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

Hey, everybody, for the 100th time you get to listen to the disclosure. For important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. I'm Meta Marshall. I cover the networking names here at Morgan Stanley. We're delighted to have Axon here with us today, Brittany Bagley, COO and CFO.

Thank you for having me.

All right. So welcome back. Congrats on earnings last week, pretty phenomenal. 2025 was another exceptional year for Axon with 33% revenue growth, 46% growth in bookings. Can you just walk us through some of the key drivers of the strong performance in 2025, particularly given like some of these, maybe manufactured concerns post Q3?

Yes. So I would say there was really strength across the board. It's hard to point to one particular product or one particular region that drove it. It was really everything working together well. So our core domestic state and local business continued to perform really well. You'll see part of that is driven by some of the new products and offerings that we have because our new product bookings did particularly well. Corrections, which is a somewhat new market for us, was absolutely on fire, booking some of our largest deals. International was really strong. We did over $1 billion in bookings in International for 2025. And then we also did over $1 billion in bookings in some of our new products. So that would be Fusus, products like that. And then we also disclosed that we had $750 million of bookings in our new AI products to our AI Era Plan. So it was all pretty much working. I think to your question coming out of Q3, it's really hard on a quarterly basis. We look at it as the full year. Coming out of Q2, we gave some guidance on what we thought our bookings would be for the full year. We not only hit that, we exceeded that, but it didn't all happen in Q3. So then we got some questions coming out of Q3. But we really look at it on an annual basis. Q4 is always a big quarter for us.

Okay. So as part of earnings last week, you laid out some multiyear targets. You talked about kind of accomplishing $6 billion of revenue in 2028. Just what are the drivers? And are they any different than kind of what we saw over the last year?

Yes. It's really rolling what we've been talking about forward. So for us, we tend to talk about big trends we're seeing, then that starts to show up in bookings. But even something like the AI Era Plan with $750 million in bookings is still really new. We've had that product out for a year, right? Then it shows up in bookings and then it starts to show up in revenue. So as you think about $6 billion of revenue in 2028, that's everything we're talking about now and everything that's just starting to show up in bookings.

Okay. We just talked about kind of $14.4 billion you already have in bookings as of the end of the year. Just how should we think about that giving you visibility into not just 2026, but kind of just a question more about like what is the duration kind of we should be thinking of that bookings?

Yes. So on that $14.4 billion, we say that we have 20% to 25% converting in the next year. It has been that range for at least the last 4 years. That's sort of as long as I've been here, we've had that 20% to 25% converting in the next year. So when we look forward, that's really what we use. We have gotten a lot of questions around is our duration lengthening. And the answer is I think that's already happened to some extent. When I looked at '24 versus '25, the average duration of our contracts is about the same. So we have talked about moving more to 10-year contracts. I think we might even have had a 20-year contract get signed, but that trend has already really happened. And so at this point, we're in that 10-year contract time frame. We still get 5-year contracts. We still get some longer contracts, but that's pretty stable. So we take that 14.4%. We look at the 20% to 25% rolling forward into the next year and then the delta between that and our guidance is our go get.

Okay. Perfect. There's been a lot of scrutiny of software companies of late, just kind of questions about AI removing barriers to entry. Rick commented a lot on this meaningfully on earnings. But just how do you see kind of that moat of Axon maybe different than a lot of software companies?

Yes. And for anyone who hasn't, I encourage you to go back and listen to Rick because he is incredibly eloquent on this and passionate about it. But I think it's really all of the pieces that Axon has build -- been building over multiple years. So yes, we have a great software business. We have fragmented end customers. So it's not like there's one customer who's going to go build a solution and replace us. Those products have a lot of data already sitting in them and stored in them. We have a lot of data from our customers that we can use to tune and make those products better. We tend to be very careful with our data. Our customers own the data. We're very privacy-centric. But even within that, there's a lot we can go do with that data to make our AI products better. And part of that is because we also have the sensors out there in the world. The other thing we talked about was being the #1 public safety sensor network. So we have the body cameras. We have the fleet cameras. We have ALPR cameras, all pulling in data. That's what's getting stored in our software, and that's what's getting analyzed, and that's what's informing our ability to go out and make AI tools for people.

Okay. Perfect. You mentioned kind of the data privacy concerns there. But just are you -- is that actively a conversation that you're having on a daily basis? Just how are kind of organizations thinking about that like right balance of kind of data privacy?

