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

Mr. Smith, you may begin, sir.

Good morning, everyone. My name is Rick Smith. I'm the Founder, CEO and the Director of Axon Enterprise, and I'd like to welcome you to the 2022 Annual Meeting of Stockholders. If you are only listening over the phone, please go to investor.axon.com, scroll down to Events. It has access to links to us on Zoom. Turning to the formal portion of the meeting, I'd like to introduce our directors and executive officers who are attending the meeting today. I'll start with Michael Garnreiter, Chairman of our Board of Directors; Adriane Brown; Dr. Richard Carmona, Julie Cullivan, Caitlin Kalinowski, Dr. Matt McBrady, Hadi Partovi and Dr. Mark Kroll. Executive officers are present today, President, Luke Larson; Interim Chief Financial Officer; Jim Zito; and Chief Product Officer, Jeff Kunins. I'd like to also introduce Scott Davidson, partner with Grant Thornton , our independent registered public accounting firm. If you any questions for our management team, you may submit them using the Q&A feature in the online virtual meeting at www.virtualshareholdermeeting.com/axon2022. I'll read out more time to see one word, no spaces periods or hyphens. It's www.virtualshareholdermeeting.com/axon2022. Today's meeting will be in 2 phases. First, we will conduct the formal part of the meeting to consider each of the proposals listed in the notice, the notice of Annual Meeting of Stockholders dated April 8, 2022, and they conduct any other such business as may properly come before the meeting. The second part of the meeting will be a management presentation, followed by a Q&A session. The second part of the meeting will be conducted via Zoom only. Now we'll move to the recording of the minutes by the inspector of election. Isaiah Fields, our Corporate Secretary, will be reporting the minutes of this meeting, and Bobby Bristol who has been appointed to serve as the Inspector of Election. He has signed an oath of office, which has been filed with the minutes of the meeting. I will now call on Isaiah Fields to establish we have met the necessary corporate requirements to begin with. Isaiah?

Thank you, Rick. We have proof that notice of this meeting and related proxy material -- proxy materials was mailed or made available around April 8, 2022, to all shareholders of record as of the record date of March 31. Based on that, this meeting is duly called with timely and proper notice. As of March 22, 2022, the record date for the meeting, there were 70,995,368 shares outstanding. We have 63,398,787 shares present by person or proxy at this meeting, which is over 89% of the outstanding shares and constitutes a quorum permitting the transaction of business. Each share entitles the holder to 1 vote on each matter which may come before the meeting. A list of registered stockholders entitled to vote is available for examination by stockholders. The polls for matters to be voted upon today are now open and will close immediately after I present the matters to be voted upon at this meeting. If you have not previously voted, or you wish to change your vote, you should do so now online at www.virtualshareholdermeeting.com/axon2022. The first item of business is the approval of amendments to the company's Certificate of Incorporation to elect each director annually. The Board recommends a vote for this proposal. The second item of business is the election of Directors as nominated by the Board. The 3 nominees for election as Class A directors are Adriane Brown, Michael Garnreiter and Hadi Partovi. If the declassification amendment and Proposal 1 passes, each of these directors will serve a 1-year term until our 2023 Annual Meeting or until their respective successors are elected and qualified. If the declassification amendment in Proposal 1 does not pass, the Directors will serve a 3-year term until our 2025 Annual Meeting or until their respective successors are elected and qualified. The Board recommends a vote for each of the nominees. The third item of business is the approval of an advisory resolution on our executive compensation. The Board recommends a vote for this proposal. The fourth item of business is the ratification of the appointment of Grant Thornton LLP as Axon's independent registered public accounting firm for 2023. The Board recommends a vote for this proposal. The fifth item of business is the approval of the Axon Enterprise, Inc. 2022 stock incentive plan. At this time, the polls are now closed, and we will take any questions that have been submitted via the virtual shareholder meeting platform. These questions are to address the formal matters being voted upon today. Attendees will have the opportunity to ask general business questions during the informal portion of the meeting using Slido at www.slido.com. While we wait to see if any questions come in, I want to remind anyone who is listening in over the phone that you can go to investor.axon.com. Again, that's investor.axon.com, scroll down to Events and access the link to see us live on Zoom. That will allow you to watch the company presentation following the formal portion of today's meeting. We'll now take a moment to see if any questions have come in.

