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

Okay. We're going to go ahead and get started. Thanks, everybody, for being here. Good afternoon. For those who don't know, I'm Will Power, I cover Cloud Software for Baird. We're really pleased to have Josh Isner with us. He's the Chief Operating Officer of Axon. We also have Andrea James, Eric Lapinski from the company over here as well. I'm sure they'll be happy to chime in for any questions that make sense. So I think as most of you probably know, Axon, of course, is a leader in public safety, products like TASERs, increasingly software, body cameras, et cetera. So we're just going to jump straight in. And if there are questions from the audience here, you have instructions in front of you. You can submit them to the e-mail address there, and I will try to get those incorporated as well.

So Josh, thanks for being here. Really appreciate it.

Thanks, Will.

Let's maybe just start for anybody that might be less familiar, maybe just talk about the Axon mission and a bit on just the evolution of the company and the platform you have today.

Yes, absolutely. We're really proud of our mission. Our mission is to protect life. Certainly, we think there's a lot of opportunity to be able to do that in policing and public safety around the United States and around the world. And through technology, we're taking a step back. We're not super confident that large reforms in public safety are going to be driven in Congress or by politicians. We just -- we think technology is the way faster way to drive change in this market. And so we've really built a company around that, and we've had a lot of success in the TASER business, start developing TASERs in 1993. In about 2003, 2004, once TASERs were becoming more well-adopted there were questions about how they were being used in the field. So we put a camera on the TASER device itself. We had really good success with that product line. We said, "Hey, why don't we take the TASER off -- or sorry, the camera off the TASER and put it on the officer's uniform." And thus the body camera business was born in 2009, 2010. That actually invited an even larger problem to solve, which was once you're creating all of this digital content, how do you manage it and share it and do everything you need to do with it. Administration-wise, in an efficient manner and thus, Evidence.com, kind of our cloud digital evidence management system was formed. And so it's a nice story, one thing leading to another, and now we're the market leader really across wearables, less lethal devices and digital evidence management and public safety.

Yes, that's great. Okay. I mean, I guess kind of along those lines, if you think about the mission, you've got a 10-year goal to reduce police-related firearm deaths by 50%. Maybe just talk about the keys to achieving that. What your -- what the opportunities are within Axon to do that?

Yes. Yes, there's really 2 things. We've, number one, need to continue advancing the capabilities of the TASER device itself. And the keys there are more shots, more range, more effectiveness, more accuracy. So -- this new device we've just launched called the TASER 10 allows the police officer to deploy from 45 feet as opposed to closer to 20 or 25 feet, also gives the officers 10 shots as opposed to 2 shots. So much better ability to use the device from longer ranges or with more shots and why that matters, especially on the more shots is you've got to pierce clothing of generally a suspect moving away from you or moving in general. And you've got to do it with 2 probes flying down range. And oftentimes, it's really hard to do that even the most trained users in public safety that's difficult. And so by offering more shots that increases the margin of error significantly to where you don't have to hit with every shot, you have multiple opportunities to do that. And of course, for more range keeps both the officer and the suspect safer. And so that's really the technological kind of driver there. But then pairing that with ways of increasing the training capacity out of police department, I think, is the other half of that solution. And there, it's really about virtual reality training. We think there's a tremendous opportunity to train police officers under stress in a far more efficient way. And right now, going to the range once or twice a year and firing some TASER cartridges down range is not necessarily preparing officers for what they're going to see in the field. And so by leveraging virtual reality technology, creating a lot of different use of force scenarios that police officers can train on day in and day out. We think that's going to be a major part of this equation in terms of limiting bad outcomes in the field.

Yes. So I'm going to -- I want to come back to TASER 10 and probably we are -- before I do, just high level then you're rolling out TASER 10, you've got AB 4, Axon Body 4 coming, I don't know, in the year, thereabouts, kind of launching into next year. I assume those are probably the top of your priorities, but -- where are your kind of key strategic priorities kind of through this year and the next couple of years?

