I just may have had a technical correction for me on the growth rate. I guess we’re going to be conservative. It was more than a doubling this year, but it was off a small base. So again, we’re seeing really early exponential growth in DFR. Now when we think about indoor drones, Sky-Hero, when we acquired them, so one of the downsides of being a big company is we have lots of lawyers to make sure that we’re very compliant and that’s obviously a good thing most of the time. But for example, we discovered that Sky-Hero had some challenges in that the bands of energy they were using for RF transmission to get through the walls to be able to fly indoor effectively were outside of the acceptable bands under the FCC here in the United States. So we’ve had to actually pause selling on a temporary basis while we are working to get approval from the FCC and an exemption on being able to sell those to state and local in the US.
But again, we didn’t buy Sky-Hero for the near-term revenue. It’s really about the relationships they have with the world’s leading SWAT teams and tactical users, and we believe that’s the foundation on which we can build transformative new capabilities. So part of it is just kind of getting, with Sky-Hero, now they’re part of a bigger organization. The good news is, we’ve got both teams focused on international legal compliance. So we’re kind of upping their game from a compliance and legality standpoint. Meanwhile, they’re bringing their, I would say, young scrappy innovation. I mean, these guys built a profitable drone business with a very small team. Not many people have done that. And I’d say the magic is happening. They’re working with our design team.
And I’d say over the next couple of years, I’d say maybe a two to five year horizon, you’ll start to see some pretty mind-blowing stuff coming out of our indoor tactical drones as well as our outdoor DFR. I think those are the two biggest segments, being able to fly outdoor drones without humans on site and then being able to go into buildings and use drones in the most dangerous situations.
Josh Isner: That’s right. And there’s also a really exciting hybrid between the sort of drone in a trunk thing Rick talked about and full DFR as the whole industry tries to sort of find their way forward as fast as they can. And this is a thing that actually, Adam Bry, the CEO of one of our other partners, Skydio, and he and I talked together about it, their keynote of their launch a few months ago of their newest drone, where you combine the physical drone being with a patrol officer who can go to scene, but then the instant that they need it, you have that remote pilot who’s able to manage it on scene in a DFR style. And so what you’re seeing is innovation and experimentation to try to move as fast as possible while navigating around these various short-term constraints. And so it’s just a keep watching the space.
Rick Smith: The last thing actually, I do want to add one more thing to all this complexity, the shifting sands between the United States and China is also creating another just change in the marketplace. So DJI was by far the dominant hardware provider, and we have chosen to partner with many different hardware providers. Initially, we were partnered with DJI, that’s no longer very viable because the US government federally will not buy any DJI hardware and states are now passing similar laws. So we see up and coming folks like Skydio that have really just recently gotten to what I would say is a competitive hardware platform to DJI for the outdoor drone use case. We partnered with a company out of Switzerland called Fotokite that does tethered drones.
So each of these things have created some short-term shifts in the marketplace, but we think the foundation is going be firming up over the next couple of years to see this go from really awesome concepts to significant businesses.
Meta Marshall: Great, thanks so much.
Erik Lapinski: And then, Rick, did you want to answer the second question as well on the new headquarters timing?
Rick Smith: Yeah, we hope to have a decision by sometime this summer to make the call. This has kind of [dragged] (ph) on for a while, so we’re — we like to get moving on it.
Meta Marshall: Perfect, thanks.
Erik Lapinski: Thanks, Meta. We’ll take our next question from Mike Latimore at Northland.
Mike Latimore: All right, thank you. So within the cloud category, you have the digital evidence management, real-time operations, productivity software. Would their relative contributions to growth in 2024 be noticeably different than what you saw in ‘23?
Josh Isner: So the question, just so I’m clear on it, Mike, is what type of growth are we looking at for 2024 relative to ‘23 in our software offerings?
Mike Latimore: Yeah, among those three, does one get more pronounced in ’24?
