Q2 2023 Axon Enterprise Inc Earnings Call
<unk> growth in our moonshot goal to reduce gun deaths between police and the public.
Teaser 10 has launched very strong out of the gate and we are thrilled with the market momentum. We are confident that Taser 10 will support the next several years of Taser segment growth axon body for a began shipping at the end of June Shadow to everyone at axon, who worked for three years to sustain our market leadership in body cameras.
Revenue retention measures our ability to grow with our existing customers. We look at our entire cohort SaaS customers from last year and asks what was axon software revenue from that cohort a year ago and what is the revenue contribution from that cohort today over the course of the year and axon software customer will have done one of three things one they may have.
Have churned off coming in one year later at zero percent revenue retention. Thus the metric is inclusive of churn, but we worked very hard to keep customers happy and avoid churn.
Too many of our customers come in at 100% revenue retention of these customers have signed five to 10 year subscriptions and in any given quarter. They are simply paying the same amount as one year ago, and finally every quarter some customers upgrade upgraded contracts come online. It monthly subscription rates that are much higher than our existing installed base.
And this drives the healthy net revenue retention, we see today. This is exxon's land and expand strategy and action it doesn't happen automatically our investments in research and development mean that our software is constantly improving customers joined the axon network and then grow with us overtime. They.
They might start out with a basic body camera video storage license for example, an upgrade after a year or two to take advantage of axon respond auto transcribe Axon records and the many other features that add value to their agency.
That's all for this quarter you can find our shareholder letter at Investor Axon Dotcom and hear from our management team on our earnings call. We'll see you next quarter.
Okay.
Alright, great job, Andrey and Angel and welcome everyone to our second quarter 2023 earnings call, it's great to be coming back to you with another excellent quarter and an even brighter outlook I'm fortunate to spend most of my time talking to customers reception.
To our new products has been fantastic recently I met with police Chiefs, who said once their officers take Taser turn out in the field. They will not go out again without it.
The trials are successful the escalations in the field and some have even joked that their officers are saying you Dr. Brian <unk> 10 for my Cold dead fingers.
This is the type of feedback that motivates us keeps us moving forward.
Axon body four began shipping in June and we're also getting a great response later, you'll hear from Britney who was recently promoted to Chief operating Officer. In addition to her role as CFO , bringing these two roles together under Britney sets us up for our next phase of operational excellence.
CLO and CFO Brittany will oversee our margin profile from end to end to ensure we execute on our ambition to deliver profitable growth for many years to come.
Britney has been a star addition to our team she brings operational rigor foresight stewardship and Canada.
We also promoted Josh Isner, who previously served as our CRO than Cielo and is now president Josh.
Josh has been an instrumental leader at axon for more than a decade and during his tenure he and I have worked side by side evolving and growing the company.
I have given Josh many challenges over the years and he has never failed to exceed my expectations as President Josh will continue to oversee day to day operations, while taking on an expanded role within the executive team.
And with our board members.
Expanding responsibilities for my team allows me to focus on what inspires me our products and our customers'.
Product development will always be a key part of my job description for years, you've heard me talk about my sometimes futuristic views of what the market needs and for years, we have successfully innovated.
So what's around the corner.
I'll touch on two key areas robotic security and generative AI.
In June we acquired Sky hero, which builds upon our strategy for robotic security and is highly synergistic with our product roadmap.
Sky Hero gives us a leading indoor tactical drone solution that complements our existing axon air strategy.
While the acquisition will not be a meaningful revenue revenue contributor this year it fits into our long term vision.
We want to make the world a safer place and avoid situations, where we have to send people through the door into highly dangerous even deadly situations Sky hero is already selling to U S. Federal government customers and swap teams in the U S and all across Europe to give very strong feedback about the value durability.
<unk> usability and reliability of their technology.
<unk> based in Belgium, and unlocked many new customer relationships across Europe .
I was especially impressed with CEO , Steve and his team, which is small and scrappy and they really moved fast theyre going to fitting great here at axon.
And finally, here's how we're thinking about generative AI and large language models.
Like we've already been doing with traditional AI, we will use these take these newer technologies to create game changing products for our law enforcement customers.
Several years ago, we published a video and the future of policing. This video features seems where a police officer was able to feed their body camera video into an AI system, which then created a draft report auto populated off the details in the audio video record the <unk>.
Point as we were talking about generative AI before it really even existed in a usable form.
Now I'm not sharing this for bragging rights.
But what it means for you is that we don't have to pivot our strategy because our strategy is anticipated this future reality for years.
We spend a lot of our time and I spend most of my mental energy studying key technology trends and then mapping those trends against customer needs. We don't wait for the customer to ask for it we don't even wait for the technology to exist.
We map evolving technologies that we believe will mature in the coming years against existing customer pain points and then we invest early so our ecosystem will be ready to catch the ball when the underlying technology matures. This is precisely what is happening now with large language models and with broader generative AI.
Our mission driven philosophy to leverage exponential technologies to solve the problems. We care about is the core to our value creation engine and.
In investment and Exxon is investing in the future of AI and it has been for several years.
Flywheel for AI technologies, including LMS is powered by signals and data.
