Axon Enterprise, Inc. — 2024 Q1

Hello, everyone. Thank you for joining Axon's executive team today. I hope you all had a chance to read our shareholder letter, which was released after the market closed. You can find at investor.axon.com.

Thank you, Eric, and thank you all for joining us here today. I want to welcome you all to our first quarter 2024 earnings call. We have kicked off what is shaping up to be another incredible year at Axon. You saw me talk about my vision in the video we just showed you, and I'm energized by the updates we're bringing you today.

Thank you, Rick, and good afternoon to everybody. I'm humbled to share more about another excellent quarter at Axon.

Thank you, Josh. We're very proud of the results again this quarter for both revenue and adjusted EBITDA. We had 34% top line growth on top of 34% growth in Q1 last year, supported by our cloud and services revenue, which grew 51.5% year-over-year. This came from growth in both users and premium product add-ons driving upsell.

Thanks, Brittany. I think we're all up in [ gallery ] with you. We'll take our first question from Meta Marshall at Morgan Stanley.

Congrats on the quarter, guys. I wanted to dig into Draft One and just get a sense of how long you foresee kind of departments needing for approval processes and whether you kind of see that once a couple of major departments sign-offs that the approval processes can go much quicker. And then maybe just a second question for Brittany that I'll include this upfront. Just the contribution of Fusus to the year? Or just what you're kind of accounting for between Fusus and Dedrone for kind of the inorganic contribution to the year?

Yes. Thank you very much for the question. Rick, did you want to lead us off? I saw you speaking there.

Yes, I had myself on mute there. Yes, I would start by telling you, we've introduced a lot of exciting products over the years. This is probably the most enthusiasm I've seen for any product we've ever introduced. I mean, police officers did not get in this career to be writing reports, and we've done a lot of background work with our Epics and Equity Advisory Council as well as district attorneys and others looking at what the risks are and testing against those. We do make sure that we're putting speed bumps in there. So obvious that we are reviewing the final report. It's really important that it's theirs.

Yes. Just add to that, ultimately, there will be a sales cycle associated with it, just like anything in selling the government, but I think we're already seeing some early orders come in and the pipeline is building. We think in the second half of this year and especially going into next year, we'll see this start to really contribute to in-quarter revenue and ultimately at a high margin as well.

I'll take your second question. Great question. I would say both Fusus and Dedrone are small. They are growing fast but they're immaterial to our top line and really immaterial to our overall growth rate. So we've incorporated that all into the guidance we're giving for the year.

We'll take our next question from Alyssa Shreves at Barclays. Alyssa are you on? Might be muted on your phone. We'll skip for now. We'll go to Will Power at Baird.

Congratulations on the strong Q1 results. I guess first question really probably for whoever wants to take it. Obviously, strong mid-30s percent revenue growth in Q1. If you look at the full year guide, while raised, it does imply some deceleration. So just love to get a perspective on any level of pull forward into Q1 versus conservatism for the remainder of the year? Any broader thoughts on that front would be great.

Yes. Thanks a lot, Will. Nice to see you. I'd say, as usual, we like to see more of the year materializing before we get out over our skis on total revenue for the year. So we're off to a nice start. We see the pipeline very strong. We're excited about what Q2 and beyond will hold.

Yes, I would just add, nothing sort of embedded in there other than the fact that we're lapping a very, very strong year last year.

Yes. That all makes sense. If I can just ask a quick second question on TASER. Maybe -- can you just update on how the automation process is going? Where you are with respect to having enough supply to meet demand? Maybe any other color on the gross margin commentary there because as you automate and over time, that should help gross margins, but it sounds like it's probably the initial investment maybe that's impacting it. Just I wanted to get some color on that front.

Yes. I think you sort of summarized that really well, which is we're in this balance between focusing on ramping capacity and really working on cost-down initiatives, and we continue to see better demand than we've even expected for TASER 10. And so we continue to be in that area where we're really ramping capacity. You saw that come through in 33% growth in Q1. I mean that was because we had more supply available. So I think the team is doing a really nice job getting that capacity online and supporting that customer demand.

We'll go to Keith Housum at Northcoast.

Question for you, Josh here. In terms of maybe a seasonality to the type of business. You guys have grown so much over the years. And if we look at last year fourth quarter, it was a tremendous bookings quarter for yet, obviously, not so much this quarter. Probably the first time I remember a sequential decline. Maybe to talk about how you're thinking about the seasonality of your bookings as we look for the next -- this year and the next several years?

Yes. Yes, Keith, great question, and I appreciate it. I think ultimately, a very similar story as Q1 last year, where bookings were kind of the low point of the year in Q1. Its a hard quarter to really rack up bookings for a couple of reasons.

Okay. And a follow-up question in terms of federal. Federal last year had another great year -- or a great year for bookings. Are we seeing [ loans ] start to deploy here? Or are those going to be it a little bit longer, I guess, deployment schedule? How do we think about that kind of contributing to your overall revenue growth?

