Q3 2023 Axon Enterprise Inc Earnings Call
Okay. Good to go hi, everyone welcome to our third quarter earnings call. Thank you so much for joining us our prepared remarks today are meant to build on the information in our shareholder letter, which was published at Investor Axon Dot com. After the market closed. So we hope you all had a chance to read that letter.
During this call, we will discuss our business outlook and make forward looking statements.
Any forward looking statements made today are pursuant to and within the meaning of the safe Harbor provision of the private Securities Litigation Reform Act of 1995. These comments are based on our predictions and expectations as of today and are not guarantees of future performance.
All forward looking statements are subject to risks and uncertainties that could cause actual results to differ materially and we discussed these risks in our SEC filings.
Every quarter, we start you off with an earnings video and we do this so you can get a closer look and feel for our business quarter by quarter and so we're so excited this quarter, we're going to double click on our federal business, which is a very exciting expansion opportunity for us.
So last month, we had a great showing at the USA Conference, which is the association of the United States Army Annual conference. So we're going to play a video we're going to take you. There. It's about two minutes and then we'll turn it over to Rick.
Okay.
Phase one of the largest conflict within the countries and today, we're taking it over we're going to show you what we're doing.
Today, we're showing the arm is that we can give them the installation of the future today.
We put together a movie that demonstrates all of our products and how they can be brought to bear to protect the people that live on these bases all around the world really were here to bring modern.
Technology ecosystem to protect the men and women of our military.
So number one we have fleet three we brought one of the best vehicles, we have across the country here or there USA and we're going to show you a little bit about it.
Every single thing that's being captured from this vehicles being transported into evidenced by com. So that now we have one repository soaring all of this information. So we're helping the army understand that we now have impact level for file repository to everything that they've put in our public laboratories now secure it can now be transported it can now be acted upon with metrics and data and analytics.
So that not only are we storing this information, but allowing them to do their jobs in a more efficient way every single day, we're trying to show the army for the next generation of less lethal weapons, which is our <unk>. So we've had thousands of people come through our booth and power of the <unk>, which is the latest and greatest weapon for less lethal effects and the <unk> has a 10 shot capability.
Which gives them opportunities to take down an individual anytime that our taser was pulled out it actually activate all of our systems as you pull out your Taser activates your body camera. If you have a fleet three system activates that as well it gives us multiple points of view of the situation that's going on.
To date with Exxon's fantastic they've had delivered on every aspect of body worn cameras vehicle amount of cameras all of the video management system all of the technologies that come with it couldn't be happier as a program manager.
Yeah.
Sky Hero provides the capability to allow us to get situation awareness via drones inside ability. So that if there is a threat we can get eyes on this right and we can have a surge downrange without putting our personnel in harm's way and then lastly, we're showing thesis pieces is the video management system that allows you to have situational awareness in and around.
<unk> and bases across the country. This has been by far our biggest and most impressive presence at AOS. Eric you can feel this is a breakout year for us.
Yes.
Yes.
Alright, Thank you, a J and great job to Richard and his team.
It is truly exciting to see the energy that our team brings to these events I was on the ground at a USA and I'm Super excited about what Richard Coleman and our entire federal team is doing well.
Welcome everyone to our third quarter 2023 earnings call, it's great to be coming back to you with another fantastic quarter.
We also celebrated the companys 30th anniversary in September.
We take a big step back for a moment and reflect on our founding ethos and how that translates to today.
We've just driven seven consecutive quarters of 30% plus revenue growth, while growing profitability and the formula has been very simple.
First we start by identifying a challenge or a problem that our customers face.
Staying very close to our customers as part of our secret sauce every company says that we've institutionalized it through frequently technology summit at our headquarters where we bring in a couple of dozen customers at a time to listen to them and to share with them, our prototypes and ideas that might not even be products until 2025 or later.
We also have an annual user conference our engineers go on ride alongs and sit along and we foster many other touch points with our customers.
I cannot overstate the importance of calibrating research and development decisions off of direct customer feedback when.
When we develop alongside our customers and helps us get it right on the big picture like moving towards robotic security.
Virtual reality.
Fused intelligence for example.
And also helps us get it right on the millions of small details and user experience decisions. It created delightful product for our customers.
<unk> should read assure you our investors.
Our investment decisions are sound, they're geared towards products that customers want and they've told us that they will buy.
And it's designed to drive growth for years to come.
We also stay close to the forefront of the innovation curve. So we can identify how technology can make things better or fix problems entirely.
