Axon Enterprise, Inc. ($AXON)

Everybody, Andrew Sherman, software analyst at TD Cowen, covering Axon. I'm here with Josh, President of Axon. I'm sure many of you know and know the story. So I'm going to jump right into it since we only have half an hour.

Q1, you had a great quarter. I'll kick it off there, really strong start to the year. Dedra was 1 thing that really stood out revenue growth. I think bookings was even higher than that. Talk about what kind of inflected in there? It sounds like -- I know there's some World Cup, but other than that, what else drove that.

Ultimately, I think between Ukraine and Russia and what's going on in Iran right now, I think it just opened a lot of eyes to what's -- what the future looks like in in some context around drones and security and public safety. And I think for the first time, a lot of governments are really recognizing how serious threat is and exploring opportunities to try to mitigate that threat and dedrones a business that's been around for 10-plus years at this point. We acquired them about 18 months ago. We're very excited about not only their footprint internationally already, but the applicability of the products to pretty much all of our markets, whether it's federal market, enterprise, U.S. state and local or international, and so it's worked out very, very well. We've already booked on that product line, essentially more than the acquisition price, which was a very exciting moment in time given that the acquisition only happened 18 months ago. And certainly see a lot of upside in that business durably. World Cup is great. It's securing 11 sets and so forth is -- it feels very relevant. It's a good opportunity for us, but these events, in general, they're happening all over the world every week, and it's not really a moment in time. It just feels that way because it's so close to the U.S. right now. But we see a lot of durable opportunity there for the long term. right?

And it's relevant to a lot of different things, campuses, data centers, you can talk about -- touch on that, Executive residences is like a large number of use cases.

Totally warehouses, anywhere you're housing valuable inventory, stadiums, et cetera, yes. .

Data centers itself, it sounds like it could be interesting.

Apparently, there's a lot of building going on anticipated we're excited to participate in that. .

Okay. But for the state and local departments, they can't yet take drones out of the sky, maybe explain where we are in the .

It's actually the first product we've ever acquired and sold in the market where the U.S. public safety business is the smallest of all the businesses, and that's because in the U.S., you're not allowed to mitigate the drones, unless you're the federal government. And so what ends up happening is cities can deploy this for tracking what they would actually have to call in the FAA to take a drone out of the sky. And for the World Cup, it's the first time that cities have been given a waiver to be able to mitigate drones. So this will be -- hopefully, it doesn't come to that in any way. But the capability is now there and cause our mainstream. And from there, we believe the the government will continue to let major cities and so forth mitigate drones. But that -- because that is still in motion in the U.S. Other markets have just moved ahead of it. International has been very exciting for drone and not only in and of itself, but the network effect to have the right connectivity in a national police force and leverage that to sell body cameras or TASER devices or whatever the case may be after that enterprise, we talked about certainly opportunity there. And then in the federal civilian market, where our product, we're not necessarily super focused on Department of War. We're more focused on federal civil and public safety use cases Department of War is much more focused on blowing things up in the sky and receptor drones and so forth. That's not going to be our core competency. And so for federal civilian and state and local, it's a really good fit as well as ministries of interior internationally. And so for federal civilian and state and local, it's a really good fit as well as ministries of interior internationally.

Okay. But someday, state and local might be able to.

Yes, someday as soon as this year or into next year.

You guys are working on.

Yes. And there's a lot of -- there's -- I think as always, the government has got to make sure that we're not getting out over our skis and allowing capabilities that have negative effects, but this one feels pretty down the middle of the fairway for things they're looking at and saying, Hey, there's much more good than harm that can be done in this case.

Yes. And in the same vein as drones, DFR seems to be accelerating and they're pretty early innings, I think. Can we envision a world where that is ubiquitous as TASERs and body cameras? What would that take to?

Yes, absolutely. DFR, for those that are unaware, drones is a first responder. This is essentially the idea you call 911 and a drone is immediately dispatched to the scene of an incident to give the police more situational awareness as to what's going on. And in terms of officer safety, read about officers being ambushed when they show up on site or called to a domestic abuse and someone's waiting there for them or something. This technology kind of gives you the lay of the land and makes the police officer far more informed. And so it's been a very valuable tool, and it aids in car chases. You don't have to chase cars anymore with a car. You can just follow them overhead with a drone, a lot of different monitoring critical infrastructure, power and things like that. So there's -- we see a lot of utilities. Skydio is the market leader here. They've been our partner in the space for a long time. Our products integrate very nicely together. Our go-to-market motion is very well coordinated. And so we're feeling a lot of tailwinds right now from that construct.

