911 centers in the U.S. So for us to partner with them, we can begin to integrate into that same system, the location data of police officers from our body cameras as well as be able to integrate some of their data into our new dispatch software so that the customer is just giving a better integration across these 2 very important capabilities. RapidSOS really having the network of connected smart devices connecting in the 911 centers plus with the connected network out on law enforcement officers themselves. And one of our big areas of focus is now in dispatch and so we believe this partnership allows us to bring those 2 streams together, our police officer data, their consumer data and bring it together in a best-in-class dispatch software that both us and RapidSOS pivot to Cellebrite. Cellebrite is the market leader in digital intelligence, basically, meaning you can imagine any investigation today, things like the terrorist attack that happened in California, where an iPhone was gathered for part of the investigation. Cellebrite really focuses on helping agencies get data off of these devices, especially when it's involved in a critical investigation. And we did a lot of bidding. It obviously brings up a lot of privacy issues, et cetera. And Cellebrite plays an important role. They've got what we believe are solid focus on privacy and protecting the privacy rights of the individual. However, this is an important capability, right, in a world where much of human action has gone digital, we can't allow everything to be the dark web. There has to be some way for public safety to be able to do their jobs and Cellebrite really fills that gap. And we felt, in both cases, an investment was both a high NPV investment for us, and it was strategically important. And then finally, I would just say, we went a little bigger on Cellebrite in terms of the magnitude of our investment. They are going public as part of this process. And as part of that, again, we looked at the sort of valuation comparables. We felt it was a good investment that we as Axon had unique access to. And ultimately, the fact it was in a public entity, it didn't necessitate that, that capital would be locked up as long as it will when you're investing in an early-stage company. So those are the factors that went into how we thought about both the strategic importance and the return financially for our shareholders.

Yes. Okay. All right. So moving on to the Weapons segment. Can you just give us a lay of the land how penetrated is this market now? Kind of like you mentioned, we started with the smaller agencies and then over the last 5, 10 years, you've seen LAPD in New York, Chicago, some of the bigger agencies that have been deploying more and more TASERs. Is there still an opportunity for growth from penetration within the U.S.? And then while you're talking about that, can you also talk about kind of your Tier 1 international countries where we stand there?

Yes. We still do see some of the larger U.S. agencies, for example, New York. They still share TASERs across a smallish subset of their officers as opposed to every officer. So we're very focused. We believe this is a capability every officer should have. If you have a gun and the ability to take a life, you should have every tool to avoid having to do that. So we do continue to see some growth opportunity even on a unit sales in the U.S. But most of the growth opportunity in law enforcement in the U.S. is really around upgrades to more capable weapons and with more premium capabilities as well as premium services. So this year, we just announced our new VR training platform where we're partnered with HTC on their new headset launch. It's really not even shipping yet, but we've been an early development partner. And that headset had a couple of capabilities that were really critical. We felt for VR to take off, you need to simplify everything. So with our system, we'll be able to take an HTC headset and a TASER weapon load-in of VR cartridge. It has all the sensors we need, and you'll be able to go through a near limited number of scenarios in training in VR, sort of like a high-end video game. But obviously, it's not for enjoyment purposes, it's for training purposes. We know that VR has a 4 to 7x higher retention as opposed to sitting in the classroom learning. And candidly, on an economic perspective, this is the most exciting product offering, I think, we've seen in our history, where we are receiving multimillion-dollar commitments before the product was even complete and ready to ship because the problem and the cost around training is so significant. Now we believe with TASER coming up in capability with the increasing scrutiny with what's happening around lethal use of force, I mean, for the first time ever in the past few months, I was listening to the enforcement officers talking about when will it be time for us to put the TASER in the strong and draw position and move our firearms somewhere else? Like that is an unbelievable sea change in thinking from where we were just a few years ago. And as we think about the training implications that will be involved or even if we talk about the weapons confusion case, where in the past few months, we had an officer who drew her gun and used it, confused believing it was her TASER. The way you solve that, we've been talking a lot with our customers. It all comes down to training. And it's about getting more high repetition training and having things like a simplistic VR headset that can be used. Instead of going through training once a year in scenarios, we can be doing it every week or even every day. And we believe that will both improve police performance as well as create another significant growth opportunity for our shareholders. And then there's actually the U.S. I think in the U.S., it's mostly about a little more penetration, but then more value add, both in the TASER themselves, is it more capable than VR and then federal military international. I mean our penetration are still single digits there. So we've got a ton of white space.

