Q3 2022 Axon Enterprise Inc Earnings Call
When we meet in an hour of change and challenge.
And a decade of hope and fear.
In an age of both knowledge and ignorance.
The greater our knowledge increases.
The greater our ignorance unfolds.
So it is not surprising.
That's all I'm going to have a stay where we are a little longer to arrest to wait.
If this capital history of our progress teaches us anything.
It is that man in his quest for knowledge and progress is determined.
And cannot be deterred.
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I chose this is our goal.
Bob.
And they may well I asked for pipeline the highest mountain.
John .
All of them.
We chose to go to the mall.
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And then.
The other thing.
Not because they are easy, but because they are.
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Hey, Todd.
Well Sir.
And many of the best.
Of our energies and fail because that challenge is one that we're watching for example.
One we are unwilling to postpone.
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Community impact engagement and feedback solutions and more comprehensive and actionable use of force in response to resistance reporting.
We are also funding third party research to provide insights into common contributing factors to gun related deaths between police and the public. This is big this is happening and this is really really important. This is the moon shots for our generation and we welcome you on this journey with us.
That's around our business is solid and our demand outlook remains strong angel.
You can read more at Investor Axon Dot Com and we look forward to seeing you in 2020 threes.
Thank you Andrea.
Our year to date results, we're pretty excited.
With revenue growth of 32% in the first nine months.
So what's the secret sauce, that's driving it.
Josh It's Brandon will provide color on.
Details and we also outlined for you in our shareholder letter.
At the highest level, we provide products, which solve real world problems. Our solutions work, we make our customers happy we keep them safe and the public benefits.
We benefit and our shareholders.
I've been spending a lot of time with customers and communities on our Moon shot goal because hopefully in the public dream with us deepens, our relationships with the answers about the broader questions about why we invest in the areas that we do.
It also paves the path for us to keep innovating in areas that will make a difference.
We've been really heartened by the by and we've seen on the Moon shot bringing together groups.
Don't normally see alongside each other these include the fraternal order of police the African American Mirrors Association. The major County Sheriffs of America, the National organization of Black law enforcement executives and the National Policing Institute to name just a few.
A common reaction ive been getting about our moonshot, who is all this all sounds great, but how are we going to do this.
Look we don't have all the specific answers just yet just.
Just like with Jack Kennedy Challenge the nation to put a human on the moon not all the tech existed yet.
But we have a good idea of where Exxon can invest to move the needle.
Using technology to solve deeply entrenched challenges because why I founded the company and why we are here today.
<unk> has been and will continue to double down on our investment in things like.
Number one.
Non lethal tools, such as our enormously successful Taser platform.
We believe the majority of Taser adoption remains in front of US we're still under 10% penetrated in terms of our global Tam.
And we're working on some really exciting.
Citing technology over the next 10 years to help hit our goal.
Number two virtual reality, we're seeing a lot of interest in our VR training, which we sell on a subscription to customers.
Number three cameras and sensors that never Miss a moment over the next few years youre going to see US introduce next generation body cameras, and we will keep them a tie between our real time operations and our devices.
Which brings me to the number for <unk>.
Real time and remote response.
The public safety sector deserves public safety, Great communications tools that are easy to use as consumer technology.
Ladies are better situational awareness and it will help them improve their decision, making and their ability to respond effectively.
Also we believe that remote response can limit human exposure to danger.
Is that removing the officer from harm's way at least to safer options for everyone and this is why we are investing in axon air our drone solutions as a first responder as well as counter drone technology.
Number five with investment community impact engagement and feedback.
Such as <unk>, which is a tuck in acquisition, we completed last year of a company that essentially allows the public and rank and file officers to anonymously deliver feedback to police leadership. This tool is already helping police departments deepen trust with their communities.
Number six we are investing in more comprehensive and actionable response to resistance reported. This includes both traditional use of course and Deescalation data.
The data collection tools today, either don't exist.
Talk with each other very well or this data is just not collected in a way that's very useful we believe the public is hungry for better data, especially on incidents involving issue for us and we believe we can meet this need and we need this data to reach our moon shots.
Now we know the moonshot vote will not be easy, but we also know that the private sector companies like Exxon has a unique role to play.
As I look at our team, which includes leaders like Joshua Brittany I.
I am confident that they will ensure we continue to invest prudently with a high degree of accountability to all of our stakeholders driving a business model that creates impressive value creation solve some of the most challenging problems facing modern society and delivers great shareholder returns.
So with that I'm going to turn it over to Josh.
Thanks, a lot Rick.
During last quarter's call I mentioned that the primary thing we can control is where we collectively focus our attention. Our sights remain set on continued topline growth, which I will address and margin expansion over the long term, which Britney will cover.
We are increasingly confident that we can do both well in parallel.
On the top line, we are very pleased with quarterly revenue of 34% and our Q4 outlook for 40% growth at the midpoint.
We're having a strong year and we are seeing a strength and strengthening strengthening of demand across all product lines.
Britney will unpack the revenue growth in the quarter for you shortly but I'd like to take a moment to touch upon what we believe will sustain healthy growth rates of 20 plus percent for the years to come where.
