Q4 2019 Earnings Call
[music].
Good afternoon. My name is Kibali double your conference operator today.
Time, I would like to welcome everyone to I think Q4 2019 earnings call [laughter] <unk>. Please tell me if to the Penske background noise.
I appreciate his remarks, there will be question you know session.
At which time instructions will follow.
I'll now turn the call for child, Outdoorsy, Andrea James VP of Investor Relations incorporates strategy.
To begin your conference during current aid in interest of time to company Quest to you linear question to one initially and then get back in queue for any follow up [laughter] I've nothing.
Well Smith, Andrea James you May begin.
Thank you Coronelli Hello, everyone welcome to Axon fourth quarter 2019 earnings conference webcast and Andrea just introduced here in the room in Scottsdale headquarters, we had axon CEO, Rick Smith, President Luke Larson, CFO, Jawad Hassan and Chief revenue Officer, Josh isn't there and joining us mark.
Mobile software Hot in Seattle is our Chief product Officer, John Kim.
People have a chance to read our shareholder letter, which was released after the market closed you can find it at Investor day, Axon Dot com and for the first time, we published an E.S.G. agenda, which you can find in the PDR link on our website management's remarks today are meant to build upon the information in that letter. During this call we will discuss our business outlook and make forward look.
These statements any forward looking statements made today, our pursuant to and within the meaning 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.
Is that could cause actual results to differ materially. He's risks are discussed in our SEC filings I'll now turn the call over Rick Smith, our Chief Executive Officer.
Thanks, Andrew and thank you everyone for joining us today I'm incredibly proud of everyone here at axon for delivering another banner year with strong top and bottom line performance, while simultaneously executing on several major product launches 2019 was the year, we planted the flag for our moon shot to make the bullet obsolete.
Publication of my book the end of Kelly.
Before this decade is out we will deliver a taser weapon that will outperform a semi automatic pistol and the effective and reliable incapacitation probably human subject.
That will be a game changer.
And Weve doubled down on our mission to make justice system more efficient more transparent and more equitable.
We will leverage the power artificial intelligence to enhance public safety well with oversight from our industry, leading AI ethics board to ensure we also cherish and preserve individual rights and privacy in the balance.
We are emboldened as we looked at a future from our strong base execution our team delivered this past year.
In 2019, we scaled the all new Taser seven while implementing significant design improvements in the cartridges.
We introduced the industry's first body camera with live streaming and we went live with Exxon Records. We also made significant investments in people and processes to improve future product launches.
I told you in August we had high expectations for axon body free and we're planning for meaningful shipments in Q4.
We delivered on that promise.
Q4 revenue of 172 million was up 50% year over year, reflecting record volume cameras shipments about 75% of our body camera units shipped in Q4 were axon body three.
For the full year, we grew revenue, 26% to 531 million.
It feels great to top <unk> billion in revenue, but I'm, even more focused on what this signifies.
Axon products provide real value to our customers and the communities. They serve we're absolutely thrilled that customers are selecting our most meaningful integrated bundles, we're going to keep innovating on behalf of this historically underserved market and our topline performance demonstrates that our customers are savvy and eager to adopt the latest technology.
We're also very pleased with our bottom line performance in Q4, six additional performance goals in our exponential stock performance plan for our employees became statistically probable in light of our strengthened future outlook.
Did result in a significant catch up stock compensation expense.
Affected GAAP net income.
Excluding the impact of that the results are pretty impressive.
In Q4, we more than tripled our adjusted EBITDA over last year and for the full year adjusted EBITDA grew 43% to $88 million.
I would again like to thank you our shareholders for proving our exponential stock performance plan, which aligns the entire company to the same growth goals as my CEO performance plan.
I believe the strong performance and increased profitability of hitting those goals are these direct result of our implementing the most innovative widespread incentive program in any public company today.
So thank you.
We delivered operating leverage in 2019, even with gross margin headwinds as we sell our five year high value integrated bundle, which carry a lower gross margin upfront, but increase in years two through file.
So we're successfully selling customers our highest value offerings in a true when when scenario, but that does create some margin pressure and we were able to deliver bottomline leverage this year regardless.