Isaiah, just a point of order. Are we looking for questions from Slido or from the investor portal at this point?

These are questions relating to the formal investor meeting via the investor portal.

Great. And for shareholders that are online, while we're waiting. If you go to slido.com, that's where we'll have the Q&A. For the presentation portion, you'll need to put in a code. That code is axon, A-X-O-N when you go to slido.com. So you may want to write that down. Back over to you, Isaiah, for questions.

Thank you, Rick. Yes, no questions have been submitted, and that concludes the matters to be voted on as outlined in the notice of the annual meeting. In accordance with our bylaws, I hereby declare the polls for voting at our 2022 Annual Meeting closed. I've received a preliminary tabulation from our inspector of elections. And based on that tabulation, I'm pleased to report that each of the 3 Director nominees were elected, and each of the management proposals was approved. The final voting results of today's meeting will be reported on a Form 8-K filed within 4 business days. That concludes the formal business, and I now declare the formal portion of this meeting adjourned. If you wish to continue on to our investor update, please join us via Zoom. You can find the link at investor.axon.com. I will now turn the meeting over to Andrea James, who runs Axon's Investor Relations.

Hello, everyone. Welcome to our annual shareholder presentation. As you can see on the screen, go to slido.com, you use Axon as the code to submit questions. We will take them at the end. Safe harbor. During this presentation, we will discuss our business outlook and make forward-looking statements. Any forward-looking statements made today are pursuant to and within the meaning of the safe harbor provision of the Private Securities Litigation Reform Act of 1995. These comments are based on our predictions and expectations as of today and are not guarantees of future performance. All forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially, and these risks are discussed in our SEC filings. Okay. So we're super excited to take you through our business today, as we do every single year, and we will be taking questions from you at the end. And before we jump into some of the content, we wanted to give a virtual tour of our headquarters. We used to do these at the headquarters, these meetings. But now we're just going to take you through virtually, and you can do this from the comfort of your own home. [Presentation]

I love that video, but we really hope you get a sense of who we are and the just intense passion and creativity that our people bring to the table. Before we dive in deeper, I'd like to thank a lot bit to thank Dr. Richard Carmona. He's retiring from Axon's Board after 15 years of service. And Dr. Pomona has been a tremendous contributor to Axon, helping us change strategy and positioning us as Axon evolved from a single product company known as the TASER to where we are today. And he is simply a wonderful human being. We're incredibly grateful to him, not only for his 15 years of service, but also for the way he helped us to design our future. Turning to Axon and our mission. Maybe like many of you watching it this year, as I watched the bloodshed in Ukraine, I had a troubling thought. Are we backsliding to a world that a more care as a way of achieving political ends? Simultaneously, the Internet, which we all believe would enlighten the world with shared knowledge, is being converted to undermine the very concept of truth. In light of these signs, our mission to protect life, capture truth and accelerate justice are as important and relevant desire. The history of civilization is that when evil rises, we almost rise to defeat it. As Canadian journalists announced or may have announced that when evil men destroy, good men must build and bind. We have cause for hope for humanity. If the world's economic force combined with the heroic train self-defense proves effective in stopping this Russian aggression, this conflict might be remembered as the moment when the world rejected wars of choice as acceptable. Now all this is very relevant to Axon and our mission. At the core, our products are designed to strengthen trust in the rule of law. We directly support several of the United Nations' sustainable development goals, including to foster peace, justice and strong institutions. Public and personal safety is foundational for modern society and our product ecosystem ties together with body cameras, fleet cameras, drones, taser devices and third-party sensors with a growing suite of software capabilities. We're not only serving customers but we're saving lives while promoting truth and really preserving transparency. In parallel, our work helps to improve fairness and efficiency in the criminal justice system, especially through our new justice software category, which will save attorney's time and shorten the time that people are jailed awaiting trial. We hear stories daily about customers using our products to save lives and protect their communities. And we believe our problem-solving approach to these major challenges will continue to drive our growth. Our products work and they're going global. In Brazil, our body cameras translated to such a dramatic improvement in lives saved, about 5 lives saved each month that the customer agency moved to a wider deployment just months after our initial adoption. Let's hear more of this from the customer. [Presentation]