We have invested hundreds of millions of dollars into building out an ecosystem of wearable cameras and sensors and the world's leading cloud platform to securely hosts the enormous data generate generated by this expansive ecosystem everything we have built over the past decade.
<unk> been in a position us to be able to safely and ethically and securely collect share and analyze that data for our customers.
Paving the way for public safety adoption of ever more advanced AI tools.
These tools will build upon and expand the applications that are already a critical component of the axon ecosystem.
And just like we have annualized and were the first to bring cloud software at scale to public safety, We think axon will lead the way in bringing danced AI designed with thoughtful ethical controls.
At scale to public safety.
We're already seeing really promising results from our early work here and we're just getting started.
Europe Josh.
Thanks, a lot Rick.
It's been an honor and a privilege to build my career at axon I care deeply about our mission, our customers and our team and I'm proud to help lead an organization that is unapologetic about winning.
This team just blocks out the noise and executes and you can see that in our results.
As Rick reflected we're getting great feedback from customers about Taser 10, and axon body for and I'm, especially pleased that this feedback is translating into orders.
We closed the first half with strong orders and we expect a great greater increase into the second half as we convert more of our new product pipeline.
This drove our confidence in increasing our guidance, which Britney will take you through in a moment and.
In Q2, we continued to execute on our 2023 focus areas revenue profitability, new market expansion and new product adoption. We just finished our sixth consecutive quarter with revenue growth above 30% is kind of growth doesn't just happen. It's a combination of having the right products the right sales strategy.
And the right team to execute on an enormous market opportunity.
And our relationships with our customers are truly deep we don't just look for transactional share or sale, we partner with our customers and make sure. They are successful and they keep coming back to us. So we can help them solve more problems or cloud business grew 62% year over year and we are in the early days of expansion into new markets and products.
Our software penetration remains low and we are finding ways to sell more software content into our installed base executing against a $22 billion software Tam.
Our Taser Taser business grew 14% year over year in Taser seven remains the greatest contributor for now and we are pleased to see incremental growth driven by early shipments of Taser 10.
We are just getting started with that weapon and its a game changer and we think it will drive taser growth over the next several years.
Profitability is our second operational focus and is critical to ensuring we have a sustainable business model to drive the next decade of our growth strategy I am pleased with our team's focus on execution in Q2, as we stabilized growth March gross margin through two of our largest product launches in company history, while growing.
Our team at the same time.
Third our new market bookings grew ahead of revenue in Q2, we are seeing continued success in the federal market with first half bookings up nearly triple digits year over year and in Justice, we have triple digit broke bookings growth year to date.
Four of our 10 largest deals in the quarter came from new and emerging markets a sign of continued diversification.
Finally, new product adoption is critical to our success, we are gaining traction.
Seen emerging product bookings grow nearly 50% year over year.
Our auto tagging Axon records and axon respond are a few key callouts here.
We closed an incredible first half of the year and the outlook for our second half looks very solid we are on to the next play and with that I will turn it over to Brittany to go through the operations and financials in more detail Brittany.
Thank you Josh.
Yes.
And thank you for the kind words I'm very excited to take on more of the business and to continue driving the next stage of operational excellence at this fantastic company.
Turning to the results, we reported another strong quarter, reflecting broad strength across our business.
Our topline grew 31% year over year, and we saw EBITDA margins of 22%.
Second quarter gross margin of 62% improved sequentially, primarily reflecting business mix from software.
As you saw in our shareholder letter we did have some noise in our segment margins. This quarter as we worked to more closely align our overhead costs with our specific product lines and have some one time adjustments on an aggregated basis. However, most of that is allocations between segments and our overall gross margins were flat.
A mix benefit from software.
Axon cloud and services revenue made up 35% of total revenue this quarter compared with 29% a year ago.
As we noted last quarter, we would expect full year gross margin to remain approximately flat or improved modestly from Q1 2023 levels.
Due to continued professional services related to fleet III and the continuing ramp of axon body for warranties or 10.
We continue to believe there are opportunities next year and over the long term to improve our margin profile as we invest in automation and recognize scale efficiencies from recent product launches. We also expect to continue to see mix benefits from our software growth.
We believe we will exit this year at a more normalized run rate demand for our fleet.
Having largely caught up on our backlog.
Turning to our operating expenses, we saw leverage out of both R&D and SG&A.
We continue to invest absolute dollars to drive our product roadmap and to scale our business rapidly.
We're pleased with the adjusted EBITDA margin of 22% in the quarter, but given the second half gross margin profile and timing of some opex investments continue to keep our guidance of 20% for the year.
With our increase in revenue. This does result in us dropping more to the bottom line for the year and we're continuing to focus on how we can better leverage our opex, especially in SG&A over the longer term.
Turning to our guidance, we are increasing our full year revenue outlook to a range of 151 to 153 billion, representing about 27% to 29% growth.
We continue to target full year, adjusted EBITDA margin of 20%, which implies an increased range of $302 million to $306 million of adjusted EBITDA.
In terms of the healthy guidance increase we always want to make sure. We can deliver on what we say, we're going to do and that continues to be our focus.
At the same time, making sure we're doing our best to accurately reflect what we're seeing in the business.
We had two major hardware product launches this year and the successful rollout of these products as well as the robust customer response to these launches has given us the confidence to increase our forecast after a strong first half of the year.
