We're delighted to have Axon here with us today, Brittany Bagley, CFO and Chief Business Officer. I'm gonna read a brief disclosure. I'm Meta Marshall. I cover the networking space here at Morgan Stanley, and delighted to be talking to you guys today. For any important disclosures, please see the Morgan Stanley Research Disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. Was there anything you wanted to add disclosure-wise? Just general disclosure. Whatever you're supposed to read. Perfect. I think that that's all-encompassing. All right. Brittany, you recently joined Axon from a consumer hardware company after spending many years on the finance side. What attracted you to the company and the opportunity that you saw here? Yeah. I think it was really three main things. One, as a CFO, you're always really interested in the business model of a company. While you learn a lot managing a consumer hardware business, it's really nice to have software revenue and recurring revenue be part of your business model. That has been a very nice and welcome change for me. Beyond just the software recurring revenue piece, I think Axon has done a really incredible job with their channel, with their customers, with how important they are to their customers. That feeds not just the business model, but number two would be the opportunity in front of them. Mm-hmm. There's just so much more runway for growth, for new markets, for new products. Axon's had an incredible history of evolving, going from being sort of just a TASER company to innovating on the body camera side. We now have in-car cameras, all the way through to that software business I was talking about, where we really attach a significant amount of software revenue to our customers and from those products. Probably just the last piece which goes to that is people. I thought the team was great. Our CEO Rick Smith is our founder. He's just a visionary in the space. We've got a fabulous chief product officer, a great COO, who's done a phenomenal job building the sales channel. You don't turn down a chance to work with people like that. Got it. I mean, from the perspective of a new joiner, you just laid out a lot of, you know, you have a lot of recurring revenue, a lot of software opportunities. Just what do you think is kind of the most underestimated opportunity for Axon today? Yeah, I mean, I think we spend a lot of time talking to people who think because we've been around for a while, or, because they see a lot of TASERs and body cameras on their police departments, that we are in the later stages of our growth or, you know, we have a fully penetrated market. I think what's underappreciated, at least by some people, is just that opportunity in front of us. Again, I think depending on where people come from, you know, maybe some people underappreciate that software opportunity just because it is the latest leg of our story. It's been growing so quickly. I think probably the amount of recurring revenue we have, how fast our software business is growing, I think all of that is probably a bit underappreciated. Got it. I mean, you just reported Q4 last week, growing more than 50% in the quarter and looking at 20% growth for 2023. Just how should we think of, like, what those kind of core categories of growth are between TASER, sensor, software, kind of as we build to that 20% for this year? Yeah. They're all growing. That's the really nice thing, is we have a lot of different levers and drivers to get to our growth targets. 20% for 2023, actually 20% all the way out to 2025. Mm-hmm ... where we put out a target of over $2 billion of revenue. That said, software has been growing the fastest for us recently, and we would expect it to continue to be the fastest-growing part of our business. Got it. I mean, in addition to kind of this very impressive top-line target, you laid out a profitability target to get to 25% EBITDA percentage over the next three years. Just what are the drivers to kind of get that 500 basis points of improvement? There's a couple of drivers. Well, I mean, the two big ones are really gross margin and then OpEx leverage. On the OpEx side, we're gonna keep investing in R&D because we continue to see tremendous growth and growth opportunities in front of us. That's gonna be a really important pillar. When you're growing 20% a year, that's a lot of $ that you can reinvest back into the business and still get leverage on your OpEx. Our goal would be to grow OpEx more slowly than our top line, and that will be a big lever and a big opportunity for us in hitting that EBITDA target. Beyond that, I think there's opportunity from a gross margin standpoint. Our gross margin story is a little bit complicated. There's lots of puts and takes as we think about our business mix and what goes into that. We're working really hard to make sure that we're balancing out sort of the opportunities and some of the challenges from a growth margin standpoint. It's really those two pieces that'll get us there. Perfect. You know, Axon's growth has been fueled by kind of ramping products that are new to market, you know, whether that be TASER or body cameras. You know, you guys were kind of very early in those markets, you know. Software is more of a displacement in some of these cases. Does that change how you approach the opportunity and just some of those growth drivers there? I think there's two great things about our software revenue. One is, while it is displacing things, a lot of what it's displacing might be an older, more manual or analog way of doing something, of driving a process. A software tool is coming in, and it's saving our customers time and money, where they didn't have a software tool before, so I think that's really helpful. I think the other piece that's really helpful is a lot of our products really work together. An example would be a lot of the software that attaches into our body cameras. If the police department didn't have body cameras, they didn't need all of the software and the tools that attach to that to analyze the video or to do the tagging, or to auto-recognize certain situations. We've been able to both give them a tool like a body camera