Axon Enterprise, Inc. (NASDAQ:AXON) Q1 2024 Earnings Call Transcript

Axon Enterprise, Inc. (NASDAQ:AXON) Q1 2024 Earnings Call Transcript May 6, 2024

Axon Enterprise, Inc. beats earnings expectations. Reported EPS is $1.73, expectations were $0.97. Axon Enterprise, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello everyone. Thank you for joining Axon’s executive team today. I hope you’ve all had a chance to read our shareholder letter, which was released after the market closed. You can find it at investor.axon.com. Our prepared remarks today are meant to build upon the information and the financial tables in 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 meeting of the safe harbor provision of the Private Securities Litigation Reform Act of 1995. These comments are based on our predicted — 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.

We discuss these risks in our SEC filings. We’ll also discuss certain non-GAAP financial measures. A description of each non-GAAP measure and a reconciliation of each non-GAAP measure to the most directly comparable GAAP measure can be found in our shareholder letter, as well as in the Investor Relations section on our website. Now turning to our quarterly update. We like to start-off every quarter with a video, because we think it’s a great way to show you more about our business and there’s no shortage of highlights to share from our team. We’ve got a good one this quarter. It’s about five minutes. Let’s pull it up. [Video Presentation]

Rick Smith: All right. Thank you, Erik, and thank you all for joining us here today. I want to welcome you all to our first-quarter 2024 earnings call. We’ve kicked off what is shaping up to be another incredible year at Axon. You saw me talk about my vision in the video we just showed you and I’m energized by the updates we’re bringing you today. First, one of the areas I’m obviously very excited about is drones, robotics and aerospace security. I believe Drone as a First Responder or DFR is a massive opportunity ahead of us. We anticipate that it will drive faster response times and improved decision-making, giving us extra seconds and more information before we act in critical situations. As we push forward into this new era of aerial innovation, drones are not just helpful tools, they’re becoming indispensable.

At the same time, drone tracking and countermeasures become equally, if not even more important. And we believe a critical element to enable widespread Drone as a First Responder programs. DFR programs are designed to deploy drones to an emergency in advance of human first responders, enhancing situational awareness to improve response strategies, optimizing the allocation of already limited resources and reducing the risk of harm to first responders and communities. But limitations exist that today have hindered the use of DFR at-scale. Namely, current FAA requirements mandate the presence of a human virtual observer standing on a rooftop to ensure each drone remains in a direct line-of-sight. That means operators must be positioned in relatively close proximity to the scene, usually on rooftops and operating primarily in clear daytime conditions.

That’s one of the reasons I am so thrilled about our planned and announced acquisition of Dedrone. We believe Dedrone’s technology solves through these limitations, allowing law enforcement to operate in low visibility conditions and at times of day without the need to maintain a human observer with a line-of-sight. The planned combination of Dedrone with Axon is a natural extension of our strategy with several tangential applications already deployed in the field, including stadium, aerospace security, along with robust military, critical infrastructure and other civilian protection applications. Another area I’m very passionate about is the realm of artificial intelligence. I believe that we will one day look back on these times as the beginning of the AI era.

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Q&A Session

AI has applications across every element of what we do and offers the potential to unlock our human capital resources to accomplish more than we’ve ever been able to in the past. In the video we showed, you briefly saw us introduce our most recent innovation here. Born from our visionary initiative seven years ago, Draft One leverages AI to produce police reports from body camera, audio and video. Our studies have found that officers in the US spend about 40% of their time or 15 hours per week on what is essentially data entry, writing reports. This is valuable time they could be spending in their communities, with their families, in training or on their own well-being. With Draft One, we’re giving them a new lifeline that we expect will save them critical hours each and every day.

And while these two developments are massive in their potential, they’re just two examples of where we’re focusing our innovation and we are not slowing down and several other areas that we believe will also be critical to achieving our moonshot goal. We’ve introduced real-time operation solutions that bring situational awareness into the modern age, expanding our ecosystem to ingest networks of cameras and sensors and Fusus and raising the bar for communications beyond monolithic audio to include live-streaming video and two-way voice communications through video and audio feeds. We introduced our new mobile application, which allows our customers to seamlessly work together on evidence management and report writing while they’re on-the-go and we’re giving agencies new capabilities and next level of training to improve human performance under pressure in the most high-stakes events with our continuously improving and expanding VR portfolio.