It's a conversation we have as a team on a very active basis. We think about it. It is not new to AI for us. So we have thought about data and data privacy and what that means to our customers for a long time now. We've developed a responsible innovation framework that we've put out there on how we deal with data and privacy. We deal with a lot of sensitive data, and our customer has always been sensitive to this. So doing it for AI is a bit of a roll forward of things that we've always been focused on. You see it in our approach to ALPR, you see it in our approach to AI.

Okay. Got it. Your AI Era Plan looks to give kind of customers easy access to ongoing innovation and clearly seeing traction with the $750 million of bookings, you kind of talked about in the first full year release. Why did you kind of choose to introduce the plan with kind of these future innovations built in?

Yes. It's a great question. What we wanted to do is we wanted to future-proof AI usage for our customers. So one of the things about our customer base is it can take a long time to get a contract signed. It takes a lot of effort and a lot of work. And what we found, especially when we launched Draft One is some of our customers came to us and said, "Gosh, I wish you'd had this 3 months ago or 6 months ago when I signed my contract. I don't want to go do a rewrite or try and get additional money, but I really wish I had this product in there. And it was a little bit of a light bulb going off for us on AI, which is the pace of innovation is going to be so fast. And Rick has really been at the forefront of it. I mean he's been talking to all of us about AI for far longer than the AI trend has been popular. And so our thought was, let's do that for our customers. Let's take all of that vision that Rick has around AI. Let's be at the lead of it, and let's make sure they have access to it, and let's do it in a way that is frictionless and seamless for them in terms of having to go back out and contract.

Yes. Okay. Rick talked a lot last week about work being done on a new hardware form factor, not asking you for your product roadmap, but just where are you seeing kind of some of those most incremental opportunities to bring AI further into law enforcement?

Yes. So we always have new hardware products in development. So Rick will probably say that to you every year because he's always thinking of something. I think a great example is really in 2025, we really got our ALPR product launched. So that's a tangible example of a piece of hardware we brought up. I think from an AI standpoint, more on the software side for us and then connecting into the sensors, but it will be a continuation most likely of a lot of these productivity tools. So we started with Draft One, which does the police report. We have added Axon Assistant. We've added BriefOne and PolicyOne so that they can pull in all of their policy rules and just get a quick query. Axon Assistant does translation. So it's really going at all of these things that take time or have friction in their day and speed it up and make it more seamless. I think the other thing that's nice for our customers, other than like who doesn't want to be more efficient or who wants to spend less time writing report is that they can make that a real ROI-based pitch.

Yes. Okay. The 911 market and the Carbyne prepared acquisitions looking to bring more AI into the 911 market, which has kind of been running probably the same way for about 40 years. Just how do you see, like what are some of those prepared success stories? And just what kind of sparked that this was a market that was ready for innovation?

Yes. I would say we had been poking around the edges of 911 for a while. We had thought about doing our own CAD platform. We decided that, that didn't work for us. But we knew it was a space that was really interesting. And the reason it's interesting is because you're getting closer to the origination of the call or the origination of the information. And so the more you know at the front end, the more information you can provide to an officer who's getting dispatched to the scene or in the coming world, maybe it's a drone getting dispatched to a scene, not an officer, and you want that underlying data so that you can help do that. The second thing is we listen to our customers and our customers were raving about Prepared. They were talking about what a great solution Prepared has. Prepared is also AI first and AI forward. So it's not a legacy product that we had to come in and try and jam in or significantly upgrade, like they have already thought about that. It's an overlay on top of other existing products. So it's a really easy add-on. So you take all of those things together, and it felt like a really natural place for us to play. We like finding companies that are disruptors. We like finding companies that are innovative. We like finding places where you can add value to your customers and Prepared was all of those things for us. As we were looking into Prepared, we also were spending time with the Carbyne team, and I think we talked about this a little bit, but we didn't necessarily know we wanted to do both of them until we really got into diligence and understood the underlying platform and the benefit. Carbyne is doing the same thing for the underlying call platform and that they're significantly modernizing it and they're making it cloud-based. So all of our software as well. There's like tiny asterisk exceptions, but the vast majority of our software is cloud-based. And so Carbyne is now doing that for the call handling systems. So if you put them together and the customers don't have to put them together, but if you put them together, you have this modern call handling platform in the cloud that you can do a ton of AI overlay work on. And then you can drive efficiencies for the customers. I think some of the early success and use cases on emergency calls, if you can get this information and do the right routing and triage, you can make sure that the calls that are emergencies are getting put through quickly and the nonemergency calls are getting handled.

Yes. I mean at IACP this year, there were some pretty interesting kind of demos of Prepared and kind of that triage and kind of front being front-footed that can happen with the tools that are pretty interesting.