Our mission is strengthened by the fact that we are a public company. We're held accountable by shareholders and the market in driving us to build better products and services. Our results speak for themselves. In 2021, we achieved record revenue growth -- I'm sorry, record revenue of $863 million and revenue growth of 27%. Over the past 3 years, we have delivered a 27% compound annual revenue growth rate. These financial results showcase our ability to deliver profitability while investing heavily in new technology. And 2022 is off to a robust start, highlighted by growing the global demand for our solutions. In Q1, we reported 32% revenue growth, net income of $55 million and adjusted EBITDA of $49 million. Our focus on building best-in-class subscription software has driven our annual recurring software revenue to $348 million, tripling over the years. President, Luke Larson, will now take you deeper into the product strategy that is driving these results. Luke?

Thanks, Rick. Hello, I'm President, Luke Larson. Let's take a look at what we're building. If we break our business down into 3 main phases, we'd say the first 15 years of the company, we're getting TASER off the ground. This era took the company to about $1 billion in market cap. Then we entered the body camera era. We began investing in body cameras in 2008 when Ferguson happened. In 2014, we were ready. In 2015, body cameras began to take off. Within 2 years, we were the clear market leader. We entered the dashboard camera market in 2017 to augment our product offering. This brought the company to about $3 billion to $5 billion market cap. The track record of solid execution provides the foundation for the next phase of rapid growth, which will be the result of leveraging our platform. Our next product growth drivers break down into 3 main categories: #1, TASER, which are TASER devices, virtual reality and training; number two, our vast network of sensors. This includes body cameras, in-car cameras and drones. And number three, cloud software. Our software fulfills 3 critical market needs: digital evidence management, productivity solutions and real-time operations. Our products all work together to form a virtuous cycle. We build products and bundles that give our customers superpowers to ensure everyone gets home safe. This creates more users, aka people and nodes aka devices on the Axon network that then creates more data that we can unlock more value with machine learning and artificial intelligence. We use that to create even more great products and bundles. The most frequent question we get from our shareholders is how we view the total market opportunity and where we are in capturing that opportunity. We are in the early innings of penetrating a $52 billion total addressable market. You might notice our market has grown since our 2021 annual meeting last May. In November, we updated our market size and penetration estimates for investors. In case you missed it, here's an 8-minute clip featuring Rick and our IR team. [Presentation]

Great. Okay. That's right. There is more to come. One of the products that we're most excited about in our TASER category is virtual reality Axon's VR team is transforming public safety by making training more accessible, relevant and affordable. This is one of our fastest-growing new categories. We are actually privileged to have a VR expert on our Board. Let's hear directly from Caitlin. [Presentation]

Great video, and thank you, Caitlin. Another area of the business that we're really excited about is sensors, and they're a growth driver for us. And while you're probably familiar with the success of our body cameras, we thought we'd take a few moments and share about our leadership in dashboard cameras, Check out this video from our Fleet 3 launch last June. [Presentation]

