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

Yes. So the first thing I'll say is we're a mission-driven company. And we think if we create products that save lives and make people safer, the economics will always follow that. And so we never start a TASER development projects and like how do we make the most money here. We start like saying, how do we solve the biggest problem. And we think TASER 10 does that. And -- but obviously, with 10 shots instead of 2, the cartridge consumption will go up. So the economics of that are interesting to us. But we really were the big kind of departure from previous models is, is the availability of VR training. And so police training is really, really hard on agencies logistically. You think of an agency, the size of New York Police, 40,000 officers; having to get all those offices through in-service training and not only get them through training, but make sure the training was worthwhile and that they retained all of the information and so forth. It's really hard to do that. And after a couple of hours or 6 hours of in-service training once a year to expect the police officers to fire TASER at an expert level with maximum accuracy and maximum comfort with the device, it's just -- it's a stretch to think that's enough training. And so when you have VR and you can literally put a headset on and be practicing firing a TASER in VR every day and the controller is an actual TASER 10 or it's the same weight and feel of a TASER 10 and the aiming is the exact same as you would see in the field, all of a sudden, you can get way more proficient in using the weapon, and we think that is a very interesting way to further monetize the device when you're talking about maybe disrupting the training business as a whole in public safety. And we're building this platform to -- you'd be able to engage with all use of force tools, not only TASERs. So we think the TAM here is actually bigger than our TASER market in terms of when this thing hits scale. We're excited about it.

And then maybe can you just touch on the cartridge opportunity there as well, if TASER 10 gets more widely adopted and the capabilities of it? Like how do you think about cartridge consumption going forward?

Sure. Obviously, with 10 shots versus 2 in the field, there'll be more cartridges fired, more cartridges fired in training. And so we do sell cartridges as part of a package on a recurring basis. So every year, when you buy our TASER 10 plan, all of your training cartridges and your duty cartridges for that year ship automatically on the 1-year anniversary of your purchase. So certainly, a nice stable recurring revenue stream associated with the cartridges. And with our new design that we're going to see better gross margin at scale. They're made in an automated fashion. We don't have the gas capsules in the cartridges anymore, that was one of the highest BOM items in the cartridges and it's -- it was one of the limiters to the actual size of the cartridge. Now we've replaced that with a new mechanism and that will not only drive the cartridge down, but will continue to allow us to offer more and more shots as part of the offering to the market.

Maybe you just repeat the question [Technical Difficulty]

Oh, sure. Yes. So the question was at an agency, the size of New York, how often is a TASER shot? Usually, and it varies wildly depending on the availability of them and the training and where it is on the use of force continuum? But you'd expect a police officer to deploy his or her TASER at least once a year on average.

Any other questions in the room before I move on to -- we got 1 right up here.

So you've built some great customer relationships. You have a fantastic distribution business. And you've talked a lot about R&D. But have you talked about any of your inorganic growth or merchant acquisition strategies?

Sure. Great question. So over the last 10 months, we've announced 3 acquisitions, which is major departure from us. In the last 5 or 6 years, we've had a couple of more like [indiscernible] or oriented acquisitions, but we've become far more acquisitive over the last year, starting with our Sky-Hero business, which is an indoor drone company. We think that's going to be the platform for the TASER drone in a few years. And we haven't announced a timetable for that yet, but it's something that we're interested and we think will save a lot of lives when you don't have to put humans in the middle of these highly tense and dynamic situations involving use of force and weapons. We've also acquired Fusus, which we think is a really exciting market opportunity not only in public safety, but in enterprise. This is essentially the technology that can take any fixed camera and integrate it in with law enforcement. So when you have privately owned cameras, you install this Fusus core into the camera and all of a sudden, all the codecs and so forth translates and you can play those back live in Evidence.com. So you can think about the alternative without that, you're chasing down kind of disparate footage everywhere. You need all the software just to decode the feeds coming from the CCTV cameras. So as I said, we think that's an interesting play not only to connect more cameras into public safety, but to seed the market in enterprise with a product where then we can go back and sell our additional products into those customers. And then the third one is we just announced a couple of weeks ago as Dedrone, which is a two-pronged business. Number one, they do all the drone mitigation in defense. So they take drones out of the sky that are harmful enemy drones. They track all drone traffic in the air. You can think about targets like stadiums or government facilities, correctional facilities. Those are the places that are deploying Dedrone to protect their infrastructure. And then Dedrone also offers what we think will be hugely valuable in the future, which is a product called Beyond Visual Line of Sight for drones. So right now, there's an emerging part of public safety called DFR, which is Drone as a First Responder. So 911 call comes in, you dispatch a drone first. and get all the live video of what's going on at the scene. So as the officer arrives at the same, they have more situational awareness. Well, the problem with doing that today is this person has to literally be watching the drone from start to finish. So they're passing it off on rooftops. You've got humans set up on rooftops, watching a drone fly until they can't see it anymore. And then the next person takes over watching the drone. It's kind of humorous that, that is the workflow right now for this use case. Well, Dedrone because they monitor all of these drones in the sky, you can actually apply and get a waiver to do DFR using Dedrone instead of using a human's line of sight. And so we think offerings like that will accelerate the pace at which drones are adopted and widen the use cases for which they're used in policing. So very excited about Dedrone as well. All of these teams, I think, really are entrepreneurial. They have a lot of the same kind of cultural values that Axon does, and we think they're great fits as part of our business. And so we're excited about what the future holds for those 3 portfolio companies as well.