We do expect most of the increase relative to our prior forecast to occur in the fourth quarter due to typical seasonality.
With that I would like to open it up to questions.
Okay. Thank you we will take our first question from will power at Baird.
Okay, great well I guess first congratulations on the strong results and congratulations Josh and Brittany.
Your promotions was great to see.
Maybe I guess two questions I guess first.
I'd love to kind of dig into the cloud success, I mean really strong growth there over over 60% I think in the shareholder letter.
You said about 50% of the growth was driven by body cameras, and so I'd love to get perspective, how you think about the continued opportunity just within that piece of it. The other second part of that question is what are the other key drivers within cloud right now because it gets cleared or having a lot of growth outside of just that body camera views.
Yes, Thanks, a lot well and it's good to see you and thanks again for having US at your conference in June .
I would I would say in terms of just growing cloud adoption for us Theres really two elements of it number one is making sure that we continue to proliferate kind of hardware and as many different forms as we can plug into our cloud ecosystem. So the more body cameras, we sell into our existing core market, but also into.
<unk> International Federal and enterprise, obviously that'll drive more usage of evidence dot com.
Likewise, the more enterprise software licenses, we sell for things like Records management computer aided dispatch, our justice product axon air licenses.
The more software only licenses that we continue to roll up here that will that will continue to provide favorable results as well in our cloud business. So it's really about doing those both of those things really well at the same time. The team has done a really nice job of that so far this year.
Okay. If I can just fit in just a second question raise guidance pretty significantly for the year.
The thing else you can add with respect to the visibility in the second half and particularly the fourth quarter given the seasonality of that I think pretty just alluded to to just provide investors confidence in that increase.
It's a great question. Thank you well I think part of it goes down to come down to what we see in our business and I think we were very careful as we came into the year not to get ahead of ourselves in terms of what we were expecting for a before and teaser Ken given that those were.
Sure.
Two big launches for us, but we have seen as Rick and Josh both commented just wonderful customer reception to those products.
So we have good visibility both in terms of what we can ramp up from a manufacturing standpoint that gives us confidence in the volume of those products that we'll have available.
And then I would say you couple what we have available from an operational standpoint, with what we're seeing from the customers and we think we have pretty good visibility in terms of delivering the second half of the year I think as I said, where we're partway through Q3, right now and so we can call out that we think some of that will be in Q4.
Especially as we ramp into a before and see the timing of some of the contracts that we have coming in and some of the deals we have in the pipeline with customers.
Then I think the other thing is just our cloud and services revenue as you can see it's it's done very nicely this year.
And that is just a very reliable recurring software business that we can bank on every quarter.
And we look at that as we go through the second half of the year combined with the teaser Kennedy for products and that's what gives us confidence in that guidance.
Great. Thank you.
Okay. Thank you next question from Tim Long at Barclays Go ahead, Tim.
Thank you.
Two if I could first on the gross margin side Brittany.
Could you talk you talked about a lot of the moving parts here, but maybe if you could just touch on.
Two aspects that where we are in and how we're feeling about the ramp of the two new products and the impact on gross margin as we go through the year and I noticed I think axon cloud might've been one of those areas, where there were some adjustments it looks like the margin went down there a little bit can you just talk about as that business scales, what we should.
<unk>.
For gross margins and then I had a follow up after that.
Yes of course.
So theres a lot of moving pieces in our gross margin as you can tell from going through our shareholder letter.
Thank the biggest thing is we have had.
Some headwinds on gross margin this year really from three main pieces, one getting taser can ready to go ready to ramp ready to be scaled in production and.
And we expect we continue to ramp and scale that business as we go through the year, but that's really a next year event. When we think that that's fully scaled and ramped up.
So factored into our gross margins this year, but should be a gross margin benefit for next year.
It's similar on the launch of a before Theres just a period of time, while we go through a transition of bringing a new product off and getting it ready to get launched.
John you know weighing a bit on this year should be nice for US next year, and then probably the last piece that we talked about last quarter, it's continuing to impact the cloud and services gross margin, which you noted for this quarter is just the professional services on our fleet installations, So our fleet.
It has been.
A phenomenal product for us this year some of that was because we were inventory constrained and had some backlog coming into this year and we've really been working through that but with fleet. We sell the hardware we have professional services to install the hardware that is a bit of a hit to gross margin for us and a onetime way.
And then we turn on software associated with the fleet product and so once we're through the professional services and install we have nice recurring software revenue attached to the fleet camera, but our volumes of fleet are so high. This year you can view that as a bit of an investment in gross margin to unlock nice long term software revenues sort of next year.
And beyond.
Okay, and then just a quick one for Josh you mentioned a lot of that some of the larger deals were.
In newer areas like federal and international could you just give us a little flavor of what.
Examples of what type of deals those are and how sustainable you think the moves into these new geographies and regions would be thanks.
Yes, great question and thank you.
First of all one one that we're really excited about is the deal in our justice segments. So here, we're talking about prosecutors buying kind of enterprise licenses for evidence dot com.
And tightly integrating with the police departments and so that was one of the for a couple of our federal and certainly we continue to see those.
Become more common and that larger dollar amounts as well, which are both very encouraging signs and speaks to all the great work Richard Coleman and his team are doing in our federal business and then lastly in international.