As I reflect on what we’ve delivered to the market and where we’re investing, I think we’re still in the early chapters of an epic story. And before I pass it over, I want to take a minute to acknowledge that our mission is more important than ever. We’ve seen a number of truly unfortunate and devastating tragedies between the police and the public over just the last few months. Our thoughts are with the families and departments who are experiencing these difficult times that we are out to end. We’re innovating for a better future and remain dedicated to our mission to protect life. And with that, I’ll turn it over to Josh.

Josh Isner: Thank you, Rick, and good afternoon to everybody. I’m humbled to share more about another excellent quarter at Axon. While we continue to build-out the operating system of public safety, the team has not lost focus on the importance of execution. There is no doubt in my mind, we have the best and most well-equipped team in our industry and our first-quarter results are further proof of that. I feel really good about our momentum to start 2024. We started the year running at full-speed as the team closed out 2023 with our strongest bookings quarter in company history. In Q1, we worked hard to set the stage for the remainder of the year. Since it is the only quarter in which very few budgets close, we focus on pipeline development and key customer-facing hiring initiatives.

I am happy to report that our pipeline is the strongest and it’s the healthiest it has ever been across all major customer segments. This is a testament to our awesome R&D teams that continue to zero in on strong product market fit across our entire portfolio driving this type of record demand. Whether it’s TASER 10 now being more directly linked to VR training within our TASER platform or our on-body cameras changing the game for real-time operations or Draft One revolutionizing the RMS category, there’s so much for us to bring to the market and we are just at the beginning of what we think will be a deep increase in the ways we leverage technology and public safety for the better over the next decade. Looking ahead, I see many opportunities for continued growth.

We believe our domestic state and local law enforcement customers are eager to adopt the new products that we have brought to the market and we are seeing our emerging markets become more meaningful contributors to our results. One of the many things that gets me excited about Dedrone is their strong international presence, which could accelerate our international channel expansion. On that note, I’d like to share our excitement in welcoming Cameron Brooks as our new Chief Revenue Officer. Cameron came to us from Amazon Web Services where he most recently led their Europe, Middle-East and Africa business for the public sector. As we look to drive more cloud adoption across the world, Cameron’s wealth of experience in spurring international cloud adoption will be a powerful asset to our team.

Cameron joining Axon is a perfect example of how our mission and our unique approach to the market helps us attract the best talent from some of the most successful companies in tech. Before I pass it over to Brittany, I want to briefly highlight how grateful I am from my teammates at Axon. We have spent the last two years fortifying and rebuilding our leadership team and we are ready-to-move faster than ever. We are focused on the right areas to continue delivering in the quarters and years to come, both on our financial commitments and on our mission. We just recorded our ninth consecutive quarter of greater than 25% revenue growth and our business has approximately quadrupled over the last five years. We’re also delivering our strongest adjusted EBITDA margins in more than three years as promised.

This kind of compounding does not happen without the best people and the best products and without a lot of things going right behind the scenes. While it’s always encouraging to deliver such strong results, we continue to embrace our next play mindset and put our collective organizational energy behind the most important metric of all and that is lives saved. And with that, I’ll pass it over to you, Brittany. Brittany Bagley Thank you, Josh. We’re very proud of the results again this quarter for both revenue and adjusted EBITDA. We had 34% top-line growth on top of 34% growth in Q1 last year, supported by our cloud and services revenue, which grew 51.5% year-over-year. This came from growth in both users and premium product add-ons driving upsell.