This is how we were the first to evangelize cloud software to public safety in the early 2000 tens and why we believe we'll be first introducing generative AI tools in the 2000 twenty's.
Our engineers are some of the best and brightest in technology.
They are energized to go out and fix problems and work hard at it as a result, we end up with undeniably best in class product market fit.
<unk> relationships with our customers and employees, who are motivated to partner with our customers to drive their success.
Our growth today is driven by decisions, we made five years ago and while we enjoy an undeniable time advantage, while competitors, who are trying to catch up.
We're now thinking five years ahead.
We believe the R&D decisions, we're making today will continue to drive growth for decades to come.
And then of course, we must execute on all fronts.
So that's the formula customer closeness plus long term vision plus day to day execution equals value creation across the board.
For the public.
For Exxon.
For our employees.
And for our shareholders.
It's a winning equation and we're excited about that decade ahead of us.
Before I turn it over to Josh I'd be remiss, if I did not acknowledge the wake of escalating global events.
These conflicts bores violence and unspeakable acts were all seeing them today.
We commiserate and the pain and suffering many people are facing around the world and because we are globally connected company the personal pain faced by our own employees and many of you listening to this call.
Axons mission.
Our mission is to protect life and we're focused on continuing to execute and grow that mission.
Youre up Josh.
Thanks, a lot Rick.
Every quarter here at Axon leaves me more impressed with our team.
As Rick highlighted we just reported our seventh consecutive quarter of over 30% topline growth.
Kind of growth does not happen automatically it's fueled by our ability to drive value to our customers and the momentum we have built over many years, while I'm pleased with our results for the quarter I'll share with you a few things that give me confidence in the long term.
First I'd like to share my vision of where we will execute over the next five plus years, we mainly sell into four key customer categories state local U S Federal International and enterprise.
Each of those has a different path for how we tackle go to market yet the overarching way to think about axon is we are building the operating systems, where public safety and security across the board.
A few years ago, we would say that we envision every officer carrying a taser device Orient axon body camera and having a seat on our software network.
As we built out this network division as you can see it is expanding so that from an off so that from when an officer first interacts with the civilian.
So when it cases adjudicated were powering that workflow from start to finish we have the team and the capability and we're going to continue to challenge ourselves to execute on that vision.
And we remain really excited about the opportunities that we're seeing in state and local agencies across the United States are facing growing challenges. They are understaffed navigating increasing training requirements and have to do one of the most difficult jobs in the World. Every day. This segment remains our core and we are investing in delivering solutions to help.
Our customers, we brought two new devices to market. This year invested in productivity enhancing software features and relaunched a disruptive VR training portfolio. When I think about our mission to protect life and look at the inefficiencies in the existing training landscape today, I think VR can be one of our most.
Exciting long term opportunities.
We're also spinning up more customers on our records product getting pays a turn in the hands of early adopters and ramping shipments of axon body for summit.
But something I find particularly encouraging as our new order book for Taser 10.
Talked about my excitement here for the past few quarters and even my expectations have been exceeded simply put we have found product market fit very quickly and the credit goes to Rick and our Taser pillar team led by Pat Madden for driving tremendous early results.
Orders for Taser 10, after three quarters have already surpassed the first six quarters of Taser seven orders, even as I read that boggles My mind.
That means three quarters in our Taser 10 orders are pacing at over four times the order rate we saw for Taser seven.
What is encouraging is our top three taser 10 orders each came from customers outside of our core state and local base too.
<unk> international customers and one correction.
Another customer area that has me confident in our long term strategy as our U S. Federal business as you just saw on the video.
Our products are meeting the needs in several applications for federal customers, where safety goes beyond the traditional state and localities and expand into the global footprint of our military basis, where we can help protect those who have chosen to protect us.
Five of our top 10 deals booked in the quarter came from federal customers growing from a base of essentially zero a few years ago.
Finally, I will talk about the traction we are seeing internationally, which grew 52% in Q3, we think international is one of the largest opportunities in front of US today, and we are evangelizing the cloud hiring country heads in new markets and spending a lot of time growing our brand and presence overseas.
We've got line of sight into a strong close to our year and we are building pipeline to support long term growth.
It's been an incredible journey and it's easy to look back on what we've accomplished so far but we don't spend a lot of time on that stuff that axon, we're onto the next slide.
Now I'll turn it over to Brittany to go through our financials in more detail Brittany.
Thank you Josh.
We are pleased to report another strong quarter of top line revenue growth and improving profitability in 2023.
