Axon Enterprise, Inc. (NASDAQ:AXON) This autumn 2022 Earnings Name Transcript







Axon Enterprise, Inc. (NASDAQ:AXON) This autumn 2022 Earnings Name Transcript February 28, 2023

Andrea James: Okay. Welcome, everybody, to our This autumn 2022 Replace. I hope you’ve all had an opportunity to learn our shareholder letter at Our ready remarks in the present day are supposed to construct on the knowledge and tables in that very sturdy letter. Throughout this name, we are going to focus on our enterprise outlook and make forward-looking statements. Any forward-looking statements made in the present day are pursuant to and throughout the that means of the protected harbor provision of the Non-public Securities Litigation Reform Act of 1995. These feedback are primarily based on our predictions and expectations as of in the present day and aren’t ensures of future efficiency. All forward-looking statements are topic to dangers and uncertainties that would trigger precise outcomes to vary materially. We focus on these dangers in our SEC filings. And earlier than we flip the decision over to Rick, we are going to play our quarterly earnings video, go forward and settle in. It’s a few 10-minute video.

Rick Smith: All proper. Thanks, Andre and Angel. Nice job. And to our buyers, I hope you may really feel the fervour that comes by means of in that video. And I’m simply so humbled to be part of this group. And the components is de facto work for us is after we deal with some of the vital issues we are able to remedy that will get us fixing the issues which can be additionally probably the most worthwhile issues for our clients. And that in the end is what places up the outcomes that you just see from final 12 months. So TASER 10 is probably the most subtle, correct and efficient TASER vitality weapon we’ve ever created. It’s an enormous leap ahead. Future generations could merely take as a right the existence of those actually succesful much less deadly applied sciences as if that they had all the time existed.

And like all technological developments that drive our society ahead, that’s our objective. Now the client reception has been incredible. We’re extremely humbled to be on the forefront of breakthrough expertise and societal change. Our 2022 standout efficiency with income up 38% and powerful profitability and money stream follows a number of years of remarkable outcomes even by means of tough macro environments. Axon’s historical past of superior execution could be traced to some key issues: our imaginative and prescient and mission; our long-term strategic considering, and that pulls simply an incredible group of passionate and proficient individuals and our relentless deal with clients, we construct upon a stable basis of buyer belief. And eventually, our conviction to double down on investments to drive unprecedented change and cumulative progress.

A chief instance of that is the foresight we had greater than a decade in the past to begin constructing a software program enterprise. In 2022, our recurring high-margin cloud income comprised greater than 30% of the corporate whole. It’s nice to see our long-term methods persevering with to be a — to that finish, I’ll take a second to speak about areas the place we’re at the moment investing to make sure that Axon continues to drive worth creation nicely past the 2025 planning horizon we’re sharing in the present day. The long run policing will embrace extra robotic safety, full cease. We stood up our Axon Air program just a few years in the past, and we proceed to spend money on that. We view drone and robotics expertise, at the beginning, as a approach to lengthen visibility and communications for first responders. Robotic safety is already enjoying an more and more vital position in search and income pure catastrophe response, crime and accident scene reconstruction and a brand new class of DFR or drone as a primary responder.

We see potential for robotic safety to play a larger position in de-escalation. Quite a few high-profile circumstances. We’ve all seen these tragedies on the information have impressed police departments to do every thing potential to cut back the frequency of use of drive incidents. Substituting a robotic for a human may help in lots of forms of situations. One instance is high-risk entry with SWAT groups. We see the chance to cut back the necessity for individuals as law enforcement officials to enter a house with firearms drawn, for instance. One other space we see coming is the fusion of clever ecosystems that combine with public security. How lengthy video for a number of forms of cameras and sensors to port into one system, each to help in real-time response and to help investigations.

We’re additionally enthusiastic about these current advances in generative AI and Practically 6 years in the past, we revealed a imaginative and prescient video with the concept synthetic intelligence may in the future extract key data from physique digital camera movies, which, along with a short oral description from the officer can be utilized to write down the police report for that officer. Nicely, that imaginative and prescient now not seems like science fiction. This imaginative and prescient was a part of our thesis and our focus in constructing out our cloud infrastructure over the previous decade, and we’re excited to see what capabilities we can leverage over the following few years to please our clients and to make our public tax {dollars} rather more environment friendly by automating many mundane but very time-consuming duties. And eventually, after we construct for the longer term, we collaborate with our trusted constituencies.

We work with governments, metropolis councils, public security and our Ethics and Fairness Advisory Council. This council supplies invaluable suggestions. They ask us the laborious questions and assist us to see round corners. We glance to them for help in guaranteeing moral design and that we proceed to work with our counsel leaders who’re every dynamic, extremely profitable and spectacular people in their very own proper. And with that, I’d now like to show over to our COO, Josh Isner, to speak in additional element in regards to the enterprise. Josh?