We're growing along two axis. The first is expanding our product suite for existing customers, both Rick and the shareholder letter.
About our product roadmap.
We believe we.
We can.
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Value.
And wide runway for continued growth we believe that in the next five years, you will see axon emerged as the leading operating system for public safety strengthened by our strategy of focusing on the customer experience and not Cobbling together point solutions that don't work well together, which is the current state of the industry.
Beside of axon. The second axis is diversifying into new markets by both adding new types of customer profiles or users and by adding to our core customer base. You can think of our core customers as falling into roughly four categories of funding sources. The U S state and local governments the U S Federal government.
International government customers and commercial enterprises simultaneously the types of users we are adding to our platforms is expanding beyond beyond law enforcement, we are adding attorneys fire and EMS personnel corrections in the U S military and the funding for those tight.
Of users generally rolls up into the four sources I mentioned.
Like to update you on two of those four first our progress with the U S Federal government and second touch upon international growth.
We are very excited about our U S. Federal government business in the first three quarters of 2020 to the federal government has book contracts exceeding $200 million.
Up from an approximate 15% to $20 million run rate just a few years ago annual revenue has grown to the tens of millions in our deliverables now extend over the next several years, our progress with the federal government as a direct result of our intentional investments in both sales channel and product.
We have been building trusted relationship with agencies that are now finding value in our products and missions and our commitment to helping them be successful.
And while we can't necessarily name all of those.
Customers.
Yes.
Brett.
Deb.
Yes.
Seven.
Interest.
Alright.
<unk> <unk> and even the accelerators to international growth. The first is continuing to innovate on our Taser platform. We believe the total taser install base has room to grow by more than five times over time and as we continue to develop technology that potentially matches a pistol in terms of staff.
<unk> power, we think we have the opportunity to become the primary defense weapon in several international markets. The second thing, we're focusing on is helping European customers overcome their historical resistance to cloud solutions. This is a playbook we ran in the U S. Starting in around 2012 domestic.
State and local customers at first were very averse to cloud hosted software and we successfully evangelize the cloud to build a business that now topped $400 million in annual recurring revenue.
We are starting to chip away at cloud acceptance in the EU and we see European governments, starting to adopt other commercial services for cloud and we believe that this bodes well for our international SaaS business just like in the U S. Once we overcome that initial aversion strong adoption of evidence management will fall.
Low <unk>.
Finally last quarter I told you that I am working on building the team that axon needs for the next five to 10 years, we're thrilled to introduce Brittany Bagley as our Chief Financial Officer, and Chief Business Officer. She brings a wealth of experience not only as a public company CFO , but also as a seasoned board member and Investor in the technology.
<unk>.
We sought to attract an executive who brings a next play mindset versatility mental toughness and a strong capability to deliver outsides outcomes.
And we're excited that Brittany.
Brings all of those qualities to axon based on working with Britney over the last 40 days I can say with confidence and excitement that the future of axons core strategic and financial functions is very very bright and I'll hand, it over to Brittany.
Thank you Josh.
Hi, everyone I'm thrilled to be on my first official axon earnings call.
I wanted to start with a big Bang the team for making it such a great quarter, and then Jim needle for doing such a nice job in the interim CFO Paul.
It's an exciting time to have joined such an incredible company.
I'd like to share a little about why I joined and where you'll see me put my focus over the coming quarters.
While there were many reasons to join three main ones, but I would like to highlight include the strong leadership team the company's inspiring mission to protect life and the compelling business model.
On that last one, especially I think the combination of the hardware ecosystem. The company has been building along with innovative software solutions.
It's a powerful flywheel that as well.
Growth and profitable, which provides a relatively rare possession in the technology world.
Additionally.
Delivering mission critical product.
<unk> safety customers, who purchase on long term comp.
Max.
Makes sense.
Both for the pitfall.
Paul.
As Josh discussed we continue to have a lot of growth in front of us and I look forward to supporting our mission and our profitable growth trajectory.
At that point my areas of focus will be on helping the team continue to execute and deliver strong results over the next several years.
As both CFO and Chief business Officer, I get to take a strategic and holistic view of the business to ensure we're making the right long term decisions to deliver on our mission and our financial promise.
Near term that means spending time, better understanding axons gross margin potential and how I can help move the needle on other metrics, we care about including overall profitability and cash flow.
We see opportunities to improve gross margin by investing in automation driving manufacturing efficiency and improving fixed cost absorption as we scale.
Driving the revenue mix further towards software is also a key gross margin lever over the longer term.
We are also focusing on controlling opex by enhancing financial discipline, while still investing in research and development and sales channel expansion to support future growth.
In addition to leaning in on operational areas of the business I'm also focused on helping Exxon to deliver upon its strategic ecosystem vision.
Leveraging partnerships investments and M&A to truly become the leading technology hub for public safety.
Turning now to the quarter.
Our domestic business grew 37% year over year in Q3 and continues to make up more than 80% of our revenue.
This strength came across the board supporting strong teaser segment growth at 19%.
