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

Great. Good morning, everybody. Welcome to the Axon fireside chat at the Goldman Sachs Communacopia and Technology Conference. I have the privilege of introducing Brittany Bagley, who's the Chief Financial Officer and Chief Operating Officer at Axon. My name is Mike Ng, and I cover Axon here at the firm. We have about 35 minutes for today's presentation. But first and foremost, thank you so much for being here, Brittany.

Thank you for having me. I always like coming here.

I'm thrilled about that. To kick things off, I wanted to ask about Axon's portfolio and key growth drivers. Axon is the market leader in U.S. public safety technology. Historically, Axon has done very well in TASER, body camera, evidence management software. Today, about 1/3 of the software comes from non-evidence software like 911, Fusus and the AI Era Plan. How are you thinking about the key growth drivers from here and what the strategic priority is for the management team?

Yes. No, it's a great question. And it's really nice to be able to share some of those stats with all of you because these are businesses that we have been talking about and investing behind in the last couple of years. So it's great to actually be able to share some of those growth numbers. I think the really important thing to remember about our products and as we've evolved the product portfolio is that it really is an ecosystem and everything works together and so everything gets better together. And so, as we look towards the future, we're not prioritizing any one product category over another. We continue to be incredibly pleased with how TASER and body cameras are anchoring the portfolio. But then we've added on counter drone through our Dedrone products. We've added on 911. We're adding on these other software pieces, and they all just reinforce each other. So as we look at our priorities, it's really just to make these products continue to get better, continue to solve problems for our customers, fill in gaps in the ecosystem where we see them, continue to evolve our AI products because we're only at the very beginning of what AI can do. So that's a big area of investment for us. But what we do is we tell you about things well before they actually become meaningful to our P&L. And so the things that we talk about are things that are the drivers for the next couple of years. So then we start telling you when they become meaningful to our P&L like some of these software products. But that's the goal is just keep evolving that ecosystem.

Let's talk a little bit about business momentum, bookings, which is a new metric that you complemented in terms of a 5-year bookings metric starting last quarter. That number grew over 30% in the second quarter of '26. Gross bookings grew a little bit more slowly. But could you just talk a little bit about the differences between gross bookings, the new 5-year normalized metric? How do you think investors should evaluate this new normalized growth metric alongside your contracted backlog?

Yes. So we gave the new 5-year normalized because we were getting a lot of questions about what role duration of our contracts was playing in bookings. How much of our bookings growth was because we were getting really long-term contracts. And so we wanted to provide this metric as a way to help all of you look at our 5-year normalized bookings. What that really means is that when we look at 5-year deals, we take out any of the years that are 6 and beyond. So you're really just getting a number for 5 years. Now if we do a deal that is shorter than 5 years, we don't gross it up. So this is the total bookings that will happen in the next 5 years. We thought that would be a helpful metric, both to get to the duration piece, but also as we go forward to help give some comparisons for as we grow our enterprise business, not all of those deals are going to be 5-year deals. Some of our international deals aren't 5 years. So give everyone a way to look at it. We did it in a quarter where -- or a year where it shouldn't make a particularly large difference. So we're not expecting there to be a dramatic difference as we look at the year between our normalized bookings and our gross bookings. You could see normalized being higher sometimes, you could see gross being higher sometimes. In Q2, normalized was higher. Gross was lower at 20%. Gross was also comping a 50% growth in bookings from the prior year. So you have to balance some of those things out. As we look at the year, we really look at both gross and normalized bookings, but we do look a lot at normalized bookings and we look at our future contracted bookings. We had given the color that we expected our normalized bookings to grow 30% plus. We expect our future contracted bookings to grow well above that. You can back into what that means for gross bookings, but it shouldn't have a material difference for the year between gross and normalized.

Great. One common question that I also -- I often get from investors is just about Axon's TAM and how penetrated Axon is within its TAM. A couple of things that we could tease out here. But maybe to start out, how much does Axon make of a state and local police budget today? And is there opportunity to grow that percentage just in terms of.

