Axon Enterprise, Inc. (NASDAQ:AXON) Q4 2023 Earnings Call Transcript

Axon Enterprise, Inc. (NASDAQ:AXON) Q4 2023 Earnings Call Transcript February 27, 2024

Axon Enterprise, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Erik Lapinski: All right. Hello, everyone. Thank you for joining Axon’s executive team today. I hope you’ve all had a chance to read our shareholder letter, which was released after the market closed. You can find it at investor.axon.com. Our prepared remarks today are meant to build upon the information and the financial tables in that letter. During this call, we will discuss our business outlook and make forward-looking statements. Any forward-looking statements made today are pursuant to and within the meeting of the safe harbor provision of the Private Securities Litigation Reform Act of 1995. These comments are based on our predictions and expectations as of today and are not guarantees of future performance. All forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially.

We discuss these risks in our SEC filings. We will also discuss certain non-GAAP financial measures. A description of each non-GAAP measure and a reconciliation of each non-GAAP measure to the most directly comparable GAAP measure can be found in our shareholder letter as well as in the Investor Relation section on our website. All right, every quarter we play a video to kick off our call. We love how this helps you get a closer view and feel for our business. To start us off today, we’re going to play a video we put together that hits on a bit of what we talk about when we tell you about our moonshot. It’s a little under three minutes. Let’s pull up the video. [Video Presentation]

Rick Smith: All right. Thank you, Erik, and thanks all of you for joining us today. Welcome everyone to our fourth quarter 2023 earnings. It’s great to come back to you with another incredible year in the books for Axon. We kick off these calls with those videos to help you understand what we do. Sometimes seeing these kinds of scenes brings out different emotions. But that’s what our customers face every day. And making those complex situations safer for everyone involved is what energizes us in our work. I’ve talked about my abhorrence for violence many times in the past. [Technical Difficulty] everyone who chooses to come to work here. We envision a world where violence is just far out thought, but we are constantly trying to find new forms of technology to make this a reality, and we’re really proud of the progress we’ve made over the last year.

First, with seemingly small things like adding a warning sound to TASER 10 to help communicate to someone on the other end that something unpleasant is impending with the hopes that that person will rethink their decisions and alleviate the need for a use of force action at all. And adding a watch me button to our body camera so that an officer can proactively request a second set of eyes for them during their most high risk situations. Next, we thought a bit more outside the box, introducing individually targeted probes, enabling far more effective range on TASER 10 and making our innovative TASER technology more effective in more situations. And we reimagined real-time operations, introducing two modern communication capabilities with two-way voice communication through our body cameras to help complex decision trees in real time.

As we look ahead, we’re solving for higher level challenges like enabling better decision making in potentially life threatening encounters, or effectively expanding a police force by reducing the extensive time that they spend on paperwork. And we envision accelerating the speed of the entire justice system. We’re innovating in diverse areas from robotic security to Generative AI to virtual reality. And there’s really so much more that’s still left for us to do. When I think back to the video we just showed you, think about what would happen in those situations if an officer didn’t have one of our TASER devices or was not wearing one of our body cameras so we could all understand what unfolded and why. It excites me that we made huge strides and that our technology is driving better outcomes.

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Q&A Session

I think a lot of what we’re working on now has the opportunity to become so pervasive in the future, it will be hard for us to remember life without it. Highly disruptive technology, that’s the beauty of it. When you get it right, it quickly becomes difficult to imagine what things were like beforehand. But we’re not always going to get it right by ourselves. We rely heavily on feedback from our customers, their challenges in the long term, rather than what’s simply in demand today. While present needs do matter too, I spend most of my time with our customers on the vision beyond tomorrow, which is what I believe will drive our growth for not just the next one to five years, but the next decades. What energizes me in my time with customers is they provide us with the best and most actionable feedback on our roadmap, the snags and problems we may run into, and they help us think through the way to overcome those challenges and the best avenues for us to deliver them what they need.

Most critical for us is making sure we have the right people to help us deliver for our customers. When I look at our team, I know we have attracted some of the best and brightest to come and work here. If it’s not me meeting with a customer about a new product we have in development, it’s somebody from our team. Our team works together, relays feedback and understands our common goal. We don’t accomplish what we’re doing in silos. We join forces across the company and together with our customers. This goes beyond our current team, extends into key partners like Fusus, who we’re thrilled is now part of Axon. Our partnership with Fusus began a few years ago and we’ve really been impressed with their people and the product they’ve built. I’m traveling with their founder as we speak today.