And our tier one markets the U K, Canada, and Australia, we still see very.
Meaningful orders coming out of those markets, both across Taser and body Cams and evidence dot com and then.
We continue to start to make more headway in some of these large markets outside of those three.
And generally at those at this point those have been more taser oriented orders as we continue to.
Evangelize, the cloud and work with our early kind of opportunities on getting some of these major customers onto the cloud. So that's a little bit of background about around where some of those are coming from.
Josh.
If I can add a little bit as well just very rough if we look at the long term right now international is about one fifth of our business.
On a scale international I mean, the U S should be about a fifth of our business. The rest of the world is at least five times larger than the U S market is and so as we were very focused on opening these markets, but police face similar challenges around the world.
Now there is one unique thing about the United States, So not as the gun culture of the public that is quite different from the challenges other countries face and in some ways that makes taser 10, even more transformative in every other country around the world because I think what we've generally seen as U S. Police will carry a dynamic taser we've seen.
Not less likely to be something that our international customers would do but if you are a police officer in a country, where the public doesn't really have firearms <unk>.
Or 10 could actually become the primary defensive weapon in those markets.
Because frankly, if your for example, the French police officer, and you need a firearm chances are it is not.
Petty criminals with a gun you might be dealing with some sort of terrorist event, where a pistol is probably not the right tool anyway.
And so I believe <unk> actually is the biggest game changer in those international markets to give us beachheads, where we could really begin to expand the growth because again long term, we need to succeed as a truly global company and when we do that.
International markets should frankly dwarf our U S market.
Okay. Thank you very much.
Hey, Josh Reilly at Needham go ahead, Josh.
Thanks for taking my questions great job on the quarter. Your team what are you seeing in terms of customers, who are interested in getting new tasers and body cams.
And they were going to buy the 83, maybe in the Taser seven but now that you switched to the new models and these are release can you give us a sense of the magnitude of customers in this category and did it have any impact on the Q2 revenue results would it have been even higher with some customers switching around and is that impacting the Q4 commentary around revenue as well.
Yes, Josh Thank you for the great question.
A couple of ways to think about this so come.
Coming out of the first half of the year as everyone remembers who are a little more conservative on what our guidance would look like for that reason because there is this period. When you launch new products, where you don't know if customers are going to want to just continue with what they have or trial, the new product before buying it or just switch right over to the new product and so I think.
We've kind of cleared out a lot of those uncertainties at this point and I think.
It's fair to say that a lot of the interest has converted from Taser seven to Taser 10, and so customers that were on order for Taser seven kind of pumped the brakes wanted to trial Taser 10, and now we're moving in that direction, a before as a separate a little bit of a separate motion because the early volumes of those cameras are driven.
By hardware upgrades in our Taser assurance plan not as much book and ship like right out of the gate and so.
Two kind of slightly different stories, there, but yes as those things become.
Better and focus it allows us to get a little more aggressive with our guidance and as the year comes together and that combined with a really solid back half pipeline gives us a lot of confidence moving into the last two quarters of the year here.
I'm going to throw in a little bit of extra color for you on that or teaser seven was pretty stable in this quarter. So there is certainly a dynamic of customers getting very excited about tens or 10, but we're still seeing very nice support and volume from cans or seven I would think about a lot of them.
Growth in the teaser segment this quarter coming from teaser 10, starting to ramp up and get into customers.
And then I would say similarly on our cameras.
Didn't see.
Significant growth in our camera business in Q2 and that really was because as we go do those refreshes, we're going to let customers who want a refresh on EE before refresh on it before we just started shipping before and so again youll see youll see some of that be stronger in the second half of the year.
<unk>.
Got it and then just a follow up on the fleet three you mentioned that youre going to catch up on demand by year end, how much of the catch up is around manufacturing the hardware versus actually getting the product installed at the end vehicle.
There has been greater bottleneck then in the last couple of quarters here. Thank you.
I would think shifting I would say the <unk>.
Greater bottleneck coming out of <unk> 22 was probably on the hardware on the actual inventory side and now we've done a nice job catching up on that and really the bottleneck now.
A bottleneck because we're ramping up to get it to customers, but the gating item is really more around the installations.
Thanks, guys.
Thank you.
Mike <unk> at Goldman Sachs Go ahead, Mike.
Hey, good afternoon, and thank you very much for the question.
Just have two so axon cloud and services revenue was up substantially outpacing the sensors and other segment revenue growth I was just wondering if you could just answer a couple of questions to help reconcile the differences in revenue there.
First.
Said youre selling more software content into the installed base.
So that is that customers just upgrading their plans, but using existing equipment.
Does that give you higher confidence about an equipment upgrade and then are there other.
Pieces of software that you would call out that are doing particularly well I know Josh you flagged for you. Thanks.
Yeah, ultimately for us and we've talked a little about this in the past, but the big kind of.
Focus for our sales team is selling our officer safety plans, which have a number of different software feature.
<unk> features and across them and records in our standards project product, which is kind of a use of force tracking products. So there's a lot in those plans and ultimately the more the more of those bundles we sell.
The higher our <unk> will be in software and then when we combine that with kind of picking up momentum both on the records management side in the Justice segment and then in some of our new markets those things combined.