Along with Great software and sensors segment growth at 51%, which was driven by sensors growth of 51% and axon cloud growth also at 51%.
One of the great things, we are seeing domestically is strong demand for the premium versions of our products and bundles beyond the strengthen our core business and the traction we're seeing on our software and cloud revenue. We continue to be excited about other areas of growth, including our international business, which delivered 20% growth in Q3.
We had a strong Q3 gross margin of 62%, which represented more than 100 basis points of sequential improvement.
The increase was primarily due to the strength of axon cloud and the overall product mix in the quarter.
Axon cloud gross margin in Q3 benefited from our new long term contract with Microsoft Azure.
This benefit will continue we also have low to no margin professional services costs, which supports the setup of these contracts and the mix can change quarter to quarter.
That doesn't change our view on exceeding the long term target of 80% plus for the software business, but we do expect quarterly variations as a result.
In addition to the sequential gross margin improvement the strong topline revenue allowed us to achieve the operating leverage in the quarter and resulted in adjusted EBITDA of $68 million or 21, 7% margin.
Finally, I wanted to touch on our outlook.
Given the strong quarter, we are raising our annual revenue guidance to a range of 1.15 billion to $1, one 6 billion.
Which reflects about 34% annual growth at the midpoint.
This also implies Q4 annual revenue growth of 40% at the midpoint.
Turning to our adjusted EBITDA, we are raising our outlook from $200 million to a range of $215 million to $220 million.
We believe demonstrates strong performance on profitability.
Our Q4 adjusted EBITDA is expected to be in the range of 49 million to 54 million implied margins are down slightly sequentially from Q3 on product mix and less opex leverage but remained strong overall with an almost 19% EBITDA margin implied at the midpoint for the year.
We are proud of our performance and outlook and they speak to the bigger picture that Rick and Josh talked about which is the overall strength of the business we are building.
We look forward to delivering another strong Q4, and setting ourselves up well for 2023, as we execute against our financial objectives profitably delivering a 20% plus top line CAGR going forward.
With that I would like to open it up to questions back to Andrea.
Thank you and we have you all in the queue. So if you're on the call assume we've got you.
In the queue. Thank you so much well take our first question from Josh Reilly at Needham.
Go ahead Josh.
Alright, thanks for taking my questions.
Very impressive results during the quarter.
I guess, maybe starting off.
Had a pretty significant revenue beat here, obviously, how much of a tailwind are you seeing now from a stimulus government funds from programs like the ARPA.
Beginning to hit budgets.
Or is that something that you see more of an impact in 2023 and beat in Q3.
Is that driven more by budgets that haven't been impacted to date by those budgets.
I don't Josh I appreciate the question and nice to see again, I don't necessarily think theres a ton of correlation between our momentum and results in any one time or kind of recurring government subsidy for us.
Ramos.
I think.
Ultimately we are building a very strong business, where there's a very high ROI on our products and our customers continue to see that and not only buy more of them, but by more and more premium levels in licenses and so while those are nice.
Moment in time types of tailwind for some customers I don't think they have any major implication on our continued growth and we're very confident that's independent of those factors were building, a very strong and consistent business.
Got it that's super helpful. And then the Taser gross margin was down sequentially and remained probably below where you guys wanted I know thats. The focus now for Britney and Youre evaluating cost there, but was there anything specific in the quarter.
That brought the margin down sequentially or any color there would be helpful.
Yeah, I would say that we have been investing in everything related to our manufacturing capacity as well as supply chain.
For the teaser until you have seen that impact the gross margin this quarter and a little bit year to date I think it'll be one of the big areas of focus as we look to improve gross margins is making sure. We can really scale into those costs and scale and we get leverage on gross margin over time.
Got it thanks, guys Congrats again.
Thanks.
Next question from Jonathan Ho at William Blair Go ahead Jonathan.
Let me Echo my congratulations as well I wanted to start out with your commentary around sort of the higher end bundles and maybe customer behaviors that are leading to more selection of that higher end bundle and just want to understand.
Why you're seeing this behavior and whether you expect it to persist or not.
Yes, certainly Jonathan I think the first thing I'd say on those bundles as even though we're seeing a lot of demand. There is a ton of white space ahead of us in terms of adoption of those bundles, especially the specialty in state local and it's really driven by the adoption is driven by the idea of that.
<unk> bundles, we're adding more and more value added add ons and so jeff's team is doing a fantastic job understanding.
We accidentally called you're back.
Oh, sorry about that.
The I think Jeff's team is doing a great job of understanding.
Some of what.
What the customers are wanting in future releases of our products and then going back and building those things that are highly valuable and example of that is transcription and another examples VR both of which exist in our in our more premium version of the officer safety plan and that's driving a lot of customers toward those bundles and so we will.
<unk> to iterate on that strategy and make sure that you know the things that are the most highly valued in tandem with our core products appear in bundles in a way that makes the customer excited about the potential of buying all of these items and features at one time and one license Hey, Josh I would add to it as well what I can tell you with.
Customers.
I haven't.
Can't think of a customer that has been gone up to a premium bundle that has gone down the other direction that the more stuff.
