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

Hello, everyone, and thank you for joining us for our Growth Stock Conference in today's presentation with Axon. My name is Jonathan Ho, and I'm the research analyst for William Blair & Company. Our speaker today is Josh Isner, who is the President of Axon. Before we begin, I am required to inform you that a complete list of research disclosures or conflicts of interest is available at our website at www.williamblair.com. We'll have Josh kick us off with a high-level overview of Axon for the presentation, and then we'll continue with fireside chat. Thank you.

Thanks very much, Jonathan, for having me today. Nice to see all of you. Wow, this room is full. Sorry to disappoint you. This is me, Josh, the President of Axon. But looking forward to answering all of your questions. We have a few slides to get started just to give you a little background on the company, not much, just 3 or 4 slides, and then we'll go into Q&A. So our safe harbor statement. Eric usually reads that one. I assume everybody knows the gist of that. And we'll get into our mission. So our mission globally is to protect life. We came out 2 years ago and launched our moonshot goal was to -- the moonshot goal is to cut deaths in policing by 50% over a 10-year period. So these are civilians that die in police incidents and police that die in incidents, looking to cut that number in half. Right now, it hovers right around 2,000 or so. And so there's 2,000 deaths per year. So there's a lot of work to do there. We think our tools are very much capable of driving that number downward, especially some of the new tools we've launched over the last couple of years, and we're very, very excited about that. We're founded in 1993 by our founder, Rick Smith, He had 2 friends die in a road rage incident, actually got him thinking about less lethal tools as opposed to firearms and what we could do there, started the company as a consumer product and then quickly pivoted to public safety, where we've been serving our police customers for just over 30 years now. We'll talk about our products in a second. We've got essentially an ecosystem of hardware and software products that work together to fight and solve crime, keep people safe in the field, come out with a lot of new products every single year and very much expanding into new markets. In terms of markets themselves, we're really active in these 4 markets. And what I talk about a lot is how we think about growth in our business is very much doing 2 things at the same time. Number one, is selling new -- I'm sorry, selling new products to our existing customer base. And there we're talking about that first segment, U.S. state and local, that's where we have the most users and our motion there is really a land and expand play where they might be using tasers and body cameras now, but how many more value-added tools can we build, how many more software and AI features can we build that benefit that market. And then the other 3 markets, it's the inverse of that motion. Instead of building new products for that market, we take our existing products and we try to break into these new markets. And so U.S. federal is a combination of all the federal police around the U.S., essentially in the 3-letter agencies combined with the Department of Defense. International is essentially national-level police forces around the world. And then our enterprise business, which is all of our nonpublic safety use cases. And I was saying just in a breakout session a couple of minutes ago. Right now, U.S. state and local is the largest market that we're in, followed by international, followed by enterprise, followed by federal. I think 10 years from now, that will look very different where enterprise is the biggest market we're in, followed by international followed by U.S. state and local, and followed by federal. And I think that just speaks to the pure TAM available in both enterprise and in international, and I'll give you a quick anecdote on each. In enterprise, Walmart alone has 2.1 million retail workers. There's only 900,000 cops in the United States. So in terms of unlocking some of these enterprise opportunities, on either body cameras or video aggregation or drone defense or drones themselves, a lot of different opportunities there to break into the enterprise market. And in fact, we launched our -- we announced our biggest deal in company history, was actually in the enterprise market in Q4. So again, I think that speaks to the TAM and opportunity there. And then internationally, the way these police forces are structured, you can go to in Italy, for example, there's 200,000 officers in their 2 biggest police forces in the country of Italy. That's 5x the size of the NYPD. And so it doesn't take -- it's not like we have to win everywhere at the same time for international to be a bigger and bigger part of our business. We have to execute really well in the countries and markets we're focused on and we could see our user growth really explode there over the next 5 years. So very excited about that as well. In terms of products, it really starts with our TASER product. That's been our longest-standing product, some electronic weapon, 2 darts come out of it and connect to your skin, they conduct an electric circuit between them, the wave form mirrors your brain waves. That's what causes your muscles to tense up quickly and for big tree to fall hard, and that's -- I think everyone's seen videos and so forth of TASER deployments and that's how it operates. Our new TASER 10 now goes out to 45 feet and you have 10 shots. So you increase your chances of getting a connection with the probes through heavy clothing and so forth, but you also have almost twice the range to cover, and that's really important for cops because if you think about someone with an edged weapon, for example, that extra 20 feet gives you more time to react and to use less lethal tools as opposed to have to go to a lethal option inside of 20 feet. Then, of course, we've got our connected devices and sensors. Here, we're talking about body cameras. We're talking about in-car video, fixed cameras, interview room, recording drones, et cetera. These are really they're a valuable tool in policing they create transparency. They create mutual accountability in the field and so forth, but they are also very much a means to an end. They're the sensors that are taking in all of this data that's allowed us to build this library of video that's approximately 40x the size of the Netflix library. So when you think about our business, we're really sitting on this well of video data and in the age of AI, we're able to use that to train models and to deliver more valuable -- more value to customers by virtue of all the data they already have. So that's kind of that bottom left portion in digital evidence management. You move on over to real-time operations, all of these devices stream from the device itself. So you can imagine high-intensity incidents where a command center is watching firsthand all of those streaming tools and when real-time operations are really becoming a big part of policing you see every major city starting to develop its own real-time crime center with a lot of these capabilities in terms of streaming video straight from the field, from body cams, from fixed cams, from drones, from in-car video and then the AI and productivity, all the reporting that happens. And there, we launched a product called Draft One a year ago, essentially analyzes the body camera transcript and writes your first draft of your police report for you. And so today cops spend about 50% of their time writing reports and doing other administrative tasks with Draft One, and that drops to about 10% of their time. So one of the big value propositions there is you don't need to go out and hire as many police officers because you're getting far more productivity out of the workforce you already have. So it's a little bit of a tour through our product portfolio. And we're really proud of our results. We've grown by over 25%, 5 straight years. Last year, it was over 30%. We think we have the opportunity to do that again this year. EBITDA margins were about 25% last year. We've guided to that same percentage this year at 25%. NRR, 123%. Usually, when customers renew, they end up buying a lot more from us at the time of renewal. Of course, $1.1 billion in annual recurring revenue and a big market ahead of us, so still plenty of white space to go attack and execute on and then almost $10 billion of future contracted bookings, which we think is a better metric than RPO for us because some cities require things like a cancellation for convenience clause by charter in their city and that takes some of those contracts out of RPO when we've seen, in fact, almost 0 churn in the history of our business. And so we came out with this metric at the end of last year to just kind of demonstrate what the opportunity actually is in terms of book contracts and what we expect to unlock moving forward. So that's a little bit about the business and happy to, I guess, start with Jonathan's questions and then answer any questions anyone else has.