Together, we’re taking our real-time operations to the next level and opening our ecosystem to an even larger network of sensors and devices which will unlock entirely new solutions for our customers over time. Before I hand it over, I’d like to say that I’m grateful that I’ve been trusted to lead this company for the past 30 years and that we’ve been able to maintain same drive and energy we had when we started. I might be a little atypical as a CEO as my day-to-day responsibilities align more with my background as a Founder than as a Senior Manager. I’m focusing on what’s next. What’s always important in driving any enterprise from a startup to a $20 billion public company is that we need to encourage people to be the best versions of themselves, but also to challenge each other, just as our customers will challenge us, and to share in a common mission with a culture that encourages us to do our best work.

I’d like to provide one last comment on something near and dear to me. We’ve talked about our intent to invest in our new headquarters over the past few years. And we mentioned last quarter, we were revisiting those plans after we had paused work in September — I’m sorry, in the summer of ‘22. Part of revisiting that has been working to bring our vision of a corporate campus to life. We would like Axon to remain headquartered in Scottsdale where we own a piece of land and where we have built this business. I love Scottsdale. However, it’s not clear that Scottsdale wants Axon as we’re seeing the political environment become more challenging and frankly, anti-development. It’s unclear if we will get the approvals we need to execute our project.

So we’re exploring several geographies and other options. As a result, and it may take some time before we have a definitive decision on our next steps. We will keep you updated in the coming quarters as we resolve our plans and we make progress. Now, I know we’re not a startup anymore, and that also means we need people focused on execution, making sure that what we do is viable and is executed to world-class standards. And I am beyond fortunate that Josh and Brittany and their teams here to help me in our execution. And with that, I’ll turn it over to them now. You’re up first, Josh.

Josh Isner: Thanks a lot, Rick. And good afternoon to everybody. I continue to believe there is no better place to be than at Axon. We are building the most talented, outcomes-oriented team in tech, knowing that that’s what it will take to deliver on our moonshot of protecting life and reducing the number of deaths in civilian police encounters by 50% over a 10-year period. 2023 marked another promising step in that direction. We just recorded our fifth consecutive year of greater than 25% revenue growth, and we beat that far by a good amount, coming in at 31% year-over-year. Looking ahead to 2024 and beyond, the opportunity is right there in front of us. We’re steeply ramping TASER 10 and Axon Body 4, we are building transformative new products and we’ve added Fusus and Sky-Hero, which together grow our estimated TAM by over $13 billion to a total of $63 billion.

And I’d just like to say welcome to the Fusus team. This is your first earnings call as part of Axon and we’re thrilled to have everybody on board. In the past, I’ve shared my vision on Axon’s priorities over the next three to five years. We are focused on delivering the technology ecosystem of public safety globally. This approach supports our growth in two powerful ways. Number one, through new product introductions, which expand our ecosystem and deliver new value to our existing customers. And number two, through expansion into our new customer verticals, where our existing products empower new users to deliver safer outcomes and drive a clearer ROI. This framework has led us to invest in opportunities with federal and international governments, justice, corrections, and in the enterprise space.

We finished the year with record federal bookings as we continue to see rapid adoption of both hardware and software within the federal civilian market. Likewise, the new Axon Body Workforce camera, or ABW as we call it, has driven strong pipeline in several segments within enterprise, such as retail and healthcare. One shining use case within the healthcare space is Fairview Health where they are trialing ABW with nurses as part of their commitment to patient and staff safety. A key to our success is that we continue to lead the market in innovation. It’s no surprise when you listen to Rick that we believe our ability to innovate is a competitive advantage for Axon. Jeff’s leadership in our product org combined with Rick’s visionary thinking and foresight is an unmatched combination that gives us the luxury of doing two things in parallel, building the next wave of world-class products for public safety and identifying the most synergistic partners in the market, such as Fusus and Sky-Hero.

