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

Hello, everyone, and thank you for joining us for our Virtual Growth Stock Conference. My name is Jonathan Ho, and I'm the Security Technology Analyst for William Blair & Company. With us today are Jawad Ahsan, the Chief Financial Officer of Axon; Andrea James, Vice President of Investor Relations as well as her team. Before we begin, I'm required to inform you that a complete list of research disclosures or conflicts of interest is available at our website at www.williamblair.com. With that, Jawad and Andrea and the rest of the team, I want to thank you so much for joining us today for our conference. For those that are maybe a little bit less familiar with the company. Can you give us a brief overview of Axon, just the level set in terms of the background?

Yes, I'd be happy to, and thanks for having us, Jonathan. So I always like to start with our mission as a company. It's what attracts a lot of us to the company and that is to protect life and to protect truth. And our products are all geared towards doing exactly that. The TASER, the body camera and the software that we're developing that goes along with it. And really, those are the most, I guess, the 3 most strategic drivers of growth for the business, the first one being TASER, that includes the actual TASER device itself. VR increasingly is becoming a big part of what we consider to be deescalation. That's a term within policing today that everyone is moving towards as far as deescalating a situation and really understanding the state of mind that someone is in when you arrive in a scene. Sensors would be the second part of that. So the body camera, in-car camera, all the various sensors that we use to collect video or other types of evidence, that's a separate category. And then the third one would be software. So that's really the back-end digital evidence management, what we call DEMS, that's our bread and butter. That's the back end for the body-worn camera as well as for the fleet. We also don't make drones, but we have the back-end video management for drones, interview rooms, covert cameras. That's really, as I said, is our bread and butter of our SaaS business. And then we've got 2 new product categories that we're pushing into -- in software. One is productivity, and that's a suite of tools that increases the productivity of an officer, and it includes things like report writing, standards, use of force reporting and that also includes productivity tools like auto transcribe. So transcribing the audio or the report from the audio of a video -- Body 1 video is a big new area for us. And then the third category is real-time operations, and that's really the all geared towards delivering more situational awareness when an officer arrives on a scene. We call that respond for devices is like the core product there. And that's typically -- that's our version of the new computer, the new thinking around computer-aided dispatch. So it's TASER, it's sensors, which is more than just body camera and its software.

Thanks for that overview. I did want to spend a little bit of time in terms of trying to understand the increasing amounts of software content that we're seeing with the company. And especially with some of the exciting new areas that you mentioned. Can you maybe give us an update on where we are with some things like Records management and computer-aided dispatch products? And how do you think about competing against traditional players like Tyler or Motorola Solutions?

Yes. So the big thing that we've learned is that Records is a large complex market, and there's no one size fits all solution. Records means, a Records Management Solution, RMS means different things to different agencies. And from the beginning, our approach has never been to go build a full-featured monolithic record solution that will compete with the incumbents that are largely on-prem today from niche and Motorola. We wanted to first focus on the modules that are the most -- what we consider to be value add, so report writing, the use of force reporting. And that's really where -- when you look at Axon Records today, that's the core of what we're focused on, are the modules like that. And now what we're finding is like we are playing the long game, and we want to be able to serve all of the market. Our solution today probably serves about 50% of the market. Ultimately, the goal is, through some combination of build or partner potentially by, we want a solution that will address 100% of the market, but we're still in very early innings. And a big part of our strategy has also been to bundle records with the Officer Safety Plan or OSP, which is a key way that we go to market in domestic law enforcement. We've talked about Baltimore PD, that's one of the flagship agencies that is on track to becoming the largest agency to deploy Records. They're an OSP customer. We've heard some great feedback from them. Dispatch is that's a little bit earlier innings for us. We have quite a few customers that we've sold Records to, that were in the process of deploying Dispatch's -- probably a couple of years behind that. A lot of that's because of the nature of a Dispatch product, it has to be full-featured right out of the gate. In many cases, you have to be able to dispatch not only policing -- but police, but fire and EMS as well. And so we're building that functionality. But the key differentiator for us there is the ability to integrate with the body-worn camera and the live streaming capability we have. And that whole GPS dot on the map functionality is a differentiator for Axon and Axon Dispatch.

