Q3 2019 Earnings Call
[noise] tend to be hands on dive deep and be customer obsessed on Amazon.
Relentlessly focused on finding new ways to truly delight customers and keep doing that effectively at ever bigger scale across an ever more diverse range of products and I see that same passion and commitment at axon.
One of the most exciting things about axon as our opportunity to create software devices cloud services, SaaS subscriptions and mobile apps that all work together to create a flywheel effect of customer loyalty and long term value and that business model is incredibly compelling.
First a little more perspective on why joined Exxon beyond the business model beyond the opportunity look I love to Amazon I Love Amazon was very happy there for five and a half years with zero intention of making a change and in particular I was thrilled to be a part of Alexa and helping invent the future of cloud based voice assistance, especially having space.
Rent previously eight years of my life at tell me networks, one of the early pioneers in that space, but a member of axons Board was instrumental in introducing me to the company and then three things happen and quick succession that convinced me I had no choice, but to join axon and its mission to protect life and obsolete the bullet for.
First there was a shooting just a few miles from my children's Elementary school and one of the teachers was shot.
Thanks, Felicia survived, but it brought the reality of the world, We're all living in much closer to home.
Second I attended a fundraiser with a bunch of other Seattle's Hectoliters, where the father of one of the parkland, Florida shooting victims told the room that donating money is great, but challenged all of us by asking if you really care.
What are you personally going to do about the significant problem facing our society today.
And then third literally that same day I saw the announcement about ricks upcoming book the end of killing.
Ordered it all my Kimball of course.
And I got to chapters into the book decided okay I just have to talk to them.
So clearly I'm a big believer in axons mission I'm honored to be here. My first seven weeks at the company have done nothing but reaffirmed my confidence in our tremendous opportunity ahead, now I'll turn the call over to Luke.
Thanks, Jeff and welcome in its first seven weeks, Jeff is already making a great impact and thank you to those members of the investment community who came to the International Association of Chiefs of Police conference in Chicago last week.
For those of you that attended you were able to see first hand, the bugs that axons booth and the positive feedback we get from our customers.
Attacks on our Northstars to drive adoption of our high value integrated bundles, which marry our hardware devices in cloud services into one monthly recurring payments, it's clear that the customers see a lot of value in cloud services were offering. So we made it easier for them to purchase by combining all of our offerings into one integrate.
Hi, good wispy bundle this strategic sales because it pivot has been a huge success, helping us to drive substantial momentum on the software side. The way we sell the most software it's through these bundles wispy seven plus is our most popular bundle this year among the top 1200 public safety agencies in the U.S.
I did state in the first three quarters, we booked more than 11000 seats on Pete.
Across dozens of agencies, and we expect that number to accelerate.
By the ended the year, we aim to have more than 100 agencies on our highest value officers safety plants always ERP is a critical mechanism for helping us to drive customers to axon Records. This is because oil SP creates the purchasing mechanism for records transactions is obviously puts us in a very favorite.
I will position and consequently, the pipeline for Axon Records is very robust. These plants only drive our software average revenue per user substantially higher we are seeing monthly ARPU is double and triple but the plans also maximize the value we are delivering for our customers. The way reinsurer we are delayed.
During valuable services is by looking at usage of our products, which also drives customer retention, having a near zero turn rate. We think is also a testament to the value. We are providing for these agencies now I'll hand, the call over to Jawad, our Chief Financial Officer.
Thanks, Luke this.
This is an incredibly exciting time Braxton, we're executing and scaling at a rapid pace and we continue to grow our network of cloud connected devices and cloud services that deliver real value to our law enforcement customers.
I'd like to focus my comments today, and how we're tracking toward our long term targets.
The product milestones we achieved this year are driving a re acceleration on the topline in the back half.
As we expected and position us to achieve our increased expectations for 2019 revenue growth of approximately 20%.
Heading into year end with this momentum sets us up nicely to continue delivering against our long term target model.
We're very successfully building a high margin SaaS business on top of our existing hardware business.
One of the ways, we measure progress here is by disclosing annual recurring revenue.
As of Q3, 2019, we're delivering nearly $142 million in high margin AOR, which is up 39% year over year for the past six quarters Aer grew nearly $10 million incrementally on average per quarter and we expect this trend to accelerate in 2020.
Let's take a look at what drives leverage both on the gross margin line in on the adjusted EBITDA margin line first the software portion of every contract we signed with customers carries an 80% gross margin and that's including storage and compute costs.