Josh Isner: Thanks rather a lot, Rick. Final August, I talked about 4 main areas of focus for the again half of 2022. And I’m happy to report that we delivered on all fronts. First, we’re driving self-discipline and prioritization throughout the enterprise. We are saying no to many alternatives. And after we do say sure, we win. The outcomes of our efforts embrace an exceptional near the 12 months with income up 44% within the again half and greater than 50% in This autumn alone. After which a game-changing product launch of TASER 10 just some weeks later. The second space I talked about was investing to penetrate our whole addressable market. In our shareholder letter in the present day, we launched a brand new TAM evaluation which outlines a $50 billion alternative and reveals progress in our core markets.

That core TAM, which incorporates our SaaS classes, cameras, skilled TASER, Axon Air, VR and a buyer base that features U.S. federal, worldwide and business enterprises grew from $34 billion to $45 billion in our up to date evaluation. A lot of the TAM we pursue in the present day is in areas the place our investments have helped place us as a frontrunner and as a pioneer. We see ourselves as the perfect positioned to ship on the way forward for policing that Rick mentioned a second in the past. Thirdly, I’m very happy to see us ship on our promise to generate sturdy money stream. For the total 12 months, we delivered $195 million in adjusted free money stream. This was an 84% conversion on adjusted EBITDA of $232 million. This allowed us to take care of a internet money place roughly flat to final 12 months, whereas investing CapEx to drive international scale in deploying $83 million in strategic ecosystem investments to make sure we keep on the forefront of business innovation.

Lastly, we’re assembling a world-class group from prime to backside, a few of whom you see on the decision right here in the present day. This group brings monetary self-discipline, a subsequent play mindset and the potential to drive outdoors outcomes for the following 5 years and past. We’re constructing a tradition the place we anticipate to ship on our commitments to workers, to clients and to our buyers. Wanting ahead to 2023, Working with Britney, we’ve streamlined our company-wide bonus metrics to 4 core gadgets. The whole group is incentivized to measure, drive towards and exceed the next: primary, income. High line progress stays a prime precedence. Quantity two, adjusted EBITDA margin, which Bindi will take you thru in a second. Quantity three, new market growth within the U.S. federal authorities and worldwide markets and quantity 4, new product adoption, guaranteeing that the merchandise we’re constructing proceed to be adopted and utilized by our clients.

We by no means stopped serving to our present buyer base to stroll up the worth chain and reap the benefits of our new software program options. Lastly, earlier than bringing lays out our 3-year plan to attain $2 billion in income, I needed to supply some shade on what we expect will assist us construct towards that milestone. Our path to $2 billion in income and past can be pushed by a mixture of promoting new merchandise into our present markets and by promoting present merchandise into new markets. We proceed to introduce new merchandise that ship worth to our present buyer base of U.S. state and native legislation enforcement, and we consider we are going to proceed to develop our share of pockets in that market. Objects similar to TASER 10, Fleet 3, digital actuality, Axon Information, Axon Dispatch, Axon Air and the multitude of add-ons will proceed to drive progress amongst our state and native US clients.

In parallel, we are going to proceed to develop worldwide, federal and enterprise, leveraging our core product portfolio. Not solely will the mixture of those two simultaneous motions create prime line progress alternatives for the longer term, nicely past 2025, however they can even present a number of paths to our annual income steering 12 months in and 12 months out. And with that, I’ll flip it over to Brittany.

Brittany Bagley: Thanks, Josh. It’s significantly gratifying to see broad-based energy throughout the enterprise and our sturdy 2022 execution. Each software program and {hardware} are driving sturdy efficiency. Notably, Axon Cloud now represents about one third of our enterprise, carrying best-in-class metrics on progress and internet income retention. In 2022, cloud income grew 50% to $368 million with a 73% gross margin. Annual recurring income has grown to $473 million and the online income retention is 121%. As well as, we’re extremely pleased with the incredible job Axon has finished promoting {hardware} and subscription bundles. 9% of whole income in 2022 was tied to a subscription in comparison with just some years in the past when lower than half of income was subscription-based.

Following on Josh’s commentary relating to the GAM alternative, our up to date evaluation extra intently aligns with our focus as a corporation. Axon’s core TAM of $45 billion throughout SaaS classes cameras, skilled TASER, Axon Air and VR displays alternatives and a buyer base consists of public security, U.S. federal, worldwide and business enterprise. On the identical time, the buyer private safety market stays a chance, and I’m at the moment recruiting for a everlasting GM to steer the enterprise. Nevertheless, as we famous in our shareholder letter, we’re refarming our evaluation on this market from $18 billion to $5 billion when it comes to whole TAM. Virtually $5 billion remains to be giant alternative that we’re all for pursuing, however we’re rightsizing our focus to higher replicate the traditional alternative we see in our core enterprise.

You’ll additionally observe that in This autumn, we acknowledged $8.5 million of cloud income that we had beforehand underreported. This income pertains to work that was accomplished in prior durations and was unrecognized as a consequence of our ERP implementation in 2021. Whereas the impression is immaterial to our financials, it did end in a fabric weak point. Remediating this can be a spotlight in 2023, and we’ve laid out an in depth plan in our 10-Ok. In opposition to the backdrop of an distinctive 2022 and an enhancing demand atmosphere, we’re thrilled to be sharing one other sturdy outlook for the 12 months forward. Moreover, now that I’ve had a while to dig into the enterprise, we’re introducing 3-year monetary objectives. 2023, my key monetary priorities for the 12 months are the next: first, executing in opposition to our monetary goal of delivering income progress of 20%.