Demand for TASER 10 also remained robust and drove 33% growth year-over-year in our TASER segment, supported by increasing supply availability. Sensors and other revenue grew 14% year-over-year with the adoption of Axon Body 4 driving camera revenue, somewhat offset by lapping the big catch-up in fleet revenue from Q1 last year as we’re now at more normalized deployment levels. In addition to healthy growth across all our categories, we see strength across our end-markets. In Q1, over 25% of our revenue came from outside domestic law enforcement, including international, federal, other adjacent markets like corrections and justice and enterprise. Our ARR for the quarter is $825 million, up almost 50% year-over-year and it now includes Fusus and our TASER warranty revenue.

We continue to maintain a net revenue retention of 122%. In Q1, we introduced adjusted gross margin to normalize for increased stock-based compensation resulting from the grants we made to employees whose compensation was under a specified threshold, many of whom are in manufacturing. As a reminder, we’ve committed to keeping our stock-based compensation at or below an average annual dilution of 3% for 2025 and beyond and this is in keeping with that commitment. Adjusted gross margin for the quarter was 63.2%, up from 61.5% in Q4. This improvement was from product mix benefit as well as the fact we didn’t have any onetime reserves hit this quarter. We do expect some pressure on gross margin for the rest of the year as we continue to balance mix-shift and ramping T10 capacity.

Q1 adjusted EBITDA margin increased year-over-year from 19% to 23.6%, representing a 460 basis-point improvement. In addition to the benefit of strong gross margins, we saw operating leverage contribute approximately 110 basis-points year-over-year. As Josh mentioned, this is our strongest adjusted EBITDA margin quarter in three years since COVID. We continue to balance driving strong top-line growth with investing in the business. We’re pleased to be able to do this both organically and inorganically and are thrilled about our plans to welcome the Dedrone team to Axon. Rick did a great job talking through the strategic rationale. From a financial standpoint, we expect to close the deal sometime over the summer and to have approximately one full-quarter of financials included in our 2024 results.

This timing is subject to customary closing conditions. We expect that the potential acquisition of Dedrone would increase our TAM by $14 billion, bringing our overall addressable market to $77 billion. Dedrone is still investing for growth and we expect incremental costs from their business and from integration that would have a slight impact to our core adjusted EBITDA margin. We’ve tried to factor this into our updated guidance and should be able to further refine these assumptions next quarter. Today, Dedrone is small relative to our overall business and once closed, you will see them incorporated into our software and sensors segment. Dedrone highlights another step in our M&A strategy of acquiring talent and technology that complements our roadmap and expands our addressable market.

In total, our acquisitions of Sky-Hero and Fusus and our planned acquisition of Dedrone have expanded our TAM by more than 50% over the last year from $50 billion to $77 billion. The acquisitions also increased our capabilities in robotic security and real-time operations, both areas we view as critical to the future of policing and our other markets and we are excited to continue delivering on our product vision. Finally, I’ll turn to our guidance. We are increasing our full-year 2024 expected revenue guidance to $1.94 billion to $1.99 billion, which represents approximately 26% annual growth at the midpoint, above the prior high-end of our guidance range of 20% to 24%. This incorporates both our outperformance in Q1 and our increased expectations for the year.

While future contracted revenue was down slightly quarter-over-quarter to $7 billion in Q1, we have a strong pipeline for the year to underpin our forecast. We have also included an immaterial amount of revenue we expect to come from Dedrone this year, reflecting everything we currently know. We expect adjusted EBITDA of $430 million to $445 million, which implies an adjusted EBITDA margin of approximately 22%, up year-over-year and approximately in-line with our prior guidance on margin. This includes our best estimate of integration costs and impact from M&A on the year. Finally, we’ve also increased our expected investment in CapEx to $80 million to $95 million for the year as we are continuing to ramp our capacity investments to meet the strong demand for TASER 10.

We’re very pleased with these results and think the quarter demonstrates continued execution on our business across both the top and bottom line as well as strong investments for the future, so we can continue to deliver outsized performance. And with that, I would like to open it up to questions.

A – Erik Lapinski: Thanks, Brittany. I think we’re all up in gallery view. We’ll take our first question from Meta Marshall at Morgan Stanley.