These -- a lot of these large federal bookings, they are phased into multiple years. And so we tend to recognize revenue when the product is deployed or when it's shipped on the TASER side. And so of those phased deployments that are previous bookings, there's just some noisiness and when the shipments are sent and when the deployments are done, but Federal is in that bucket of when I said we had a really, really healthy pipeline for the rest of the year. We're feeling great about where the federal business is headed. We've got some large opportunities here in the next few quarters and certainly expect federal to register another awesome year.

Thanks, Keith. Next, we have Josh Reilly at Needham.

So following this body cam issue with the New York Department of Corrections from a competitor solution, the NYPD, as we know, is a customer for you guys in other areas of their police force with body cameras. Can you just speak to how quickly you could move in, if asked with the replacement product there? And maybe just from a higher level, like what have you done from an engineering perspective to ensure that your cameras don't catch on fire from battery malfunctions?

Yes, Josh. Thanks a lot. And the first thing I want to say about this is there is a captain that was injured as part of this. And so our thoughts are with him -- it's really a bad scenario when this type of stuff happens and you indicated there might be a business opportunity here. We'll see what happens with that. We're certainly -- we feel good about our ability to deploy products. We've invested a lot into them. We've invested a lot into the deployment, and we have the opportunity, of course, we'll be ready to go.

Got it. And then just a quick follow-up on the TASER revenue strength in the quarter here. Is there anything to call out in terms of TASER 10 domestic strength versus international being stronger? I know you had some big opportunities there for the 7 in Australia. And then just balancing that versus the automation coming on. Was the automation of benefit in Q1 because I was thinking that was a little bit more tilted for the automation equipment taking hold in the second half.

Yes. Maybe I'll cover the demand and then we talk about the automation after. I mean, TASER 10 is a monster, Josh, like it's the most popular TASER device we have ever brought to market. It's out cycling the TASER 10 -- or TASER 7 demand by double. We continue to see strong indicators from all over the world that this product is the one that is a meaningful step in outperforming a firearm, and it puts us on that moonshot journey that we've talked a lot about, and it's a credit to Rick and our entire TASER pillar for all the great work they're doing to ramp this product and do so with high quality.

We'll go to Jeremy Hamblin at Craig-Hallum.

I wanted to talk a little bit more in-depth about -- so the acquisition as well as just the new product opportunities, you've had a this is a pretty substantial increase in your TAM, and you've had that on a couple of occasions here over the last 6 or 7 years, but this is among the most significant. And just getting a sense for Dedrone, which gather there's quite a bit of sensitivity out there in how this is going to be used, potential for pushback in the community.

Yes. Let me take that one to get started. A few years ago, when we were standing up Axon Air, our business leader there, had an important insight that as important as drones are, probably even more important is going to be how public safety can deal with the new threats that drones pose. And that was before what we've seen recently in world events, where in modern warfare turns out these small consumer-level drones are a real game changer, but they're also presenting new threats to everyone from stadiums to critical infrastructure to major events.

I would just say from a timing standpoint, echo Rick fully. I think there's a question of, is it from a financial standpoint, is it 2 to 3 years from now? Is it longer? I mean it will certainly be a really big pillar of our business, and you can see us investing heavily behind robotic security. I think we are really seeding a long-term growth trajectory, though, a business that's going to be material for many years in the future, more than targeting a year or 2 years from now.

Got it. Helpful color. And then just following up here on Draft One, which the demand for this sounds incredible. In terms of thinking about the competitive set, there are lots of other solutions out there, although maybe not quite rolled out in the way that law enforcement is looking for just yet.

Well, this is the entire reason that we invested in a record management system 6, 7 years ago was entirely because we saw this coming, but the ability to not only have your video evidence and your written records in one system, but to be able to extract one from the other would be critical. And I think we're really seeing that come to bear. So we always want to stay a little paranoid about competition. It's a very competitive market.

Just building on what Rick said, as always, we obsess about our customers, while being healthily self-aware about the competitive landscape. And that's one of the reasons we talk about the ecosystem so much as you were talking about. We've had transcription of the audio from body camera video at scale with a very large number of customers building up and up for several years now. We've got the footprint of both our body cameras themselves and them and the growing momentum in records. And all that together is sort of the perfect tee up that makes Draft One possible.

Next, we have Trevor Walsh with JMP.

Rick, maybe one for you. It was great to hear all the commentary around kind of opportunities around AI coming out of Axon Fleet. I wonder if you could just ponder or kind of pontificate a little bit for us around the kind of nature of data and AI versus the sensors that sort of drive that. Is there any worries for a product for such as Fusus, for example, it's relying on not just Axon proprietary data, but things coming from other places where vendors don't necessarily start to play as nice in the sandbox when we kind of realized -- or [ I think I ] realized that AI is kind of the new -- or the data for AI is kind of the new gold. So that become an issue in terms of people kind of sharing that data kind of on a more longer-term basis.

Well, we certainly haven't seen it yet. And most of the partners that are sharing in through Fusus, I mean those are really members of the community, businesses, other enterprises, churches, schools, partner government agencies that are sharing that data primarily because they want to be safer, and they want to be able to have that data, put to use to be able to help police do their jobs better and identify whether it's criminal activity or solve crimes. So we haven't seen people sort of pushing back against using that data responsibly to protect them better. Jeff, I don't know if you have any color you might want to add on that?