All right. Awesome. Moving to software. We are so proud of the stable and growing cloud business that we've built, and it's just getting started. Axon's Evidence is the world's largest cloud-hosted repository of law enforcement video data and other types of electronic evidence. We are the global leader in digital evidence management. Our productivity suite of tools reduced time spent on paperwork, and it includes Axon Records, Axon Auto-Transcribe and Axon Standards. Our momentum with Records is just starting to accelerate. We just had a major city launch in Tucson, which brings us to more than 25 agencies with nearly 11,000 [indiscernible] officers live on Axon Records, including 9 that are already using it to fully replace their legacy records management systems. We remain excited and confident in our long-term trajectory. Meanwhile, our short-term focus is on driving customer success, one deployment at a time. And finally, real-time operations is another exciting software category for us. In February, we appointed Ran Modaky -- Mokady, sorry about that as SVP of Real Time Operations and Site General Manager for our first European R&D office in London. The London R&D hub is Axon's 4 after Seattle, Ho Chi Minh City and Scottsdale, Arizona. We're proud to recruit the top software talent in the world who write code and save lives. And before I turn it over to our interim CFO, Jim Zito, I just want to thank all of our employees on the call who have built this amazing customer and also give a shout out to all of our shareholders who believe in us. Now over to you, Jim.

Thanks, Luke. Hello, everyone. It's great to be joining you today, especially at a time when the business is demonstrating tremendous momentum. I'd like to share some of my background and the role I've played over the past nearly 5 years at Axon, building a strong culture of financial rigor and discipline. I joined the company in 2017, after previously serving as the Global Controller of GE Healthcare Digital, a nearly $2 billion global software company inside General Electric. I spent the first 8 years of my career as an auditor at PwC, seeing the inside of Fortune 500 companies and how they operate at scale. These experiences prepared me to have an impact at Axon from the moment I arrived. I've helped to build out our accounting and controllership organization, enhancing our internal controls and overseeing the implementation of stronger processes to drive operating rigor to improve our financial results. and I partnered with our SVP of FP&A, Arvind Bobra, and other cross-functional leaders across every part of our company to lead the creation of the internal plumbing necessary to enable our culture of rigor and discipline to succeed. You've seen that translate to our results. We've established an impressive track record of execution and scale with cost discipline and strategic capital allocation, and we remain confident in our ability to continue to deliver accelerating growth, profitability and cash flow. I'm energized by this opportunity to support the company as interim CFO. This is a natural transition given my role over the past nearly 5 years. I'm honored to lead our world-class finance team, and I've already hit the ground running. At Axon, we are driving 4 pillars of our financial strategy: one, grow the top line at more than 20% while driving operational discipline; two, sell subscriptions to create a powerful recurring cash flow engine; three, invest in R&D to maintain our status as the innovator in public safety, delivering the most value and helping to drive strong margins; four, maintain strong liquidity and abundant operating flexibility. In February, we introduced adjusted free cash flow targets to our financial strategy, and we have started to deliver already. In the first quarter, our operating cash flow of $44 million supported $32 million in adjusted free cash flow. ESG is a core competency at Axon and is integrated into our business strategy. ESG is made up of 3 components: environmental, social and governance. On environmental, we are so proud to have minimal environmental impact. Because we are not a heavy industrials manufacturer, we believe our Scope 1 and 2 greenhouse gas emissions are relatively low. Because of this, we really lean into the S, which is our social mission, which you've already heard so much about in today's meeting. And finally, on governance, we've been listening to you, our shareholders. Axon Directors and management met virtually with shareholders via an ESG roadshow from October of last year through January. We received feedback from institutions representing about 30% of shares outstanding at the time as well as institutions that had not yet taken meaningful positions. If you were a shareholder who provided feedback during that process, we want to thank you for that input. Let me touch briefly upon our financial results, and we have an expanded view here. Our 5-year revenue compounded annual growth rate has been 26%. We aim to deliver at least 20% top line growth and to deliver near-term adjusted EBITDA margins approaching 20% or higher. Here, you can see that we have been very successful in driving significant revenue from recurring subscriptions. The Axon flywheel that Luke talked about, where we bundle hardware and software, drives our hardware-enabled SaaS business. By the end of last year, 80% of our revenue was tied to 1 of our bundled subscriptions. To close, we are proud of our strength as a category leader. We have a powerful platform and ecosystem that are revolutionizing public safety and creating societal value. Our high-growth subscription model is demonstrating a track record of significant operating leverage. We are addressing a $52 billion market opportunity in millions of users globally. We are building a holistic software with AI-based solutions for the end-to-end public safety life cycle from the incident all the way through the judicial process. Our management team has a proven track record of executing at scale and on launching it. And now we'll turn it back over to Rick and Andrea to take your questions.