Yes, for sure. So we are launching -- we have launched TASER 10 and shipping this year. We're going to start shipping Axon Body 4, our new body camera in July, and so we're really excited about that as well. I think strategically, of course, we want to continue to perform well in the categories that we own today, which are really around wearable camera technology and less lethal tools in the field. But at the same time, we're moving on the cloud side to becoming more of the operating system of public safety, and that's across police reporting, evidence management, dispatching police officers to calls, in-car video that feeds into some of these situation awareness products, drone video that feeds into the situational awareness products. So it's about really building out that operating system so that police officers and police agencies really have one place to go for all of their technology needs from the time a dispatcher is called on a 911 line, all the way through the culmination of that court case and really controlling that flow of information and evidence as part of that workflow.

Yes. Okay. That's helpful. Maybe just dig into TASER a little bit. TASER already noted major upgrade for you. What are you seeing in terms of early demand indicators and I guess as importantly or close to as importantly, how is the supply chain manufacturing process going with new products?

Yes, really well. Demand -- this is really the first TASER we've ever launched, where legacy customers are interested in upgrading early to this device. And so we view that as a great sign of product market fit and customer interest. And so now it's about fulfilling that demand. And as you mentioned, the supply chain environment is getting better. And so we're -- we don't see any real headwinds as of now to being able to not only ship this year's kind of allocation that we plan for TASER 10, but moving into next year when a lot of our automation equipment comes online, we should be able to pick up speed at that point. And so we're very excited about what the future holds for the TASER business, both in terms of impact as well as adoption.

I guess one of the issues you ran into with TASER 7 and at least out of the gate, I think more maybe for cartridges, you had lower gross margins. And I think part of that was just the lines range, some of just the miscellaneous challenges there. I mean what are you seeing from a gross margin perspective thus far on TASER 10 and potential impacts there?

Yes, absolutely. So for this year, we're building TASER 10s essentially by hand because we want to have the design locked completely before we turn over to automation because you're inviting a lot of headaches when you've invested in a bunch of automation equipment and then the design changes and you need to retool and it's just a painful cycle. And so as we finalize all of the final designs, including some of the cost-out initiatives that we're working on, we're going to be building TASER 10s by hand this year. . The good news is, there isn't -- it's the lowest part of our total TASER mix that you'll ever see with T10 because we've got large installed bases of our other models. So there'll be a little bit out of the gate of gross margin headwinds associated with that core product line, but as a whole, gross margin won't look very different from past levels. And then hopefully next year as this automation equipment comes online, we'll actually pick up some tailwinds on TASER 10, and that will reflect through in the gross margins in the years to come.

And how -- well; a, so was it -- was the plan alone to kind of build by hand, just knowing that it was going to be a newer product.

Absolutely.

And how to do that, all right.

Yes.

So have been up on that front. And it sounds like the demand indicators have been positive thus far. How does that extend outside the U.S.? Or is that too early to call?

Now we're seeing really nice interest from our key international markets as of today with the U.K., Canada and Australia. We're seeing some opportunities to upgrade large installed bases in those markets. And it's starting to allow for increased interest and trials in some of our other key European markets. And so we're excited. We also see some opportunities in Brazil, which is another large market for us. And early interest there is very good on the TASER 10. So we think this will be something where it might shorten the cycle of adoption in some of these first time or early international users.

And then if you get that early upgrade interest, how do you balance that against whatever the previous agreements were they had in place versus upgrading, I mean, how do you make sure the economics work out?

Yes. Generally speaking, I think each case is a little different based on where the customer is in their life cycle, in their contracts and if they finance their last TASER model and so forth. But this isn't -- it's called TASER 10. It's actually the eighth generation of TASER we've launched, but because of the 10 shots, we've moved straight to TASER 10. And so we've done this a few times before, and we're comfortable with some of those motions, and we've had some practice leading up to this point. So we feel really good about being able to execute on that.