Our standards are high and yet year in and year out, our products — our product team sets a new bar. Before I turn it over to Brittany to go through our operations and financials in more detail, I’d like to congratulate several of our teams on some substantial recent achievements. First, the TASER 10 lead team led by Pat Madden. We are now four quarters in, and our order rate is pacing at more than four times what we saw with TASER 7. And then secondly, with Axon Body 4 product line led by Jason Hartford and David Mesri, we shipped more than 100,000 units in the second half of 2023, only two months after announcing the product. While these products started in R&D, they end in the hands of our brave customers, And a lot of collaboration amongst functions, or as we call it, #JoinForces, happens in between.

Our teams deliver outsized societal outcomes together. As you can see, we’re not slowing down. We are incredibly humbled by the trust our customers and shareholders continue to place in us and we remain committed to holding up our end of that bargain. 2023 was a record year and we are so proud of the team. But we are equally proud that that same team moved on from 2023 58 days ago. As we like to say, we’re on to the next play. Over to you, Brittany.

Brittany Bagley: Thank you, Josh. As Josh mentioned, 2023 was another great year for us with revenue growth of 31% year-over-year and Q4 revenue growth of 29%. We continue to be incredibly pleased with all segments of our business and continue to see enormous opportunities in front of us. In addition to continued strong top-line growth, we expanded our profitability with a 21% adjusted EBITDA margin for the fourth quarter and full year. This represents 160 basis points of improvement versus 2022, largely driven by leverage in our SG&A function. As we’ve talked about before, we continue to focus on expanding gross margins and expect improvement over the course of 2024 as we see the benefit from enhanced efficiencies with TASER 10 from manufacturing automation and cost initiatives as well as continued benefits from software growth.

We’re also going to continue investing in our R&D to support the opportunities we see in front of us and to make sure we can keep delivering strong growth for years to come. You’ve heard today and read in the shareholder letter the significant growth opportunities we see in federal, international, and enterprise, as well as for Axon Air, real-time operations, and new software capabilities to name just a few. We think we’re hitting a nice balance of investing for the future while also increasing profitability and driving towards operational excellence. While we have leveraged SG&A, we have also continued to invest in expanding our sales and marketing teams to address new markets, improving our internal technology capabilities, and bolstering our financial strengths, including the fact we remediated our material weakness this quarter.

This positions the business well to continue growing and scaling. Now, as I turn to our guidance, we expect 20% to 24% total revenue growth, or $1.88 billion to $1.94 billion for 2024. This is quite strong guidance for us and is the result of increased visibility for 2024. The strong visibility is driven by TASER 10 demand, as well as the continued strengths in our future contracted bookings, which has reached $7.1 billion as of the end of Q4, growing 54% year-over-year. Our software, which provides us with strong visibility, recurring revenue, and attractive gross margins, also contributes to the strength of our guide. In Q4, our ARR was $697 million, which grew 47% year-over-year. We continue to have a 122% net retention rate and strong customer satisfaction.

We expect adjusted EBITDA of $410 million to $430 million, which implies an adjusted EBITDA margin of approximately 22%, up another 100 basis points from this year, on moderate gross margin improvement as well as continued SG&A leverage. This guidance includes the impact of Sky-Hero and Fusus, though we aren’t going to comment specifically on either of their financials. Finally, last year we put out a 2025 target model of $2 billion in revenue and 25% adjusted EBITDA margin. As you can see from our 2024 guidance, we’re pacing to well exceed our revenue target in 2025 and tracking nicely to our adjusted EBITDA margin target. As we look to 2025 and beyond, we expect to continue targeting a 20% annual revenue CAGR and a 25% adjusted EBITDA margin.

We think this is achievable and represents a very healthy, sustainable, and attractive long-term model. We’re comfortable in maintaining this long-term growth rate based on the opportunities we’ve discussed and think this is the right balance of investing back into the business and generating attractive profitability. Also, while we have fantastic organic growth opportunities, we’re very excited to be able to strategically make acquisitions in markets that will continue to support and grow our TAM like we have just done with Fusus. Finally, we are also continuing to target 60% free cash flow conversion on adjusted EBITDA and approximately 3% average annual dilution from stock compensation expense for 2025 and beyond. As you can tell, we’re all incredibly excited about what we can deliver in 2024 to both our customers and our shareholders.

We’re looking forward to another great year. And with that, I would like to open it up to questions.

A – Erik Lapinski: Moderators, can you bring everyone at the gallery view? Thank you. We’re going to take our first question from Trevor Walsh at JMP.