Okay. Austin. Are we in gallery view? Perfect. So we do have some time to take some questions, and they have been coming in. Again, slido.com, put in Axon and submit your questions, and we will get started. So first question here from Amanda King. Would love to hear more on our vision with the recent Fusus strategic partnership, which you guys may have seen the press release we put out yesterday on that.

Well, the shareholders have heard a lot from me. So I'm going to hand this one over to Jeff Kunins.

Absolutely. Thanks so much for the question, Amanda. We appreciate it. We're very excited about the announcement of our Fusus partnership and investment yesterday. And as you heard both Andrea and Luke talked about one of the big pillars of our overall investment in our -- towards our mission is real-time operations. And by real-time operations, we ultimately mean all hardware, all software, all services that combine together with the human beings and all the agencies we serve are put together to do what it takes to detect, respond and efficiently get to safe resolution of events and incidents as they happen in real time. So that includes everything from the 911 dispatch serving software to increasingly connected cameras and other sensors and all of the other coordinating and communication software that's necessary to deliver on that mission. And also, as you heard about in the Fleet video, just like many other aspects of what we do today, we recognize that, like any great platform, delivering on that mission requires a mix of what we do ourselves as first-party hardware and first-party software and building a great platform that connects with incredible third-party partners on both the hardware and software side. And you saw that with our partnership with Flock Safety in the ALPR space for dashboard cameras. And the same thing is coming to fruition in real-time operations. So while today, we already have the Respond platform that allows real-time streaming and other great connected-camera features off of our own body cameras as well as third-party drones, by partnering with Fusus, who is the leader in real-time crime center solutions that allows connecting massive networks of city-owned and other enterprise security cameras to give appropriate and secure but real-time access to help deal with unfolding situations, by partnering with Fusus, we will connect that with respond and help advance our overall mission to lead and drive innovation in real-time operations.

Thank you so much, Jeff. That was great. Okay. So our next question -- we have a couple that came in on supply chain. I'm going to merge them. One is from [ Kanikwa ] who asks, what effect do global supply chain issues have on Axon's ability to increase market penetration for physical products. So how is supply chain affecting our market penetration. And then the other one is when supply chain shortages do impact product availability, how do we prioritize for filling orders between existing and new customers?

Great. I'll go ahead and take that one. One of the advantages that we have in our business is unlike, let's say, baby formula where you needed that day, oftentimes, we've got a 3- to 6-month view and even sometimes 12 to 18 months on our customer orders. So we're able to manage customer expectations with the supply chain that we have available. On our last earnings call, we communicated we've got line of sight to hit our midyear guidance, and we feel really good about that through the end of the year. As we look to bring on new customers internationally, we don't see these -- we don't see any issue with supply chain constraints that are going to hold us from onboarding those customers. And relative to other companies, I think Axon is really, really well positioned to handle these supply chain shortages.

Just to add a tack on to that one, I think this is another of the great benefits of our bundled subscription offerings is those subscription offerings are 5, sometimes even 10 years out, which gives us great visibility to those hardware shipments ahead of time. So we're able to plan out not just quarter-to-quarter but year-to-year, so we can plan and prioritize those shipments accordingly and not really have as many surprises as a company that was more book-and-ship-based.

All right. great. Next question from anonymous. What is Axon doing to tailor its products to meet the unique and critical needs of its corrections customers?