Thanks, Josh, for that presentation. That was quite impressive. And the company has done exceptionally over the last few years. When we look broadly at Axon's future as a technology enabler, I think you've done a great job of showing us where we are today and what the history of the company is, but when we look forward a decade from now, what are the challenges that you can address? What will Axon look like in the future?

Yes. I think part of it is that market view switching to -- we're not switching but continuing to support public safety, while we build out other markets at the same time. But from a product standpoint, I think our North Star is we really want to be the OS of public safety, if you will, the operating system, the platform that all police agencies use to fight crime. And we won't be able to do 100% of that ourselves. Of course, there will be integration with other technology vendors in this space. But when customers are going through all of their key workflows in the field, we want to be the mechanism that they use to deliver safer outcomes in the field and more efficient outcomes in the police precinct and in the courtroom.

There's also been a lot of talk about the impact of DOGE on public safety and Axon has been relatively immune. Part of the DOGE mandate are finding initiatives to drive efficiency in the government. Can you talk about the role that Axon could play in terms of helping drive that efficiency?

Yes, for sure. So DOGE has kind of carved out public safety from it's -- what it's reviewing. And I think ultimately, even if they were in public safety in analyzing the spending there. I think we're really proud of the fact that our products are highly valued by our customers. And even when they're not mandated to use them, they continue to use them because they really believe there's an ROI in what they're using from Axon. And so -- in terms of making our customers more efficient, yes, we're -- I say this a lot. We're kind of at the center of this Venn diagram where we've got a customer base that is tremendously underserved historically by technology and thus they have a lot of manual and outdated workflows. Then they're also sitting on this well of data by virtue of all the video that they've collected and our brand is such that they really trust us. Our NPS score generally is between 60 and 70, which we're very, very proud of that's far exceeds a lot of the brands that I think consumers are used to and highly value and such that our customers really trust us. And so as a company delivering a new tool that not everybody is sure exactly how it's used and what they'll get out of it. I think that's where our brand equity with our customers really matters. So we're kind of sitting at the center of this perfect storm of circumstances that enable us to deliver AI and productivity tools to our customer base far faster than a lot of other businesses, and we're seeing those results really rack up pretty quickly here and a lot of excited customers.

You've recently announced a lot of product innovation and additions, including areas like fixed-mount camera. Can you maybe help us understand how this fits in within your portfolio of existing fleet and body cameras and what the network effects could look like?