Trevor Walsh: Great. Thanks, Erik. I’m going to thank Erik and thanks everyone for the question. Maybe for either Josh or Rick. Excuse me. I appreciated the TAM outline in the shareholder letter as far as how that’s expanding and kind of where Sky-Hero and Fusus are coming in. But there wasn’t, unless I missed it, I didn’t see any details around the Axon Body 4 Workforce kind of component or contributor to that. Can you maybe just give us generally kind of how you see that opportunity unfolding and especially curious to see kind of an adoption rate there, given it’s a kind of a new vertical or user experience and how — does it look like the body camera kind of adoption rate within law enforcement or does it kind of feel different from what you’re seeing?

Rick Smith: Yeah, Trevor, thanks a lot for the question. I appreciate it. The first thing just to clarify is within the enterprise section of our TAM. That’s where the Axon Body Workforce would roll up. And we could certainly talk through that more offline. And in terms of just interest in the camera, we had a launch event. We had some customers in town for it and some trial partners in town. I think this year is truly about, hey, how do we make our early customers really successful on this product and then build from there. It’s not much different than the playbook we ran in public safety. And so much of it comes down to just having these early maven type customers that will help us not only build our brand in that space but also help us build the next iterations of the products.

And so that’s really what we’re focused on. We really do believe the future is bright in enterprise. We’re seeing that early on in the bookings results. We’re not quite ready to share anything more on those at this point, but over the coming years, we do believe enterprise will become a bigger and bigger part of our business.

Brittany Bagley: And just to jump on a little bit, so we gave enterprise a $15 billion TAM in our update, so that’s where we see that playing in. And a lot of the Body Workforce camera really came because we were getting feedback from our customers as we were trialing it, largely in retail and in healthcare, about sort of the size and the weight and how they wanted to wear it and how they wanted to use it. And so we really took that feedback and we reflected it in the updated product. And that’s what you see, We announced Fairview Health as an early customer there but we’re really looking to be able to provide this solution into the retail and the nursing part of the market where they’re facing a lot of challenges today around associates and nurses feeling safe in their work environment.

Trevor Walsh: Great, thanks for the color, I appreciate it. And congrats on us all at finish of the year.

Erik Lapinski: Thanks, Trevor. We’ll take our next question from Joe Cardoso at JPMorgan.

Joe Cardoso: Hey, good afternoon everyone and I’ll echo — also echo my congratulations on the results and thanks for the question. So it’s great to hear that TASER 10 momentum is tracking where you left off last quarter, but curious if you could just touch on how you’re thinking about the margins tracking for the product. If I take a look at TASER gross margins, looks like you had some stability over the past two quarters. Just curious if we should interpret this as the floor for the segment? And then how should we think about the trajectory for the remainder or as we rather progress through ‘24, particularly in the backdrop of you guys — you’ve been talking about it for a couple quarters now, bringing on automation, the cost efficiency. So just curious how you’re thinking about the margin trajectory there. Thank you.

Brittany Bagley: Yeah, great question. Thank you. We had a one-time event in TASER in Q4 where we had a bit of a manufacturing issue largely related to a batch in March of last year. And so that is impacting our growth margins in this quarter in TASER by about 420 basis points. So absent that one-time impact, they would still be down slightly on mix, but they would look much more stable sort of quarter to quarter. And so as we go into next year, that one-time impact comes out and that’s where you start to get the commentary about how the TASER gross margins, overall we expect them to improve and they really are improving around our efforts for TASER 10. As TASER 10 mixes in, that’s an impact, but then we’re offsetting that by the fact that we’re getting benefits from automating the line and doing cost-down initiatives as we go through the year.

Rick Smith: Yeah, and just to jump in and reiterate there, the issue was on TASER 7, not TASER 10 that led to this warranty reserve. And one thing I would point out is TASER 7 was developed prior to the current regime under Hans Moritz that’s leading our whole hardware engineering group and we’ve seen substantially more rigorous free market validation and as a result with AB4 and the Fleet 3 and so far with TASER 10 we’ve actually seen more robust field reliability, lower return rates. So just want to make sure we didn’t conflate that warranty issue was T7, previous design, not the current T10.