As most of you know under GAAP or hardware revenue must be fully recognized uptime of shipment while software revenue was amortized over time.
What this means is that on an office or safety plan integrated bundle, even though the five year direct gross margin on the contract is above 70%. It takes a while for that margin to build.
We expect to continue seeing that play out in RPL as our business is scaling and we're driving strong growth in hardware from both new products and markets.
This means gross margins can be lumpy quarter to quarter, but we're more focused on driving the long term underlying trend.
At a high level you can expect to see US continued scaling the hardware business and using our growing network of devices to drive more high margin cloud services.
For adjusted EBITDA, We see ourselves is building a business that supports a long term target margin of 30% in the third quarter adjusted EBITDA margin was about 18%.
Our incremental adjusted EBITDA margin compared with Q2 was 68% demonstrating that were successfully driving leverage on incremental revenue, while continuing to invest for future growth. We did this to a very intentional approach to capital allocation driving leverage in DNA and reinvesting it in R&D as well as through rigorous cost controls.
Our growth outlook remains strong as you saw in our shareholder letter we're seeing early success in several new adjacent markets, which allows us to sell or core products to new customers, including federal law enforcement correction in international markets.
You can expect to see us continue to expand the breadth and depth of our product offerings. While also tapping new customers in markets to drive long term growth and increased our total addressable market, we see a tremendous opportunity to create an even broader ecosystem of products and services that will allow us to continue delivering value to our customers community.
Yes and stakeholders.
And with that operator, let's go to questions.
Certainly at this time, if you'd like to ask a question simply press Star then the number one on your telephone keypad to withdraw your question press the pound key.
In the interest of time the company asks that each person.
Limits sums up to one question and one follow up question.
Your first question comes from the line of Scott Berg with Needham and company. Please go ahead. Your line is open.
Hey, guys Josh on for Scott.
Congrats on the strong quarter.
The Taser.
Production issues related to the battery now resolved.
Mentioned the cartridge issue in the latter.
I wanted to get some more color on how that's progressing how many cartridges are you shipping currently with the new Taser is and what do you expect to get this too in 2020.
Yes, great Great question, Josh So to answer the first part of your question the battery issues or a 100% resolve.
And with the cartridges why don't I have great answer that is pretty close to the D.
Having built the first ones into garage avid affinity for a for our cartridges.
So we're feeling really good about where we're at with getting the design.
The design modifications, we talked about earlier this year.
Those are three validation were in production, we're feeling really good about it.
In terms of a number of partridges.
Per handle sold with Taser seven it typically includes about 12 cartridges in the first year and then there's recurring hard produced in the out years, which on on the plans are typically around 12 cartridges per year as well, but we obviously, we don't recognize revenue on the future cartridges until they ship.
Be anniversary date from when we shifted.
From the first receipt of the order.
Okay, Great and then just staff financial question you raised the revenue guidance nicely. After Q3 be are there any other factors other than that Taser gross margin not allowing the access revenue to flow through to EBITDA here near term.
Yes. This is what I will take that so we essentially we're looking at the full year, delivering 80 to 85 million and.
Unfortunately, we had some headwinds earlier in the year with the manufacturing.
Challenges on the Taser weapon and those are going to be difficult for us to overcome which is why we left the EBITDA margin at the current guidance at the previous guidance 80 to 85, but we are going to see strength in revenue.
Thanks, guys.
Your next question comes from the line of Jonathan Ho with William Blair and company. Please go ahead. Your line is open.
Hi, Thanks for taking my question. This is John widen where for Jonathan.
I'd like to talk about your pipeline for your who SP.
Well Eurospeak general.
I'm wondering about the pipeline of major city deals for us pieces in place that you see your confidence is visibility and such.
And.
I also have a question about a statement you made in the shareholder letter if I'm looking at it correctly in the US your your percentage of.
Weapons that were sold through the LSP is.
64% and overall 55. So im wondering is that tells me that outside the U.S., it's closer to 50 or even below 50 can you talk about the dynamics there that may be different and how.
And.
What might be done to to get that to be.
Hi percentage.
Okay. So to answer the first question.
On the RSP adoption amongst us customers.
We're very pleased with the adoption through three quarters. Here. This was a program that was launched on January Onest stand.
Frankly, we were expecting.
A little more of a ramp up to when these would turn into purchases, but our customers have been extremely excited about them and we've closed roughly 70 to 75 of them through three quarters, and we expect that number the.