Yes, absolutely. I think depending on the department, we're somewhere between 1% to 5% of the police budget today. So pick 3% in the middle, if you want. I think at some of our largest customers who are buying everything, you get up to that 5%. And those aren't necessarily our numbers. One of the great things about our customers is they publish a lot of this information, so you can go find customers who lay out their budgets and how much Axon is a part of that. So not a huge part of their budget today, lots of room to continue growing inside of the budget. Police budgets have continued to grow, but we have grown much faster than that, and that is really because we're increasing our share of wallet. We increase our share of wallet by coming up with products that solve real problems for our customers that they need, that they want to use. Depending on the product, some of them are really mission-critical. Some of them are lifesaving. Some of them are about transparency. And as we look at AI, some of them are even more about ROI and actually generating efficiency for the department. So there's different reasons that we're able to do that across our products. But I think we estimate we're about 15% penetrated in our state and local TAM today. And then our overall TAM is about $159 billion, $160 billion from a TAM standpoint. Lots of detail that we can get into all of you on how we get to that TAM. We try to be pretty conservative. We try to really have a look at only products that we sell today in countries or markets that we can actually apply it. So I know there's lots of ways to do TAM. We try and be pretty conservative and think that it just shows that there's a huge opportunity in front of us.

Great. I would have thought that Axon was relatively fully penetrated in TASER, yet last quarter, you had your largest individual TASER order in company history. Could you talk a little bit about what's driving this TASER momentum? Is it the TASER 10 refresh? Is it expanded number of seats, if you will?

Yes. And it differs depending on market. So the U.S. deal that we were excited to call out last quarter, like our largest ever TASER deal still happening 3-plus years into our refresh cycle. That was an upgrade to TASER 10. So great to see that we still continue to have customers moving to TASER 10, still a lot of opportunity to do that. But then we also called out international deals having TASER in them. International has had some real reception to TASER 10. TASER 10 is -- it has higher efficacy and more use cases. And so that's really appealing to some of our international customers. And so that's where you're seeing us get into markets that we were not in before.

Perfect. I wanted to ask about enterprise. Enterprise bookings tripled year-over-year last quarter, and you're currently conducting trial programs for newly launched Axon bodies of the Workforce Mini and retail and healthcare organizations. So first, could you talk a little bit about the feedback that you're getting from your enterprise customers? How do you map the time line from trials to full-scale deployments? And what are the main enterprise use cases that you guys are most excited about?

Yes. Great question. So there's a couple of ways in. It usually really is with the trial. Some of our customers trialed our older Axon Body workforce camera, which was a little bit larger than our new ABW Mini. ABW Mini really launched at the beginning of Q3 for us. So nothing in our Q2 numbers from an ABW Mini standpoint. And so we see customers either trialing the Axon Body Workforce and thinking about upgrading to ABW Mini or they were waiting to get their hands on ABW Mini and they will trial ABW Mini. What do they like about it? They like the transparency. They are seeing that it helps them understand situations, improve efficiency. There's training opportunities off of that. There's also deescalation capabilities coming off of it. Sometimes if you just see someone wearing a camera and you know you're getting recorded, you behave a little bit better. So that is also something that they're seeing. So depending on the customer, they're seeing different use cases, but it's all sort of in that training efficiency, interaction with customers or patients. And so that's where we're seeing the benefit. I would imagine how long trials depends on the customer. I would say some large customers will even have phased rollout. So they won't do all of their locations at one time. And so that's typically what we see. It goes from trial to phased rollout. So can be fast in terms of what they see, but they usually want to collect data and then make that transition.

Perfect. You talked about some of the momentum in international with TASER 10. Overall, international bookings have been on a tear, 3x year-over-year last quarter. Maybe expand a little bit about the drivers behind the international momentum. How are you adapting your go-to-market in these regions? And anything else you would highlight in terms of whether it's T10 momentum or something else?

Yes. I think back to where we started, it's the whole portfolio and the whole ecosystem working together. T10 definitely has momentum internationally. Our counter drone products are very interesting internationally. And I would say our AI products are really interesting internationally. So we called out that some of our international customers were some of our largest AI deals in Q2. So we're seeing that adoption. Now with our AI products, we have to do things like localize for forms and language in those countries. So we have a little bit of work to do when a country decides to come on to those AI products. But again, I would say we have more things than ever that are resonating with our customers. And so that is what's allowing us to get into international, not just with TASER, with TASER and with our other products.

Great. On the topic of counter-drone, some of the U.S. federal agencies have intent to acquire counter-drone products and sensors. And Axon, I think, was named as a participant in one of the DHS programs. Could you maybe just talk a little bit about that and the opportunity there?