We've all embrace the practice of being very intentional and strategic with our capital allocation and our R&D investment and I feel confident that we exited 2019, the strongest we have ever Ben.
Now Lou can talk about how in Twentytwenty, we're focused on building for scale. Thanks, Rick I too want to congratulate our team. Our company goal was to ship 60000 axon body cameras in 2019 in order to support our upgrade programs as well as the demand for the new product. This wasn't.
Ambitious goal and given some of the headwinds we faced in Q2 with operations. It was really important to us as an organization to deliver on this goal for our customers as well as shareholders everyone executed at year end from sales to engineering to manufacturing to operations and supply chain and we not only made a lot of customers.
Happy who are waiting on their new cameras, but we proved we have the muscle to meet a surge in demand even on the new product line not only that we accomplished this record revenue quarter. While also so sequentially, reducing operating expenses, excluding stock comp and driving adjusted EBITDA leverage in fact, we exclude.
If we exclude stock comp as seen a was down both year over year and sequentially and this is really a testament to our strengthen cost control muscle as well as leverage we see in our model.
Looking forward our big theme for 2020 is billed for scale. This means making sure we have the right tools and people in place and that everyone stays focused on execution just like in Q4, we see ourselves as building a 2 billion dollar revenue business and we get there by staying focused on our mission and building upon our virtuous cycle.
More users means more data, which means better products, leading to better societal outcomes, which means more users completing the virtuous cycle. In 2020, we will continue to drive adoption of the officers safety plan, which combines a taser a body camera and a host of mission critical software capabilities.
More than 100 agencies have adopted officers safety plan, seven and more than 70% of those users on the highest tier which carries the most premium software features.
Before I turn the call over to Jawad I want to take a moment and talk about the Corona virus. Our operations team has been effective managing through this situation, thus far and at this time given the current impacts we feel that we can manage toward our full year guidance and that we have some flexibility to be adaptable.
However, like every company dealing with this we're closely monitoring this and in constant communication with our supply chain and this may impact year end, if the situation further develops but currently we feel good about our guidance with that I'll turn over the call to Jawad to talk about some of our areas of expansion for 2020.
Thanks, Luke before we move on to our 2020 outlook I also want to take a moment and say how proud I am of our team. After a tough Q2 last year our teams faced into the challenges in worked hard to regain ground proving that we could deliver strong topline growth and margin expansion in 2019, if our finish to the year reinforces anything.
That axon has a strong sense of accountability, our customers are counting on us to deliver life saving products and our credibility with shareholders is vitally important to us.
At our Investor Day in November of 2017, we laid out a three year vision for the company that showed our path to continued strong topline growth while also turning around our declining margins.
We also set a goal for ourselves to be profitable in the body camera and dems business within three years and we achieved that ahead of schedule.
Since 2017, our revenues have grown at an annual CAGR of 26% and our EBITDA margins have expanded to 16.5% on an adjusted basis. The body camera business is now profitable and the Taser seven and axon body three launches launches are now behind us.
We are heading into 2020 with strong tailwinds on profitability that we intend to use to slingshot our way to the next phase of growth. We have built a high growth high margin high retention $161 million, a our enterprise software business and we Havent even began recognizing revenue for Exxon Records.
Today, we're charting a new path for the company, we had set for ourselves in Northstar that by the end of the decade, we'll have achieved the following.
First taser weapons will be the primary means to stop a threat second AI enabled body cameras will eliminate the majority of manual report writing.
Third cloud enabled devices will be the primary means to dispatch officers in the field and finally axon will be a household name by virtue of the transformative value will create for society and shareholders.
From a financial standpoint, we'll also have built the business that we're targeting to deliver revenue growth of over 20% per year and achieve continued operating leverage with EBITDA margins approaching 30% on an adjusted basis.
To get to these outcomes, we see a unique opportunity to accelerate the funding of some of our most promising new growth initiatives in 2020, we'll invest over $100 million, an R&D and new channel growth excluding stock comp. An example of one such R&D initiatives dispatch.
Our goal was to bring dispatched to market in 2020 and that team is tracking so well under the leadership of Josh Pepper that we expect to have our first paying customer live within the first half of this year.