Okay. Maybe switch over to software because it's really longer term, this is one of the biggest opportunities you still have in front of you. But maybe pretty good to the newer products, mean Evidence.com is to continue to be the major driver, right? And it continues to demonstrate strong growth. What should we expect from here? I mean, how do you kind of continue that cadence of growth or something even close to that, given more body camera penetration is and whatnot?

Yes. I think for us, it's when you walk-in to a police department and you asked about software, generally, you don't get a lot of excited responses because a lot of the software public safety uses antiquated on-premise, highly customized, not the recipe for great software success. And when customers answer like what's their favorite piece of software, it's almost unanimously Evidence.com because we really brought the cloud to public safety and all the good things that come with the cloud in terms of scalability, security, information sharing. And so we're really proud of the business we built with Evidence.com. And while traditionally, it's been viewed as something that is more of the repository for body camera footage. Now it's really changing to be the platform for all of digital evidence and reporting and policing. And so as customers pile more digital evidence from more sources into evidence.com as they think about what the next generation of police reporting is going to look like. It's really around the incident, right? It's -- you're writing a report on something that you have on video already. So those 2 concepts are very tightly linked together now, and it really lends itself to Evidence.com becoming kind of like we said, the operating system type concept for public safety, cross-reporting and evidence management.

This might be kind of a 2-part question, but I'll try to pull in the AI kind of component too, but as you move into records, it opens up a whole new growth opportunity. I know you've had early success with at least a number of, I don't know, what you might call kind of midsized agencies. So a, what's the opportunity, I mean, we're here in New York, right? I mean, what does it take to get some of the big law enforcement agencies on board and any sense for interest there; and b, maybe talk about what you're doing from an AI perspective. They're using camera footage, et cetera, where that sits today?

For sure. So I think for us, one of the things that is an opportunity is the fact that this is a highly, highly fragmented business right now in police reporting. There's dozens of vendors and none of them actually have even close to a majority of the market. And one of the tailwinds we have is because we've entered into these large software and hardware contracts, we have a vehicle where we can introduce our next products existing in these agencies. And so very bullish on our ability to become the market leader in records management. A lot of it is driven by the cloud user experience and the integration with digital evidence. And so our playbook has kind of been, "Hey, look, introduce Evidence.com, get customers comfortable using the product and then layer in the next thing on top of that over and over again, whether there are things like real-time streaming features or whether it's something like reporting." And in the case of reporting, I do think in the past year, we've racked up a number of major cities that are now deployed on Axon Records and that momentum has really started to accelerate. And such that I think in the last 5 or 6 months, we've added 4 or 5 major cities to the platform. We have a large backlog over the next couple of years of future deployments, and we're really excited about what they -- what that might mean in terms of our market leadership over that time. And so in terms of AI, lot of opportunity there. We already built in transcription into Evidence.com. So whenever you have a video, it's automatically transcribed then it's searchable and very easy to view or view the transcript of it. There's other opportunities though. You can think of a world where if you have everything that happened on video already, eventually, AI can just write the police report for you, and you can kind of proofread it based on its analysis of what actually happened in the video. So being able to do that at scale across thousands of police contacts every day at every large department, we think that carries a lot of value. And so a lot more to come certainly on the AI side. We're also really focused on how we can pick up leverage internally by adopting some of these new AI tools as well. And hopefully, that leads to less reliance on kind of expanding our OpEx over time and we can pick up a lot of efficiency that way.

How does the go-to-market differ for software versus somebody that's talking to an agency about TASER or a body cam? Do you need -- can that same individual go in and pitch software? Or how has that evolved?

Ultimately, we've had a lot of kind of additional folks come in on the sales side as we've gotten deeper into technology. The weapon sales motion is very different than the kind of connected devices and software motion. And so we have recruited with a lot of intensity over the last 5 or 6 years to build what we view as the best sales team in the industry. We're one of the few companies that sells directly to end users. We don't use distributors. We think that's a big differentiator for us. And strategically, as a company, I think we're going to perform really well if we continue to do 2 things: build the best products and combine now with the best sales channel. And it's hard to beat that equation, and that's really where we're focused and have a lot of confidence. This team has driven like last year, I think 34%, 35% revenue growth like you don't commonly see that with companies that are 30 years old. And so we're really excited about the momentum we have and what that looks like into the future.