Second, working in the direction of long-term gross margin enchancment. We really feel assured within the levers we are able to pull on gross margin over time, which embrace investing in automation, enhancing manufacturing effectivity additional rising our software program income combine and offsetting inflation with pricing. In 2023, we’re balancing these alternatives in opposition to ramping TASER 10 within the first half of the 12 months, and persevering with to compensate for our fleet in-car digital camera installations. Our Fleet enterprise carries a decrease margin upfront and transitions to high-margin recurring software program income over time. Third, controlling working bills by enhancing our monetary self-discipline. In 2023, we’re nonetheless digesting giant investments we made in 2022 and investing for progress. We’re guiding to twenty% adjusted EBITDA margin, which means 50 foundation factors of enchancment year-over-year.

Fourth, delivering on our ecosystem imaginative and prescient by leveraging strategic partnerships, investments and probably M&A. And fifth, setting us up to make sure we’re on the trail to hitting our 3-year objectives. Turning to these objectives. Our 2025 outlook for greater than $2 billion in income is underpinned by our confidence that we are able to ship on the 20% CAGR that we’ve communicated beforehand, and as Josh laid out the drivers. Over the following three years, we additionally anticipate to drive gross margins and leverage our working bills to attain roughly 25% adjusted EBITDA margins. We’re excited to display the growing profitability of the enterprise, and this represents vital growth of greater than 500 foundation factors. We’re additionally specializing in money stream and thru prudent administration of working capital and CapEx, we’re focusing on adjusted free money stream conversion above 60% on adjusted EBITDA.

This enables us to each spend money on our enterprise and ship enticing free money stream technology. Lastly, we’ve heard you on share rely dilution. And whereas we are going to spend the following few years working by means of present inventory comp bills, we’re committing to convey our dilution down on a go-forward foundation. Personally, I’m extremely energized by the runway we see over the following three years. Axon enjoys a compelling enterprise mannequin, delivering subscriptions to a steady and rising finish person market. We take pleasure in low international TAM penetration, sturdy buyer relationships, and progressive R&D capabilities which can be constructing options to satisfy a vital market want. With that, I want to open it as much as questions.

A – Andrea James: Okay. Thanks. And do we’ve everybody in gallery view? Sami Badri from Credit score Suisse.

Q&A Session

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Sami Badri: Simply have a pair. First one is for Rick. I believe Brent simply talked about that TASER 10 goes to be ramping up in 2023. However one factor I believe that you just specified by the video is simply the function set and what TASER 10 truly proposes to plenty of your clients would there be clients that really feel very strongly about possibly an early cargo or an early refresh of their precise TASER nonlethal weapon, or would they’ve to stay to form of the plan or subscription kind time line that they’ve already signed and are subscribed to?

Rick Smith: Nicely, nice query. I’d say I’ve by no means seen demand this sturdy in a brand new TASER launch in my historical past within the enterprise, which is nice information. The subscription mannequin does have already got our clients on an improve pathway, however I’m working intently with Britney and Josh on a customer-by-customer foundation, and we’re getting plenty of enhance for those who need to improve early. And so clearly, the income accounting on the — on our contracts with the a number of deliveries is a bit advanced. So we’re taking these on a case-by-case foundation. However we consider that general, we can discover methods to accommodate clients to have the ability to take early upgrades in ways in which additionally work for our shareholders and which can be worthwhile for us and assist our clients get this functionality sooner with out the necessity for any large onetime expenditures by simply having the ability to convey ahead and modify and clearly, we hope they’ll additionally improve to a few of our different new capabilities that we’re launching a few of our new VR and different issues.

So we expect this actually — the enterprise mannequin continues to arrange a win-win for us and our clients. And one nice instance is the flexibility for us to speed up the improve cycles.

Sami Badri: Obtained it. Subsequent one is for Josh. Josh, you talked about how compensation can be measured by 4 key drivers. One of many drivers was truly promoting different merchandise or cross-selling. Will that embrace ecosystem companions which can be a part of your Axon cloud function set additionally being pulled by means of within the gross sales movement? Or is that very remoted to simply Axon services and products?

Josh Isner: Sure. Nice query, Sam. I’d say any time we’re a gross sales agent, there’s a income impression after we promote by means of a accomplice’s product. However to set expectations, I believe that can be a comparatively small a part of our general income for subsequent 12 months. So it’s a part of it. After which while you have a look at the rep degree fee plans, we do have a brand new product gross sales group that’s basically compensated largely in momentum of each new merchandise and accomplice gross sales. In order that’s how we remedy for that.

Sami Badri: Obtained it. After which one final one for Brittany. I’m burning for the five hundred foundation factors of growth by 2025. Is that this going to be again half loaded throughout these three years simply due to the remark you made relating to a number of the merchandise, nicely, the feedback you made and the feedback made within the precise press launch relating to margin neutrality for a few of these merchandise. After which as they ramp up with software program, does that

Andrea James: I believe Sami froze, however I believe we received the gist of this query, so we are able to reply it.