This deployment will see axon displacing a major competitor in the dispatched space, we expect to have a competitive dispatch product in market in widely available by the second half.
In terms of channel growth one of our key initiative is our investment in federal in 2018, we hired Richard Coleman from General dynamics to head up our federal business and he has led us to some terrific early wins such as the US Forest service in the Deo Jays Bureau of alcohol tobacco firearms and explosive.
We're excited about the prospect of serving that one of the half billion dollars, Tim and we'll be investing more aggressively in this area going forward.
While we're very excited about the momentum we're carrying into 2020, we are not stopping to celebrate we are instead, putting the pedal to the floor and you can expect us to continue to execute with a high degree of accountability.
And with that operator, let's turn to questions.
At this time I wanted to remind everyone feel like to next question. Please press star one on your telephone keypad again, then start one or both or just some capacity roster.
Your first question comes the line Scott Berg with Needham.
Hi, everyone. Congrats on a very strong quarter here several questions, where do we start because yes one.
I guess, let's start and the.
Ken environment, a little bit I'd like you announced that they're going to have the products available. This year, we've done a fair amount of work kind of on this space one of the things. We found just customers are less interested in a cloud based.
Ed model at least today can help us trying to understand the successes that you think you're having there at least early on with maybe a beta customer or two in particular that.
Kind of an tap this area that maybe different than what they're used to today.
Yep, Yeah, we love entering new markets, where the initial customer reaction is no.
When we started with electrical weapons, we heard no. We started to body cameras. We are no we sort of cloud digital evidence software we heard no.
That tells US we have the opportunity first and leave the market. When we think about CAD really what they're talking about is reliability and indeed be reliability and uptime of the major cloud providers dwarfs, what your average municipal city could do in terms of uptime themselves. So reliability really comes down to two things the reliable.
Many of your Internet connectivity.
And the reliability of the system, if you lose internet conductivity. So the first one is is not a huge problem to solve that redundant internet access through multiple carriers and over the next few years I think we're going to see all sorts of new ways to connect to the Internet Fiveg lower satellites. In addition to ground based systems. So that as it is certainly a beer.
That customers have because I think they sort of think in terms of well, sometimes I lose internet connectivity, but thats a solvable problem and then the other is if you do lose connection to the Internet, we've engineered our system in sexual way that we've done some demos, where we've watched customers job hit the table when we just unplugged via Internet and assistant.
Keeps chugging away just fine so.
When we get in front of actual customers with demos, we think that.
Those are there is an absolutely solvable perception issue that sets us up to again I think leave the market this direction.
Great Super helpful. Congrats again.
Hey.
Just to go much better with Democratic people are like limiting their questions.
Great.
Chuck.
Don't go incrementally.
Your next question comes from the line of Jonathan Ho William Blair.
Can you hear me okay.
Yes, we got Jay.
Perfect. So when we look at your guidance for 2020.
How do you think about sort of on the growth over the course of the year and what maybe gives you the confidence that and we're going to have a little bit stronger second half ramp.
Yes ultimately.
I think there's an element of first I was Josh isn't or ultimately, there's an element of seasonality there where the second half does tend to be stronger as we spend the first half of the year building up the pipeline with people in newer territories were doing a lot to expand our channel in terms of both inside and outside sales right now and so while.
We expect good results in the first half of the year certainly similar to last year, we will see revenue weighted towards the back half and we're already laying the groundwork right now for that to become a reality.
Thank you.
Your next question comes the line of James asset.
Hi, Thanks, a lot I wanted to ask Steve you talked about in the press release and then in the prepared comments about increasing investment during the course of 2020 I'm wondering if you can provide some color as to where that investment is directed on what kind of rolls et cetera, and then.
What you expect the outcome and time to pay back to be on that investment to says what kind of calibrating, obviously things are going at least as well if not a bit better than you had expected maybe a little while ago and so just trying to get a sense as to where you're thinking about that investment and and and the impact it will have.
Yes, that's a great question and really that's the right way to think about it we are making investments and expecting to leverage that into our next phase of growth and so the investments really fall into three categories. The first one is the investment we're making in the product and as you know, Jeff Collins joined US as Chief product Officer has just reinvigorated our product organization.