They use from us the more value they see in it is very similar this flywheel effect, where what I'm hearing from customers is they just want to put more of their solution set with dot com.
They struggled with technology.
Hamstrung by really long complex procurement rules that make it very difficult for them to be agile and with what theyre doing.
And so I think we've earned their trust and it's really incumbent on us to keep earning at every day. So we don't break this dynamic but it does seem to me that.
Theyre pretty consistently moving up the up the ladder each time, we launch something that integrates with the other stuff.
It's paying off that hits, its working well and we get a lot of interest goes for awesome execution adjusting the product group.
Excellent excellent and just as a follow up with the U S fed opportunity U S. Federal government opportunity Whats I guess been most impactful in terms of helping you break into this market I mean, obviously incentives hoggatt target for a number of years, but it sounds like things have improved from a step function perspective.
What initiatives or what level of education do you have to sort of provide to kind of get further into the U S that opportunity. Thank you. So I'll start and then maybe hand back over to Josh I think investing to get fed ramp accreditation for the overstock com system early.
It was a bit of a bet when we did it right. It was expensive it was.
Difficult to invest in that and I think for this data we're still the only fed ramp.
Sure.
Our credit or certified system and all of these federal agencies that want to use the cloud.
That obviously gives us a tremendous advantage and then we've obviously seen things like the bite administration moving towards standardization.
<unk> cameras.
And then Richard Coleman, who we hired a few years ago is really I think they've done a great job building out a team.
That really understands the federal space to installing some fantastic relationships.
Yes, I'd, just add to that Rick, especially on the last point.
For us every problems starts with how do we build a strong team full of subject matter experts that we can trust there.
Instincts and expertise to execute and when we brought Richard in that was two five years into our business and we haven't quite practical <unk> on how to run.
A growing federal business and just.
Bringing him on along with a very talented team.
With him as well as more and more product focused as just unlocked. This this amazing opportunity and even though we've had a phenomenal year and seen a literal tenex in bookings at this point in the last few years, we still think we're very very much on our own side of the field in and have a long way to go.
To maximize the full opportunity across federal but we really believe we have the team in place to do that.
Thank you.
Thanks, guys next question, Eric Lapinski go ahead, Eric and from Morgan Stanley .
Thanks, guys, maybe I wanted to follow up a little bit on the federal side, because it looks like at least the deal with the veteran affairs was pretty comprehensive across the product portfolio.
Whereas I know your other federal agencies, maybe with some products, but not all of them I guess just would be curious on that like as you're moving into newer federal agencies do you see the opportunity for more of a sizable kind of across the spectrum deal upfront.
Maybe you haven't seen one that included fleet previously so it would be good to just kind of understand the vision there that some federal customers are having and kind of if you are seeing more of that let me start first and then I know Josh is going to want as awkward as to I would say this is where we see the advantage we have.
Talk about being ambition focused business and a lot of times that can sound like puffery or.
Kind of fluff, but it really is true.
We are running this business to solve problems, we're passionate about and of course, we also want to run a rigorous business, where we have financial models that makes sense, but.
The financials come from the problems, we solve and infusing that in every employee.
Right.
I'm impressed with the team and the attitude they've got where it's all about keeping our customers productive and safe unhappy and we really give a lot of latitude to our teams to make things right.
And where that pays off is.
We don't think of these as just contracts, we're going to sell and make a few bucks to move onto the next one until we get phenomenal customer references and the investments we make in really delivering a great product to the end user not focusing on winning the band RFP.
Sort of bureaucratic process I think builds the types of things, where you see these relationships where people even relatively early on their cross checking with our other agency customers that are similar and they are getting the confidence to to give us a large part of their technology ecosystem. So I think thats. The underlying thing is the <unk>.
Focus of the team on really with passion around the business to build things that that really for life and protect our customers that give customers the confidence to go do that.
And it over to Josh maybe give a little more.
I'm proud of our federal specifically.
I think Jeff was going to chime in first Greg Yes, Sir.
Totally echo everything Rick said, and then combined with that.
You've heard us talk a lot whether it's in margins are in many other places about scale on our flywheel and leverage over time, but in the way, we invest and deliver our products for customers as we do these market segments expansion. The same thing is true there as well because you can think of leverage where we've spent a decade on our core dams and.
Cameras products, and then even longer on Taser and at this point even internally what we have is small surgical dedicated parts of our engineering team for these expansion markets like federal who can inherit all of the common aspects of those products that are already fit for purpose for all segments were.
Competing in but then overlay on top of that in a very focused way, what our federal customers need to tailor those existing products to unlock federal and then over time as that keeps getting even more and more large and well situated youll see us build bespoke products that might be first for federal after we've earned the right.
By building out those sockets with loyalty to the products that we already had.
And I'd just add finally, I think to your question about fleet specifically Eric.
In Federal I think it's just an example of in some cases, we will have one or two products off the bat that are nice fits for the customer and we'll land in Atlanta and expand for lack of a better term from there and then there'll be other customers that.
Let's see the value across the board in terms of what we offer and want to engage in a more extensive contract upfront I think we still maintain the belief that either way longer term the customer ends up in the same place, which is very happy with exxon's full suite of products.