That makes a ton of sense. And maybe getting in a little bit to the financial model around this opportunity. Can you give us a sense of how the pricing steps up with your bundles as these new capabilities are added on? And maybe just, generally speaking, how you think about increasing pricing over time as you add more functionality.

So we have a bundle for every flavor. We've got -- the basic bundle start at about $30 per officer per month, and that is for just the TASER, it's not really geared towards or doesn't really have a lot of software. It goes all the way up to $239 per officer per month, and that bundles the body camera and the TASER and lots of software, VR, headsets as well. All of this are -- main method is to deliver those plans in a 5-year deal. So it's a 5-year subscription, increasingly, you were signing up for 10-year subscriptions as well.

Got it. Got it. And I guess when we think about Axon as a potential disruptor, what kind of police department do with your integrated stack of solutions that maybe they couldn't do before. Can you give us a sense of how you're maybe starting to change or leverage technology to, I guess, disrupt the existing status quo?

Yes. This is a great question, Jonathan. It really, I think, gives us a chance to showcase what we can do. So I'll give you a quick anecdote from an agency, about 1,000 officer agency in the Midwest. There was an incident where 1 officer was out in the field, and she was involved in a struggle in a physical altercation with someone, and she began to radio for help. But because of the struggle, she couldn't complete that call and broadcast her location and like all the information she typically sends over the radio because of the situation she was in. So back at the command center, the real-time crime center personnel used the live streaming capability of the Axon Body 3 camera and the Axon response software to geographically pinpoint where that officer was, and they dispatched officers to the scene without actually having talked with that officer, they got back up there, and they were able to arrest the suspect without any injuries to the office or the suspect. I think that really highlights for me the promise of Axon's technology in our platform. The ability to be able to very quickly respond to a situation with full situational awareness of what's going on without even talking to the officer. And a lot of what we can offer is along those lines where you have the devices talk to the -- talk to each other. So if you pull your TASER, it will activate your body camera, you'll activate the light bar in the car. You don't have to think about anything. It's all seamless. The also -- the ability, I think, to have VR training and deliver empathy training. That's another key thing that we hear with the agencies today is to not just arrive on a scene and pull out your gun and start screaming at someone, but to understand what that person is going through. That's why VR has been a really big selling point for us. Back at the command center, having them being able to view all the data that's coming in from the devices and now with video as well. The -- you want to, on the other side of an incident, being able to transcribe the video and pre-populate your report. That's a huge productivity driver. So these are all examples of how Axon's software is driving productivity.

Excellent, excellent. Yes. I think there's a big push these days to leverage technology to basically transform business processes. And so maybe building on that example that you gave around the AB3 and some of the wireless capability there. Are we starting to see those business processes actually change? Are you actually seeing law enforcement agencies leverage that real-time interaction? And I mean, how easy is it to get people to or get the law enforcement agencies to actually change their business processes. Does it take a significant amount of time? Or are they sort of be eager in jumping on the opportunity?

Yes. So we're seeing one major trend we're seeing, Jonathan, is our bet on body-worn camera and DEMS was on the cloud. We made that bet about a decade ago, and it's proven to be the right one. And it's not only driven adoption of Axon body cameras and DEMS, but also has like been a great gateway for dispatch and for respond these other software products. But what we're finding is that workflows, in general, are moving more into the cloud, even beyond DEMS and a couple of proof points there. It's one of the reasons why we partnered with Cellebrite. We made an investment in Cellebrite in their recent offering. We've made -- we've got partnerships with RapidSOS with Flock Safety. A lot of these tools and workflows that agencies are using. They're all cloud-based, and they're all -- all those workflows are moving to the cloud, if they're not there already. And our ability to integrate with those other workflows has been a trend that we found. And it's also informed a lot of our inorganic strategy. And then the other thing I'd point to is that, like in the example I just gave, previously, if you're an officer and you're wanting to disclose your location to someone over a radio, you've got to say something like, well, I'm -- like the nearest cross streets are first in Maine. That's still pretty ambiguous, and it requires the officer to be able to be in a frame of mind, in a state where they can actually convey that. Well, they can't always be in that in that situation, as I just pointed out with that example. And so the body camera is automating that without even having to interact with the officer, broadcasting the location, electric body camera to command where you are. So those types of things we're finding are getting more automated as well.