Yes. Yes, sure. So fixed cameras are kind of the final piece of our product portfolio. We started with on-officer cameras. We have cameras in police cars. We have cameras mounted on drones, but having fixed cameras at intersections across cities and so forth allows us to do 2 things. Certainly, license plate recognition leads to an outsized number of crimes being solved. All these cameras take in data. They analyze the license plate. They ping it against a hot list and let the command center know if they've got a hit. Secondarily, there's all of these cameras are built with 2 lenses, and the second lens just does live video streaming at all these fixed points in public. So imagine, you have an accident or a high-profile police incident or a use of force, all of these cameras over time through AI will be able to detect those incidents and alert a command center and get the right personnel on scene and so forth. So we think this is just another sensor kind of adding into that overall mechanism we have around compiling and using digital evidence to get smarter and more efficient as a police force.

That makes a ton of sense. Drone as a first responder and your counter drone offerings also represent significant opportunities. How should we think about the pace of adoption of this market? And maybe what drives even faster adoption here?

So drone as a first responder is a really exciting market in policing right now. And what it really means is you have somebody calling 911, the first thing that's going to get to that scene is no longer going to be a police car or an ambulance or a fire truck, it's going to be a drone. And as the -- we'll get to the point where when you call in, all the metadata is already being sent to that real-time crime center, that dispatch center. They know what your address is. They know where to go and the drone will just automatically be dispatched ahead of time. And so you'll start to get real-time video before your officers arrive at the scene, which leads to better situational awareness and safer outcomes. And so that's what folks mean by drone as a first responder and via our partnership with Skydio, we think we're really well positioned to solve this problem for public safety agencies. And then we've really coupled that with drone defense, which is a drone defense and awareness, making sure you know where all the drones are over your jurisdiction, your own and others in our software through a product called Dedrone can analyze all of the different drones in the sky, tell you where the pilots of those drones are, tell you what the make and model of those drones are and allow you to mitigate those drones and send them back home, back to the pilot or take them out of the sky and cause them to land. Just drop out and land safely below. And so unfortunately, it's probably going to take an act of terrorism with a drone for this to become really mainstream in the United States for folks to understand why drone defense is so important, and it is scary to think about how easy it is to opt for consumer to operate a drone and a nefarious actor to kind of figure out how to use that to create havoc. And so we think these drone defense products are really going to be a big part of public safety going into the future. It's the same product that Ukrainians are using right now to take Russian drones out of the sky.

Yes. For those of us that have battled the traffic on 1994 here in Chicago, I think drone as first responder makes a lot of sense.

Yes, absolutely.

So just maybe moving on to the AI opportunity. AI Era looks like it's been a product of very strong interest. Can you talk a little bit about the new capabilities like translation and real-time draft reporting that you can bring to officers and maybe how customers think about the ROI or savings that come from here?

For sure. So in terms of our AI Era Plan as a whole, what it is, it's kind of like Amazon Prime for AI and policing. You pay a fixed dollar amount every year. And every AI product we build automatically gets deployed to the customer base. And so -- right now, we have 5 or 6 AI products available. The sum of the parts is over $200 a month, and we sell this plan for $200 a month. So there's an inherent discount on day 1 when you buy this. But all of a sudden, what's going to happen in years 2, 3, 4 and 5 is we're going to have dozens and dozens of AI products and the sum of the parts quickly becomes far, far greater than the list price. And so that's the value proposition to our customers as to why to buy now. You're kind of making a bet that will continue to deliver more and more AI products that are useful into the future. And our hypothesis is really like in policing, there'll be 1 company that drives 80% to 90% of the AI usage across the user base. So isn't a market typically where you go to 5 to 10 vendors to solve 1 technology problem. It's a market where they really bet big on 1 vendor. And so for us, we view this as really important to be the company that supplies AI to public safety. And I mentioned Draft One already. Another AI product we've launched is our real-time translator where if you're, for example, at the border and someone speaking Spanish, your body camera will detect it and automatically translate everything being said back to the officer in English. And so it supports over 100 languages. It's certainly a very attractive product for a lot of different use cases around the world. And then we're launching a number of other AI products, a different ones called Brief One. And this essentially for a detective or a prosecutor analyzes all of the evidence in a case and writes your index for you. Like here's all of your evidence, here's what it says. Here's the summary of it. Here's where it came from. And so instead of having to do all that manually in every case, now the AI is doing that for you. So you'll start to see more and more products like that, that maybe at times aren't the sexiest products in terms of what they do, but like I said, we've got a market that's traditionally very underserved by technology. So there's a ton of opportunity to just automate a lot of the workflows and make those departments more efficient. And where the rubber hits the road on that is policing is still not a very popular job. In the last 5 years, you see less applicants to police forces than we've really ever seen before. Someone was telling me they did the Danbury, Connecticut Police Academy. And 5 years ago, there were I think like 400 applicants for 3 vacant positions. In this last cycle, there were like 20 applicants for 3 vacant positions. And so with that, it's a lot higher comps, and it kind of highlights the idea that you need to get more out of the police force that you already have. And one way to do that is by getting them back on the street fighting crime, doing -- allowing them to do what they're best at and a lot less of the paperwork and administrative work that comes along with that.