Brittany Bagley: Sure. So I’m taking the gist of the query to be when would possibly we get to that 25% margin. And we’re actually wanting to verify we get there by 2025, Sami, like there are a bunch of these places and takes that we’re taking a look at each for 2023. And definitely, a part of attending to the OpEx leverage that we’ve talked about is attending to that $2 billion in income. And so we have to pull these levers, and it’s good that we’ve a number of completely different levers to get there, each from a gross margin and an OpEx standpoint.

Andrea James: Jonathan Ho at William Blair.

Jonathan Ho: Congratulations on the sturdy outcomes. I suppose I needed to dig just a little bit extra into your feedback about what’s underpinning your confidence for the 2025 steering. Is there one thing that’s possibly modified with a few of your market assumptions or one a part of the enterprise that’s proving stronger than you anticipated to provide you that further diploma of confidence to increase that 20% steering?

Josh Isner: Sure. Thanks, Jonathan. Truly, I believe it’s very a lot that we’ve plenty of confidence in all of our product classes and market classes that proceed to develop considerably year-over-year. And as I’m certain you’re conscious, we talked about prior to now that we do measure five-year normalized in as form of a forward-looking indicator of what income will seem like into the longer term and never solely on a gross foundation, however on a year-over-year foundation, and we proceed to be optimistic in regards to the outcomes we’re seeing and the 5-year bookings progress in that 5-year bookings progress charge. And so it’s a mixture of seeing plenty of actually thrilling indicators in our new markets, seeing our new product scale and seeing a number of the reinforcements when it comes to future revenues that the look into bookings present.

Jonathan Ho: Glorious, glorious. After which simply on the subject of the TASER 10 tempo of adoption, are you able to remind us what occurred when TASER 7 was launched? Do you are concerned in any respect about possibly clients delaying orders to buy the ten million. Simply questioning if there’s any type of linearity that we could fear about right here simply given the step perform enhancements that you just’ve made or above step perform enhancements.

Josh Isner: Sure, completely. With out going into an excessive amount of element there, I believe the ten forecast is exceeding 12 months one of many TASER 7 actuals from 5 years in the past. So we’re inspired to see that and it speaks to the worth and utility of the product. I’d say that it’s one thing we’re managing very intently when it comes to each early upgrades and new buyer shipments. And it supplies actually on path to satisfy our steering for the 12 months. We’re going to exceed our steering for the 12 months, however there are a number of paths towards that objective as nicely. So we don’t need to get too far out over our skis right here. We need to make it possible for the product we ship is a really top quality one which scales very nicely within the subject. And as we do this, we’ll actually proceed to ship all the opposite high-demand merchandise that we provide to mix for a very nice 12 months this 12 months.

Andrea James: Subsequent query, Eric Suppiger from JMP.

Erik Suppiger: So a few questions right here. First off, it seems like your TASER income was down sequentially I’m curious, was there any motive for that? And conversely, the Axon Cloud and the sensor revenues had been up sharply. What should be blamed for that? And I believe you had some provide chain constraints that had been an element final quarter. What occurred with these varied dynamics?

Josh Isner: Sure, completely. I believe it’s simply timing of shipments and orders. And I believe towards the tip of the 12 months as we seemed on the 12 months and the upcoming product launch. We needed to be considerate about with a product launch a few years away, simply sustaining flexibility for our clients as we knew some is likely to be within the subsequent one. And so we tried to handle that as finest we may. And we’re very excited to see the availability chain opening up on fleet. I believe you’ll discover that was an enormous merchandise when it comes to the quantity of fleet that shipped in This autumn. We anticipate that to proceed all year long. We talked about a number of the provide chain challenges traditionally. We’re cautiously optimistic that we’re previous form of many of the storm there and feeling good about having the chance to ship actually record-breaking quantities of Fleet 3 this 12 months and naturally, loads of tasers, physique cameras and a few of our different options as nicely.

Erik Suppiger: Okay. After which your — are you able to give us a common concept of how a lot of your put in base has been migrated to the TASER 7 at this level?

Josh Isner: I don’t have the precise quantity in entrance of me, however I’d say over the past 12 months, when it comes to the quantity of CW shipped, TASER 7 was above 80% to 85% of the overall there. So I believe that speaks to the truth that a lot of the market had moved over from our legacy good weapons into TASER 7. And now we’ve the chance to, in fact, improve all of our early TASER 7 clients. However as Rick talked about, I believe there’ll be some which can be newer that can be as nicely. So we’re very excited to get as many case tens on the market as we are able to.

Andrea James: Keith Housum at Northcoast.

Keith Housum: As we have a look at the form of popping out, first off, you guys introduced a particular knowledge that’s going to be deployed. After which second, if we have a look at previous rollouts of the TASER weapons, there’s clearly has been some challenges when it comes to the gross margin recognition in these first few quarters. So maybe you guys going to deal with steps you guys have taken over the previous a number of years to determine and deal with the bot challenge and what you guys are doing completely different with this rollout to guard your gross margins.