Joe Cardoso: Got it. Totally makes sense. And then maybe just quick clarification on that front just in terms of the TASER 10 improvement, not to harp on it, but maybe just in terms of the improvement you’re expecting through the year, is the expectation that it happens more linearly or is it more back-end loaded? Just curious just in terms of, like, as you bring on this automation equipment, is that more subject to being in the back half or is it more first half? Just curious how we should think about linearity through the year?

Brittany Bagley: Yeah I think there’s a number of different initiatives going on including the automation and then cost-down initiatives. And so I would expect you see that starting to roll in as we go through the year. So it won’t be all back-half weighted, but obviously you’ll see the cumulative impact of that more in the back half as we get all of those executed.

Joe Cardoso: Thanks, Brittany. Appreciate all the color.

Erik Lapinski: Thanks, Joe. We’re going to go to Jonathan Ho at William Blair next.

Jonathan Ho: Hi, good afternoon. Congrats on the strong quarter. Maybe just starting out with a high level question. How should we think about the impacts from the Fusus and Sky-Hero acquisitions? I know you’re not giving financials, but in terms of your ability to either sort of approach your longer-term vision or to cross-sell the products, just wanted to get a sense of the synergies that you see here with these acquisitions?

Brittany Bagley: Yeah, I can start and I’m sure that the team will want to jump in. I would say that these are acquisitions that we’re really doing for product and the team and the opportunity far more than we’re doing specifically for synergies. So I really want to focus everybody on sort of the long-term market opportunity and customer opportunity that they bring in. All that said, I think there’s some real benefits as we bring in these products and these teams to having access to our customers and our channels and all of the experience that we’ve had, scaling up these types of businesses, as well as giving them access to some of our infrastructure and support on the G&A side. And so, in a lot of ways, we’re hoping that that really allows them to run faster and accelerate what they’re doing.

Rick Smith: Yeah, and starting to respond there, I had muted myself. The other thing I would say is on each of them, they are highly strategic. So Fusus, what they really bring is, I described them at a high level, like the Switzerland of cameras. They’ve integrated with every imaginable sensor and CCTV camera, and we met them. We were introduced by customers who really loved what they were doing and said, hey, we want you to integrate Axon cameras onto the Fusus map because we don’t want to have to open a different map and a different interface for every different vendor of cameras that we’re using. And that’s a lot of work to build something, Fusus has stayed away from building first-party cameras. And we really do want to keep that solution very open so that it can be broadly compatible with virtually any type of sensor, any type of camera in the market.

We think that’s critical to expanding the utility of our ecosystem to our customers. And then on the Sky-Hero side, long-term, this is probably not going to be big revenue in the short-term, but they are one of the, if not the leading tactical drone maker in the world used by special forces, by SWAT teams, and we think if we want to eradicate violence from society, we’ve got to get out of this mindset that the way you stop a person with a gun is sending more people with more guns and have a gun fight. And we think drones and robotics have a huge role to play there. I’d say that’s probably a little longer term. It’s not going to be a 2024 or maybe 2025 revenue impact, but 10 years out, we think it could have an enormous, both societal and revenue impact, especially in the space around private security where there’s millions of people worldwide whose job is to sort of observe, report, and secure facilities.

That’s a highly monotonous job and one where drones and robotics — we need to do a much better job at those monotonous jobs and when those jobs become dangerous, they could do a much better job than putting a human in danger when a threat does emerge.

Jonathan Ho: Thank you.

Erik Lapinski: Thanks, Jonathan. We’ll take our next question from Will Power at Baird.

Will Power: Okay, great. Thanks for taking the question. I’m in a vehicle, so I’m going to stay on video for a moment. But maybe if I could come back to software, I know you expect that to be one of the key drivers in ‘24, along with T10 and other products. Any way to kind of help unpack what the expectations for growth there are across the different components, evidence versus records, dispatch, et cetera, just to get a sense for the breadth of that growth?

Josh Isner: Sure thing. And I think the answer, Will, really depends on the market segment. I think for state and local, that’s where we’re really, really focused on selling the officer safety plan and this bundled set of enterprise software from digital evidence management to reporting software to all of the key software add-ons, all in one place. And so, that’s one of the true measures of success in the channel domestically. Internationally, it’s really about, hey, how do we get folks on the cloud for the first time? And then, for some of these governments, it’s literally the first time they’re on the cloud in their professional lives. We’re starting from a place of just arriving at that moment and then building from there over the next several years.