Excellent. The AI era plan has obviously been a huge success in just a short amount of time. A lot of healthy contribution to bookings last year in its first year, about 10% of the total. It sounds like all agencies are now thinking about this, maybe buying it or planning to buy it. What -- is it like a product maturity thing where we're finally -- they're realizing the benefits of Draft one and the other products? And what -- ultimately, how broad can this go across your state and local?

Yes. It's our fastest-selling product ever, as I was saying in our group meetings, so ironic, we're caught in the middle of like the SaaS pocalypsephere. It's like we are the company going on offense and AI, like our first year of selling AI products to police. We sold almost $1 billion of it for a company whose revenue was was around $3 billion last year, whatever it was. It's like this is a meaningful contributor and something that's growing -- grew 140% in Q1 year-over-year. We're going on offense in a big way in AI. I think our customers recognize us as the company that they can trust deploying AI. I think we've earned that trust through bringing several disruptive categories to law enforcement, whether it was conducted electrical weapons, whether it's body cams, whether it was a cloud, virtual reality. We've just built up a lot of equity with customers that they trust us to deploy this well. And so for us, that's where the opportunity is and speaks to the product market fit to see bookings growing this fast in such a short time, and we expect that to continue throughout the year and feel really good about the opportunities that the AI Aeroplan positions us for in the future.

Yes. Draft 1 pays for itself pretty quickly. And I've seen some small agencies buy that, too. Absolutely. It's not like you need a massive budget.

Yes. The equation there is really, really simple. Like today, police spend 50% of their time writing reports. So that's 2.5 days per week that they're sitting behind a computer writing police reports instead of being out in the community fighting crime, doing what they're passionate about. And with Draft 1, that goes down to about 20%. So you're giving every police officer 1.5 days back per week -- and you can understand like what that means for vacancies in policing. All of a sudden, you don't need to hire all these unhired roles that have been sitting there the last couple of years, you can redeploy that headcount money to buy tools like this that make you more efficient and put your folks back on the street to do what they do best. And so it's really been a massive winner and one that our customers have highly valued.

That's great. There's also the overtime budget component. I was actually looking at my towns budget book that they send everybody.

Hotly read publication.

Yes. Well, I didn't crack it until I realized that this data was in there about the police budget, which 89% of the budget goes to people. They are a TASER customer, which is great. 13% to 15% of that people salary is overtime. So if you can cut that out by making them more efficient, you seeing customers? -- absolute customers.

Absolutely. Yes, people are the biggest cost in every public safety budget. And whenever you can really convince and show that your products can save money out of the people budget, that's like a -- that's a well that's not tapped very often because there are so few products that meet that bar, but we're very lucky that Draft 1 is one of them.

Yes. Speaking of budgets, I get a lot of questions on that. It was more so a year ago given the federal stuff. But you guys have had a remarkable ability to drive up budget capture by adding more products in, you're less than 1% of the average customer, but that could be 3. How do you just keep growing that over time?

I think like the name of the game is you have 2 options. You can create new categories, you better make sure that new category, you're creating solves a massive problem because that's where there's not a lot of net new money trickling into police budgets every year. So if you're going to launch something new in a new category, you got to have a plan of -- you're going to solve a problem so important that the customer has no choice, but to invest in that. The other option is you disrupt incumbent spend categories. And I think that's what we've gotten really, really good at the last few years as things like Draft One. It's like we're disrupting the head count spend that exists, especially the vacant head count spend. Everything we do, VR, you're taking this training budget that's heavily weighted on in-person training where you're you're firing all this ammo, you're spending all this fuel to get everybody to a centralized location, you're paying over time for the people that have to cover the ships. And all of a sudden, you can administer better quality training every single day by wearing a VR headset in your precinct for 10 minutes versus 1 day a year of in-service training where you're firing devices weapons at an actual range. And so that's the kind of positioning and approach that leads to some of this new funding that shows up is coming from other spend categories in a police department budget.

Yes. That's awesome. But on the bookings growth side, you had a great Q1. You had a huge year last year, over 40%. How should we think about -- I know it's seasonal and we're not talking about quarterly, but how should we think about this year's bookings growth.

Yes. We see a similar opportunity for growth this year. Every year, you get the law of large numbers, so you're coming off a bigger base. And in our business, we're doing bigger and bigger deals. And so what I would say is quarter-to-quarter, like last year was a -- usually every quarter, it goes up into the right incrementally in bookings, like that's what we saw for 20 years. Last year was the first quarter where we went up in Q1, then Q2 and Q3 were kind of flat with each other, and then Q4 was a very, very steep ramp. And -- that will happen, I think, throughout years in different quarters just based on when we're able to close these massive 9-figure deals. There's just a little more of that, that's going to factor into the growth rate. And so it's not going to look perfect every quarter. But I think when you add it all up at the end of the year, there's similar opportunity to put up the kind of numbers we have in the last few years.