Josh Isner: Yeah. Jeff, feel free to follow on with your thoughts. But my instinct is DEMS is essentially built out, and we’re on the right track there and we’ll continue to build out that ecosystem into new markets and so forth. But, productivity is really the one that stands out to me as the huge opportunity for the year. I think we’ve bared all the pain of coming to market with enterprise software, especially historically custom enterprise software over the last couple of years. And now we really believe we found product market fit when we deploy this product to customers. We’re getting fewer calls in the weeks following that are, hey, this didn’t quite work the way we thought it would, or a new feature request, whatever the case may be.
Customers are very, very happy with their early experiences with the product. And now we feel like, hey, we can start to dump a little more gasoline on the fire and deploy faster across more customers in a year. And then, the one aid of that, I’d say, is our response product, which is our live streaming product. And that’s part of our real time operations pillar. And there, that’s all the live streaming from the body camera that’s where Fusus slots in as well. There’s interesting things we can do you know between Fusus and in our DEMS — sorry, our real-time products. So yeah, very excited about each of those. But in the short term, I think you know the biggest growth relative to 2023 year-over-year will come from productivity.
Jeff Kunins: Yeah, that’s right. Thanks, Josh. All of those are incredibly exciting. I think the reason why we call it productivity is it is not only — while it also includes our straight up product for full classic RMS replacement, it’s really — the vision there is all of the things that relate to helping, as Rick talked about in his intro, saving time and giving hours and minutes and moments back for officers to be out in the field, helping communities be better as opposed to doing paperwork or other things. And so there’s an exciting story on multiple fronts there. First, you’ve heard us talk for a long time about transcription and transcription has been steadily and steadily and steadily been being adopted even for the straight-up use of looking at a single body camera video at a time, and being able to scrub through the video and see and search through the transcript of just that one video.
And now, as that gets adopted more and more, we can build incredible new functionality on top of that using AI and other things. And so stay tuned for future announcements in that regard, but that keeps mixing up in customer [delight] (ph) and customer adoption. On [pure] (ph) records, as Josh said, now we’ve got more than 100 agencies who are live with at least one module of Axon records, including a rapidly still growing of those who have done their full RMS replacement, as well as a bunch that are using that Axon Standards product, which is the use of force module, which is the easiest thing for them to get started with alongside, even before they’ve made the full replacement of their RMS. So we’re just incredibly excited about the trajectory and the momentum and the acceleration there.
Mike Latimore: Great. Thanks. And Just on the future contracted revenue, 15% to 25% in next 12 months. Can you just talk a little bit about the variables that would move that 15% versus 25%?
Brittany Bagley: It’s really about average contract length inside of that future contracted revenue. That’s sort of the variable between the 15% versus the 25%.
Josh Isner: And, Brittany, would you also say it’s the number of TAP upgrades of hardware that would ship in a current year? So our upgrade cycle…
Brittany Bagley: Yeah.
Josh Isner: …is 2.5 years. So if we have a outsized number of contracts that year where these customers hit 2.5, we’ll see more revenue because we’re shipping all that upgraded hardware. And if it’s a year where it’s more software and the upgrade is next year, then that will be closer to 15% versus the 25%.
Mike Latimore: Okay.
Erik Lapinski: All right. Thanks, Mike. We’ve got one minute left. We’ll go to Jeremy Hamblin for our last question at Craig-Hallum. I believe he dialed in on the phone. Jeremy, can you hear us?
Jeremy Hamblin: Yes, thanks. Hopefully you can hear me. Congrats on your strong results. Just in terms of — I wanted to, just sorry if I missed the explanation on this already, but in terms of TASER automation impact in thinking about what that can do for gross margin on that product line, both in the second half of ‘24 but also then as we get beyond into ‘25, can you just provide me with a little bit of color on that?
Brittany Bagley: Yeah, of course. So I think the TASER automation as well as initiatives that we’re doing around cost improvements are a lot of what gives us comfort talking about how we think we’ll have moderate gross margin improvement for 2024. And then we don’t have any long-term margin guidance out beyond that. Our long-term guidance beyond ’24 is really focused on the 20% revenue CAGR and the 25% adjusted EBITDA margins.