and then give them the software tools that go alongside that to really utilize it and use that information in the best way they can. Got it. You know, you've been investing in a number of different software offerings for two years now. Just where are you expecting the most success, and which products will kind of be bigger drivers today versus two years from now? Yeah. Our, our DEMS product, which is our digital evidence management product, is the hero product of our software category, and we continue to see that driving significant growth and really being a strong opportunity for us going forward. I would really point back there. That's not to say we're not also very excited about the opportunity we see in our real-time operations platform and our productivity tools, but DEMS just continues to have so much runway in front of it. Got it. Is the primary route to selling software by up-bundling that, or are there certain software capabilities that are more likely to be purchased on a standalone basis? We have sold some of our core software capabilities on a standalone basis. We have, you know, some actual countries that have bought our DEMS product without any of the rest of our solutions. There is definitely an avenue and a path there. Given our install base though, and how many customers we have who are on a bundle, I think continuing to sell those bundles and sell those subscriptions and move our customers into our higher price point offerings, which also offer them a lot more and have a lot more of our capabilities baked in, is probably the primary path for us. Okay. Yeah. -for you guys. All right. How long is the sales cycle for something like Records or Dispatch, and how does that differ from kind of a body camera sale or add-on capabilities? Yeah. I mean, we're newer in Records and Dispatch, I think in a lot of ways we're still figuring out what a sales cycle looks like there. We've gotten some nice traction with Records recently, we're pretty excited about what we're seeing on that front. You know, sometimes that's a different sales cycle than, you know, our TASER or our body camera products. Sometimes our customers are coming in, and they're buying everything all at one time because they want the full solution that we offer. Okay. Got it. Okay. Turning to TASER, you know, you recently announced the TASER 10. The company has been vocal about improving TASER efficacy to grow greater adoption. Does this launch hit any customers? Any threshold customers have been hesitant to purchase for or just, you know, what do we get from TASER 10 that can help-? Yeah hit the market? To your point, I really think it comes back to the efficacy. The team did a tremendous job studying when TASERs were in the field, and they weren't working, and they weren't offering an alternative to lethal force, what was happening, what was going wrong, what were the technical challenges that were a problem for that. They did a really tremendous job designing TASER 10, and TASER 10 basically gives 10 individual shots. The officer or anyone who's using the product can choose where that goes. You need two of those to hit to make a connection. Instead of having in TASER 7 you had two chances to shoot two darts at the same time, now you have 10 chances, and you can place the dart wherever you want. We expect it to have much better efficacy, and really give the officers a lot more situations in which they can successfully use a TASER. We think that that's tremendous for U.S. law enforcement. We also think it opens up more opportunities where a TASER is an applicable alternative. Especially as we think about international opportunities, we think that improvement in efficacy will really get more, you know, more countries and more international police departments comfortable using the product. What is that upgrade cycle like? You know, is it customers who purchase TASER 7 on a subscription model, and they're at the front of the line? Just how much of the, like, is it install base that hadn't even moved to TASER 7? Just how do we think about kind of who is in line and how that upgrade cycle. Yeah -continues? Our typical upgrade cycle for a TASER is every five years, and most of our customers are on subscriptions. Not all of them, but about 90% of our revenue is tied to a subscription. If you are on that subscription bundle, you would be coming up for your refresh after five years. TASER 7 launched about 5 years ago, so our early TASER 7 customers will be coming up for a refresh and are likely to be early adopters on TASER 10. I think we also have new customers who haven't adopted TASER before, either in the international markets, federal customers, who will be looking at TASER 10 for the first time. Finally, if there's a customer who's not on their upgrade cycle, but they're interested in moving to T10 early, we will always work with our customers to get them the right tools and do a contract rewrite as needed. I got it. I mean, you've spoken a couple of times about the international opportunity- Mm-hmm particularly for TASER. You know, what is the strategy to drive higher adoption there, and then what bottlenecks are there to that? Yeah. We do talk about international a lot because it's still a very under-penetrated market from a TASER standpoint. We think there's a big long-term opportunity to make our international markets look a little bit more like our local U.S. state and local law enforcements look. We've had really nice traction with some of the Commonwealth countries, with Canada, we are seeing really nice traction internationally. I think what does it take? It goes back to that efficacy point. Then I think, from a bundling standpoint, it depends somewhat on where they are in terms of embracing cloud adoption versus on-prem solutions. The more cloud adoption gains traction, really in, you know, continental Europe, the more interested they will be in adopting our full suite of products. Got it. I mean, maybe moving on to body cameras. Investors often fear, kind of similar to TASER, that we're just reaching kind of saturation points. We know many of the larger agencies in the U.S. have deployed body cameras, but is there still room