The VA is a great example of an agency that trusted us on day, one to deliver all of it and in some other cases, we will see.
That same phenomenon overtime.
Awesome. Thank you that's really helpful and maybe if I could just sneak in a follow up but more focused on record it looks like in the release you included at this point you kind of a 40 agencies in 12 doing our forward placements.
Just as we think about obviously a full replacement of very intensive workload. How much are you being relied on for that type of work and do you see opportunity to potentially streamline that or build software around it over time that makes it kind of more simplified I guess and moving fully to records and just.
To understand maybe some of the timelines you're seeing with with those 12.
Sure I'll take that so like we said were I think like you see when you talk to anyone in the industry, where we remain.
These are big complex deployments, just like ERP systems, and things like that and there is nothing that will ever change the fundamental physics that those are big complex systems, because they are big complex work to do but we are.
We remain extraordinarily optimistic and confident in our long term trajectory and growing our leadership position in this segment, but we're approaching it and we think a humble and disciplined way one deployment at a time and as you heard us share.
We are both continuing to go up into the right steadily and in agencies adopting records overall and for their full deployment and.
Our ability to continue to scale up a number of those that we're working on simultaneously and the amount of bespoke work per each successive deployment. Both of those are going in the right direction and so I think youll see continued steady and accelerating momentum there, but we also are not going to get over our skews and.
And B to chess BD before we've earned it.
Awesome, Thanks, and congrats on another good quarter.
Keith Knudsen that kind of keep your eyes.
Thanks, Ryan on mute myself here Guy.
Again, I'll echo everybody else is saying.
Phenomenal quarter.
But as we look at some of the individual results Axon fleet sales were down 15% for our year axon dock was down as well because the quarter of even the even better I'm, assuming if you had access to some of the I guess materials, you've got a lot of the areas, perhaps rather bit of color on some of those two items that did not perhaps good well alright, I'm seeing your portfolio.
Yes, certainly Keith and I don't necessarily want to speculate on what the quarter could have been and we're really proud of where we landed but I think it is an indicator that the future looks bright for a variety of reasons, including increased fleet shipments, we did run into one or two minor items with the hubs that power our fleet unit.
From our supplier, but the good news is in Q4, you'll see that demand rebound substantially and we expect to see our best ever shipment of fleet quarter of shipments.
For fleet, specifically in Q4, and the strong demand continues well into the future there and we're very excited to continue to build on our market lead in that product line.
Great and then just as my follow up but maybe Britney I'll put you on the hot seat here for you first time.
As we talk about the Moon shot go how does that fit into axons I guess existing R&D budget and our financial profile.
Yeah, I mean, I think no way, we philosophically think about it is that we can achieve both really healthy top line growth.
And you know head towards that moonshot, and do that profitably and have a really nice bottom line as part of the business and so to your point that will be a balance for us as we go forward.
But of course with our growth, we're not going to stop innovating, we're not going to stop investing in R&D, we're not going to stop coming up with great new products and so it's just a lot of those will be focused on helping achieve that mission, but all inside that financial profile that that we think is the right long term profile for the company.
I guess I see it in Norway that associate extremely great expense increase for R&D as a result of this large goal.
No. There's nothing specifically, we're calling out on that I do think we will continue to invest in R&D and we've been consistent on saying that but does it wouldn't necessarily change that profile in a way, where we're calling out today great. Thank you appreciate it.
Thank you Sami Badri at Credit Suisse go ahead. Please alright. Thank you.
My first question was on the 20% annualized growth target I was hoping you could kind of give us an idea on how youre going to get there either by new subscriptions existing subscriptions that are seeing some price increases as a function of new features maybe you could kind of give us an idea on the composition of that 20% growth and then my second question is on Capex.
Looks like your guidance was reduced for the year could we just go through the puts and takes on that please.
Sure.
I'll start with the <unk>.
Revenue growth question, and then hand, it over to Brittany for the Capex question I think Sami there as one of the beauties of our business and business model is there's a lot of different ways. We can achieve exciting growth and it's not one specific thing I think there are some of the things you mentioned are very much in play will continue to invest in new products that delight customers and <unk>.
Cause customers want.
I want to buy more at higher pricing tiers, and more premium bundles, but I think it really boils down to two specific things. One is we're going to do a really good job of building new products for our existing customer base, meaning state and local U S, especially how do we introduce new products into that base over time.
And the second one is applying existing products to newer markets like international Federal and enterprise and we really believe we're doing those things well in parallel and we'll do them even better in parallel next year and of course by doing so that opens up kind of.
Growth opportunity on both of those axes, so I'll probably leave it at that for now and hand, it over to Brittany for the Capex question.
Thanks, Josh I mean, I think the only thing I would add is I think it's exciting how many levers I see the business happening in terms of where and how it can grow there is an enormous amount of opportunity. So.
Now you have to you have to focus and make sure youre executing against them and going after the right one but the opportunity is there.
From a capex standpoint.
Just highlighted is we are making some capex investment this year and some of those are getting really pushed out to next year.