Okay and under Jess leadership, we've decided we're going to make investments specifically in things like dispatch was a big one that we've highlighted as an area. We're excited about for accelerating an investment. In addition to investments were already making in products like records the second area our.
Channel investments. So we mentioned federal federal is an interesting one thats both a product investment there is some work we need to do ticket the product ready for the better market, but there's also a channel investment as we build out.
The channel under under Josh is there and his team and then third Luke mentioned in his prepared remarks, how we're building for scale and a portion of the investment we're making in 2020 is also to help build the business for scale and really in some of these support functions and systems and processes that are going to get.
Really support us as the company approaches a billion dollars in revenue.
As far as the payback that's something that.
Really you can see reflected in our strengthened outlook over the we've got a and outlook for the next few years, that's reflected in the additional tranches that became profitable. So we're expecting that that payback certainly within the next few years.
And again, if you like to ask a question. Please press star one on your telephone keypad re queue.
Alright will do.
We didnt hear that last question right here at axon.
Your next question comes the line of Jeff Im sure.
Hello, there everyone can can you hear me.
Yes.
Okay, great. Thank you as we walk in to 2020, it's interesting the unit composition of your the CW business has has kind of porpoise around a bit I'm wondering if we can expect in 2020 that mix too.
To shift more decisive we over to Taser. So thank you.
Yes, absolutely I think the first half of last year was a time were large and small agencies were evaluating the taser seven trialing. It in the field for 30 to 60 day here is that a time and.
No that led to a little slower adoption in the first half at all and obviously picked up in the second half and we expect to continue to have momentum toward upgrading taser.
These are customers to Taser seven specifically this year, we are very very focused as a sales team on upgrading all of our customers to two shots devices and again, especially taser seven.
And the market is responding well to that concept and we feel like.
We've got.
The most effective and.
Just best overall CW, we've ever come out with we're hearing it from our customers there's excitement over it internationally as well and we have a lot of confidence that we're going to have a year with taser seven this year.
Thank you.
Your next question comes from one hopefully will power with Barrick.
Great. Thanks.
Well I guess first question on AB three obviously really strong quarter and it seems like above perhaps where expectations were at least relative to guidance. So just curious on what drove the I guess the upside relative to prior expectations. How much of that was kind of pull forward and I guess kind of tied into Asia.
Any thoughts with respect to.
Contract manufacturing impacts from krona virus and supply chain impacts you call out there that give you any pause for concern on meeting demand out there.
Yes, great Great question, Let me answer the first part about the general AB three demand was driven by two primary things one is.
In our bundled offerings, we have tap some upgrades one is our tap program, where they pre sign for the second device and so there's a lot of demand for that that we had previously sold in addition to new demand for the product in terms of the Corona virus.
As it sits today our ops team has been working around the clock since is broken we've been in communication with our supply chain too and that actually kind of diversified this with some of the tariff impacts earlier in the year and so as it sits today, we've got a clear path, but this is a dynamic situation like everyone.
We're monitoring it day today.
Yeah, I would just double down this is Rick the the significant majority of those AB three units were part of our hardware subscription plans and what a great things that I believe we actually innovated as a business was this idea of combining a SaaS software with hardware with predetermined upgrades. So they get a new camera every two and half years.
And we saw the power of that whereas for example, Taser seven there was more testing in time to ramp, whereas with 83, because that was on an automatic upgrade plan. We have tens of thousands of cameras waiting for delivery. So really became just our ability to produce and ship. So we've been very pleasantly.
Maybe surprised to stronger we it's been great to see that reaction and that's you know elements you can expect to see it to continue to move toward in our business to it really helps our customers do they want to be on the latest technology and being able to not worry about whether its hardware or software service knowing that with one contract plan with officer safety plan. They just continually.
You know get updated the latest capabilities.
Great. Thank you.
Okay.
Your next question comes from one of Charlie Anderson with Dougherty and company.
Thanks for taking my question and congrats on a great into the year I wanted to focus on Taser gross margins I Wonder if there was a path back to 70% or so they are just.
What you're seeing there in terms of the.