Brittany Bagley: I believe it goes to every thing from how we design the product to how we design our manufacturing capabilities. We’ve talked about how after we get to scale, which is able to occur within the second half of the 12 months. So we’re calling it out as just a little little bit of a possible headwind within the first half of the 12 months. However as we get to the second half of the 12 months, it will likely be gross margin impartial. And I believe the group realized rather a lot from the T7 launch and took these learnings into T10 and we’re considerate and cautious on the gross margin entrance.

Rick Smith: It’s just a little bit there. The Fleet is the primary main product to launch underneath the brand new regime with Hansberitz working our R&D and John Graf and his group working engineering and constructing in and others and NPI. And mainly, what we noticed with Fleet, we injected in all probability six to 12 months of further prerelease testing to actually validate the product. And that paid off in an enormous manner the place Fleet 3 is a really subtle product, however it’s had among the many lowest out-of-the-box return charges and buyer bugs reported of any product we’ve ever shipped and TASER 7 — I’m sorry, TASER 10 went by means of very comparable. It has been in testing with a extremely automated manufacturing line for in all probability 6 to 9 months main into the launch 12 months.

So the extent of testing in comparison with beforehand after we had been possibly a much less mature firm and nonetheless making that transition from the extra entrepreneurial days. that there’s simply much more time, effort and expense that goes into the upfront testing, however that’s paying dividends within the stability and reliability at which we’re capable of scale these with out a number of the challenges we had with T7 particularly, come to thoughts.

Keith Housum: Nice. And has the restart transport?

Josh Isner: As on TASER 10 will begin transport in March. .

Keith Housum: In March. Okay. After which simply if I may, Brian, maybe you place the context or shade relating to the convertible observe providing you guys did when it comes to plans that you just guys have to make use of that money?

Brittany Bagley: Sure, in fact. One, I’d say, as you may inform, as a result of it’s been just a little little bit of time. Now it was very a lot opportunistic from our facet to strengthen the stability sheet and to provide ourselves a bit extra flexibility from a capital standpoint. And we expect we discovered a time to get enticing phrases available in the market. So we’re very happy that we had been capable of proactively get forward of that. After which I believe you heard me speak about how we’ve been investing in our ecosystem companions, how we’d probably think about M&A as we glance going ahead. And so we need to make it possible for after we discover one thing that’s interesting from an M&A standpoint that we’re capable of be on our entrance foot and transfer rapidly and neatly going ahead on that.

We spent plenty of time on that convertible providing speaking about what would possibly we search for from an M&A standpoint as a result of that was prime of all people’s thoughts. And so just a little shade is, I believe, in the event you have a look at our M&A historical past traditionally, that’s in all probability a reasonably good indication the place we’re actually searching for both expertise or expertise that may help our future product highway map and/or our moonshot objectives and mission.

Brittany Bagley: Paul Chung at JPMorgan.

Paul Chung: So simply one other follow-up on form of the tempo of working leverage by means of 2025. The tempo accelerates a bit in ’24 and ’25 to get to that 25%. How will we take into consideration the OpEx base form of relative to gross margin growth? And long run, can you continue to get to that 30% mark you’ve talked about prior to now?

Brittany Bagley: Sure. So I believe we’re actually wanting on the 3-year steering that to not say we’d not get to 30% sooner or later. However I believe that is actually meant to type of substitute that and like, okay, we’ve a plan in a concrete approach to get to 25% by 2025, after which we’ll begin searching from past there when it comes to the place we are going to go. So I wouldn’t say we’re calling that, however possibly we’re phasing that out and specializing in what’s actionable and in entrance of us and what we actually see a path to proper now, and that’s the 25% in 2025. I believe you’re appropriately decoding that we’ve received some places and takes in 2023. And so we’re not placing a stake within the floor particularly on any 2023 gross margin steering. However we do anticipate to see each enchancment on gross margin and OpEx leverage to get to that 25%.

Maybe over time with just a little bit extra underneath our belts, we be capable of quantify the items a bit extra. However for proper now, we’re simply actually wanting on driving each of these collectively to hit that 25%. And once more, it’s about 50 foundation factors of leverage in 2023. So you’re all appropriately selecting up on extra of that enchancment will are available in ’24 and ’25.

Paul Chung: Okay. Nice. After which only a follow-up on money stream. Are you able to increase on form of the large upside relative to prior information and also you’re above your goal form of conversion charge this 12 months are again in 2022? After which how will we take into consideration free money stream conversion in ’23 and the places and takes there? And is not less than 60% conversion long run, considerably conservative given the robust macro backdrop, you guys hit 80% plus mark. Is that — can we be at that 8% mark fairly persistently?

Brittany Bagley: Sure. No, these are all glorious questions. I would go in reverse order, which is I don’t need to say that we’ll be at that 80% plus persistently. We’re actually — we’re seeking to be at that 60% plus persistently. And the explanation that we’re there quite than the 80% plus, though we did an exceptional job on free money stream technology this 12 months is — in the event you have a look at ’21, I’d say we did a much less phenomenal job on free money stream technology. And so in the event you have a look at type of ’21 and ’22 collectively, you truly get again to that roughly 60, 65-ish p.c free money stream technology on common between these two years. And a number of the issues that result in which can be investing in working capital and investing in stock as we proceed to develop our {hardware} enterprise, persevering with to spend money on CapEx like automation.