Any other questions in the room? So maybe I'll come back to TASER, but you mentioned Fusus and you obviously had, I don't think NYPD had an announcement or a New York add announcement about a contract with you guys in Fusus. Maybe can you talk us through that announcement real quickly? And then more importantly, can you talk about how you think about that opportunity and how big that opportunity can be going forward?

Yes. I'd probably shy away from talking about any specific customers use case. I think they're generally similar place to place in the larger markets. So obviously, Fusus can have a larger impact, if you think of a major city like a New York or a Boston, think about just how many stores line the sidewalks here and all of those stores have their own private CCTV in there. And so if you think about something like the Boston Marathon Bombing, about 10 years ago here, you look at it and say, how do you collect all that footage? You literally would have to go store to store, and like I said, use de coding software to just be able to see the feeds from those videos. Now all of those customers are able to participate in the Fusus network and send their data straight into police. Now it's not something that is going 24/7. If the user doesn't want it to, they can decide if this is pushed to the police once a crime happens or if this is constantly monitored, but it really accelerates a lot of that workflow in terms of getting video to the police in any kind of incident and you think about what's happening in retail loss, right now theft is up, you see major retailers closing stores over theft and workplace like retail workers getting abused by customers and so forth, we think this could be a major value add. And it's proving out to be -- they've had a lot of success even prior to the Axon acquisition. And so when we take that and then we combine it with this opportunity to go in there and say, "Hey, you're already using Fusus, would you like to use Evidence.com, would you like to put body cameras on your retail workers, which is kind of a growing trend in the U.S., would you like to use license plate recognition in your parking lot? Do you want to secure your facility from any kind of drone attacks with Dedrone? Like these are all opportunities that stem from having this Fusus installed base, so we think it will be a really interesting kind of foot-in-the-door as we grow our enterprise business over time.

No, that's great. So maybe taking it back to TASER. And one of the areas -- I mean, you talked about it, it was in the question. We talked about police officers, but obviously, you guys are having a tremendous amount of success branching out of that traditional customer base. Can you talk about that, like what's driving these nontraditional customers to adopt TASER 10? And then maybe if I could just tack on the second part of this question, which would be, obviously, there's barriers now to nontraditional customers. So how is Axon overcoming in?

Yes, for sure. So I think we are seeing use cases, for example, in hospital security and private security for TASER really grow. These are folks that might not be trained in firearms, for example, or they might, for whatever reason, not be carrying firearms. We think TASER is a great fit for those markets, and we're really seeing that business grow. And so it is classified as a firearm, which I think you were alluding to unlike our previous versions, I think, in practice, it's not creating a major issue in the market. It's more kind of all the logistical checks and balances that have to take place internally. For example, when you have firearms, you can't ship them by ground, you have to ship them Express. And so that changes things for us in terms of how we have to charge for them when you have firearm manufacturing, there are all these controls about the physical space and who has access to it and there's something called the bound book, which is how you track the movement of firearms to customers. And there's just a lot of regulation that is costly for us, but it also is just part of launching the new weapon. And so we've tried to get really good at that really fast and are pleased with the results. But Ultimately, we don't necessarily see those same constraints being passed on users who are already very comfortable managing their firearm inventory and being part of the public safety space in general.

So maybe switching gears to the other area of your portfolio where you recently had a new product introduction is obviously body cameras. Specifically, you announced Axon Body 4 late last year. You also -- early this year, did Body Workforce. So maybe can you walk us through those 2 products, like what's the differentiation relative to your legacy products as well as what you're seeing in the market? And maybe touch on like similar to TASER 10, like what's the monetization opportunity that you see beyond just selling the hardware?