What's embedded in the guidance for 21 for days. Your gross margin. Then also on the cartridge number was very large in Q4, just wonder what's going on there and sort of the interplay between cartridges in units before thanks, so much again.
So this is Rick.
So yes, we continue to we believe Cajun margins will continue the March backup word from here.
Getting back towards 70%.
Sure why do we given the timeframe on that are just mostly general that 70%.
And then on the large number of card shipments. So one of the things that impacted tangible margins last year was we had a margin issue on the cartridges in the first half of the year.
That led to the challenges in Q2.
And I'm, so proud of the team if you're able to not only.
Correct those delivery challenges, but also to engineer a fair amount of cost out on the cartridges now will really begin to see those those cartridge cost savings in 2020.
Because once we got the cartridge redesign done we have a lot of back orders. So the reach those cards cart terms were so I was.
Yes.
We had cartridge down production down for good part of Q3 that.
Demand really built up into Q4, so we had a very heavy margin I'm, sorry to very heavy shipment.
Quarter on cartridges, and we're still struggling with higher than usual scrap is the new design came online in higher than.
The cost should we expect to see going forward. So we expect to see.
Significant improvements this year in margins container business.
Great. Thank you so much.
And again, if you're Lucky you asked a question of the Star one on your telephone keypad.
Your next question comes the line of Jeff Kessler with Imperial capital.
Q.
Thank you for taking the question with regard to the integration of.
Of evidence into the entire package.
Point, you talk you talked about.
The various parts of your program beginning to draw I guess you'd want to if you want to call it draw demand in.
Point do you see enough of the rest of the business.
Out there sold as as the system, so that customers will be asking for evidence as opposed to you having to push push sell it into them.
So since 2008, we've been selling a combined digital evidence management cloud software system with the body camera and now we've been very successful at creating this category of a cloud cloud based software and a connected hardware device.
On in the last few years, we've now bundled that with our taser offering as well and our latest programs include on some of our advanced software capabilities like records, which are mission critical agencies, and we're seeing a lot of demand in those bundle offerings and when we.
Going we lead with the entire capability as a service for how we can create value for the agency and you know the demand is very strong strongest or our highest value bundled offers.
Okay.
And and that ultimately leads to profitability for evidence.
Yes.
Great. Thank you. Thank you very much.
Great. Thank you.
Your next question comes the line of Mike Latimore with Northland capital.
Great Thanks awesome quarter.
I think over last year say, even building on the enterprise.
Software sales team I guess, how many people do you have in that group and how faster than you might grow that this year.
Well look we're making the investments across the business certainly we're making investments on the sales team in the field to get ready to sell additional products like records and dispatch equally important that we're making investments on our customer success seemed to ensure that customers are having a great experience with us and they continue to use.
All of the elements of the bundles that theyre buying we're also making investments on our inside sales team and our federal channel in international and we'll keep investing in the channel until we feel like we have full coverage across the market then so.
We're going to keep adding people to make sure. They have a reasonable number of accounts to manage and to keep adding people to make sure that we offer the best customer experience in the market and when that becomes won't need to add people anymore and one thing I would add Josh This is Rick.
We it sounds like we're not building its software sales team from scratch you know 10 years ago, we add the Taser weapon sales team when we launch body cameras and software was really combined operating a body cameras and cloud software and so there we as we scaled up that team that team is almost entirely people that come from.
Enterprise software sales background, because that there it really is in enterprise software sale that comes with hardware attached and so that same sales team, we're continuing to expand it but that same sales team already has that skill set and they're dealing typically with the CIO isn't the people that are.
At least in the more sophisticated agencies the body cameras being driven by the IP shop that hasnt relationship, but thats sales team. So just don't want to leave the impression that this is a new thing we're building up we already I think a very capable software sales team. We're just now arming them now with very high margin pure software a place that they can.
Well as well absolutely and we're we're focusing on coverage right like the most important thing as these very talented salespeople have manageable territories.
And manageable.
Account lifts that they're able to sell into and.
Certainly we're doing now in a very.
[noise] calculated way.
Great. Thank you.
Your next question comes on line of key Houston with Northcoast No Northcoast research.
Hi, guys. Let me ask is an update on the record systems. Now you guys are few quarters into it actually doing but deployed.