to grow within the agencies, or is it really about kind of some of these either other verticals or international expansion? Yeah. There is still room to grow. I will say, I will direct everyone to our investor deck, which is great and is on our website, investor.axon.com. We actually have a really nice slide in there that shows our view of penetration sort of by market and by product type. I think you'll see across the board, we think we still have a lot of opportunities from a penetration standpoint on Taser, on body camera, and then, a huge dollar penetration opportunity on software. I do think that includes opening up things like, the federal market. Even in the federal market in the U.S., there's just a lot of runway in front of us. Got it. I mean, how do you think about kind of opportunities as you kind of expand your TAM of opportunities within enterprise or private security? You know, are there just certain use cases or customer verticals where you're seeing kind of, demand expansion? Yeah, absolutely. That's a really great example 'cause that's a big opportunity. I mean, we've been talking a lot about federal because we've won some really great contracts in federal. We got FedRAMP High certified in federal, so there's been a lot of momentum there. That's not in any way to take away from our enthusiasm around our enterprise opportunities. There's a lot of opportunities in enterprise like private security, hospital security, stadium security, that are really very adjacent opportunities and a lot of use cases similar to how law enforcement is using our products, but whole big new markets for us to move into. Got it. I mean, in your letter last week, you kind of lowered the TAM maybe, or expectations just for personal protection. What led to that change? We re-look at our TAM every two years, and we do a bottoms-up analysis for basically looking out over the next 3 years on the products we have, the product roadmap, you know, what we're seeing, what kind of opportunity we think we have in front of us from an addressable market. As we looked at our consumer business, what we realized is that we continue to see such a tremendous opportunity in our core business, that that is where the bulk of our focus is going. Now, that's not to say, you know, that we're not still excited about having a healthy consumer business. It's really part of our mission to provide this alternative to consumers as well. Even in our resizing, it's an almost $5 billion market, so it's still there. The bulk of our focus, like where we're seeing growth rates, the opportunity in front of us is just so much in our core business that that's really where we're seeing market growth opportunity, and we're focusing really on that core business in the future. When you're looking at net new customers, obviously you have a very healthy win rate, but kind of what do you see that influences kind of that win rate the most? That's a great question. I would point back to our ecosystem. Our products really work very nicely together. We spend a lot of time talking to the customer, understanding what their pain points are, what they need from us, then we develop products for that. Our products really all work together. It's that full solution and that ecosystem of offerings, right? Whether or not it's, you know, reading the footage off the body camera or, you know, knowing when you take your TASER out of its holster. Having that all connected, I think is very helpful for our customers, really allows us to be a great partner to them. Okay. Got it. That, that's helpful. You know, your new Fleet product has seen strong adoption. Where has customer feedback been most positive on that? You know, what is kind of helping informing the roadmap? Yeah. adoption there? We did a really nice job. I think probably the biggest feature for that is the automated license plate reading. That technology has existed, but not at the price points or availability that our fleet product brings to the market. It's really a valuable tool and a game changer for our customers. That's been driving a lot of excitement, even more excitement than we were expecting, and we were excited for the product. I mean, What is the runway for that product? Is it getting into the body camera customer? Can it expand kind of beyond kind of traditional customers today? Yeah. I mean, I think there's a lot of runway in our existing U.S. state and local law enforcement. I think there's opportunities in federal. I think we see a lot of opportunities for our Fleet product, where we sell the rest of our products. We tend to think about selling our existing products into new customers to help expand, and then selling new products into our existing customers. That's sort of our framework for how we develop and how we target. Fleet is one of our newer products, where we're really starting by thinking about selling that into our existing customers. And the nice thing about Fleet, similar to our body cameras, is over time, that continues to open up a lot of higher-margin software revenue for us. Where are our customers, not to make a TASER pun, but having pain points? You know, where are you seeing kind of Like, where are they asking you for kind of the most development and the most kind of opportunities to kind of, like, advance your roadmap? Yeah. Great question. I mean, I think part of it would be on the productivity side, and just how can we continue to automate things that are taking a lot of people hours right now. How can we continue to drive that efficiency for them? I think Rick talked about it a little bit on our earnings call, which is, you know, can we help make reporting easier for them? Can we do more autofill on their reporting, so they don't have to fill out the same report as many times? I think that's one area. I think the other area is training. We've maybe talked about it a little bit less, but training is really important. Training on the new TASER 10 is really important for all of the officers. We are looking at solutions for that, and we're actually using VR as a potential, really attractive solution to help officers train, well, efficiently, and at scale. Got it. Before I step into kind