Yes. Okay. If I go back 5, 6 years ago, I think the average upgrade cycle for your weapons was somewhere around 7 or 8 years, if I remember right. And part of that was at least the agencies that we were talking to back then, we're saying, it's not that there isn't a better weapon available. It's just a hassle to go to my city council or whoever and get approval for a big CapEx line item within the budget. Your recurring payment plans that you introduced it was 2016, if I remember. The thought process back then, I think, was to help shrink that upgrade cycle just by making it easier for customers to upgrade. What is the average up right now, just specifically and for the weapons business?

Yes. So I would say a few years ago, if we go back maybe 10 years, it was more like 8 to 10 years upgrade cycle just because you get to the end of the 5-year suggested useful life, then you might begin an evaluation process, and then they slotted into their priorities for their asks going for funding. Once we have agencies on a subscription plan, pretty universally, they're upgrading in the 5- to 6-year window. Because it's just all the logistics train is in place, they don't have to really do anything differently for the upgrade to happen. And so that's actually one reason we're now starting to see more 10-year bookings as we've begun to preview, do some sneak peeks of some of the technology coming in our next-generation of TASER weapons, customers are getting pretty excited, and we've actually used it to help even drive current upgrades of some customers where upgraded TASERs wasn't even necessarily on their short-term priorities. I would go on with the sales team and kind of show them where we're going, and we found that, that even kind of unlocks, okay, well, let's get on a program now with TASER 7 and maybe look at a 10-year deal, where it includes the upgrade to the next device. And in fact, we've even been working to make sure that we can even let them pull 1 upgrade early so that they don't have to wait for the fifth year in order to be upgraded and make sure that, that still works for us, and it does work and our customers financially.

Yes. Okay. Just a couple of minutes left. I want to go back to your comment about obsoleting the bullet. I did read your book last year, a very good read. Just give us a glimpse. I mean by the end of this decade, what do you have in mind? And what are kind of the steps that investors should be looking for over the next timeline to gauge your success in that?

So I think our next upgrade, which will be named TASER 8, not surprisingly since we're in TASER 7 now, will be the biggest upgrade in our history. And the things that we're working on are really -- we're just looking at what are all the things that go wrong when a TASER does not incapacitate someone. And then how do we fix those? And the big causes of failure are things -- the biggest one is if you miss. If you don't get 2 darts on the subject, it will not form a circuit and you'll get 0 effect. So miss is our number one. Heavy clothing is number 2. We get through most clothes, but not all clothing, heavy jackets, leather trench coats, if you have a really loose hanging flap somewhere in your clothing, that can prevent one of the darts from getting through. And then the third is close spreads. So we need -- for this to really be effective, we need to spread out the electricity really more than 8 inches or so, so that it's hitting a large portion of the body. And so those are the things that we're working on is how can we redesign the weapon to make it more accurate, more shots. So if you do miss, you've got more attempts. I mean there's a reason police carry a black handgun with 17 shots. It's because it takes more than one to hit the target. And with police, in particular, a lot of times, it takes a lot more than one shot actually to shot the target. So we need to give the officer enough shots to be able to get to 2 connections with a good spread through the clothing very reliably. And we've actually, in the past few weeks, had a pretty big breakthrough in R&D on a couple of those areas that make me confident. I think we will be ahead of schedule. It won't take until the end of the decade, that we will have a weapon that matches or out performs a 9-millimeter but in stopping power.

Yes. Very amazing. Okay. With that, we'll probably have to wrap it up. We're out of time. Rick Smith, Founder and CEO of Axon, thank you so much for joining us, and thank you all for listening here.

Thanks, Mark, and thanks, everybody, for joining us.