Excellent. Excellent. One of the things that seems to be upcoming later on this year is the Fleet 3, which is combined with automated license plate reading or ALPR. Can you talk a little bit about why that combination makes sense? Could this be something that's disruptive? And can you talk about the opportunity set that you see for the Fleet 3 ahead?

Yes. This is one we're really excited about. So we talk a lot about not texting and driving, right? It's -- in some cases, it's against the law in certain states. And the big reason for that is that the human mind can only really focus on one thing at a time. We're not meant to be multiprocessing. And yet we expect officers in police cars as they're driving down the street to take their eyes off the road and punch in license plate into a terminal to try to pull up information, like that's not a -- that's a very 20th century sort of mindset. And so what we're doing with ALPR, automated license plate reading is taking that action in automating it, just like we're trying to automate a lot of the core activities that officers do today. So as the fleet enabled vehicle will drive down the street, it automatically will read license plates. If any license plate that is in the field of view, it will automatically get picked up. And with optical character recognition, it will spit back and highlight for you, if there's a vehicle that maybe has -- there's a warrant or something associated with it. It's something that's of interest to that officer, it will highlight that for the officer without them thinking at all, without them taking their eyes off the road. And the other thing that's great about that is not just -- not only is it automating that, but it's also a much better price point. So today, for you to put an in-car camera in a police car, it's like a $20,000 to $100,000 proposition, and you've got a tear down the police car and there's a lot of heavy wiring that goes in there. And as a result, you only have typically a few vehicles in an agency's fleet that have that capability. What we can get ALPR technology should be every car, right? In every police car, they should have that capability. And at $1.29 per car per month, you can have that, right? Fleet 3 allows that to happen. It's also compatible with 5G. It's got the router in it to offload the video wirelessly. So it's something we're certainly very excited about.

Excellent, excellent. How important from a selling point are capabilities like transcription, rapid search and other capabilities that are built into the platform. Like can you give us a sense of how much these technology differentiators help you compete against maybe more traditional camera differentiation or hardware differentiation?

Yes. So there are -- like if you read Bricks Book, there are some software technologies, like AI-powered technologies that we're excited about. They're like a little bit farther off. But one thing, near-term, that are available today and they're making a difference are things like transcription. That's a game changer for sure, right? And not just for patrol officers, but for those individuals that are really going deeper into the justice system. So for officers, we talked about, we used to give the statistic that 2/3 of the time that a patrol officer spends on their shift is spent on report writing. And if we could automate that, if we can get them away from their desk and away from writing reports, then we're going to effectively triple the patrol officers on the streets. And that's -- a big part of what we're trying to do is automate those workflows so that you're not having to type in, first of all, right reports and then type those in and have those proofread like the transcription, the auto transcribe, we're actually making it so simple, where it's not even something you have to think about. The current integration between the Body 1 camera and Axon Records will automatically transcribe right? You don't have to think about it at all. As you upload the video, it automatically transcribes that. And we've offered that in an unlimited capacity. And it really helps you get to the initial sweep of the case, about 25% to 50% faster. So as an example, that's automating and not just for the police officer, but if you're a prosecutor and you're having to review all the incidents, all the like details of the case, you can get through it that much more quickly if you're reviewing a transcribed report versus a handwritten one.

That makes a ton of sense. And I mean, especially with demands on officer's time, I think the more that you can save, the more value you drive these products sort of pay for themselves just in terms of productivity. One thing that you've referenced on some of the conference calls in the past is that there is a new TASER weapon design that's in the work. Is there anything that you could maybe share with us in terms of some of the things that you're trying to improve relative to prior generations or in new future sets that you're sort of adding on to that TASER. Any sense or early peak in terms of what your thoughts are for that next generation?