of some of the more CFO questions, I wanna open it up to the audience, see if there's any questions from the audience. All right. Perfect. They just wanna know the financials. All right. Cash flow generation is in focus for investors. You know, last year, the company made some decisions to kind of preserve cash, limiting expenses. You know, what are the levers to kind of drive incremental cash generation this year? Yeah. One of the things that we came out with as part of our 2025 targets was to get to, you know, on average, 60% free cash flow conversion from EBITDA. I think some of the things that go into that will allow us to deliver that, when maybe in some years we haven't, are really being disciplined about those OpEx levers and really focusing on working capital, and trying to drive efficient working capital across the business. We, at the same time, we get the, "Well, maybe why aren't you higher?" You know, why we're not at a higher level of free cash flow conversion has a lot to do with the growth rate we're at. We're just growing really quickly. There's reinvestments back into the business from a cash flow standpoint that we're making for that. Some of that is the timing of revenue recognition versus cash flow that you'll see show up in that. Some of that is we continue to invest in inventory as we grow and scale. There are pieces like that that make it a slightly lower free cash flow conversion number. Again, I would just point back to that is at the types of growth rates we're talking about. Maybe just for investors who might be newer to the Axon story, just kind of laying out the recurring portion of the revenue, you know, the more replacement part of the revenue that can just kind of help investors kind of contextualize that product versus subscription story. Yeah, well, I'm relatively newer to the story myself, having been here slightly less than 6 years and 6 months. Sometimes maybe feels longer. I would say, first of all, the team does an amazing job laying out really great information. I know when I was getting up to speed on the story, the investor presentation we have, all of the disclosures we do are incredibly helpful. That will go through and lay out some of the things I laid out, like, you know, our TAM, our penetration rate. I think one of the things it also does is it's shown our increase in our subscription. Our subscription has really increased over time. Now 90% of our revenue is tied to a subscription. It'll take you through a really nice chart that shows how and when we recognize that revenue and when we have product refreshes. TASERs are on a 5-year refresh. Body cameras are on a 2.5-year refresh, that all gets bundled into the subscription. You get a much smoother line in terms of how you look at our revenue recognition over that. All the software gets bundled into that. In our shareholder letter, we give a lot of disclosure around our different segments. We talk about our Axon Cloud business and break out growth for that. We talk about how much ARR we have. We talk about how much future contracted revenue we have, which is at about $4.7 billion. Because we have very long contracts on average our contracts are 5 years, and we sign 10-year contracts and sometimes longer, we have a lot of future contracted revenue, which converts into a year at somewhere between 15%-25%. That's the base that we'll get in the year, you can go figure out how much go-get we have to get to our targets. you know, we give margins on that. Our software margins, absent sort of setup costs are close to that 80% level. We break out TASERs. We break out a lot of information on TASERs. We're actually talking about breaking out slightly less detail going forward. you can get a lot of information on our TASER category. Our margins there are in the low 60%. We have our sensors and other revenue, which is body cameras, Fleet, that's a more traditional hardware, gross margin of, you know, sort of the low 40%. You can also play with those pieces as you think about mix going forward. There's a lot out there, and it's all really good info. Perfect. I mean, just how are you thinking about the Axon capital allocation framework more broadly? We're very happy to have a very strong cash balance. We went out and did a convertible a couple months ago. Morgan Stanley helped us with that. Thank you. We got a nice a bit of cash on our balance sheet, just over $600 million after fees and expenses, we're at above $1 billion of cash. We did that opportunistically. We got a lot of questions like, "Oh, you know, is there a deal that you're just waiting to tell us about?" There wasn't. It's been a couple months. There's been nothing announced. Most of that capital, really from an allocation standpoint, is, we're thinking about M&A, obviously organic investments in our business, CapEx where we need CapEx. We're really thinking about M&A for that, and that will be companies where we can further our moonshot, we can fill in our product roadmap, we can get technology and talent that really helps us to continue to support that 20% growth rate, you know, hopefully beyond 25. Perfect. Maybe just last question for you. You know, obviously you have a tremendous amount of experience that you kind of brought to this position. Like, is there anything that should kind of stylize you or kind of what you're bringing to this role versus kind of what you were stepping into a well-oiled machine? Yeah. You know, I think any time you have a business growing as quickly as this business is growing, there's a lot on the back-end processes that really have to keep up. So, we're gonna try really hard to make it look smooth and seamless. That's where I'll be spending a lot of my time, including, you know, capital allocation M&A, but also how can we just future-proof this business by growing and scaling and building the pieces that we need to run a really good, clean business that has, you know, a tremendous amount of complexity with our customer base and our products and is growing really rapidly. Perfect. All right. Well, with that, we'll leave it there. Brittany, thank you so much for being here today, and enjoyed hearing more about the story. Thank you.