Great. And the visibility you have into the pipeline because all these are they're slated with city councils essentially. They know that their deal is up or that they want to expand it. So there's a meeting and there's a whole process to that. So that gives you good visibility.

In U.S. state and local, for sure. In federal, it's a little more unpredictable. There's different procurement policies and rules and procedures. International is probably the hardest 1 to exactly predict because you're working in markets that kind of new for you. And so -- but a lot of that can be resolved just with good salespeople going through a good sales process and connecting with the right stakeholders and we feel like that's a a core strength of ours. And so yes, it's -- there's certainly opportunity in a lot of places right now.

Yes. Great. Yes. Speaking of international, that they really felt like it took off last year. There are years in the making. I know you've done some things on the go-to-market side. But is the market itself embracing more cloud ready days potentially because of AI? Talk about that .

Sure. Yes. Last year was our first year over $1 billion in international bookings. That was a big moment in time, I remember I took over international sales as a sales leader in 2016, and we were pump when we did -- we broke like the $30 million threshold for the first time. So it's super exciting to see the growth over the last 10 years. But I think the next 10 years are even going to be more exciting because, like you said, we've established more of a presence internationally. And the idea, like AI is maybe ironically, just based on the state of software right now, but like AI is actually driving more cloud spend internationally because a lot of these governments that wanted to do as much as they could on-prem historically are now realizing it's just not scalable to run all of the AI tools you want on-premise. And so that's opening up more adoption in the cloud. That's opening up more potential body cameras and having the dot com customers for us as well as some AI opportunities -- that's a piece of it, no doubt. The go-to-market investment over the last 5 years has been a piece of it as well. There's probably 2 other motions. One is around system integrators. We've just gotten better at working with the right systems integrators in some of these markets. where we can go and work at the national police level instead of working our way up through users and try to get to as high as you can in hierarchy, essentially, the system integrators have a seat at the table and some of these large international forces. And we've been able to close some large deals through integrators in the last Q4, that happened a few times in large volume. We're seeing that again this year. And then the last 1 is these acquisitions between especially ddrone and Carbine our call handling 911 solution, both of them have large international -- large international presence already. And so going in and not having to start from scratch and have a product in market that's working well that customers like that's just such a more advantageous position to start from as we look to diversify the number of products we can sell into that customer.

And international, it's not like it's just Europe, your products can work in any country essentially. So there's really no -- there's no reason why all sorts of different total increase and these agencies are huge.

We have -- historically, our other Commonwealth countries have been our most consistent international markets, U.K., Canada, Australia. But now we're seeing major business in South America. We're a major business in Europe, major business in the Middle East, some in Asia and then Africa coming online with more and more TASER purchases as well. So really starting to see it happen. It's like we knew it was there. Certainly, we know the products add value, just had to kind of crack the code between the go-to-market and some of the right partners and acquisitions to position us well. .

Yes. Well, that's great. The other new market I want to touch on is enterprise, which has gotten a lot of attention for obvious reasons. So talk about the 3 buckets, fuses, body mini and ddrone and kind of your approach to each of those.

Yes. I think we have 3 very clear opportunities in enterprise. And for us, when we talk about enterprise, we're really talking about not public safety. So businesses, retailers, logistics companies, like those types of businesses would be in our enterprise bucket. And there, we see really, as Andrew said, 3 different types of opportunities emerging. Number one, body cameras on retail workers, and we have a product called Axon Body Mini. It's launching in July. We're already in field trial with some of the biggest retailers in the world on it. They've already preordered some of these cameras. We're very bullish on what the opportunity is in those -- in that market. I'd say it really comes down to limiting shrink and limiting workplace islands and abuse, and both of those are unfortunately on the rise right now. And so we're helping there. I think customers are seeing that and they're investing in the body camera product. The biggest overall bucket, though, is Fuses, which is our video stream aggregation to -- so picture a lot of these Fortune 500 companies, they built out their geographical footprints over 20, 30, 40 years such that they have buildings in different states or countries. All of those buildings were built at different times. So they have different core camera infrastructure like CCTV, different vendors, different products, different models. And now they're establishing their security operations center, which is becoming more and more common to see businesses have their own security forces, some of them are the size of NYPD, some of these private companies their security forces, and they want everything centralized in their global operations center. And so what does that mean? You've got to find a way to take all of these disparate cameras and connect them into 1 place in a way that's kind of low drag, which means you don't want to go out and replace all of the camera infrastructure. You want to find a way to just leverage what's in place and aggregate it into your command center, and that's exactly what Fuss does. -- our biggest deal in the enterprise space at the time, it was our biggest deal in company history involved 300,000 video streams from 1 company. And so you can think about the amount of work to deploy that and so forth, that's -- it's a lot of work, but certainly a lot of upside in doing so. And we're seeing that continue to just drive a lot of enterprise interest right now. And the third one, like we talked about before, just counter drone like valuable assets, whether they're data centers, whether they're warehouses, logistics facilities, whatever they are, there's a lot of interest coming out of the thread of flying drones in the data centers in the Middle East that kind of materialized in the last few months, that's driven a lot of interest in this. And especially in these massive CapEx like data center build-outs, we think this is a really good opportunity for us to kind of integrate this technology as this space gets hotter and hotter.