Yes. I mean if you get into it, right, like the longer your 911 call takes, the less likely you are to have a good outcome at the end of it. And so for the people who are spending a lot of time in the 911 space, it's all about shortening that call time and getting the right people dispatched with the right information. And so the fact we can do that all the way end-to-end is exciting and valuable.

Yes. The federal and corrections market has been an area of growth for you guys over the past couple of years. Just how is this market different than how you guys look at the maybe traditional state and local market? And just what are the opportunity time lines do you see with some of the OBBA funds?

Yes. I would sort of separate corrections and federal for us. I think our corrections market looks a lot like our state and local market. Interest in a lot of the similar products, real value to having all of the products in there. It's a great place to improve safety, body cameras make a lot of sense, all of that. And I would say because it's at the state level or the local level, it functions a lot more like our traditional state and local business. The federal business, if there was one area that was maybe not firing on all cylinders for us in 2025, it was probably the federal business. There was just a lot of uncertainty, a lot of question around funding. Government got shut down at least twice. So I do think as we look out into the future, we continue to be really optimistic about the federal business, things like World Cup, potentially the Olympics, there's a lot of opportunity there. I think it's just working through some of the funding mechanisms.

Okay. International market has maybe been something almost like federal, where people have been kind of skeptical until it was successful. Just given some of the different dynamics with that market, can you just rehash some of the success you're seeing there? And does it feel like this kind of dam has now broken on International?

Yes. So it's interesting because we had a very successful International business, in countries that we would call the Commonwealth countries. So Australia, New Zealand, the U.K., we had a really nice business there and international was doing well. A lot of times when people hear up, I'm excited about at the end of 2025 is those 2 cloud deals that we got signed in Europe. I don't know if I would say the dam has broken, but I would say there's definitely water trickling through, which is a great -- it's a great sign and exciting to see. And I think AI will start to be a big part of that. It's really hard to deploy AI if you're not on the cloud. And as these customers see real value in AI or in Fusus or something like that, it's just more appealing to them to think about being on the cloud. And we're not the only ones trying to solve that, right? Like all the cloud providers are trying to figure out data sovereignty and how they can do hosting and how they can get.

Yes. I mean, I guess just on that, are there increased investments that you need to make kind of on that data residency side to kind of compete with some of the needs in that market?

Yes. I think probably. Nothing that's not factored into our guidance. But yes, I think you'll see us continue to invest in some of that as we go after international data residency, localization, the supporting sales teams and customer success that go into that. As we look out as we get to 2028, that investment is sort of baked into our model. Investment in International, including data residency, investment in the enterprise business. So we're expecting we continue to invest in these new markets.

The enterprise opportunity has been yielding success as well even before I think what some people have considered we're going to need, which was the mini body camera. Fusus seems like a great kind of early use case here. But just what are the breadth of your portfolio that you're seeing being looked at by the enterprise customer?

Yes. We're getting to a nice point where there's really a lot they can look at. I would say it's less on the TASER side. At some point, private security may carry TASERs. But when we talk about enterprise, we're focusing less on that and more on people on the front line. So I would say that's less of a big market for our TASER business, the body cameras. We're really excited about the ABW Mini coming out in the second half of this year. Fusus, absolutely really valuable. I think counter drones and drones, as you think about something like campus security for large enterprises, both of those can be particularly interesting. That's on the counter drone protection side. On the drone side, the ability to do inspections with a drone. So I think really across the portfolio, there's a lot of opportunities. And I imagine as we get more into the enterprise, having machine learning or AI embedded on top of those products will be an opportunity for us.

How is that go-to-market different in --for enterprise and maybe some of the other businesses?

Yes. It's definitely different. We're selling to a totally different customer. Most of them have heard of Axon, but there's definitely a little bit of education to do. I think in some of the places that we got in, we're actually really getting in with the security part of the enterprise. So take retail, retail theft has been a real challenge or organized retail crime or just incidents in the store, that's running to their security team. Their security teams obviously know Axon really well, and then that goes up a level and becomes sort of a C-level type sale when they see what we can do.

Okay. What other markets are you seeing Fusus adoption in? Because certainly, it's kind of a pretty exciting new piece of the portfolio.

Yes. I think it's getting adopted across all our markets. I would say it differently. There's no market where I don't think they're interested in.

All right. We wrote a large note last year just kind of about the drone market, Ukraine, what we're seeing over the weekend, bringing kind of more news about drones to the forefront. Just where are you looking at where is the most attractive piece of that market to compete in? And what do you see as some of the catalysts for that business?