It's more of a timing piece than a fundamental change in strategy.
Got it I have one more question and it's mainly on working capital and just inventory.
Do you foresee inventory levels, just consistently stepping up from now all the way, perhaps maybe until the end of 2023, just a function of supply chains and components and all that all those other factors that are essentially increasing inventory levels.
So I'd say, there's two things right now that are driving our inventory investment. One is we are still not out of supply chain challenges. So we still have products that are supply constrained that we would like to get back in stock on and get to a better inventory position and then I.
Two just with the types of growth we're seeing.
Across some of our products, we need to continue to invest in inventory to support that top line growth. So I do think you'll continue to see that be just a strategic area of investment I think at the same time.
One of the things I talked about is really making sure we are arguing the job with our free cash flow and so as we get to 'twenty. Three we will have to work to make sure. We're appropriately balancing strong free cash flow generation with making sure we have that inventory we need to support the top line.
Got it got it thank you.
Thank you Paul Chung Jpmorgan go ahead.
Hey, guys can you hear me.
Yes, Okay. So just another follow up on the.
Free cash flow, so you're putting up.
Record numbers herein and haven't seen free cash flow conversion surge as well talk about how the firm has driven the higher conversion business kind of sustainable here.
You know I think it's been a big area of focus the team has done a nice job specifically stepping up what they've been doing from a collection standpoint, and paying more attention to our accounts receivable and so that's a lot of what gets US I think as we go through the rest of the year or two.
Our key free cash flow target.
And again I think it's just of course, we need to balance with our inventory investments and making sure. We're in the right place from that standpoint, making sure from a capex standpoint, we're investing in the business, where we need to invest in the business, but there.
There should be some good free cash flow characteristics that we can continue to focus on.
Okay, Great and then just a follow up.
On the investments you are pursuing we saw a lot of that at the at the show So where are you seeing some momentum across your investments.
What can you what can really become more material over time, where you get excited about on the investments there.
Yeah.
I'll start and then maybe I'll, let Jeff jump in a little bit but.
I get excited in a couple of places one.
There really is this incredible ecosystem that the company has created where the hardware and the software have a flywheel to benefit each other you heard us talking about how more customers are buying the premium part of.
Our business and so that's that's really proving out the software.
And so I get excited that we can make investments and partnerships that continue to drive that ecosystem at the same time with my CFO hat, where we're going to be thoughtful and we're gonna be disciplined about where and how we invest but I really do think we have a unique opportunity in front of us with that as the lever to continue to pull thing.
And I think what's great and the more you can bundle some of these products together the more powerful each one is and so on.
It's just a great opportunity there, but Jeff I know you spend a lot of time thinking through the ecosystem and products and where we should make investments. So if you want to add anything sure absolutely. Thanks, Britney and again. Thanks for the question, Yes, I think of it of course, very similarly, I think kind of three three to three core areas, one as Josh said earlier and Rick.
Alluded to and people not stepping down the power of our of our bundled sort of delay my own Amazon roots and the power of things like crime or other similarly, situated model. The fact is that giving customers for a fair price that they already think is a great deal even for a subset of the benefits that they already know they want.
To use and then once they've done that they have access to at what feels like free to them.
Additional and steadily growing set of product benefits that just light up in fact, just today I was talking with one of my team members, who is that one of our major city customers who've already and a particular level of our bundles, but they werent using Ah.
Performance for example, and they had been approached by another company with a standalone product at <unk> and then we help them realize and remember that they had access to performance.
And boom I've asked and we started using it and now they are more excited about the bundle than ever I think the second across our ecosystem as you've heard Andrea and all of US talk about is not just our own first party products, but more and more and more the story or the narrative or the idea of the axon network.
Is becoming more and more tangibly real as customers have and use both our own products and our partners products, whether thats block or fuses or drone SaaS or D drone.
Yes, it's great that they can sometimes by those on one piece of paper, but the actual products themselves light up in ways that we're at we're just.
Moments in a video demo vision IV are not too long ago and now they are real and then the third that gets me excited about in our own products as more and more of these magical connections and leverage from our software services, adding value to our hardware even ones that hardware has already been deployed in the two greatest exam.
<unk> of that or respond and so there are many many many.
Hundreds of thousands of our <unk> body cameras that are now.
Have respond paid licenses connected with them and those agencies using those real time connected features respond which is both a paid AD on and great value and LPR as a software connection to fleet three and the absolute peanut butter and chocolate combination that our customers are.
Finding of having both the world's best hands down Standalone in car camera system, but that being connected to the world's best cloud powered.
Democratized access price point, and ethically design LPR system. So it's those connections both inside our first party products and across us and our partners products.
That's super exciting for me.
Alright, Thank you very helpful.
Right.
Power at Baird go ahead will your App.
Okay, great. Thanks, I guess, a couple of questions first one probably for Josh maybe Jeff, but youre, a nice acceleration in software revenue in the quarter I guess I'd love to get any other color around the key drivers of that how much of thats tied the OSP seven plus adoption and attorneys and dems I mean, what's what's kind of.
Leading into that acceleration, where you've seen last few quarters.
