Axon Enterprise, Inc. (NASDAQ:AXON) Q3 2023 Earnings Call Transcript

Axon Enterprise, Inc. (NASDAQ:AXON) Q3 2023 Earnings Call Transcript November 7, 2023

Axon Enterprise, Inc. beats earnings expectations. Reported EPS is $1.02, expectations were $0.76.

Operator: 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.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 discuss these risks in our SEC filings.

Okay, every quarter we start you off with an earnings video and we do this so you can get — so you 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 AUSA 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. [Video Presentation]

Rick Smith: All right. Thank you, AJ, and great job to Richard and his team at AUSA. It’s truly exciting to see the energy that our team brings to these events. I was on the ground at AUSA and I’m super excited about what Richard Coleman and our entire federal team is doing. 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 company’s 30th anniversary in September. Let me 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 a 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 is part of our secret sauce. Every company says that, but we’ve institutionalized through frequent technology summits 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-alongs 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 we develop alongside our customers, it helps us get it right on the big picture like moving towards robotics security, virtual reality, fused intelligence, for example, and also helps us get it right on the millions of small details and user experience decisions to create a delightful product for our customers.

This should reassure you, our investors, that our investment decisions are sound. They are 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 a 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 2010s and why we believe we’ll be first introducing generative AI tools in the 2020s. Our engineers are some of the best and brightest in technology. Like me, they are energized to go out and fix problems and they work hard at it. As a result, we end up with undeniably best-in-class product market fit.

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Q&A Session

Strong 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 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 Axon, 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, wars, violence, and unspeakable acts, we’re all seeing them today. We commiserate in the pain and suffering many people are facing around the world and because we are a globally connected company, the personal pain faced by our own employees and many of you listening to this call. Axon’s mission, our mission is to protect life and we’re focused on continuing to execute and grow that mission. You’re up, Josh.

Josh Isner: 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 with over 30% top-line growth. This 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 keep me confident 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 and 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 system for public safety and security across the board.

A few years ago, we would say that we envisioned every officer carrying a TASER device or an Axon body camera and having a seat on our software network. As we built out this network, the vision, as you can see it, is expanding, so that from when — so that from when an officer first interacts with the civilian to when a case is adjudicated, we are 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’re 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 and 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 TASER 10 in the hands of early adopters and ramping shipments of Axon Body 4. Something I find particularly encouraging is our new order book for TASER 10. I’ve 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 7 orders, even as I read that boggles my mind. That means three quarters in, our TASER 10 orders are pacing at over 4 times the order rate we saw for TASER 7. What is encouraging is our top three TASER 10 orders, each came from customers outside of our core state and local base, two being international customers and one in corrections. Another customer area that has me confident in our long-term strategy is our U.S. federal business, as you just saw in the video. Our products are meeting the needs in several applications for federal customers where safety goes beyond the traditional state and localities and expands into the global footprint of our military bases 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, higher in 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 at what we’ve accomplished so far, but we don’t spend a lot of time on that stuff at Axon. We’re onto the next play. Now, I will turn it over to Brittany to go through our financials in more details.

Brittany?

Brittany Bagley: 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 move seamlessly the margins over-deliver and drop 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 expand 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.