That makes a ton of sense. I mean, you referenced the single vendor AI platform. What is the moat for Axon in terms of why couldn't somebody just take a plain Jane ChatGPT and plug it into the platform.

Sure. I think the biggest thing is just the amount of data they already have from Axon in evidence.com. So you could export some of that data into a different system and run AI on which our customers will do for certain use cases. But for the core like middle of the bell curve stuff, having that integrated into the same system you already administer your evidence in, I think, has a lot of value and gives us kind of an inherent advantage in that way.

Excellent, excellent. One last question for me before we open it up to the audience. I think your largest deal ever was signed with an enterprise customer. Can you help us understand how all of Axon solutions are used potentially by a customer and what drives the need to have these sophisticated solutions for enterprise.

Yes. In enterprise, there's really 2 main things that are happening right now. Number one, you're seeing more and more abuse of retail workers. Target closed 9 stores last year in the Midwest over this exact issue. And then you're seeing that coupled with large amounts of shrinkage. So go from 1% to 3% loss in retail, that represents billions and billions of dollars of merchandise that retailers are now having to write off. And a lot of times, when you talk to customer -- retail customers, it's because they're not giving a prosecutor enough evidence to actually prosecute the case and get an outcome out of it. It turns into a lot of he said she said and ultimately, it's not worth the prosecutor's time to prosecute anymore. That's sad, but that's kind of the reality of where it is right now. So video in these enterprises is the thing that changes that. And so like you said, we've been in the enterprise market for about 3 years. And to have our biggest deal in company history come from that market speaks to just the TAM and the total opportunity there. This particular customer, which will hopefully be able to announce in the next few months. They use one of our products Fusus to consolidate 300,000 video streams that this enterprise has across their warehouses, their trucks, their logistics hubs, et cetera., in their retail locations and so forth. So a lot of value there, and then, of course, body cameras on their retail workers where they have locations as well. So we think there's a lot more where that came from in terms of opportunity in this new market.

Great. I'll open it up to questions fast. Anyone. We have a shy audience. I'm surprised with -- go ahead.

[Technical Difficulty] I guess what are sort of things I imagine it'd be more internal and external, but that could cause kind of the pause in the strength and kind of grow the path...

Repeat the question. Yes.

You want me to repeat. So a lot of opportunity, but what are kind of the internal risk that could slow us down, I think -- frankly, I think it's just this classic innovator's dilemma like we're the market leader. If we get complacent, people over a 10- to 20-year period will start to take pieces from us, and then we wake up 1 day and kind of got our lunch eaten. And so for us, the most important thing is to make sure we're reinvesting and outinvesting a lot of our competitors in new technologies. We want to continually be the company that delivers new things every year to our customer base and continues to -- like at our company kickoff, I showed video of Secretariat's race at the Belmont and how it starts close halfway through close, but then all of a sudden, the gap widens over time, and that's exactly how we're thinking about our businesses. We've got a lead, but we're going to invest to widen that lead. We're not going to rest on our laurels here. And so the way the rubber kind of hits the road on that as you'll probably see, we're not overly focused on EBITDA expansion from here. I think we'll have a very healthy business, 25% plus EBITDA margins. But if it's a dollar we can save versus invest back in R&D, we're going to invest it back in R&D. SG&A, I feel differently about. That's where we want to get a lot of leverage over time and use internal AI tools to mitigate the need to hire more people in SG&A, maybe outside quota-carrying salespeople. But that's kind of how we think about making sure we're investing continually in the growth here.

Yes. Thank you. Sure -- about public funding, but municipalities seem to be under some constraint. You have the impact?

Sure. So the question was just around budgets and if any contraction of budgets is having an impact on Axon or any other budget implications. I'd say for us, we're much more on the OpEx side of police budgets. So we're a lot more insulated from grant cycles and onetime asset seizures and other things police can use to buy equipment. And thus, I feel outside of something cataclysmic that causes the tax revenues for a city to dry up, I think we're in pretty good shape. Grants are starting to slow down from the federal government in some areas, but oftentimes, grants are used for things like helicopters where it's like a onetime, very heavy capital expenditure and that's not really how we do business. We're much more of an annual subscription and operational items. So we're actually feeling like with this new budget going into 2025, 2026 in the federal government, there'll be more dollars available for World Cup, for Olympics, for border security, all the places we think we're going to be heavily involved in. So we see more opportunity than kind of headwind right now in the budget climate.

Unfortunately, that's all the time that we have for questions. So please join us in the breakout session. Thank you.

Thanks, everyone. Appreciate it.