Is there anything that -- any particular event that helps drive these customers into the software beyond Evidence.com. So when the records are pain threshold you reach with your on-premise plot, but you just can't support it anymore. I mean, just like you see in kind of software broadly, the shift from on-premise to cloud and sense for kind of where agencies are in that...

I think on the digital evidence side, it was more about, hey, solving the initial problem with the camera and then realizing, hey, there's 5 or 6 additional things we need to do to make this a really strong program from capture to courtroom as we say. And so customers have adopted more and more of our software along the way. And in terms of reporting, I think it's really what happens in a lot of police agencies as they build their own records management solution, and then it gets to a point where it just doesn't scale anymore. It's so customized that it doesn't integrate with any of the other tools that the PD uses, and then they take its step back and they say, "Hey, how did we get to this place?" And a lot of it is this concept of customization as opposed to configuration. And so for us, we want to build a highly configurable solution, but not one that is customized. And that's really the key to -- for these big agencies to scale these programs over time. And I think that message is resonating and that lends itself to just way better integration with everything else the police department actually uses.

Yes. Okay. All right. Maybe if I switch gears a little bit to cover sensors, obviously, another big opportunity of growth area for you. So before launching July. So what -- what does the manufacturing there look like? What are the real demand indicators on that front look like? I mean that's companies that are -- customers that are already on subscription, they'd have an opportunity to upgrade to that.

Absolutely.

Is it -- so what are you seeing in terms of indicators there?

Yes. Axon Body 4 is our -- if you walk outside here in New York, you'll see all of the officers here were wearing Axon Body 3s, and there was a big breakthrough with Axon Body 3, where it was all about live streaming. And so it was an incrementally better camera, incrementally better battery, but it offered real-time streaming for the first time. With AB4, we're building on that. And now we're offering 2-way real-time streaming. So not only can you push out your feed, you can actually get incoming traffic on your camera, mainly by voice. So if you picture a scenario where somebody is in need of medical assistance, you could have an EMT watching the video coaching the officer, the camera were on what to do, and also use that for translation support, could also use that for communicating on the whereabouts based on if you're looking for a suspect, and you have maybe drone footage that could inform that using 2-way voice to inform that based on the officers' location and stream. And so really excited about this voice use case in the body camera. It's the first time that's ever been available. And then, of course, we've made a lot better in the camera, the video quality, the stabilization, the battery life, all the things that our customers come to expect. So this is something that's going to be available to our customers by virtue of our upgrade cycle that's already built into their contracts and then there's an element of certainly new camera adoption that we think this product will open up as well.

Are you feeling good on production? I mean, what kind of opportunities...

Feel great on production. On the body camera side, we leverage contract manufacturers. We've realized we're not going to be the best company in the world that building camera technology, but we have a lot of pride in the design and the fact that we've really built this for public safety. But in terms of the manufacturing that's done by a CM and that allows us to scale really quickly. So we certainly anticipate 6-figure shipments of Axon Body 4 in the back half of the year.

Okay. And I've got a bunch of questions, if there are any, please feel free to submit them. And again, I'll try to get to those as well. So one of the big opportunities outside of the various product categories, right, maybe which are still early in are expanding the TAM in terms of different verticals you're going after. So whether it's federal corrections. Maybe just update us, maybe start there, like what are you seeing in terms of federal demand, where is corrections. We had like the State of Ohio and maybe Florida and a few, where -- what's the pipeline look like across some of these newer areas outside of local?