100 by the end of the year I think long term we view this is the purchasing.
Mechanism for.
At least mid size and large agencies and and hopefully smaller agencies as well so to answer your question, where we're very confident that number of licenses continues to grow nicely I think.
A side effect of that which is also very positive is the fact that this essentially sets up the pool of prospects for RMS customers for us as well so very very pleased with the momentum that oil SP seven and seven plus have provided this year and believe it will continue.
On your second question, just so I understand.
The question was the mix of Oes pieces between domestic and international customers. So just a point of clarification, John the 64% in the U.S. is on a recurring is positive. Thank you plan plus some sort of teaser subscription like the surplus.
And the question is why is that lower internationally.
It comes down to the it comes out of the fact that.
We are still driving toward great product market fit in some international markets I think we've achieved that in our tier one markets and we are on the verge of achieving that in some of our tier two markets but.
Across the World, we certainly still have work to do to get to the point where.
Taser and body Cams come together for every police force and.
And there is there some.
Circumstances, where that might depend on cloud infrastructure and some of these markets and so we are confident that.
We see this trend continuing in tier one tier two markets in each year, hopefully, we see more and more of those markets start to appreciate the value of.
The cloud plus Cws plus on office or cameras as a combination great. Great question, John just for a point of clarification that was Josh is in our Chief revenue Officer.
Great. Thank you very much if I could just one more question can you just talked too.
The competitive landscape and and in the if you have any updates as a competitive response to your new product.
I can take that as well.
Look we believe we have the best channels combined with the best products and we think both of those are huge competitive differentiators for axon moving forward.
Thank you very much.
Your next question comes from the line of James Faucette with Morgan Stanley . Please go ahead. Your line is open.
Great. Thank you very much apologies for the background noise, but hopefully we'll be able to hear me okay.
Wanted to ask a follow up question to your comment that you're looking for faster building up our are in 2020 than what we've seen in 2000 than we've seen in 2019 can you explain a little bit.
The dynamics that will lead to that.
What kind of visibility you have on on on that.
Objective.
Yes look we've made investments over the past couple of years in things like.
Live streaming fed ramp LPR other AI services, and you're starting to see those investments pay off.
Our bookings, it's going to converting to revenue we've seen a lot of exciting from our customer base for these software services and that's what.
Thats really whats feeding into that we've already had we had a nice base of air our that was building with our core body camera evidenced dot com product and we're now adding other services on top of it.
And I guess just to dovetail with that is.
As a team has generally been fairly conservative and addressing your potential uncommon but.
From our perspective, we're pleased to see new insertion points that you called out in prisons and correction markets you talked about expanding that Sam how do you think about your current product portfolio in the sales strategy to pursue those markets and and I guess, maybe more importantly are there any gaps you think you need to an incrementally invest Stan.
To start to address these these natural adjacent please thanks.
I think our goal is to identify adjacent seems that don't require product overhauls and just small product tweaks to.
To be successful in those I think for all of US it starts with a talented team selling into those markets and we believe our products have an ROI in those applications. So certainly moving forward a point of focus for us to continue to expand our Tam and.
Builds momentum in each of those adjacent sees overtime.
Great. Thank you.
Your next question comes from the line of Steve Dyer with Craig Hallum Capital. Please go ahead. Your line is open.
Hey, guys trying to go on for Steve.
As it relates to AB three the live streaming.
I guess I'm, just trying to reconcile comments today than it is exceeding expectations versus that I CP. When I thought you said initial adoption was not as positive as initially expected due to various friction points any help there I guess reconcile those two comments.
Yeah. This is Rick.
So yes it ITD.
When I got to question I wasn't saying that it wasn't it would it meeting our expectations. All I was saying there was that when you are deploying something new like live streaming that is a change that's going to require the customers are adapting to that knew.
That new capability. So I was just tempering our expectations that this is a market where the moment something's available everybody immediately turn it on you have to work through policy issues you have to work through things like we're.
Working with unions et cetera. So there I was just literally pointing out that as excited as we all are about live streaming there were just like every service. We drive there are you going to be work to getting adopted and scaling with the customer base.
In contrast that with the comments that it's exceeding our expectations and met with the cameras that are going out in the field, we're getting very positive responses from customers.
And so we believe we are successfully executing against those operational challenges of rolling out a new service and it's important also to say this is Josh again that by virtue of all SP seven plus sales. We have 11000 users of aware and aware plus ready to turn on as soon as they receive their cameras and that.