Sure. No, and thanks so much for the question. Again, I mean, you're right on both fronts, right? One is it is the case that having aggregated access to large amounts of data are a really powerful differentiator. And one of the things -- one of the reasons why we put so much into everything we've built over the last years, and it's one of the things that we think enables us to keep building and building in differentiated ways.

That's terrific. I really appreciate the color there. Maybe one quick follow-up, maybe one quick follow up, maybe piggyback a bit about some of the Dedrone comments. How much do you intend to kind of lean into the more counter UAS counter-driven type use cases, whether that's for [ safety ] or some of the non kind of[ public ] safety customers that [indiscernible] either?

Yes. I would say we intend to lean in pretty hard. So our goal is to protect life. And to the degree that drones are being used to threaten lives, we see that as 100% in our mission set to try to create new ways to protect from those risks. So we see this could end up being a real opportunity where Dedrone not only is useful to our existing customers, but Dedrone is interesting to a new set of customers, for example, major sporting stadiums, critical infrastructure and indeed, military, both U.S. and internationally, they have a customer set that is new for us and can bring our ecosystem into those customers as well.

Up next, we have Joe Cardoso at JPMorgan.

First one here, I just wanted to follow up on the Dedrone questions. Obviously, you've been working with them for a while. And this isn't the first time you pulled the trigger on acquiring a partner of yours that you guys think there's value in owning. Just curious why right now is the right time for you guys to acquire them? Has there been any change in terms of like -- I know you talked to the time line, but maybe is there some type of change that maybe we don't appreciate. And then maybe just -- can you just talk about has there been any change relative to your thoughts around participating? Or sorry, which parts of the technology stack you want to participate as it relates to the drone opportunity and whether that differs in what you're doing currently around like TASER and body cams. And then I have a follow-up.

So Jeff, do you want to take first crack at that one?

Maybe I'll do timing of why now, and then Jeff can talk about the technology pieces.

Yes. And then just building from there, again, great question about the ecosystem. I've personally spent my sort of 3 decades across lots of the businesses I worked in on these kinds of ecosystems that are always this delicate balance between thinking about where do you build by partner, et cetera. And those things evolve over time and you're always trying to decide at each layer of the stack, where they're the best opportunities to really, really partner well with other fantastic teams and other fantastic providers and where, over time, can you get the most leverage by self-building or by growing organically.

I appreciate the color there. And then maybe for my second question, just on the CapEx raised today. Maybe you can just talk us through what's driving the confidence to accelerate your investment plans this early into the year. Like obviously, you talked about it as being like a slower bookings quarter, but the pipeline is growing. So maybe you can just dive into that why pull the investments today versus 90 days in the future, right?

Yes, sure. So I would focus you on the part of Josh's commentary when he said it's the best pipeline we've ever had coming out of Q1 and really drive you there. I think what you're hearing from us is like, yes, we had slightly softer future contracted revenue in Q1, but that is not at all indicative of how we see the year going, which I think you can see from our guidance and our commentary. And so as we look out at pipeline, as we look at the demand for TASER 10, as we look at the 33% growth in Q1, we basically said that in order to keep meeting that demand, and we don't want our customers to have to wait too long for our products that we needed to invest in more capacity.

We'll take our last question from Mike Ng at Goldman Sachs.

I have two as well. First, just on Axon and Cloud Services, it was up $12 million quarter-on-quarter. Can you talk a little bit about how we should think about the sequential growth in this line? Is this low double-digit dollar growth sequentially still a good way to think about it? Qualitatively, is this more user base driven with the growth in the installed base across body and fleet? Or are we beginning to see more software and, I'll call it, ARPU uplift from records and standards in dispatch? And then I have a quick follow-up.

Yes, so our step-up quarter-over-quarter was almost $13 million. I would say part of that was in Q4 last year. We had a really big step up. Part of that was from revenue recognition. We've talked particularly about how with records coming online, some of that revenue recognition is going to be a little bit lumpy. So we had a particularly large quarter in Q4, and then that leads to a slightly smaller step Q4 to Q1.

Great. And then I was wondering if you could comment on some of the Axon wins that have been reported in the media -- how is RCMP field testing going? Are there any themes across the wins in Cornelius, North Carolina or Puerto Rico? I know some of them were from a large competitor. So any themes in terms of product or costs that are driving those wins?

Yes. Thanks, Mike. Great question. I'm going to give you a little bit more of a general answer on them. I think we've said this a lot about our international business that we aren't going to be and we're not aspiring to be the kind of low-cost vendor in the space. We believe what we've built is really, really valuable. And we believe that we can perform and our products can perform in the field just as we say they will in the written solicitations. And that's not always the case for other vendors in this space.

Thanks Mike. I thinks that's it for questions today. We'll turn it over to Rick to close this out.

Awesome right. Well, thanks, Eric, and thanks again to all of you for joining. I'm really proud of our entire team and the incredible execution they continue to show. We'll be really excited to come to you with more updates later this year, and we look forward to seeing you all again in August.