Yes. It's a pretty nascent market. So there's an enormous opportunity. I think as drones become more and more visible and more and more used, you can imagine that counter drone goes along with that. So I think for every major event, whether or not that's something like the World Cup and it's a sporting event or parades or really anything you can think of where there's a large gathering, you're going to start to see counter drone be a requirement to have there just because you don't know what could happen. So it's going to really start to be a necessary product for deployment. That's true for state and local. It's going to be true for Fed civil. So we were really excited to see those contracts come out. We were excited to be named as part of them. Still too early to tell what that means in terms of how they're splitting up those dollars across products. but it's why we talk about there being such an opportunity inside of Counter Drone and why we get the question sometimes like, well, was it just a World Cup event? It wasn't just a World Cup event because there's going to continue to be events and sporting events and gatherings of people. And so it continues to be relevant.

Right. And for the World Cup in that quarter, you guys had over $100 million of quarterly revenue for counter Drone, which to put that into context was bigger than body camera, I believe, in the quarter. So maybe if you can just elaborate a little bit on that. I mean, obviously, the World Cup is such a large and seminal event. Like what else could be going on from an asset protection or asset monitoring perspective that could help that?

Yes. Yes. I mean I think -- I mean, you could imagine that there's like single events that maybe could pass that. I don't know if the Olympics is going to be a big deal. But I think it's less going to be like there's a single event that has to like be bigger than the World Cup and more that this is just becoming a standard required capability for everyone to have when they're doing events. And so as we continue to grow the business, it's really -- there's probably -- I mean, I'm sure there could be like an event we call out again in the future, but it's not going to be built on that. It's going to be built on the rest of our business proliferating out to all of our customers. But I am really excited to say that we passed that $100 million because we acquired this business 2 years or so ago. It was nascent. We got lots of questions of like how big is this going to be? Is it only going to be for DFR? So it's really validating on the vision and the strategy that we set for counter-drone.

Great. If we could pivot to the AI Era Plan, certainly something that has emerged as a true standout. Revenue -- AI revenues, I think, grew 700% year-over-year last quarter. And 3 of the top 5 AI Era Plan deals last quarter came from international customers. So this is really something that's seeing global demand. Could you unpack what's driving this growth, talk about customer adoption and feedback? How important is Draft One in driving AI Era sales?

Yes. Draft One is important because it was really one of our first products that came out in the AI Era Plan. As a reminder, we sold the AI Era Plan as like everything that we do in AI, you can get. And so Draft One was really the first big product inside that probably along with transcription. And then we continue to innovate and add more products. So we went from Draft One to Form One. Translation has been incredibly popular inside of our AI Era Plan, and there's more to come. There's always more to come with our product road map. But you can imagine we're really just getting started with what we can do with AI inside of that product portfolio. So I would say customers continue to believe that we will innovate and we will be leading, and we will come up with product ideas first. And so they both like the products that we have in, but they also like the fact that we are basically future-proofing AI for them. They don't have to be out deciding who the next great start-up is or what they're going to get. They know that we're going to do it, and we're going to do it in a way where we have thought through the ethics of it. We are willing to work with their DAs. We're willing to really make it a product that they can use in their ecosystem. I think that's some of the stuff that's really exciting about the AI Era Plan. Back to our earlier conversation, it also allows departments to get efficiency, which is a really nice conversation to have. Draft One saves time. I think we put this out a couple of quarters ago, but we went through and said it can save officers up to 4 hours a week. That's real-time savings, especially relative to the price of the AI Era Plan. And that's before you get into things like translation and the other products that we have. So it drives real efficiency. And the point on the international customers is they're seeing it, too. This doesn't just resonate in the U.S., it resonates with our international customers. Now you have to do the work to make it apply. Everybody has different forms that they have to fill out, but just huge runway there.

Right. So AI Era Plan is a subscription. You get all of the latest software and products coming out of Axon that are AI related. Is there anything that you could share as it relates to product road map for AI Era Plan or how you think about pricing, right, especially as you add more features and capabilities to AI Era? Like where are we now? Where do you think it could be?

Yes. I would say that there's lots of development going into the AI Era plan. Nothing I can share right now. We did talk about Axon Gravity back at Axon Week, which is helping connect all of the systems together. And we do have IACP coming up in October, which is usually where Rick likes to talk about some of the cool new things that we're putting on the product road map. But I would say you can imagine like just like translation, you can imagine we're doing more and more things on the body camera or with the video that comes off of that. Those are areas that are really ripe for us. And then what the next part was?