We’ve got a variety of these places and takes that we’ve checked out and primarily based on locations that we’re investing in our money stream. We actually suppose that, that 60% goal on an annual foundation is what we’re searching for, would possibly imply we do higher some years. However I believe as you look over a 3-year interval, and as we’ve seemed again, that’s in all probability the proper expectation degree to set. Whereas we’re rising on the form of charges we’re rising at. So if we’re rising at 20% plus anymore, would we revisit that free money stream goal? Sure, actually. However at these forms of prime line progress charge, we expect that’s the proper stability when it comes to what we’re flowing by means of.

Andrea James: Will Energy at Baird.

William Energy: I’ve received a few questions. I suppose I’m going to begin with TS-1, in all probability for both Rick or Josh work, I suppose, just a little over a month previous TASERCon. I’m wondering if in case you have any further suggestions feedback you would share from businesses which were utilizing the system within the subject, any feedback round degree of use, effectiveness, et cetera. And I suppose the second half would simply be with regard to produce chain parts for each the units and cartridges as we transfer by means of the 12 months right here. A – Rick Smith So I’ll begin off. We proceed to get nice suggestions from the sector. I believe we’ve now had one thing approaching 40 or so completely different makes use of. I believe we’ve had — the one which I discussed at TASERCon, the place it was fired at a working scenario at one thing like 40 ft and the particular person stumble ahead.

and the wires broke, however the company then closed within the different offset of TASER 7. So in the end, TASER on the day in that use. We categorize that as a partial effectiveness of the T10. After which we did have just one different case the place it was not efficient, and that was one the place it was in quarter use an provided the primary dart and end up the second officer had not been educated on the TASER 10 but and really ran in and received between the operator and the topic earlier than we half second artwork. And so one of many issues we took away from that’s truly ensuring we work with our companions that they prepare all officers and the way the brand new system features. So the excellent news is we’re persevering with to see very excessive effectiveness. We — since TASERCON, we introduced to the most important metropolis chiefs and the Main County sheriffs with simply very vital curiosity throughout the board.

I talked to at least one main county sheriff that has had a good variety of shootings already this 12 months with farms, they usually mainly ran by means of with me of the circumstances they’ve had this 12 months, they suppose Azure 10 may have modified the end result in each one among them, which was a reasonably exceptional assertion. And I used to be truly with one other main metropolis chief in the present day that instructed me in her company, she thinks TASER 10 may have alleviated about one third of their taking pictures as she enumerated them. So we’re persevering with to get very constructive suggestions. I’m about to go on a world tour to the primary one I’ll do because the TASER TAM launch and begin speaking to some worldwide clients. The place I believe that is likely to be the best progress potential internationally as a result of internationally, we don’t see many businesses individually issuing TASERs the best way they do in the USA.

However TASER 10 may attain a degree of functionality the place it may turn into the first defensive weapon. And I believe which means in lots of international locations the place they don’t have many weapons within the arms of the general public ones are carrying the firearm. In these international locations, we’d truly see them start to maneuver to TASER 10 as their main weapon on very clear. We’re going to see that taking place within the US.due to the gun tradition and the prepared availability of firearms and most of the people, they may proceed to hold each however this enhanced functionality in several international locations may actually be a market-expanding phenomenon. After which what was the second a part of your query? I believe I used to be going to let Josh take it.

Josh Isner: Sure, it was nearly element availability, I believe. Is that proper, Will?

William Energy: Sure, provide chain parts, each for units and cartridges, what does that seem like?

Josh Isner: Sure, completely. So our provide chain group, as all the time, has simply finished a incredible job staying forward of the curve in what are much less difficult occasions than possibly a 12 months or two in the past, however any time you launch a brand new product, there are plenty of provisions and shifting components main as much as that. And in the end, we really feel actually good about our capability not solely this 12 months, however persevering with to construct out our automation capabilities to extra exponentially increase our capability into the longer term. And so actually, we’ve loads of stock to help our income steering and past for this 12 months and subsequent 12 months, we’re aggressively planning for even increased demand.

William Energy: Okay. Nice. If I may simply add a query on software program, continued sturdy traction throughout Axon Cloud. Perhaps form of two components there, too. What’s form of driving the continued DIMs adoption? It seems like that continues to speed up, I suppose, in some respects. And I suppose, in tandem with that, possibly simply any form of replace what you’re seeing with respect to information and different merchandise out of form of the core proof class?

Josh Isner: Perhaps I’ll begin with the dentist query after which hand it over to Jeff for information. However the motive I need to take this one will is to provide Jeff an enormous shout out for the work he’s finished over the previous few years. He’s basically constructed a group that not solely has delivered on the core ecosystem, however continues to construct out the final mile forms of options and merchandise that make the product, not solely that rather more worthwhile to our core market, but additionally extra enticing to our form of up-and-coming markets in federal and worldwide. And so his group has simply finished a terrific job persevering with to determine alternative and market wants after which executing nicely on the plan to ship these capabilities and simply that flywheel continues to lend itself to extra buyer curiosity and extra completely happy clients that may purchase extra over time. And in order that’s been the spine of our dems adoption. And possibly Jeff, I’ll take it over to you on information.