Yes, certainly well nice to see you again I think it's really just a combination of a few things driving more users to our more premium licenses expanding our user base to more software only use cases outside of kind of core state and local you mentioned attorneys that that's certainly a big one and there are others.
Along that same realm.
And then just increased overall adoption across evidence dot com, even within the state and local we continue to add new users every quarter and we see some of that also in federal and international and enterprise as well so it goes back to <unk>.
Really focusing on selling more into our existing markets and then opening up new markets in parallel and that's one of the places we're seeing some of the result and of course, there is theres a lot more work to do there as well.
Okay, and then maybe just a second question.
For bread Nate just as we look at large and EBITDA margins going forward I know you touched on it sounds like you expect EBITDA margins to dip in Q4, I guess it'd be great to get any additional color. There isn't there isn't any higher revenue that I think at least.
Modeling previously obviously down from Q3 of the seasonal issues. There Q3, obviously help myself by the outperformance on the revenue side.
Then I guess in tandem with that just your broader thought process on EBITDA margin expansion over the next few years as you move into 'twenty three.
Is that kind of comp look like relative to point to any other kind of framework you can help us work there.
Yeah. So I think a couple of things going on in Q4 are we talked about having slightly less leverage on our opex. We do continue to invest in opex as we head into the fourth quarter of the year.
We have also.
A little bit about how.
It's still a very positive margin for the overall year, So we'll get to almost 19% EBITDA margin, but I think if you.
You look at sort of last year to this year, what you really saw with gross margins came down year over year and up a lot of what was impacting our EBITDA margins year over year. So we actually have managed to get some opex leverage.
If you look at some of those numbers and so as we look and start thinking about what is that going to be like in the future. That's one of the main reasons that I'm really starting by digging into gross margins and where can we get some continued leverage in gross margins.
All can then flow through to the bottom line and support what we come out with in terms of longer term EBITDA targets. We will have more for you on 23, when we get to our Q4 earnings call, but really looking forward to digging in there and being able to provide some more of that color.
Okay. Thank you.
Yeah.
Jeremy Hamblin at Craig Hallum.
Thank you congrats.
Brittany I want to follow up on that last point actually so gross margin performance was pretty solid in the quarter, especially with.
A lot of the revenue upside tied to AB three cameras.
<unk>.
And now that you've had.
Obviously, it's still.
Getting familiar with the company and the opportunities and so forth but.
I sense that there is a is notable tone change in terms of opportunity on gross margin.
And that that may be like a key focus on a go forward basis of where there's opportunity.
So I wanted to get a sense for the timing.
While a how much low hanging fruit you think there is.
Because maybe.
We're going to gain 500 basis points, how much of that is easy and how much of it is youre going to have to work hard.
So I wanted to get a sense of.
How much opportunity you think there is overall.
And then also the timing on.
What do you think.
Again, I'm, just throwing something out there, but how much of the gains you think could happen in the next.
18 to 24 months versus a five.
Five or six year slaughter.
Yeah No I appreciate the question I mean, I would say I think that the business has been well run and so.
I wouldn't say, there's any glaring low hanging fruit, but I would also say, it's a business that has come through many of the supply well still in many of the ongoing supply chain challenges. So the company has been paying PPV and having to invest in manufacturing capacity and automation in all things I think.
That has been talked about but should start to see some benefits going forward as we continue to grow as we continue to get scale on some of those investments and hopefully as we get to a more normalized supply chain.
Saw the growth in software, which is higher margin for us so that product mix is very important going forward I think all of those things are.
Things that we're going to need to do to drive gross margin improvement.
Okay and then in a similar vein then in terms of I'd also sense that may be.
Your your Opex growth might also be.
A lot of investment over the last few years and.
A lot of that was new product rollout and not that you're not still iterating from there, but it does I do get the sense that now your.
Youre going to mature or realize some of the opportunities in those businesses.
It's taken them four or five years to lay the foundation.
And start to see a little scale is that.
A correct read that.
Obviously, you continue to invest but maybe the rate of growth in your opex might be a little bit lower than what it's been the last few years.
I mean, I think that we're certainly looking to get some good opex leverage as we continue to grow but I also I don't want to leave you with the impression that we're not going to continue to invest in that growth because the opportunity in front of US is just so enormous.
You should all want us to be investing behind going after that and so I think we're going to continue to be really thoughtful about where we do that and make sure. We're getting a good return on those investment dollars, but.
Both from an R&D standpoint, and then some of these new channel opportunities are big and you're starting to see that pay off in federal.
So we would we would like to keep doing that and keep driving that top line growth just just doing that profitably and making sure. There's a good balance there and a good focus on really getting return for the dollars we're investing.
Great. Thanks, so much for the color. Thank you.
Thank you we'll go a couple of minutes over Eric Supergirl at JMP go ahead.
Yeah. Thanks for taking the question on the International front can you talk a little bit about kind of the.
Near term strategy.
I'm not sure if there's a timeline associated with the.
The five X.
Opportunity that you envision there, but can you talk a little bit about kind of your lead products and how youre going to develop the international markets sure I think generally speaking the focus Eric is is really to land with one product whether it's on the CW side. The video side interview room in <unk>.