How close you guys actually recognizing revenue on a consistent basis that and perhaps and give us an idea how many customers you have using it and lessons learned over the past few quarters.
Sure This is Jeff.
First I think you know.
We are I am incredibly excited we're all incredibly excited about records for three key reasons.
The first is just hand down the experience you know every single agency we've showed it to.
Simply loves Vacs direct axon records experience its hands down the best they've ever seen in the category, regardless of whether they're ready to switch to it yet we're not.
Number two is the thing we call standards and standards is specifically the module within Axon Records. That's used for use of force and internal affairs reporting and it's a unique fast and high value way for customers to immediately start using and getting value for Max on records right now immediate.
Lead regardless of whether they're ready to switch over their entire RMS, yeah, and customers love It and as we've already seen like we talked publicly before about Cincinnati I in particular, it perfectly tees up their decision to then go all in with Axon Records as soon as they are ready.
To make a change and then the third is as we continue to build this out is the is this is the Sam or the addressable market for the category and I'm incredibly encouraged both by the velocity and the quality that we're building out records at and we're on track just to Dimensionalize that for you that by the end of 2020, we're going to be the.
Obvious RMS choice for about half of domestic agencies, both large and small and we're incredibly excited by the feedback we've gotten from life customers like Fresno and Cincinnati with standards and the momentum is great and we're super excited about it for the rest of year.
Gotcha, sorry, you guys recognizing revenue already or is it still sometime in 2020.
I see that.
No we are not recognizing revenue yet.
Great. Thank you then if I could squeeze another one in here I guess I'll be the one got it doesn't comply with the one question rule you guys help us understand sorry, [laughter] help us understand what's different in terms of federal agency that requires additional investments in the product compare to what you have currently.
Oh, Yeah, I'll take that was no federal agencies just.
The way they purchase is just really quite different it's almost like a just a different language.
So.
Having people with federal sales experience like Richard Colin It's just a different animal from the talent in the sales process after state and local.
Agencies, and then there are things like getting the product through the fed ramp certification.
So what two or three years and millions of dollars of investment.
To be compliant would be fed ramp standard, which is not a standard that applies for the product in state and local agencies. There we were cgis combined with a much easier standard to get to a there's just a lot more compliance flowed on dealing with the federal agencies and so at this point, it's our understanding where are the only cgis Oh I'm sorry, the only fed ramp.
Software products in this category.
Yeah, we've now started to bring agencies online.
And so we're continuing to build that out. We're also you know there will be times, where at federal agencies are going to just have additional capabilities that will lead to invest in there might be different from some of the state and local guys.
Great. Thank you.
Your next question comes from the lines, Andrew Uerkwitz with Oppenheimer.
Yeah, Hey, Thanks team for taking my question.
Could you walk us through some mechanics around and maybe it's already happening that Q in this Q4 body camera number but as we think about.
Some of the larger agencies, you signed two three years ago.
As they upgrade to the the next body camera in the next Taser.
You know because I think a lot of the rollouts early on were phased so.
Well the upgrades also be phased rules be kind of one times all the same time and then and then finally on the back into this question.
As we start lapping.
Some of these bigger contracts.
How does the renewal process work on some of these big contracts. Thanks.
Sure thing so to answer your first question on the upgrades are generally not faced the reason being as early on when you're deploying a new technology.
Onboarding us a set number of users every month or so forth works really well, but then when you upgrade to a different version of the camera that has different features in different docs you want to have parity across your whole agency using the same platform and so all the contracts are designed to support phase roll ups Rollouts out front, but that have an upgrade universally across the agency.
At the two and a half year, Mark and so that's what we're executing on right now in terms of renewals were very focused on that and we have a lot of confidence and we've seen last year with over 100 customers on our new all SP programs that were effectively able to.
Position the value of U.S.P. seven in seven plus offerings and customers are very excited about that so our sales team is very very focused on not only renewing these customers and preparing for their renewals, but also making sure that were.
Demonstrating the value of new features within the bundles and of course.
An effort to convert these customers to RMS as well as part of that process and I would just add one more comment on that often times, we're not waiting for the renewal to come up our sales team is engaged early early in the process on as John said, demonstrating the value. So oftentimes, we're able to upgrade them before the renewal.