To offer a nice uplift over just kind of our base evidenced dotcom licensing and so it's really a combination of those two things.
Great. Thank you I would just I would add.
100% agree everything Josh that is spot on I mean, we are seeing very healthy demand for our premium bundles and that's driving our strong net revenue retention, it's driving growth in the software business. The domestic E dot com evidenced dot com licenses drove the largest sequential increase I think the other.
Thing I would note for this quarter.
As we were able to start recognizing revenue for our standard products now that we have and in general availability and so that helped to make the step up slightly larger this quarter than it has been in some other quarters.
And so we spend a lot of time talking about how big is the size of the staff. It was definitely larger this quarter.
And we continue to look at it more as an as an average up quarters over time. It was slightly smaller in Q1 as big in Q4, it's big this quarter. So it's been lumpy as we've had some of these revenue recognition pieces come together, but overall the domestic evidenced dot com businesses is driving the bulk of that and that's why you're seeing such.
Nice healthy growth in that segment.
Great. Thanks, Brittany and I did want to follow up on that along with the comment that Josh made earlier about.
Good momentum in Justice. So it is it right to interpret that there are.
Customers that are buying the software or the dot com licenses that may not necessarily be part of the body camera Taser installed base.
And.
If that's the case I was just wondering if you could expand on that a little bit more and talk.
Talk about the opportunity there.
Let me jumping over to Josh I'm excited on this one like for example, the country of Scotland selected us for their digital image management system across police prosecutors court the whole country and they are not using our body cameras. We've had some similar.
Albeit I am not sure, which ones, we've specifically disclosed or not but we've had other international agencies move software first.
And that's something that we're really proud of and obviously our software teams take great pride in that as well that 10 years ago. Our software was basically an enabler of our hardware and now theyre, both strong on their own and our software products, especially things like records.
Can stand on their own although some of the generative AI stuff I alluded to in my comments are a true game changer when agencies, our body cameras and our cloud software our ability to unlock all the valuable data that is hidden in those audio video record for our customers.
Pretty awesome and so we think.
We're very well positioned.
Forward to coming back with more details when we get out over my skis, but we have been doing some we're always inventing and prototyping with our customers and we're just hearing really positive feedback on on things that we have not even announced yet so.
Growth instead of doing the hardware <unk> software enables us to do things that you can't do it.
If you can't do both those things together.
And I totally agree with Rick and the only thing I'd add on that is.
There are extra licenses every agency buys for non sworn personnel and that number will only go up with axon records and so that's a big piece of the puzzle here as you think about.
The police officers on the streets, using our body cameras and tasers, but then all of the people in the back office that need access to records and evidence that's a substantial uplift as well. So in addition to some of the new market and kind of them only features that Rick talked about there is there is an element of just our domestic customers, adding on more and more as our product portfolio.
Gross.
Brian I think you've heard us say, 75% before the power of that entire ecosystem distributed through this hardware plus software OSP bundle philosophy.
As it is our Amazon Prime it is our flame.
Flavor of this opportunity that just inherently drive increased adoption of that as customers get value out of one basket.
Currently you know motivates them to keep going up to higher and higher tiers, and then to use more and more of what feels free to them because it's already in the Bakken basket that they have paid for and have access to it.
Come back to connect that to one of the questions about federal Justice before that's also the leverage of our R&D.
Philosophy and approach at work, where if you take something like <unk> Thats had.
A decade of R&D investment enough to bring it to where it is to be fit for purpose broadly for domestic.
International Law enforcement.
A relatively light lift but to tailor that with a surgical part of our team to make it fit for purpose for the next adjacent market segments like prosecutors and justice like things in the federal government and that instantly or relatively quickly unlocks whole new segments building on the back of R&D, we've done before.
And then once we've done that and we have momentum with federal customers and justice. It earns us the right, but then start building the spoke products directly before those market segments. So that kind of success that latter ing up from each angle is fundamental to our flywheel great.
Great. Thanks, Rick Josh Britney and Jeff really appreciate that very interesting.
Okay, Thanks, Mike and before we move on we've used the term Dennis a couple of times that means digital evidence management system. So that's the acronym for everybody she twosome at Northcoast.
Hey, Keith you're muted.
Thank you I appreciate it Rick with the promotions for Josh and Brittany, how has your role evolving it Rick.
The new organization.
So it's it's.
Actually not changing a ton.
Over the past five years to six years I've been wanting to put more and more focus on customers and technology really creating understanding the pain of our customers conveying the story is our existing ecosystem on writing the story for the next 10 years.
And focusing on that requires just frankly have very different mental outlook than running a business day today. So if I went back five or 10 years ago.
To be honest I always give me quite burned out it's just very difficult to run a large organization and mango in between this endless email inbox and all of the two dues of managing the business. Let me now pause and shift to creatively looking at understanding what is the next phase look like.
And so I think these promotions just sort of clarify those roles.
And this is giving basically britney more control over the <unk>.
Operational excellence of our margins and our everything in the manufacturing supply chain to really make sure we're delivering.
Josh has actually taken a little bit more some of them. For example, my interactions with the board that are more operational.