Our video any of our digital evidence management products and there will bet on ourselves to continue to grow the adoption and.
Numbers volume of that one product that will also grow the adoption and volume of other products along the way. So right now we still remain focused on.
Doing everything we can to grow in the.
The U K, and Canada, and Australia as being our tier one international markets, but also just finding one product to fit in all of these other large national police forces and from there.
Supplement with with our additional products and I think its working well we've seen a lot of interesting taser adoption. This year in markets, where we haven't really participated before but we also see a tremendous pipeline going into next year and the year after not only across taser, but across body cameras and cloud. So we're very excited.
The prospects of international and it's it's really about that land and expand strategy that we talked about earlier in the call, let me jump in and help them.
I think in particular this moonshot right one could look at that and say, okay, well, how do I tie that back to the financial returns of the company.
What we're trying to do is push ourselves not to just think of in particular, the taser as a product that we're going to incrementally.
Making marginally better than the last version, but how do we absolutely support how do we become the primary defensive weapon and one that doesn't kill when we do that we will move the taser from a specialist item, but a few officers or a specialized team may have to wear every officer is going to need one now in the United States. Please.
Carry a taser on one happened had gone on the other in most international markets, we don't see that dynamic happen where.
Thus, even as I think.
Maybe a more American approach to carry both devices when we start to approach the stopping high reliability of a vessel with a non lethal weapon I think that will be a game changer.
No not in the United States, United States has unique challenges because of the gun culture broadly in the country.
You may need to carry both for quite some time, but if you think about it.
Germany, Spain, Victor International country, where officers are routinely wearing here guys. If we can give them something that's similar in performance stopping power I think we will see those countries potentially shift to wear a taser weapon can become their primary device and suddenly we go from 5% to 10% of a police force.
Two approximating, 100%, so I think that sort of thinking is going to pay off in really breakout moments of growth for us, particularly in the international space. So.
And then the other piece is the cloud we are hammering away, it's taken longer than I thought it would.
In Europe in particular to get acceptance to the cloud over the same objections, we saw in the U S. A decade ago.
Seeing some some bright spots and signs of life and I think if we get one or two leading customers to crack and prove the cloud is safe that we'll start to see the dam break there as well so I'm, particularly excited about the international opportunities led by Taser to Bob.
Does does the Taser take time, you had talked about the moon shot in getting to the point, where it starts to obsolete. The bullet does that imply that the lead product would be.
Sensors, and the dems until the Taser starts reaching that level or.
How do you think between those two.
Many markets with Taser has already lead products.
It tends to bring us I think into more markets because of its unique.
Value proposition, but I think that will accelerate as we.
We need to step up its capability to move from a specialist capture tool to a highly reliable personal defense system. Although if you want to make any additional commentary Josh.
I think that covers it Rick.
We will take questions from one more analyst and then Rick will close this out Logan hanging from Northland Securities Europe .
Thank you and congrats again on another great quarter.
So with our first question, we are hoping that you guys could shiloh light around.
What percentage of sales is currently coming from the federal government and how do you guys expect that to change come fiscal year, 'twenty, three and 'twenty four.
Yes logo I appreciate the question and thanks, a lot of I don't know that we're going to go into that level of detail right now I'd say.
Our focus in federal continues to remain on growing bookings in total contract value with the expectation is that close to the top line and revenue not only upfront as those contracts are signed but over time, but.
At this point, we're not prepared to break out federal revenue.
And maybe we will reassess later, but at the moment were stick with the way we're reporting it.
Yes understandable.
And then so our next question is what should we anticipate for fourth quarter bookings. What are you guys kind of noticed so far and do you expect that to be the highest of any quarter. This year.
We do expect Q4 to be our highest.
Bookings quarter.
Of the year for sure and maybe even ever depending on a few factors. There. So we're certainly excited about it but that's the extent to which will will.
We will elaborate on that right now.
Perfect. Thank you.
Alright. Thank you again and thank you everyone, we're going to have reclaimed with that answer.
Thanks, Andrea and of course, thanks to our shareholders. It is with great pride that we are able to deliver results like this.
It is an amazing team I got to tell you Josh Isner.
Having watched him grow at his career is just an amazing team builder.
And coach and he gets a lot of credit for helping us find and recruit Britney Andrew.
It is our first call with you guys, but I can tell you we're already feeling the magic that she is adding to the team for the course, Jeff.
Amazing team. He has built over his product is continuing to just bring you an amazing talent.
So theres never been a better time to be at <unk> com.
The Moon shot.
We didnt blindly make that promise without some pretty clear vision of how we're going to get there. So.
For the move we're working on the Saturn five an ego lender and a lot of really awesome tax you can expect to see over the next couple of years, so with that I'm going to wish you all a happy holiday season.
Thank you for your patience in sticking with us through many of that followed the company for a long time, we are delighted to see the investments we're making in the past pay off and we're excited to show you where today's investments will pay off tomorrow in the future. So if I don't see you all enjoy your holidays and we look forward to talking to you in the new year.