Even comes up and get them on another multi year contract on on one of our higher offering.
Got it thank you guys.
And again it seems like you ask a question have extra wondering your telephone keypad.
Your next question from the line of Scott Berg, Yes.
Hi, guys a figure to squeeze one more and even though it was compliant on the first time.
Well done.
[laughter] just a follow up question on gross margins a little bit.
With the AB three camera obviously it was good quarter in terms of devices that were booked in ships I think theres, a little bit of an expectation that the gross margins on those devices will be better than some of the ABTS going forward you gross margins in the quarter were actually a little bit worst sub last couple of quarters can you help us understand maybe push and pulls too.
Move the gross margins on that product categories, maybe over the next one of the two years.
Yeah, Great question, Scott This is Luke and on the Avi Threed actually has a higher hardware Bom cost. So the initial gross margin is not going to be it's actually can be worse than the avi to where we made a big bet is by making not connected camera.
An LTV component so that we can sell additional services and that the bet that we're making as an orbs. So much so that it's one of our key.
Kind of company level bonus goals is to up sell those advanced software features on top of RMB three platform.
Yes, I would just add on there. We just went through our product planning, we had debated about whether due to versions of AB three one with Ltd, and one without because as we mentioned the majority of those shipments were cameras that were owed as part of an upgrade and we could have ship them a camera with much lower cost.
But we felt that we know much more important than short term hardware margins is we're building long term service revenues.
And that it was worth that investment and from a customer experience, we thought well how delighted with our customers be whatever effectively on the ipod upgrade program and I get an iPhone for no extra charge to effectively is what's happened they've got from a camera to an LCD connected camera and we believe that now it's really about proving you know all of the high value services, we can run off.
Over that connection that.
We'll be very enticing so thats the that we've made we'll just have to see how plays out over the next couple of years.
Okay.
Great. Thanks again.
Your next question comes from the line of Jonathan Ho William Blair.
Good afternoon, so what's the incremental investments that you're making this this also maybe temporary in nature in terms of a pull forward or should we be sinking of this as potentially a new baseline level of spend around R&D.
Yeah.
Yeah.
It's an investment we're making in 2020 and given the opportunity that we have ahead of us and I would not expect at this level of investment would continue because as you know we've got these goals in place that are very ambitious and the expectation is with the guidance laid out to try to get to it business approaching 30% EBITDA margins that were absolutely going to start to realize operating leverage it.
Point.
And so I think about those as investments a short term in nature.
Your next question.
Comes from the line Mitchell Hersh Caffrey, what CL King.
Thank you congratulations great quarter.
Could you give us the international revenue for the quarter and update us on how expansion has been going outside the U.S. Thanks.
International revenue was flat at 24 million in the quarter year over year, and Josh I want to add some color on that yes.
Hey, George So ultimately two things say about international the last three years, we made a very very focused effort to shore up what we would refer to as our tier one markets, which are the UK, Canada, and Australia and I'm really proud of the teams in those markets for gaining a dominant market position.
In both.
Cws and in video in those markets, we feel like at this point, we've earned the right to continue to invest in tier two tier three markets now and we expect some of those markets. This year to develop into meaningful contributors to international revenue.
Secondly, obviously, we launched two new products last year domestically Taser, seven and axon body three and we're really proud of the fact that we grew by over 30% domestically last year.
Candidly a lot of our focus was getting those products off the ground domestically. So that this year, we can get them off the ground internationally.
Yeah, I'll just add that typically.
Internationally, both for Taser weapons, there can be a national approval authority. So taser seven will have to go through to get approval in those new markets and that takes time that theres not that delay in the United States and then for AB three the Ltd.
Chips effectively as easily U.S. are different than the ones you use in Europe, and so again, there's a lot we weren't actually operating 83 in those international markets, yet because we had to bring up a new skew that had the appropriate wireless connectivity and that'll be coming online this year and I wouldn't say lastly, jerk that are that our international bookings did grow by double.
Digit percentage last year. So we're certainly excited about the direction. We're heading obviously with bookings those do take time to translate into revenue and so again, leading indicators are encouraging and.