Yes. We're really thrilled with how our new markets are performing in general and kind of the -- we look at growth in 2 different lenses. We got to be really good at selling existing products to new customers, and we've got to be really good at selling new products to existing customers. And if we do both of those things in parallel, we will continue to grow at similar rates. And so we're very excited about that, especially on the existing products to new customer side. So that's corrections. That business has tripled over the course of the last 3 years in terms of federal bookings. That business has 10xed over the last 3 years. our international business has 10xed over the last 5 or 6 years. So all of the newer markets, we're seeing a lot of momentum in. And then it's driven by the fact that we build products that have a proven ROI for the use cases that our customers experience day in and day out. So in the federal business, we're seeing a lot of adoption, around the federal civilian business, DHS, DOJ, both on the camera and the TASER side. We have a new leader that came in from General Dynamics 3 years ago, and he really, for the first time, showed us how to succeed and sell in to the federal government. And so we're really excited about the momentum we have there. The correction is similar where historically, cameras and TASERs have not been highly adopted. We have a focused team on that. Now we just have -- this year have signed a couple of major deals in the correction space that you'll be hearing more about in the next few months. And we're really excited about the tailwinds we're seeing there. Campus security is another one of those. Fire and EMS is another one of those. Of course, our international business is moving along nicely. And then lastly, we found an enterprise business, which is body cameras and digital evidence management software geared at non-police use cases. So think about retail workers at large stores that are commonly getting assaulted now, unfortunately, and commonly seeing thefts right now. And so we see a lot of product market fit there, and we've got some early signals that, that will be a growing business for us as well. So we're very excited about that.

Yes, I want to come to that because it seems like there's a potentially big opportunity. I mean like I think about hospitals, sporting venues, which you all talked about in the past in order to incidents that happened at professional sports things are crazy. I mean it's some improving safety security generally. Is there more you have to go to the market side? Or how do you open up? How do you crack that, I guess, to become -- make commercial enterprise more -- a bigger part of the business?

Yes, absolutely. I think in public safety, we enjoyed this referral-based kind of growth where customers are very happy. They inform their neighboring cities about their success with these products, and it kind of goes from there. You don't necessarily have that same benefit in enterprise because a lot of the people we're selling to are competitors with each other. And so it really is brick-and-mortar sales. We've got to go in there and do the work. We've done a lot on the product design side to come out with a smaller, lighter weight camera that is really tailored for the retail worker experience of having to wear it for long periods of time. And not having it be too heavy and not over designing it. So we've come out with a really exciting design for that use case. And it's paired with the real-time streaming that we view as something that could be very useful if there's an event happening and police want to tap into the camera and see what's going on in the store. We've built in a lot of the kind of workflows and user interface that would be different in retail. And so we've done the work on the product side, and now it's about just going out there and doing the work on the sales side. And we've got a really capable leader, one of the people who was instrumental in building our public safety business 5 or 6 years ago. He's moved over to run our enterprise business, and we're excited about the potential there. It's certainly a large TAM and a lot of opportunity.

So is that slim down camera available today? I mean is that -- what's the status of that?

Yes, absolutely. It's a variant of the AB3 and it will be shipping in the back half of the year or 2 for trials and then available next year.

Okay. All right. No, that's great. Okay. That seems a big sense from a factor standpoint, I think -- we're going to get some of the numbers here in a minute to, but fleet. That's been a huge growth driver for you. I mean, that's still pretty early. Maybe just talk about the success you're seeing there. What's -- maybe just the differentiation in the market. I don't know that really appreciate kind of the price point and the capabilities of one of those competitors.