For sure. So Axon Body 4 is our most well adopted body camera that we've ever sold. In our first 6 months, we shipped hundreds of thousands of units, which we're really proud of and a high quality. The major kind of improvements there outside of just better battery life, better optics and the camera, better quality live streaming and connectivity, is we now offer 2-way voice in the body camera itself. So we're seeing all kinds of use cases for that, for example, translation services. If you're a police officer, you come across someone who doesn't speak English, and activate the 2-way voice and you can have someone in the command center communicating with the individual through the body camera. There's a lot of interesting use cases that supplement the police radio that can be done with this 2-way voice functionality. We think ultimately, that will be an opportunity to keep growing into that space. And we think Axon Body 4 is kind of the first vestige of that. . And then Axon Body Workforce is essentially this motion I mentioned at the beginning of how do we sell existing products into new markets, we think retail is an emerging market for body cameras. Now you don't necessarily need the same product that you sell to police, but it's not such a departure that it's a huge variant, things like taking a little -- the weight out of the product because you don't need as long a battery life because you're not going to be recording for as long, things around the touch and feel and the color of it, for example, make it more of an inviting product instead of more of like a militaristic ruggedized product but that is what Axon Body Workforce is. It's a lighter weight, different looking version of our body camera that is tailored for more enterprise use cases like retail, like health care. We see nurses starting to wear body cameras. And we think this is a logical extension of where our business is headed, where these cameras will demonstrate similar ROI that they do to police officers.

So -- and then just switching to fleet now. That business or at least on a revenue perspective, has been a little bit choppy given supply chains. And then now you're starting to see or you're back to kind of normalized levels. So can you help investors think about how you're thinking about the growth rate there going forward just given kind of the volatility we've seen over the past couple of quarters?

Yes. Coming out of COVID, there was certainly a constraint around shipping these devices. We've now hit a rhythm there. And I don't -- when you're talking about police cars, you're not going to see like explosive growth quarter-over-quarter, but I do think it's fair to expect over a longer term, incremental growth in that product line. We do have to install every fleet system we buy. And so there's a little bit of a limiter on the professional services front to how many deployments we can do in parallel and so forth. But we're very bullish on the product. We -- thinking back a little, our first fleet system was simply a body camera that was attached to a windshield by a suction cup. But we got enough feedback based on that to get our second version of fleet to like parity in the market, where it did all the things the normal off-the-shelf products do. And then with Fleet 3, we really accelerated ahead with things like license plate recognition and better optics and live streaming and faster offload wirelessly and things like that. And so this has become the market-leading product and in-car video, and we're excited about the adoption curve we're seeing not only domestically, but internationally there. And we think this will be another one of those kind of nice gross margin products that opens the door to more and more upsell opportunities in the police car itself.

No. That's great. And then maybe just rounding off the hardware side, and you mentioned it already, but the drone opportunity maybe just starting off there, like what role is Axon looking to play on both the hardware and software side? You've done acquisitions on both fronts. So maybe you can touch on them a little bit, but you've already kind of talked on it. So just curious, high level, like how you are thinking about it?

Similar approach that I mentioned before, where we're only going to build hardware when we think there is a vacancy and a need in the market that nobody else could fill. And so for us, the indoor drone space is interesting. I mentioned the Sky-Hero acquisition because to deploy the TASER drone that is having an organically built product there will give us more control over our own destiny in that product line. But outside of that, I think we're really focused on becoming more of a software value add in the drone space. It's -- right now, it's a fragmented market. We're partnered with Skydio, which we think could be the eventual winner in that space or at least one of them. But for us, it's about, hey, the piloting software, the live streaming software, the beyond visual line of sight mechanism that I mentioned with Dedrone, the retention of all of the evidence that the drone takes in, in terms of video, like those are the places where we plan to be highly active in the market, and we'll probably wait to see how the drone hardware race kind of works out over the next few years as there's still new entrants and a lot of uncertainty in terms of which products the market will adopt for which use cases.

Got it. And then when you think about the drone opportunity and like barriers to adoption, how are you thinking about it? Is there any barriers on the technology side that you think are still very relevant? Or do you think a lot of it ends up being legislation and kind of what we're seeing across state like patchwork regulation, that kind of issues?

Yes, a little bit of both, I would say. For -- we believe the most interesting use case in policing for drones is going to be that drones as a first responder market, where you can dispatch drones and sometimes in lieu of police officers to resolve incidents. And there -- it's not rocket science, but there are some requirements that can be cumbersome for drone manufacturers. The drone has got to be able to stay in the air for 30-plus minutes. It's got to be able to fly very high in the air and at high speed, and it's got to have great optics. And right now, you have DJI, but then you have no one that's really emerged as quite the exact comparison to DJI and DJI being a Chinese manufacturer, there are going to be limitations on being able to sell that into public safety. And so we think Skydio is a pretty good bet there, but we're also betting that there'll be a few more that emerge in that process as well. And -- but those kind of core specifications for that use case are very different than what you'd see for like accident reconstruction or a drone and a trunk solution, which you have a crime scene, you want to fly a drone around just to take all digital evidence from the sky, like that's just a different need than what you would see in a drone as a first responder use case.

That's great. And I think we're up on time here. So I wanted to thank everyone for joining us today and especially you, Josh, for taking the time to be here. Thanks, everyone.

Thanks, everyone. Nice to see you.