Josh actually tends to lead most of the board meetings in terms of the agenda is et cetera, and with that allows me to do is focus less on the what we're doing and much more engaging so during board meetings. For example, I'm very focused on driving discussions that are highly strategic level.
And I think we play to each other's strengths.
So my wife will tell you I am working harder than ever I am traveling more than ever out with customers and large X goes I don't have.
A list of to do is I've got to do around internally in the office and I know we've got a team.
You have got a very long relationship with Josh.
With Britain Asia.
Been here little over a year I think now.
We've rapidly develop that same connective tissue, where we kind of understand each other's strengths and that allows me to focus on the thing that I'm uniquely able to do as a founder CEO and that is as I mentioned in my in my script.
Script, but I just want to really call attention to the reason I think founder led companies outperform academic data kind of shows that.
Is when we focus on what like what is the next big leg that is not obvious and that of traditional large business.
Most of our competitors are focusing on basically running a kind of a profit driven machine in each product manager is sort of asking the customers kind of what they want my job is to predict what the customers are asking for yet and to match that up to various technologies and Theres a fair amount of risk that comes with that but the rewards are.
Significant and we saw that when we created the Taser marketed body care marketing cloud market no customers were proactively asking for those I think we're ahead of the ball on AI.
We think about overall, how we communicate when I was a child and 19 in the early seventies I communicated with our rotary dial phone in my house and police have push to talk walkie talkies.
I don't have a rotary phone like we're doing zoom with people around the world and our customers' primary mechanism communicating is still push to talk walkie talkies.
I think in the next 10 years that will no longer be their primary method of communication police will be using audio video sensors and AI to manage the massive amount of data flow. So we're collecting what is happening in the field distributing that information to the right people and then cycling factset offer in the field in a very focused way the information.
So they need to know through the media that is most efficient for them to do it this lease distracting while theyre doing this difficult job. So no sort of problem and frankly, Jeff has done such an amazing job of building an amazing team. So when I talk about solving that problem. We've got people like Ron Mecate, who built <unk> drop and calling that revolutionized.
Personal communications for 100 million people, including me right is probably far more than that now so I could talk to my mom when she was.
Mental dimension Couldnt answer a phone and my kids could drop in on her from our kitchen that sort of disruptive communication experience is part of what we're looking at now in the next 10 years, So thats, where I spend my time and Thats why im not answering any questions about margin and budget.
I've got a strong team that I know is all over that so I can focus on the future.
Okay. Appreciate it thank you.
Packing them in more detail as I go to Brittany.
And Josh as you look at the <unk> in terms of the adoption rate of that compared to <unk> seven as they grow leading device that people use for Taser do you guys expecting acceleration of movement towards 10% equity seven what does that do in terms of the mix and the margins.
Maybe I'll talk about a little bit of the demand and I'll hand, it over to Brittany to talk about the mix and margins.
In terms of demand, yes, we absolutely see customers and I've said this maybe in the last call and to others as well like this is the first product where our customers have a genuine interest in upgrading early to it usually because there is a training uplift in theirs.
Challenges around deploying it across thousands and thousands of users you can kind of kick the can down the road to the end of your useful life before you upgrade to the next one because it has a lot to bite off to deploy a new a new taser in this case agencies are willing to accelerate that process.
In favor of getting this weapon on the streets faster and so the early feedback continues to be very strong customers that there are even some customers who didn't move the T. Seven from X to who are now jumping straight to <unk> 10.
With the 10 shots and increased distance so.
Very bullish on <unk> adoption over the next couple of years here now keep in mind internationally and in some domestic markets as well there is still a trial period that takes place where agencies want to field, it and get enough data and so it doesn't happen all at once but I think over the next couple of years, our Taser business will.
Continue to grow on the back of more Taser 10 handles in the field.
I would just add Keith that I think because the demand has been so strong from an operational perspective, we can build in what we know we can manufacturer. We really are still ramping that up until for the rest of this year.
We've got a pretty good sense of how many handles we can actually make and given the demands out there. That's what we can factor into our model.
It is taking us some time to get it fully ramped up and scale from a manufacturing standpoint.
Next year I think not only will we have more scaled manufacturing, but we will have been able to invest in some of the automation for both to handle and the cartridges to help get the initial cost down and improve that gross margin.
Great. Thank you.
Thank you Andrew.
Analysts that we will get to next semi shattered countered be at J P. Morgan.
Hi, Thanks for taking my questions and hopefully two quick ones here.
Defeat systems revenue sequential ramp that you had this quarter.
It keeps looks more modest than what you had going into <unk>.
And given some of the guidance on gross margin that you had I'm just wondering should we be thinking that has an implication that you expect feed systems revenue ex fish and he was on a sequential basis to sort of increase and I think on the last earnings call. You had mentioned something about supply constraints now getting sort of easier to ship those products how should.
We think what underlying demand if you will sort of looking at a more normalized demand environment without any supply constraints.
And I have a quick follow up sorry.
Sure I think we're largely.
Getting through our inventory supply constraints and now we're really looking at.
What it will take to get fleet installed and so you know as you go through this year, you'll see basically what is normalized healthy run rate for fleet.
From a demand standpoint.
Remember as I said earlier on this call. We have three pieces of fleet revenue you have the hardware, which is showing up in our fleet.