Jeremy Hamblin: But just following up, specific to that product line and not necessarily thinking about it in terms of total company, what is the — if you undertake a project like that, what is the kind of the goal of the range of outcomes in doing that?
Brittany Bagley: I think the goal and the range is to really improve the TASER 10 margins, so that you see sort of stable TASER gross margins over time rather than some of the fluctuations that you’ve seen. But again, we don’t have a long-term target out there specifically for TASER gross margins.
Jeremy Hamblin: Got it. And then last one quick here. In terms of your kind of TAM penetration and opportunities, and as we think about, I think with Slide 15, if you look at adoption rates in rest of Europe versus your Commonwealth, I don’t know exactly the timing, but in terms of thinking about the success that you’ve had in Commonwealth versus what you’re seeing in rest of Europe, can you give us a sense for how that timeline is playing out versus when you kind of had some breakthrough contracts that you won maybe at this point, seven, eight, nine years ago? Just trying to get a sense for how that might play out.
Josh Isner: Yeah, thank you, Jeremy. And it’s nice to hear from you. I would say it’s really a tale of two product lines there. On the TASER side, we’re actually seeing Continental Europe already start to outpace the Commonwealth countries in pockets. And so, we’re really excited about that. We had some large orders last quarter on the TASER side and we see the path here where, the nice thing is, in these Commonwealth countries, they’re set up much more like the United States, where they either have states or territories or whatever the case may be. Some of these larger markets in Europe, they buy from the federal level. And so the order volumes are just much higher and you can really build with one customer with a much bigger kind of white space in front of you.
And so we do believe you’ll start to see Continental Europe really rival or outperform the Commonwealth markets as soon as this year or in the coming years. On the cloud side, that’s where the Commonwealth were very early adopters, really across the board, UK, Australia, and Canada. And in Europe, I don’t think it’s secret, it’s been slow. And maybe slower than we would have expected upfront. I’d say that’s fair to say, but at the same time, we’ve really zeroed in on three markets in continental Europe where we really are starting to break through on the cloud. We’ve got trials going on or paid pilots even. And there, I think our thesis is, there’s plenty of work to do and plenty of upside just amongst those few markets, but having a few really break through in the next year or two will be the kind of tailwind we need to start to steepen that adoption curve in other markets as well.
So still some work to do on the cloud side, although we’re seeing some really encouraging signs there. And on the TASER side, I think things are happening as we speak, which is encouraging.
Jeremy Hamblin: Great, thanks for taking the questions. Good luck this year, guys.
Josh Isner: Thank you, Jeremy. We’ll see you in a few months at your conference.
Erik Lapinski: Thanks, Jeremy. All right, we’re going to take it over to Rick to close this out.
Rick Smith: All right, thank you to our investors for joining. Thank you to our incredible employees that I’m so fortunate to work with. Thank you to our new team members from Fusus and Sky-Hero. And actually today, we had one of our employees who had joined through an acquisition of iNPUT-ACE a few years ago. And I was just delighted to hear one of the things that is really important to me is that those new team members and employees find a new and exciting home where they want to stay. We don’t buy companies because we’re going to go in and slash and burn, cut costs and make money through the traditional synergies. We buy these companies because they are critical to our mission, their people are doing great work, they’re innovating in ways that we’re excited, we’ll continue to inject that sort of late stage startup energy back into our own bloodstream and keep us going.
So couldn’t be more excited and grateful for the team of investors, employees we’ve got. Was out with Chris today showing Fusus to some customers and maybe some things Jeff was hinting at. I might need our redaction tool to cut out all the positive expletives I got today on some of our new capabilities. There’s never been a brighter time to be at Axon and I can’t wait for the rest of the year to unfold. I can’t wait to be at Accelerate here in about a month. And I look forward to talking to you all again in May. So, thanks and have a great night.