We're going to work really hard this year to grow that number.
Thank you for that and doing this from memory tier two markets, France, Germany, Italy, the Netherlands, and Belgium is that right.
Most of those are correct.
We've got a couple other than others that weve not disclosed and don't intend to at this time.
Got it thank you again.
Your next question comes from Raymond James Spicer Morgan Stanley.
Thank you very much just wanted to ask a quick follow up is that you talked about.
The that you would taking into account a little bit the potential impact from Corona virus et cetera, just wondering if you can help.
At least dimensionalize, how much of a an impact that may have had on the way that you formulated guidance or outlook for 2020 in along those same lines just a little color. If you could on how we should think about the relative growth rates within the different product lines and parts of.
Of the business.
Yeah. So on the first part of your quick question with the Corona virus, a couple of things give us a lot of confidence that maybe different from other companies and you probably very familiar with a lot of the consumer Tech companies have said their forecasts are being impacted by this up for US we don't see.
Going to China at all so there's no revenue impact there the bulk of our orders, we can kind of see into the pipeline and forecast our demand and different from consumer company right doing just in time.
Plan this month in quarters in advance.
So that gives us a fair amount of confidence certainly in the first half of the year to deliver those commitments and in the back half of the year, we're putting contingency plans in place in diversifying our supply chain. So that we can be adaptable to those but but theres certainly risk there, but we've got confidence based on what we know in terms of the proper.
Correct growth to back half of the year, maybe I would you say, whereas you know when when you've got countries going into locked down and consumers aren't going out in buying things that obviously is kind of a big impact on many businesses, whether they're in travel entertainment consumer products.
No. It's early to say because you know we're early in this game, but if I look at this you know public order.
And the investments governments, making infrastructure I would not expect those we adversely affected which were not relying on people going to a store to either to buy something in fact.
I wouldn't say that there could be any positive headwinds but.
There may be public order implications when you start talking about that things are happening in Italy with with significant levels of quarantines et cetera. So we don't have any indications of any negative demand impact.
From Cornerbacks I'd say most of what we would we're more focused on is just making sure we don't get supply chain impacts because we do up you know some support some suppliers in Asia, but we feel we got that pretty well at hand right now.
And then in terms of growth by category I don't think we're going to disclose.
Last year at the moment other than we expect CW to grow by double digit percentages and this year and of course, we've given the revenue guidance already and so.
Certainly more color to come on that as we get through the year here.
Thanks.
Your next question comes the line of Josh Katzeff Osha with JMP Securities.
Hey, I got that gone.
Kind of feel like Amy Klobuchar are right at the end of the debate.
[laughter] hi.
I wanted to ask a little bit about something we haven't talked as much about which is some of the consumer CEW stuff I know that that's or.
Something draw that that we had talked about when I was down there was just an area that we might see more focus on in the coming here.
In 2020, no. We're very focused 20, so 2019 was an important year for us for launches on the devices Tater seven body Dthree and in 2020 were focused on software consumers still very important to US. This is one of the reasons I joined the company with the help brick makerbot obsolete and consumer is very much a part of that.
It's a part of our strategy going forward and we hope to share some exciting updates on that in the future, but at this point in 2020, we're not making any any additional investment in that other than what we're already doing.
Okay. Thank you.
At this time I like to me.
[laughter] any at this time, sorry, I turn the call back over to management for closing remarks.
Awesome, Hey, thanks, everybody, obviously I couldn't be prouder of the team you know we hit some significant challenges at the middle of the year.
We had conversations with lot of folks I'm wondering if we're going to be able to pull it out and we said we're committed to hitting what we said we're going to it for the year and I got to tell you. There was a lot of hard work that went into that.
I just couldn't be prouder of the team and there were a lot of smiles you know as we rolled into December and we were able to to make good on our commitments. So.
Just once you guys you know a lot accretable put blood sweat tier is a lot of hard into I'm, making sure that we met our commitments and.
Thanks for sticking well, that's what we're really excited to see where we can show you and results here in 2020.
So that have a great day, and we'll talk to you on the next quarterly go.
This does conclude today's presentation you may now disconnect.
Okay.
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