Each line item of our reporting so you've got the hardware.
You have the professional services, which goes into our services line item.
And then you have the software revenue that gets turned on once we have it installed so as we as we come out of this year, you'll see a really nice level of run rate demand and I would expect as we get through this year, where we're at a good level of run rate demand for professional services installations as well on that fleet product.
Okay great.
So gosh did you want to jump in I, just wanted to say I wouldn't get too caught up in the.
Kind of sequential trends because they can vary a little depending on when we ship, especially large orders and so for US we're really focused on.
That.
Yeah, as we said we've grown 30% for six straight quarters, that's really that's really what we try to look at is our yearly.
CAGR in and focus on that and there might be a little noise quarter to quarter on on how that looks but but over the course of the year. It seems to kind of normalized okay.
On the evidence and cloud services growth, obviously very robust growth that you're experiencing there.
Can you talk to what the underlying customer count sort of trends because I'm trying to sort of parse out how much of this is land and expand with customers that are already using in sort of upselling to them versus actually going into new customers and them triangle. The product like can you talk about sort of underlying customer count a bit more.
Yeah, I don't know that we're prepared to give any specifics on that today.
But I would say kind of with a broader brush we try to do two things really well at the same time, we tried to sell new products to our existing customers and we tried to sell <unk>.
Existing products to new customers and if we do both of those well, meaning like in our core U S market, it's really about selling all of those new products like VR or some of the software.
Packages and features I mentioned computer aided dispatch et cetera, and then internationally and corrections and justice in our federal business, it's more about selling our kind of core products tasers body cams dems into those to create kind of that opportunity to land and expand and so ultimately we we look at both of those.
Metrics, new product sales and new market sales every quarter and really happy to say that we're trending very nicely on each of those.
In each of those categories right now okay.
Okay. Thank you. Thanks for taking my questions. The only thing we do given we gave in our shareholder letter is that the penetration rate of our officers safety plan is less than 20% relative to our potential state and local law enforcement install base. So I think we have both great ability to land.
Land as well as expand to Josh at this point.
Thank you.
Jonathan Ho at William Blair.
Hi, good afternoon, and congrats on the strong results I did want to maybe get a little bit of additional color on a before and what your customers are most excited about in terms of new use cases around the before capabilities.
Maybe I'll start and then I'll hand, it over to Jeff and Rick I think ultimately you know there are some incremental improvements in there around battery and optics and so forth, but really launching the two way voice is part of a before.
Most excited that actually fits a need in the market right now and that customers have a variety of use cases, where the the value relative to the radio of being able to see something playing out for the dispatcher or for mental health expert or for a translator watching the screen and being able to commute.
Kate through the body camera with.
Community member that is something that our customers are very excited about and we're seeing more and more adoption of that feature set early on so I think that's one of the key Differentiators. It's also nice to bring back our POB.
<unk>, we haven't really launched anything new there since flex two and now just a simple attachment to the body camera instead of a whole new product and SKU makes that a lot a lot more easily adopt it and tailored to certain use cases, and just flexible overall for our customers.
That's great I mean, I think just echoing on all of what Josh said this is a category where the main potatoes matters a lot and there is tons of exciting innovation.
No on everyone always wants more battery life, and we are delivering there, bringing turning the pov from a separate product to a no compromise simple accessory. That's an add on we think is a game changer for a lot of agencies and then full circle back to respond and really moving live streaming in this.
Future modern multimodal communications from a thing that feels like an add on to a thing that feels central and native to the product itself and to various specific aspects that we think resonate and the customers are telling us loud and clear. They love one is frankly, the notion of it being hands free the fast.
That not only do you have two way voice, but they're in the middle of Athene, having hard things go on and I can in a hands free way both talk back to who is talking to me, while I was hearing and so that enables us a new kind of freedom and interaction that complements and adds to the other communication options they have.
<unk> available to them today and number two this idea of the watch me about and you've heard us say it but from a psychology standpoint, one of the things that has.
Ben.
An opportunity for agency is to think about how they'll adopt live streaming is simply who is starting it and psychologically for an officer theres something incredibly compelling about the notion that I am the one who gets to say I'm asking for help I want someone to watch my back as opposed to.
I don't know and someone might choose to drop in on me. There are both critically important but the psychology of empowering officers to say.
I want someone to watch my back right now we are hearing loud and clear that they are super excited about.
So the one last thing I'll jump in on when we decide <unk> three a number of years ago, where we.
We faced the decision do we put an LTE chip in every camera or do we bifurcate the skus and have a lower cost Wifi only camera and I have a premium we made the batch that you don't want a connected camera will be so much more useful than we're going to put that chip in every camera. So that we can.
Turn that capability on for customers now by comparison some of our competitors for years when asked about LTE, they were saying, while our customers aren't asking for it and that is precisely the difference of how we think about these products.
Don't think about profit optimization on the current generation, we think about what is the right thing to do that's going to enable us to create massive value over the long term and sometimes I look. This is Brittany holds me accountable. She has got to make sure the numbers work, but we have a very.
Productive interplay about this about how do we make the right level of investment that so they are better in the third the answers are not necessarily knowable, but I think we're now seeing that coming through where it's like Wow. These real time capabilities are very useful in the agencies that have gone to.