Yes. That's awesome. On the retail -- on the retail trials, what have they seen? So I know it's early, but what have they seen? And does it report you guys put out, there's some metrics around the level of deterrents, it's not like the associates are going to stop what's happening, but it's capturing the footage.

So we were in 1 we went out to see 1 customer who's piloting the body mini. It's a brand everybody in the room has heard of a very large company. And we walk into their storefront. And within 10 minutes, we see a woman approach a cashier just screaming at the person around the return policy, getting very, very aggressive. You see the cashier say, "Excuse me, I'm going to turn my body camera on and then all of a sudden, it's like, well, like let's settle everything down a person just totally change in behavior. It's like when we launched body cameras into police, you saw the exact same thing in the person from corporate turned to us and said, "Did you stage that? Like that's ultimately what we're seeing. It's just the temperature is coming down in all of these places due to body cameras. And the other effect of that is a lot of times in certain states, prosecutors are saying they're not going to prosecute theft. Well, when you have a body camera video that's clear a day of the person stealing with their face and just leaving no room for interpretation, all of a sudden prosecutors are willing to prosecute those cases. And the reason that's so important is so much of retail theft is organized crime. It's not 1 person going in and taking stuff to their house to use in there like that happens. But the lion's share, like 80% of the actual shrink is getting exported out of the United States in an organized fashion. And so when you can really provide a deterrent for the shoplifters, you're you're not limiting the one-offs, you're attacking kind of the apparatus that's driving most of the shrink.

Well, yes, that's a great example. And that's how the thinking about the ROI. It's just that and maybe also like greater employee satisfaction, less turnover, and this is a high turnover job.

Totally. 90% of retail associates say they're safer with a body camera on, which is, again, very close parallel to what police officers when they first started with body camera. .

You have a lot of hospitals already.

Hospital security and nursing. I guess a similar thing in emergency rooms, nurses are often abused or don't feel safe as folks are coming into the ERs oftentimes late at night, body cameras on nurses has been, again, another deterrent in the ER hospital security forces using TASERs, body cameras, fuses et cetera Yes. .

Well, my wife's a nurse, not in the ER, but [indiscernible] Yes. I mean there's like 5 million nurses in the U.S., what would it take to to get like that kind of broad adoption .

I think a lot of them are -- and I'm not sure if this is the case with your wife, but they're organized into these networks almost -- so it's not about going to each hospital and trying to sell to the hospital. It's more about trying to sell to the health care system or the nursing organization where you can capture high volumes without going like place to place. So that's really the motion there a lot of [indiscernible].

Any big hardware R&D areas of the future you guys are thinking about or talking about it?

Absolutely. We're excited. TASER technology, we think, is applicable in a lot of places right now. We still are looking at the idea of putting TASER technology on a drone for SWAT instances and then eventually into -- we think this can limit mass shootings. And it was a little controversial when Rick talked about the idea of this in schools, and that's probably not the place we would start. But when you think about the idea of like a mass shooter on the loose, and police taking time, even if it's a matter of minutes to respond to that, if you've got a drone mounted in the ceiling with TASER technology that's flown by someone that's a law enforcement officer in a command center, that's a drone pilot that can choose to deploy this technology, and it's not done autonomously. We think that's like a Nobel prize capable product of really limiting mass shootings. And we're very excited about the prospect of it. There's still a lot of work to do before anything comes to market. But I think our conviction is growing that in today's world, it might sound a little crazy. It might sound a little controversial, show me a better path to stopping mass shootings. And so that's 1 that we're excited about into the future. Certainly, we've got some opportunities to refresh our core business devices, whether it's the next-generation TASER, next-generation body camera. Those are all coming up in couple of years here. And then more and more, that can interact on police cars, things that can potentially limit car chases more and more in the VR space in terms of sensors, more and more in the counter drone space. So yes, hardware will continue to be a massive part of our business.