Meta Marshall: Great. Thanks and congrats on the quarter, guys. I wanted to dig into Draft One and just get a sense of how long you foresee kind of departments needing for approval processes and whether you kind of see that once a couple of major departments sign-off that the approval processes can go much quicker? And then maybe just a second question for Brittany that I’ll include just upfront. Just the contribution of Fusus to the year or just what you’re kind of accounting for between Fusus and Dedrone for kind of that inorganic contribution to the year. Thanks.

Erik Lapinski: Yes, thank you very much for the question. Rick, did you want to lead us off? I saw you speaking there.

Rick Smith: Yes. I have myself on mute there. Yes, I would start by telling you, we’ve introduced a lot of exciting products over the years. This is probably the most enthusiasm I’ve seen for any product we’ve ever introduced. I mean, police officers did not get in this career to be writing reports and we’ve done a lot of background work with our Ethics & Equity Advisory Council as well as district attorneys and others looking at what the risks are and testing against those. We do make sure that we’re putting speed bumps in there, so officers are reviewing the final report. It’s really important that it’s theirs. But what we’re seeing is pretty rapidly they’re realizing the agencies and their partners again, district attorneys and others are telling us the reports they’re getting when officers are using Draft One are better than the reports that they’re writing on their own.

And so while it’s pretty early for us to make any exact predictions, the overall friction to adoption is low. This doesn’t require a lot of professional services and integration. It’s pretty easy for us to turn it on. It’s very simple for officers to figure out how to use. And we’re finding again as soon as they get experience with it, their feedback is pretty fantastic.

Josh Isner: Yeah, I’d just add to that. Ultimately, there will be a sales cycle associated with it, just like anything in selling to government, but I think we’re already seeing some early orders come in and the pipeline is building. We think in the second-half of this year and especially going into next year, we’ll see this start to really contribute to in-quarter revenue and ultimately at a high-margin as well. So we’re very excited about what this will entail for our results, but most excited about the fact that in a climate where it’s very hard to add police officers to police forces that we have the propensity to put police officers back on the street instead of behind a computer here without having to make any incremental hires from the outside. So very excited about what this product entails.

Brittany Bagley: I’ll take your second question. A great question. I would say both Fusus and Dedrone are small. They are growing fast, but they’re immaterial to our top-line and really immaterial to our overall growth rate, so we’ve incorporated that all into the guidance we’re giving for the year. Where you see a little bit more of an impact is us being cautious on EBITDA, just given absorbing those businesses and having integration costs to really make sure we pull them in and do a good job. And so as you see us not pulling the Q1 EBITDA margin through to the rest of the year, you really see us accounting for some of those impacts and where we need to invest.

Meta Marshall: Great. Thanks. I’ll hand it off.

Erik Lapinski: Thanks, Meta. We’ll take our next question from Alyssa Shreves at Barclays. Alyssa, are you on? Might be muted on your phone. And we’ll skip for now. We’ll go to Will Power at Baird.

Will Power: All right, great. Thanks. Congratulations on the strong Q1 results. I guess, first question really probably for whoever wants to take it, obviously strong mid 30% revenue growth in Q1. If you look at the full year guide while raised, it does imply some deceleration. So just want to get perspective on any level of pull-forward into Q1 versus conservatism for the remainder of the year. Any broader thoughts on that front would be great.

Josh Isner: Yes. Thanks a lot, Will, nice to see you. I’d say, as usual, we like to see more of the year materializing before we get out over our skis on total revenue for the year. And so we’re off to a nice start. We see the pipeline very strong. We’re excited about what Q2 and beyond will hold. It’s also worth noting the year-over-year comp for Q1 is always the easiest comp of the year in terms of Q1 tends to be the slowest revenue quarter. And so yeah, we’re just — it’s not — we don’t have any kind of pessimism out there or any reason not to think we’re going to have another great year. We’d just like to see that materialize in terms of throughout the year in the sales cycle and we’ll certainly update that quarterly as we always do.

Brittany Bagley: Yes, I would just add, nothing sort of embedded in there other than the fact that we’re lapping a very, very strong year last year.