Live streaming every call for incidents.
The survey their officers and you know what they are telling me unanimously officers and dispatchers are saying they refused to go back to a world without it and those are the types of things we hear early in a product cycle that make us dig in part because we know we've got.
This is a game changing capability now I was just going to take some time for us to spread the word and get agencies to try to things like the watch me feature health agencies are unions that have concerns about privacy matters have a way they can deploy if that's responsive to those concerns but 100% convinced.
<unk> is a push to talk walkie talkie for the next 20 years is your only real means of communication is not how the world is going to evolve now most very clear we are not yet a mission critical piece of communications.
The current stuff will exist for quite some time alongside what we're doing we're augmenting with new capabilities and these agencies that are using our livestream with two way voice, but they're telling me is desktop loading tons of traffic off the radio that not everybody else on the radio needs to hear they're having more in depth conversations more rich conversations because it's not.
Taking up a radio airtime and thats actually making their radio use more productive and more focused.
Great. Thank you.
Thank you Jeremy Hamblin at Craig Hallum.
Yeah, Thanks, and congrats on the strong results.
I wanted to come back to the point that Britney was making about the OSP bundles.
And you just had tremendous acceleration in the velocity of growth in your cloud business.
Is quite impressive over the last few quarters in particular.
So if.
Less than 20% of your <unk>.
Potential base state and local domestic.
Is on OSP bundle today, what would you have said that.
That percentage was a year ago would it have been less than 10.
And then just coming back to the cloud revenue growth.
Obviously, I think you talked about its license growth, but wanted to just get a sense for.
The expansion of the premium bundles as well.
How much of that is because just the value of that business has gone up tremendously in just the last three or four quarters.
Yes ill jump in it it's been great to see and great to watch we last gave that penetration start in Q3 of last year.
And it was less than 15% so we.
We have seen a nice increase in that over the last nine months and I think youre seeing not get reflected in some of the increase in our software revenue.
I wouldn't say that.
Also things, where we're adding new products I just call out I made on standards. This is a product we've been investing and we've been testing with customers.
We've had out there and we got it to the point, where we can start recognizing revenue on it and so those those are exciting things that start to feed into our our software business and our software recognition I think you know if if you're modeling for modeling purposes, we would still say you know a good six quarter average.
And maybe Q4 and Q2 of this year were particularly high because of one time revenue in Q4 and the standards piece in Q2 so.
I'm not sure it's fair to fully average those in but I I think your macro point, we're having great momentum in our software business and our customers are loving it and and they're adding more and we're upgrading people to premium bundles and that is that is the heart of the story around the software cloud business and we're really.
Excited to get to tell that story and to give those products to our customers.
Thanks, and then just a follow up question is on the international side as you think about the OSP bundles.
In terms of adoption rates on that.
Segment of your business, how how is that comparing to.
Kind of the adoption curve that you saw domestically.
Obviously, some different factors in terms of.
Taser penetration was.
A decade ago and so forth so.
Imagine the curve could look a little bit different but just wanted to get an understanding of what youre seeing.
Yeah. Thanks for the question, Jeremy and hope you're doing well, it's good to see.
I'd say that the.
International market is kind of bifurcated between our tier one customers in the rest of world right now in tier one I think we are getting closer to OSP like offerings and Thats. Because generally you are not talking about one federal government buying everything you're talking about cities like London, and Manchester and caliber.
<unk> in Edmonton and auto are states in some cases provinces in some cases, so entertainment, Australia, and so where there is heavy adoption of both and it's not all federal purchasing I think we will see OSP adopted in those markets over time and the rest of the world. The focus is really just landing in a large.
<unk> way with one product and then starting that journey, which is go from one product to multiple products and then when both of those products are more well adopted that's when we talk about this kind of bundling concept, but the fact that.
You've got these large federal government's doing the buying and a lot of cases, it's both a good thing and a bad thing it's great that the volumes can be way more exciting upfront, but it's also harder to pair two products like that together because it's just very different processes relating to the procurement of each and so we're working through it and and hopefully over the next year.
Two we will start to see OSP kind of take a foothold in some of those tier one markets.
Got it thanks for the color.
Best wishes on the continued success.
Thanks for all the great questions, we're going to have Rick close this out.
Before Rick close this out just one more thing if it's alright.
Well as always as we do the call backs Tomorrow I hope all of our analysts, which wish Britney a happy birthday, and happy birthday to you Bernie.
Thanks, Josh Dan.
I think we should all staying with our investors happy birthday, I think I think you're just going to close about Thanksgiving.
Okay all right.
Alright, Hey, it's delightful to be able to share these results.
Obviously, a ton of hard work went into this I pinch myself every day that I get this fantastic job you know these things don't happen by themselves. My view of this is just what happens when you have an amazing mission you attract just unbelievably talented people give them the freedom to operate.
And bring their own diverse backgrounds and talent into the team and let them run and we're running hard and we're going to keep running hard for you our investors and for our customers and knock on wood, we'll be back to keep telling you about.
Some of the great work our team is doing you only get to see a handful of us.
But behind the scenes Theres a cast of thousands of really talented people working really hard so for those of you on our team who are listening in thank you for letting us bask in the light of results like these from the work you do and look forward to seeing you all next quarter.