Rick Smith: Positive. No, that’s superior to listen to and I couldn’t agree extra in regards to the energy of every thing we’ve finished to proceed to make the general suite extra enticing, each in mixture and within the piece components. And I believe simply constructing on what Josh mentioned, that additionally combines with the ability of our OSP flywheel mannequin as a result of as we proceed to each add new capabilities into the bundles and advert the place acceptable new tiers of the bundle that simply makes it, once more, simpler and simpler for businesses to make one easy option to get entry to this very Amazon Prime or Microsoft School basket of each {hardware} and software program advantages that they purchase at a value that feels nice to them even for the subset of the parts that they know they need to use upfront.

After which as they go ahead, all these further advantages of basket be happy as a result of they’ve already made the what feels to them like a superb deal value for the basket and that drives the flywheel. And on prime of that, who aren’t but in these applications, all a care are an increasing number of and extra seeing the worth of these add-ons and incrementally rising ARPU in addition to including new logos. On the report facet, once more, we proceed to be each humble and actually excited and optimistic in regards to the continued progress and trajectory. Simply type of utilizing the identical numbers we’ve talked to you about over the past couple of quarters. with progress. Now we’ve over 50 businesses that characterize over nearly 18,000 sworn officers stay on not less than report one module of Axon Information.

And that features now 16 businesses who’re already utilizing the product to completely substitute their legacy RMS. And that features, at this level, main cities similar to Tucson and Baltimore, Virginia Seaside and Fresno.

Andrea James: We’ve got three analysts left within the queue and

Josh Isner: AJ, simply actual fast, I believe will deserve a shout out for the perfect T-shirt on the decision in the present day. That’s the ten outlets and 45 ft from the TASER 10. So nice trend sense.

Andrea James: So we’ve three analysts left within the queue, and we’re completely happy to go previous the highest of the hour, so we are able to ensure we get to everybody. We love the engagement. Jeremy Hamblin, at Craig Hallum.

Jeremy Hamblin: Congrats on all of the momentum within the enterprise. So I simply need to begin with a high-level query. By way of ideas round M&A, strategic investments, you guys have a reasonably sturdy stability sheet, that has been constructing I needed to get a way on phrases of what you is likely to be taking a look at on a go-forward foundation when it comes to scale, measurement of potential alternatives, whether or not it’s strategic funding or M&A? After which to get a way, are there any pointers that you just’re taking a look at when it comes to whether or not or not a deal is accretive or dilutive Clearly, you’ve form of modified a number of the viewpoints on stock-based comp and so forth, so to cut back future dilution. I needed to get a way for the way you guys are taking a look at that.

Brittany Bagley: Sure. No, it’s a terrific query. For us, it truly is about both merchandising expertise or groups that slot in nicely with our mission and/or our enterprise mannequin. And so there are a number of parameters that we wish to consider firms on. And so it’s all the time type of a multifaceted equation for us as we expect by means of them. That’s to not say that we aren’t taking a look at whether or not or not one thing is financially enticing to us. however it might be throughout completely different metrics. It may considerably enhance our TAM. It may assist us get conviction on supporting that 20% progress lengthy, lengthy, long run? Or it might be accretive to our gross margins or EBITDA margins. So there isn’t type of one set of issues we’re taking a look at, however we’re actually taking a look at ways in which we are able to discover firms that tuck into our ecosystem.

We’re seeking to actually combine the expertise and current a holistic Axon resolution as we glance ahead. After which I’ll simply observe that, that dilution quantity is de facto type of an natural dilution quantity. So I believe we’ve a robust stability sheet. I believe we are able to actually use money for that. If we had been going to make use of fairness, I’d think about that individually from what we’re doing from simply an inner inventory comp expense standpoint.

Jeremy Hamblin: Nice. That’s useful. Then a few product questions. So first, coming again to TASER 10. I needed to get a way, you provided some pointers round bundled pricing. However needed to get an understanding for versus the TASER 7, what your form of internet ASP would possibly seem like on a go-forward foundation vis-a-vis form of 10% increased ASP. Clearly, there could also be increased cartridge use given the product. In order that’s one on the TASER 10. After which secondly, you had a reasonably large quarter in Axon Fleet. I believe, by far, nearly double what you’ve ever finished in 1 / 4. In truth, nearly as a lot as you’ve finished in a few years. So I needed to simply get an understanding of — was that a few actually large orders? Or is there one thing particular to that product that you just’ve actually gained traction and now possibly we’re previous sure life cycles on prior contracts the place you guys are simply gaining extra share? Any shade there could be tremendous useful.

Josh Isner: Sure, completely. Thanks rather a lot for the query. Good to see you, Jeremy. On TASER 10 ASPs, we’re not going to get too prescriptive there, however I’d say it’s best to anticipate an uplift over earlier generations and — that’s half because of the hand value and in addition half because of the variety of cartridges within the bundle relative to earlier fashions. And so I believe we revealed the checklist costs on the web site, so you may form of derive from that what kind of uplift to it will likely be in our bundles. So there’ll be a slight inherent low cost related to any product in a bundle, however at a excessive degree, that’s form of the story with TASER 10. After which with Fleet 3, no outsized orders like simply plenty of quantity, and it’s best to anticipate that to proceed and and possibly even increased ranges this 12 months.