Yes. So I would say there -- we've been -- I've been working with Josh, our Chief Revenue Officer, to really kind of set up a key leadership across our different market segments and then teaming them with people in just product work as we're getting bigger, and we're really seeing a lot of momentum across our new market spaces. And so it's really just the [ standard ] voice of the customer process where we have our key product leaders meeting with customers and whether it's in VR, where we're now starting to create some VR scenarios or looking at our various software offerings to understand the unique challenges and customer requirements. So in that respect, corrections is really not all that different from how we approach law enforcement or federal or any of our other markets. I mean it's not different in terms of the process, but I think we've got to really finely honed and really great team dynamic between sales and products. And so it's really with those people that are living and breathing in the market and in the product design that customer collaborations happening.

Okay. Thank you. Next one, what are our concerns with the possibility of a global recession? And actually, I'll merge it with the next one because somebody else is asking about how the current stock market environment affects our ability to drive the direction we want with innovation. So I think anything sort of market downturn is probably related to one question.

Yes, I'll take this one. I'm coming up on 30 years I've been in this space now. So been through a couple of these. And I think what we've seen in the past, when the markets turn south, that actually can create some real opportunities for companies that are both strong and adaptable. We say, internally, ice age has kind of favored the adaptable mammals, and that's where we really aspire to be to find opportunities. So this is actually a time when -- the first thing I would point out is our business tends to not shift materially around recessions or not. Those really hit discretionary spending. We have found that if we create the mission-critical equipment our customers need, those demands can even go up sometimes when the rest of the world is turning south. So we are in a company whose revenues really track economic cycles. And I would tell you as well, like we're seeing other tech companies, especially those that should we say maybe don't have profitability they've had to deal with historically or not starting to really trim back as they've got to deal with this environment, and we still -- we're leaning in and investing heavily. And so this creates opportunities for us to be recruiting. It might be a little less competitive, we would hope in this environment or at least I would say that maybe we have some competitive advantages. And the nature of our business is we're driving what I believe is the right level of profitability is where some shareholders have asked, "Hey, we just raised guidance for the year, mostly on revenue and not as much on profitability. And it's very intentional. We have so many fantastic investment opportunities. We think it would be unwise for us to overly focus on letting extra dollars fall to the bottom line when they said we can invest those in very high ROI investments. So at the end of the day, I would say we also tell our people that do not focus on the stock price. That's a great way to get defocused from the things you can control, especially when the whole market is moving in ways that are largely disconnected from an individual company's performance. So don't get distracted with it. Stay focused if we deliver our results. And especially when the rest of the world is kind of going through maybe a little bit of a freak out, if we just stay focused on getting our job done, we've been through this several times before, we emerged stronger every time, and we expect them to happen again here.

And I think one quick thing to add to that is with everything going on in the world, not only the economic environment, this is a time when more and more highly sought-after tech workers around the world, more than ever, they care about aligning what they build with what their personal values are. And we really believe that Axon is hands down the best place on the planet to work on technology as a true force for good, combined with, as you've seen, our disruptively fun-to-work-on products, technology and business model.

Actually such a great note to end on, and we don't have any more questions. Rick, do you want to close this out?

Yes. Thank you, Andrea. And again, I just -- I'm so proud and happy to work with this team. Just watching you and Angel and those investor-related videos and the creativity of that drone video, it's just an awesome team to be a part of. And so to our shareholders, I want to thank you for joining us today. I hope that you share our sense of pride and purpose and our responsibility to the society. We're building important products and solutions to build with care to ensure that we maximize the utility and minimize the risks of abuse. And we're building a business that's grown from a garage to the industry-leading enterprise that we've become today. And so today is another milestone on a longer journey where we will solve even bigger problems, creating even more value for all of our stakeholders. So thank you for being a part of our mission, and we look forward to seeing you all at our next quarterly earnings call. Have a great day.