Yes. So we partner with a domestic-made drone company, Skydio. They're down in San Mateo. They're great. I would say that is really how we're partnering there for a play on DFR. So that's sort of the domestic state and local piece of it. I think that's incredibly interesting. We will also partner for them in the enterprise. So they're really our drone partner. Then I would say on the counter drone side, we made an acquisition of a company called Dedrone, and they do counter drone. They've played in Ukraine. So they've really been at the forefront. And everywhere you start to see drones, you will start to see counter drone. So that's federal, that's state and local, that's enterprise. You might be like why enterprise? Well, like think about if you're watching a game on TV, like you don't want a drone coming in and interrupting your game, right? They're doing a lot behind the scenes to make sure you don't have that happen.

Those pesky ones at the Olympics following all the skier.

Those, they want. That was a pretty cool shot.

Exactly. All right. So the NRR expanded 200 basis points year-over-year to 125% in Q4. You've noted kind of a lot of innovation coming on to the platform. But just how do you think about what part of the growth algorithm like the NRR is?

Yes. I think that the NRR is incredibly important for a couple of reasons. One, we know we have really de minimis churn. So our customers like our product. And not only are they renewing our product, but they're coming back and buying more. And I think a lot of the buying more is really because we have added more products into the mix. So we talked about the prices on OSP, how OSP has gone up. That's not just because we're doing like-for-like price increases, it's because we're adding new products and new innovations into our Officer Safety Plan bundle. If you think about it, we now have -- our top price point is $570 if you took our top OSP bundle plus our AI Era Plan, you could get higher than that if you add it on other products like fleet, but that's getting you to almost $600. So that's significantly higher than our top plan was even a couple of years ago. So I think part of it is you just have customers coming through. We talked about how 30% of our customers are on a premium plan. That's not this year's premium plan. That's they signed up for the plan that was premium at any point in time. So that gets to -- as you come back and renew, you can just get so many more things. And we're bundling in things like ALPR. We're bundling in things like counter drones, obviously, not one-for-one with officers, but it's giving them a flavor and an ability to try.

Okay. Got it. With all these innovations, expansions and end markets, you've stayed committed to expanding the EBITDA margins by 250 basis points over the next 3 years. Just how do we think about where this leverage comes from?

Yes. Rick gave me a nice shout out on earnings. We had a little bit of an arm wrestle over EBITDA margin expansion. So we landed in a really good place. We are going to continue investing in the business. So I would expect to see us continuing to invest in R&D. We have for the last couple of years. We will. We have so many more places to go. I know it feels like we're doing a lot, but they're all sort of logical next step additions to our product portfolio and what our customer needs. So expect to see continued R&D investment. I promised Rick, we would not get our leverage at the cost of R&D. But then everything else is sort of fair game. So I would expect you'll see some gross margin expansion because we have some tailwinds from our software business growing faster than our core business. And then I would expect to see leverage in SG&A, which we've been leveraging in the last couple of years. And it's not that we're not investing there. I just talked about how we're investing in our new markets. We are. We're just not investing at the same rate as growth.

Can you still get that gross margin expansion even this year when we're kind of talking about margin or memory headwinds?

I think by the end of the year, I mean, we'll see how that lands for the full year picture, but I think as we roll in a full year of tariffs, and remember, for last year, we didn't have a full year of tariffs, partly because of when they got announced and partly, we just had inventory on our shelves that wasn't tariffs that we were selling through. So we'll have a full year of tariffs this year. We'll have memory costs. You saw in Q4 that we had some mix shift, so our lowest margin platform solution business, and by the way, I say lowest margin, it's still a really nice margin. It's just lower than some of our other hardware products. That grew 81% in Q4. So that will provide some quarter-to-quarter lumpiness on mix, but I think as you get through to the end of the year, as you've digested the memory costs, as you've annualized on tariffs, then you'll start to see some of that software product mix come through.

Perfect. You talked about 60% free cash flow conversion in the coming years. Just how are you thinking about kind of capital allocation?

Yes. So we've done 60% in prior years. We obviously didn't in 2025. In 2025, we were really making a lot of inventory investments. I think every couple of years, we have to sort of relook at the supply chain and do some strategic things to make sure we're well positioned, and so that was an investment year for us in inventory in 2025. We also had some stuff around our collections timing, which we will hopefully get back in, in Q1. But I say that in Q1, and then I don't want you to think like Q1 is going to be amazing because Q1 is our seasonally low cash flow quarter, but cleaning up some of the collections timing piece, and that pretty naturally gets us back to a 60% free cash flow conversion. The things that -- the reasons we don't get higher than that, we've got interest expense. We've got timing of commissions. We won't have a huge inventory investment year, but we will continue to invest in inventory. We're most focused on certainty of supply for our customers.