The product has nice product market match. It’s a well-built, well-designed product. the ALPR performance related to it’s in excessive demand. ALPR is one among our fastest-growing software program add-ons throughout the enterprise. I believe traditionally, you would possibly bear in mind our Fleet One system, which was kind of a physique cam connected to a windshield after which fleet two was the second the place we received to parity — however then Fleet 3 was the second the place we actually surged forward of the market and have become the best — the biggest promoting in video system and public security. And so truly, I believe that’s a path you may anticipate from plenty of our merchandise over time the place we attain parity with one model, after which we actually speed up forward. And so we’re actually excited in regards to the progress with Fleet 3, Blake Bullock, our product supervisor and our whole group on Fleet 3 has simply finished a incredible job there, and we’re actually pleased with the progress.

Nonetheless plenty of work to do, however Encouraging to see that product take form as the best demand in-car video system and public security.

Rick Smith: Sure, only a fairly suppose Fleet 3 is like the right instance of the ability and the great thing about us being each an IoT {hardware} units firm and a cloud software program firm underneath one roof as a result of we are able to ship an end-to-end expertise that not solely functionality-wise, however then economically actually feeds off of itself as a part of our flywheel. And so not solely is Candy arms down the perfect straight up {hardware} and automobile digital camera system that’s ever been launched. However together with the revolutionary enhancements we made to democratize entry to nice ALPR, it makes it a very enticing software program add-on to purchase that they’ll both purchase the entrance or they’ll simply add at any level later with simply the flick of a swap, and the entire thing works finish to finish the with the remainder of our suite. .

Andrea James: We’ve got two of us left. Elisa Shreve is on for Tim Lengthy at Barclays. Elisa, you’re off mute, however we’re not listening to something come by means of Okay. Let’s go to Josh Riley from Needham.

Josh Riley: It looks as if there’s extra alternative for you guys to have some aggressive takeaways in physique cams within the U.S. primarily based on our discussions with clients. Is that what you’re seeing in the present day? Or would you characterize extra of the expansion in 2022 as a greenfield with officers who didn’t have a physique cam in any respect?

Josh Isner: I believe, Josh, the great half is it’s a mixture of each. We proceed to promote excessive volumes of physique cameras to new clients, however we additionally proceed to see present clients purchase extra and deploy extra broadly. After which, in fact, by an increasing number of of our options which can be on prime of the physique digital camera and so — in peripheral merchandise like fleet and digital actuality and drones and so forth. So it’s a pleasant wholesome combine throughout the board, and we’re very enthusiastic about that. We need to diversify the variety of methods we are able to obtain all these outcomes. And I believe we’re doing that, and we’re very enthusiastic about that development.

Josh Riley: Obtained it. That’s useful. After which are you able to simply remind us, is there any seasonality round any of your merchandise or simply the general enterprise that we must always concentrate on as we’re modeling income for 2023? And the way may the TASER ramp impression the primary couple of quarters of the 12 months’s TASER income, if in any respect?

Josh Isner: I believe, once more, like we’ve received a variety of methods to ship in every quarter. And so it’s — in fact, if we begin out with sturdy shipments of TASER 10, then that makes the trail simpler, however that’s not our solely path. And so we’re enthusiastic about the truth that between all of our {hardware} merchandise and simply the rising base of software program income that we’ve within the enterprise that we’ve been considerate about our steering right here. We consider it’s very achievable. We proceed to anticipate to develop 20% year-over-year and quarter-over-quarter. So we’ll proceed to to execute right here and make it possible for between TASER shipments and all of our different merchandise that we’re very considerate about how we information.

Brittany Bagley: Sure. And particularly, I’d say, Josh, we’re not calling out something distinctive on the form of the 12 months. And so I’d anticipate fairly typical seasonality for us. even with T10 coming in, like we nonetheless have very nice sturdy T7 efficiency. And so we’ve received plenty of places and takes to Josh’s level, and I’d say, in your mannequin, take into consideration regular seasonality.

Andrea James: Elisa, ought to we strive yet one more time? Okay. Go forward. Let’s have Rick Smith shut us out.

Rick Smith: All proper. Nicely, once more, it’s all the time such a pleasure to have the ability to share outcomes like this. Josh, Brittany, the entire group, a number of the different names you heard, lots of people working actually passionately and laborious to show these leads to. And I couldn’t be extra excited to see how this 12 months unfolds. TASER 10, Fleet 3, our software program merchandise actually beginning to scale themselves as you’re seeing within the monetary outcomes. So plenty of thrilling issues look ahead to. We look ahead to seeing a few of you speed up in April at our shareholder assembly, which I consider is arising in Might. After which we’ll be again to share Q1 outcomes right here in just a few weeks as nicely. So thanks, all people. We recognize the chance to be just right for you on such an incredible mission.

Andrea James: Good bye.

Comply with Axon Enterprise Inc. (NASDAQ:AXON)


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