Number will continue to grow so it's a good place to start to have 11000 licenses there and we believe we are on a path to every camera that is our goal that every camera turns into.
And aware and aware plus cam.
Great one more for me.
Given taser seven production targets of 65000 units this year and you've shipped 35000 through nine months here should we assume that you also expect significant ramp in sales in Q4 or are you guys planning to build some inventory heading into 2020 based on kind of the pipeline you see thanks and good luck.
I'm not sure we're going to comment on the exact pipeline in Q4, but we think it is sufficient to satisfy Q4 demand is also a strategic priority as some of these larger t. seven deals formulate over the coming quarters that we do have flexibility with inventory to be able to service those.
Your next question comes from the line of Keith Housum with Northcoast Research. Please go ahead. Your line is open.
Good afternoon guys.
Rich back to <unk> question earlier or the conversation in terms of the cartridges.
What's your comfort with backlog here as you ended the quarter and what that looks like as we look into the fourth quarter. We look at the court. This number for the quarter write down year over year.
At the very least.
I would say, yes, there is a backlog so it's a consequence of selling so many taser seven certain plans to start the first three quarters, we do anticipate clearing that backlog by the end of the year.
Great it's impossible to quantify how much it let me maybe.
We're not going to share that at the moment.
But certainly we can commit to our customers that the backlog will be clear by the end of year.
No problem I hate to try there.
Good question follow up a little bit international business relies on color commentary on how that preceded during the quarter. Thanks.
Sure thing so we're very pleased with the execution of the international team as we've talked about before they'll be kind of lumpy quarters, depending on just due to the the large size of some of the deals were working on but.
Our kind of internal metrics that we used to evaluate international continue to look promising.
And very confident in the long term.
Potential of our international markets and I think as we see revenue continue to climb a year over year. Here. You know, we feel that trend will continue I might add as well that in the international markets, we frequently need to get government approval on new products.
Example, UK or Canada, our other markets. So when the Taser seven goes on sale when you want us.
It's not been approved yet and most of those major markets, but we're making a lot of progress toward those approvals. So that will provide a nice acceleration.
Youre Premier product is approved for sale in those countries.
Okay. So from a financial perspective, we had really strong bookings, we had 20 million revenue.
Great. Thank you I'm internationally.
Your next question comes from the line of Willpower with Baird. Please go ahead. Your line is open.
Hey, guys. This is Charlie really gone for will.
Just wondering if you see much of an impact from the Motorola and Watchguard tie up either on the fleet side body camera side software any any comments on that metal so far.
We're looking forward to competing.
Okay fair enough.
And also I'm wondering.
What you're hearing and seeing from the early beta customers on RMS Fresno and Cincinnati, what's been their feedback so far and then kind of tied with that could you remind us.
About your CAD plans.
Yes so.
Let me first dig Fresno, and then I'll, let Jeff take Cincinnati. So if you went out and visited with the Cincinnati. So I can tell you I was on the on the phone.
Immediately before and after the deployment with senior leadership with the program manager level in the Jeep level and the feedback.
Was so positive the thing that stands out to me was they basically said, we're waiting for like the shoe to drop because they've done big system conversions before they had never seem them goes smoothly.
And they were able to train at 800 officers without disruption of the agency. They found with the new software is just dramatically more intuitive and easy to use.
And.
Overall, they became they actually went to a major a conference with other major city police chiefs. The week. After they made the deployment I am not normally right when things are getting pretty ugly as they explain to us.
Back to be rolled out that conference and were.
We making lots of really positive laudatory statements and have become a great reference customer that's Fresno.
I will say on dispatch, we're not going to give anymore insight on dispatch at this point smokers.
Well talk about that mortgage roll into next year. It has our next upcoming Vic software release, but we're likely to be more do you go just want to talk more about three actually Cincinnati with records sure I think I think Cincinnati is a great evidenced point both of excitement about what we've built so far and of the.
Leveraged that the RSP seven plus and other integrated.
Integrated bundles that Josh was talking about earlier provides for us. So Fresno immediately went to an all agency why that replacement of their RMS system and as Rick said that there have been very thrilled with us so far in Cincinnati. The first thing that they did was they deployed.
One piece of our new RMS system call. It standards and it's for a variety of key critical reports like use of course reporting.