That's amazing. Back to some of the newer products, 911, given the acquisitions has been a focus, and you touched on those earlier internationally. Maybe just walk through like the land and expand you're trying to do there with prepared and Carbine what is the existing calling infrastructure is very huge. It's taken a long time to kind of disrupt this -- what is the can we see that accelerate a bit given where you are familiar.

Prepared, I think, is -- and you're right. This is a market that it takes the actual turnover of the call center technology and the call handling technology, those are big enterprise like changeover. So they take time and a lot of work. But what prepared does is it's a layer on top of all that. So it's agnostic. You can use whatever call handling you want and prepared has multiple kind of AI features that are very useful and anything from transcribing to localizing the language to sending a drone directly based on the GPS coordinates of the color that are taken from the metadata of the phone to nonemergency call handling, which is a new one, large LAPD was 1 of the early adopters of this product. Essentially, when you call 911 and you don't have an emergency, you wait on the call for like an hour someone talks to you. And now this is set up where an agent just answers the call gets all the key data and routes it to somebody who can help so that the emergency line stays open for emergency callers. And so this is like the early like over-the-top type of functionality, but we're delighting customers with it. And then the bet we're making is those delighted customers when they want to switch out their call handling technology, which a lot of them do, they will go to Carbine, which is the other acquisition we made the cloud native, modernized call handling platform, starting to win a lot in major cities, starting to be very disruptive in the market. So we're really excited about the combination of those 2 companies. And when you're involved in the front end of 911, it enables you to just these workflows, whether they're dispatch related, whether they're communication related, whether they're drone-related all of those, you can get ahead of if you're on the front end of the 911 call. And so that's the goal there.

Well, that's great. On the ALPR side, you've had that product for a bit here. Talk about that traction pipeline, market dynamics.

Yes. we were not the first to market in ALPR. Motorola originally was with the company called vigilant. That since kind of slowed down in favorable company called Flock. And Flock had some success in the public safety market. I think they've had some challenges as well around data privacy and security and so forth, and that's really opened up an opportunity for us as really the trusted brand around how we manage data and sensitive data and so forth. We're already a camera provider, so like making a stationary camera that detected license plates was something that was like 1 degree away from what we already do. So it made a lot of sense to enter that space. We've had a lot of tailwinds in the last year were pipeline is up over $100 million for this year on that product line. It's going to grow from there. We see enterprise applicability to it as well. So very excited about how that's going.

That's great. Good. There's been a lot of surveillance privacy concerns that have come up because of that. But the police really needs it because I think there's like 80% of crimes involve a vehicle. And so...

That's exactly right. And I think ultimately, 1 of the things that we've done a little differently than most of the vendors in our space is, we have what we call the EEAC it's ethics and equity advisory coalition. And these are the folks that are generally skeptical of the police. They're generally from activist communities, and we invite them in to put our products through the ring or everything from any inherent bias in the algorithms to how users will deploy weapons and everything in between. And we've built a lot of trust that way because we listen. We want our products to not only work for police, but to work for communities as well. And when we have representation from both populations, we get to the best products. And so when we show up at a City Council meeting and we walk through all of the checkpoints around privacy and security and the responsible design of the product, it carries a lot of weight. And I encourage everyone, there's this [great video the Mero Denver] put out, I think, in February or March explaining the cutover from, I think it was flock to Axon in that case, and all of the thinking that went into that and why that's the best solution for their community. And it really does a good job outlining kind of the competitive differentiators there. And so we're proud of that. We think -- we're proud of the fact that we're trusted in the space and we take that trust very seriously. So it's been a big part of why we've been successful.

That's great. One last question. You've been running the company for a long time. You've worked there for a long time in many different roles. You're a lot bigger than you used to be. What is currently though something you think the investor community either underappreciates or misunderstand?

Yes. I think a lot of it right now, as you know, covering software, it's like kind of lumped into the software basket at times. And we do have a big software business, but I think we started disrupting our own software business 2 years ago, and that's why we built the biggest AI business in public safety. And when you couple that with hardware, with this -- like the regulation of all these information security clearances and a high barrier to entry in a very effective sales channel I think like we envision ourselves as 1 of the big winners in kind of this AI revolution. And I think more and more as people dig in, I think they're starting to realize that and appreciate it. At the time, it kind of just get lumped in with with other companies that may or may not be similar in those ways. And so part of that's on us. [We've got to message] it better at times, but we're really bullish on what the future holds.

Awesome. Thanks for your time, Josh.

Thanks a lot. Appreciate it.