Q3, 2022 was my first earnings call with Axon, and we were still talking about hitting an adjusted EBITDA dollar target.
So watching the team moved seamlessly to margin over deliver and dropped significantly more to the bottom line has been an exciting change that we're all proud of.
I continue to be impressed each quarter by our team and the focus on operational excellence, we set hard expectations for ourselves and we exceeded them again in Q3.
Our topline revenue grew 33% year over year, and we saw adjusted EBITDA margins expanded to 22, 2%, which is 35% year over year growth.
Software remains the largest driver of growth in our business with our cloud and services revenue growing 55% year over year.
Our software business model remains a powerful growth engine, our customers subscribe to a bundle of our products and overtime. We improved these products and deliver more new features and technology enhancements are strong software growth is tied to multiple drivers we see growth from new customers.
New licenses and adopt feature add ons.
Also see many existing customers expanding their needs and growing with us over time.
This is a result of our relentless focus on solving customer problems and driving innovation in the ecosystem as Mike discussed.
Do you see that impact excellent net revenue retention rate of 122% and IRR growth of 54%.
<unk> of Homeland Security has an idea IQ for our body worn cameras and our software. The U S. Army is reviewing its Peter teaser modernization program and our first teams our contract with a U S. Federal Government agency has been signed so we're really seeing the momentum from the customers and in the deals we're doing.
The bookings and think there's a pretty large opportunity out there from an addressable market size to everything Rick talked to.
Totally.
To speak to the timing a little bit I think key as you heard John talk about before to our market expansion at our flywheel. Overall is this simple two phased approach to every new market, which is first we earn the right to sell to a new class of customers by taking our existing products and tailoring them and the waves that are needed.
To make them resonate and have product market fit with that new customer segment, while we build out that sales channel and then once we've done that kind of brought them into the fold as an existing customer segment were strong with then we've earned the right to go even bigger by building bespoke new products that are really tailored, especially for that mark.
Segment and that story is playing out resoundingly in federal so over the last several years, we've made tons of investments in the background laying pipe with things like fed ramp compliance by Brent moderate that's better in Pi in the IL four and towards IL five all of those sorts of things as well as hundreds of small little adjustments to all of our core hardware and software.
Our products to make them.
Viable and ready exactly for these federal customers and a great example of that is the VA going nationally live with Axon Records. This quarter and then what Youll start to see over time, it opens us up into more of that Tam as well in addition to selling more and more of our existing youll see us start to develop bespoke skus.
<unk> and product lines that are even more tailored just for federal.
To come back on one last thing I don't want my comments to be misinterpreted.
For example, saying we want to drive down police shootings, we're not passing judgment on whether police are justified or not and.
And similarly, with what's happening in Gaza right now.
In ways that are certainly, causing less collateral damage in less modality and those are problems that get us really excited because I think we're seeing today's technology puts people in unwinnable situations with catastrophic outcomes and we think you know.
US and other technologies need to get Warfighters, and police and everybody better tools to be able to do the legitimate jobs that governments need to do to protect their people.
Without such.
Technology. It just requires inflicting a lot of debt.
No makes sense Rick I appreciate all the color guys.
Okay.
Thank you next willpower at Baird, you are up well right.
Alright, great. Thanks, Yeah, I wanted to shift gears to international another area, where you saw nice growth in the quarter it'd be great just.
Have you kind of unpack, what's driving that and are interested to know his body camera for starting to hopefully that is taser 10, starting to leave that where does the adoption trends look like there across the new products and what are your kind of leading with any particular geographic areas that are that are standing out Korea.
Sure nice to see it will and thanks for the question.
I would say, there's a couple of kind of a different threats to the story here. The first one is that in our tier one markets, which you could talk about a lot the UK, Canada and Australia. Those markets were just seeing wider adoption of the axon network. So it's not only about tasers and body <unk> and dams, it's about our den.
Dems add ons and it's about axon fleet and axon interview room and moving toward Axon Records. So we're really excited about just the proliferation of our products into those markets that mirror the U S. Most similarly, and then we've got.
Essentially a number of other markets that are starting to adopt one axon product for the first time a lot of a lot of the momentum has been on the Taser side, but more recently, we're actually starting to see some really encouraging signs in a few European markets adopting the cloud for the first time, so the growth of our international.
<unk> will really be driven by continued execution in the tier one markets, but starting to see more.
Historically.