Got it. Stock-based compensation has come under a little bit more scrutiny of late. Pullbacks and software valuations have had companies thinking about what is that right blend of cash compensation. Just how are you guys thinking about your stock-based compensation philosophy?

Yes. We've been really consistent on our stock-based comp since we put in place our XSP plan. So our XSP plan is a performance-based stock comp plan, and we only earn those tranches if we perform. So a bit of what you saw in 2025 is: thank you, we had very nice share price performance. We also had really nice operating performance. So you saw a lot of those performance shares get recognized in our stock-based comp. We gave guidance for this year that our stock-based comp is flat. And what it -- about half of our stock-based comp is that XSP plan. So if you want to look at our normal run rate, like divided in half, and I think we'll be pretty consistent on that XSP. We've already put that plan in place. There's no big new XSP plan coming. I don't think we're giving any AI engineers $100 million stock plans or anything like that.

It might be a couple of rooms over.

So pretty steady Eddie from here.

Okay.

And I would -- like I know, I would just give a plug for our XSP plan. It is phenomenal in recruiting. So when I say we didn't give any $100 million like AI engineer plans, people get really excited about the mission and that ability to have a plan that's really linked to our performance is exciting. And so we certainly punch above our weight in the talent we're able to recruit.

Got it. There's a lot of start-ups in the defense space kind of have reinvigoration. Just you guys have been active in that market. What makes a good kind of Axon acquisition?

Yes. Talent and technology. I went on a long discussion of Prepared and Carbyne, and I didn't mention their amazing founders. They have great founders and great teams of really smart, scrappy people. So really smart, scrappy, talented people who are building innovative, disruptive things that weren't naturally on our roadmap or that we didn't do ourselves. And then I would say really well liked by customers when we talk to them. That's really important to us. We're never going to put something in a bundle and try and jam it down someone's throat. We really care that our customers find value in and like the products. And so that's where something like Prepared was great. Our customers were telling us how much they love Prepared and how much value it added. And so it fits strategically in our portfolio. It had great talent. It's a nice business, and our customers like it.

Got it. I mean maybe just last question. Rick spent a lot of time on the earnings call talking about AI and disruption, also saying it's kind of challenging a lot of you guys internally to adopt AI as well. Just as we all look for how people are using these in their real lives. What are you guys using internally? Or how are you using AI internally to kind of gain some efficiencies?

Yes. I think we, and probably many people you talk to, are seeing unbelievable productivity gains on the coding side. So our R&D engineers are all using and loving the coding tools. We'll see how anthropics fight with the federal government lands. We would like to be able to continue using those. But there's a number of good ones out there. So I would say that is probably the fastest place we're seeing real efficiency gains and disruption, but we are pushing it through the whole organization. Everything from things that are really annoying point solutions or that take a lot of time for people internally, how we do our expense management review. We're using it in our accounting close. Our customer service reps are using it to make sure they have all the best information on their customers. I mean it's kind of everywhere now.

Yes. Okay. Any questions from the audience before we wrap up? All right.

Let's double click on the federal opportunity [indiscernible].

Those are big budget buckets, yes. And I think they're all really ripe and interesting opportunities for us. We have some umbrella contracts with some of those agencies already, but there's more to come. Certainly, World Cup money is relatively new money that's flowing through. I think that there's plenty of opportunity for TASER in the federal government. I also think there's plenty of body camera opportunity. And I would say don't forget about Dedrone. I think Dedrone has some really big opportunities on the federal side.

Similar question to that on the retail vertical. Remember last year, there was some enthusiasm that every Walmart employee will be wearing some sort of body camera, et cetera. Is that something we should think about as like a 2026 opportunity or further out?

Yes. I would say our ABW Mini, which comes out in the second half of the year, we trialed an Axon Body workforce camera. That's what gave us the confidence to say that there's real utility and use cases for the customer, but nobody liked wearing them. They were sort of big and heavy. If you think about it, officers have like a duty vest that they wear and so they can put a bigger body camera on it. A lot of retail associates or nurses are wearing much softer clothing. And so that lighter, smaller form factor body camera, we think will make a really big difference for them and the deployments and the rollout.

Perfect. Brittany, thanks so much for being here.

Thank you for having me.