They did that alongside their existing RMS for other workloads. They were so happy both with the performance of our RMS standards module, but also how much they love the user experience and how well it tied in with everything else that we're familiar with from axon that it.
Helped them quickly come to the decision to.
Commit to do an agency wide deployment of RMS and because at the exact same time they signed on for a few seven plus that makes it an extremely easy purchasing decision for them as well as they roll forward into next year and they publicly.
Made a press release, a few weeks ago to the effect on both fronts.
Great that's really helpful and congrats on a very strong quarter.
Thank you.
Your next question comes from the line of Charlie Anderson with Dougherty and company. Please go ahead. Your line is open.
Yes, thanks for taking my questions and I've been hopping between coal side. So apologize if these questions have already been answered but.
To put on gross margins, obviously at some strength and.
The camera side or sensor side I wonder to what degree was that influenced by sort of the usage of the LTV is that a factor here.
To some degree and over a period of time and then on the Taser gross margin as you cut over to the new component of the cartridge I Wonder.
Does that get you to 70 or do you can you potentially go beyond that with the new little Crostata component and then again follow up.
I'll take the first part of that question. Our gross margins in Q3 were not impacted by LTE. The main driver. There we continue to see improvement in the cost structure for the Taser weapon as well as a cartridges.
Well as the standard operational execution and then.
As you went to the second part, yes, and then just on that first point. We're also seeing a lot of success with our higher bundle programs, which we talked about on the call as well what was the second question again.
It was on that when you make the change in that Taser Carters do you expect to go to step back to 70 type area for gross margin because you actually go beyond it.
We're laser focused on improving the margin. Our primary goal is to get to full production that we have line of sight to and then as we ramp up to full production will continue to increase margins in Q4 and throughout 2020 as well.
A little bit more color there because we did have a cartridge backlog as we were making this change we expect to have a higher percentage of cartridges in the fourth quarter imitators segment than normal and cartridges do carry lower margins than the services or the taser handle into bundle. So.
It's not like is it can be a snap back to historic margin levels in the fourth quarter Theres going be some puts and takes the margin on heart disease is improving but the mix is going to go a little bit the other direction.
And in these plans. We also do you have services that are sold with Taser seven the do differ some very high margin revenue out of the quarter of initial shipment in the future. So that's going to be very helpful were over time.
We're very happy with the margins will be Taser seven bundles they tend not to.
They don't show as well in the first quarter of shipping has a lot of most high margin stuff is deferred into future quarters, but obviously over time, that's going to lead a nice continual upward pressure on margins.
And I want to make sure I put a crystal clear point on that that our gross margins will be flat to slightly down driven by mix not driven by anything in the weapons segment because of the cartridge.
Mixes as Richard mentioned.
Checked it is still to deliver the $80 million to $85 million EBITDA, that's that's baked into our guidance.
Great. Thank thank you for all the detail not for my follow up on RMS You've obviously got these two two customers I think you sort of referred to them as once customers are reference customers I wonder does there need to be digestion period.
For them to use it for some period of time before the next tier of customers jumps or.
Any commentary on maybe the pace of wins, we should expect the into next year on RMS. Thanks much.
Yes, I think to put it simply our goal is to continue to.
Accelerate adoption of all SP, seven plus and starting next year as I said earlier in the call like we're expanding this pool of prospects within that universe, we will start to go back and slop those customers in for deployments and so.
The timing depends on not only our customers you know timing, but also you know what their requirements are and so forth and we're going to be working through that over the next 12 months and beyond and we certainly expect.
Significant adoption.
Of the platform and very confident LSP seven plus continues to be the mechanism that drives that.
Great. Thanks, so much.
There are no further questions at this time I turn the call back over to the presenters.
Great. Thanks, everybody for tuning in.
After our last quarter look we had some operational challenges in Q2 I can tell you we really challenged the team and the company here and in fact, there were some calls with analysts were wondering why we didnt pull back on our our EBITDA guidance for the year given the challenges the second quarter. We said that you know we're going to put some grit, we're going to put our shoulder to the two.
The wheel here and we're going to get it done and I couldn't be prouder I mean.
Theres a lot of smiles in the room here I mean people work nights and weekends and really hard to deliver the results are we done in the quarter and if so a lot of work to do in Q4, but I couldn't be prouder that we're going to deliver on our commitments.
We're committed to continue to grow great company excited to have built out the team with some great New board members and Jeff and other new employees and we look forward to talking to you all after the holidays and I look forward to break 2020.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.