Ultimately, it's a great story of how having this installed base driven by Evidence.com allows for future purchases of kind of adjacent products and fleet is an example of that. We had a lot of very happy customers using body cameras and evidence management. And now it's about, okay, how many other sources of videos can you plug into this network and drones are one of them. Fleet is another one. And at this point, we have the market-leading in-car video product. We've been very disruptive to the incumbents in that market. Shipments have grown nicely since we launched Fleet 3 in mid-2021. We have -- as we take orders right now, those installations are scheduled well out into 2024. So we've got a very healthy backlog of customers ready to deploy, and we're very excited about that. And so yes, very bullish on the fleet business. One of the things that differentiates the product is the fact that it could read license plates. And so right now, coming into Manhattan, you'll notice in the tunnels and bridges there are fixed ALPR systems, meaning you plant this truck with this capability on it and it measures the license plate of every car coming in and out. But now we've really turned that into a remote capability where it can be in every car. And so as opposed to a city having 7, 8, 9, 10 of these fixed ALPR checkpoints, every police car you have turns into an ALPR checkpoint. And so certainly very valuable in solving crimes and something that has been highly anticipated and enjoyed by the market at this point.

Yes. Okay. So you talked about a lot of the broader drivers. Maybe you can kind of help pull that together for us in terms of growth expectations as we kind of move through this year, next few years. You laid out a couple of quarters ago, I guess, the longer -- the medium-term guidance of growing 20% plus per year. I think the guidance for this year is a 22% growth up from 20% last quarter. Maybe just talk about the confidence, I guess, and the key drivers that took a move into the second half of the year and what are pricing tougher comps you have here?

For sure, for sure. We -- for those who have been familiar with Axon for some time now, we've had some great growth in the past few years, and we tend to be a little conservative on guidance coming out of the year because we want to see things come closer to materializing before we get more aggressive in the back half of the year, we tend to get a little more aggressive with our guidance, and I'd expect that same kind of trend line this year. So we're excited about what this year entails, certainly looking forward to our call in August, and we're -- and same with the 2025 guidance where we have a lot of conviction in that guidance. We think you'll start to see some nice operating profit expansion and got a lot of confidence moving into the future here.

Are there any particular product categories that are driving the bulk of that confidence? Or is it more broad-based? I think particularly you call out as you move into the second half for the next couple of years.

Yes. I think it's really a nice confluence of a number of product lines with a lot of interest is the TASER business continues to grow, like 5, 6 years ago, we were getting questions about, hey, is this saturated is going to keep growing since then, it's probably doubled and we still see plenty of white space in the TASER market. Then you combine that with growing adoption of our wearables and growing ARPUs on the software side, where we continue to innovate and come out with new feature sets that lead to upsells -- and then we mentioned the fleet business. Our virtual reality business has grown nicely. Our ALPR business has grown nicely. So there's -- one of the things we really enjoy in our business is both on the top line and the bottom line, there's multiple ways to get there. On the top line, we have a number of product categories and markets that are all scaling very nicely. On the bottom line, we have some opportunity both on the OpEx and on the gross margin side. And so the diversified path really gives us a lot of confidence, and we'll continue to execute against the plan.

Well, I want to touch on that maybe last question because this has been a some debate, I guess some like investors. Just trying to understand what the EBITDA margin expansion is, right, there have been some ups and downs over time. .

Yes.

You're launching several new products, right? So presumably, that makes it more difficult to expand margins this year. And I think the guidance has been to expect more margin expansion next year, what really underpins that? What you give investors confidence that you can grow several hundred basis points in margins.

Yes. Not to get too technical, but first on the OpEx side, going into this year, for the first time, we only greenlighted about 70 net new roles on the SG&A side, and that's compared to 500, 600 SG&A roles in the last 3 years annually. And so -- this year, we don't really enjoy a lot of the benefit of that because if our average start date was August 1 last year, essentially, you're ending up with full year salaries for all of the people you hired last year. So that's hitting this year's P&L. But going into next year with only 70 net new roles from this year, we do get a lot of leverage on the SG&A side. So when we combine that with the opportunity to expand gross margins, as you mentioned, coming out with to new products this year, investing in automation. In the next couple of years, we'll really see a lot of relief on the gross margin side. So a lot of opportunity across OpEx and gross margin to get there.

Okay. That's great. Yes, we're going to have to wrap it up there for time purposes, but we are having a breakout session. If anybody has additional questions, so I'm going to run by the company. But please join me in thanking Josh for his comments. .

Appreciate it. Thank you.