Rest of World markets start to look a lot more like those markets, where they are adopting cloud, they're adopting taser or they're using them as they value body cameras and other wearables and camera technology and just the combination of those things is really going to provide that.
Foundation of growth for the international business I still believe.
It's very possible.
Over the next five to seven years that our international business could be rivaling our U S business in terms of bookings and once we get to that point, we feel really good about the revenue catching up over time, So that's really our focus right now.
Hey, Josh one thing I would like to add there is.
It's sort of fun to watch the company developed where there's some really healthy internal competition by.
Our software started out really as an enabler for body cameras.
And I remember, a guy who's going to be five or six years ago. There was a rallying cry like we did on our software to stand on its own as the best in class and so the country, Scotland basically their biggest move with US was not even with body cameras and digital evidence management for their entire ecosystem and theyre not really even using our body cameras at scale.
So each area of the business if it all works better together, but we're now seeing the level of maturity.
Across each of the sub segments to where they are winning best in class on their own and that gives us multiple ways to try to enter any new market.
If I could maybe just follow quickly international it's been Lumpier generally I think you all over a period of years.
And yet it sounds like from your comments, you're seeing broader traction across a broader set of products, but how are you thinking about the broader pipeline.
Internationally versus maybe where you were one or two years ago that might provide confidence that this can be a more sustainable area growth above the corporate average.
Sure Yes.
Head of international sales.
This curve is doing a really good job managing the team toward out your pipeline. So the focus has really evolved from like okay. What can we capture this quarter of this year to how can we do that and build a pipeline of three to four times. The size of the goal next year to just make sure that there is a little more consistency there so.
We will always be some lumpiness, especially in years, where we feel like we've got a lot of taser momentum because of just the nature of the revenue recognition on taser versus the SaaS products.
So.
If large international police forces or buying tasers youll see some of those kind of lumpy one time revenue events, but over the long term I think that's already starting to see that kind of balance out and that's buoyed by a foundation of a video bookings and more video adoption.
Thank you.
Mike <unk> at Goldman Sachs.
Hey, good afternoon. Thank you very much for the question minus.
Mine is just on axon cloud and services.
So it seems like we've seen two consecutive quarters of.
Greater than $15 million quarter on quarter revenue growth.
I was just wondering if you could expand a little bit about the key drivers of the strength I know in the letter.
You talked a little bit about moving more towards premium software bundles to growing installed base.
Just any additional color that you could provide there would be great.
And then is that a good way to think about axon cloud and services growth going forward kind of this teen sequential growth. Thank you.
Sure Yeah, Mike we're really glad you asked that question because that's one of the.
Things, we're most proud of here to see in the results is just this.
Site meant around the axon cloud suite of products and.
The story here has been just multiple years of investment into new feature software add ons, new enterprise software products, just finding out a product market fit and being wrapped it rapidly adopted by our customer base and ultimately more and more customers are buying our premium offerings.
<unk> and the officer safety plan, and then going up to the plus version of that in the premium version of that and we've seen that the last couple of years, but now it's really starting to flow through into the into the revenue and the results and so just.
More adoption of dems more adoption of software add on some more adoption of records management or adoption as our standards product and it's really exciting to see all that come together talked a lot about our flywheel of this idea that really OSP is the driver of that flywheel into new products and that's exactly what we're seeing.
Now so really proud of our product team for doing a great job understanding where these where this platform as evidenced dotcom can take us.
And listening to our customers in terms of where they see value and then doing an incredible job building those products and our sales team is doing a great job selling them on the backend. So things are aligning really really nicely in the cloud business. So we're really excited about it.
I'm not modeling standpoint for all of you guys. The only thing I would add is.
We have historically guided you to take an average of the last six to eight quarters and think about that is the size of the step up in that revenue I think because of this impacts that Josh talked about it more and more customers moving to our premium bundles.
Size of that stuff will start to get bigger every quarter.
It probably won't be as big as it was this quarter, though because you are seeing some of the benefit of the fleet three installations start to turn on and come into that so while there was nothing one time. This quarter you are seeing fleet three come in but I think we're also comfortable saying that because of premium we are going to see slightly larger.
What's up each quarter in software than we have historically averaged out.
And maybe if I could just have a quick follow up.
If we assume a kind of continued step up in that cloud revenue.
Is there something thats offsetting that as you think about the consolidated revenue guidance for the fourth quarter on the on the product side. Thanks, Brittany. Thanks, Josh.
Yeah.
So I would say I think the step up in software is particularly large this quarter. So I don't think theres anything offsetting it.