Go ahead and get started. Great. Great. Well, welcome to the Axon Fireside Chat at the Goldman Sachs Communacopia and Technology and Internet Conference. I have the privilege of introducing Brittany Bagley, CFO and COO at Axon. Brittany joined Axon in August 2022 from Sonos, where she served as CFO, and previously worked at KKR. My name is Mike Ng, and I cover Axon and hardware here at Goldman Sachs. We have about 35 minutes for today's presentation, inclusive of Q&A. So towards the end of the session, if you have a question, please raise your hand, and we'll get a mic runner over to you. So first, Brittany, thank you so much for making the time to come out here and be with us today. This is really fantastic. Thank you for having me. It's great to be here. So why don't we start out with, you know, a higher level strategic question? You know, Axon's the leading TASER manufacturer in the world, and it has developed relationships with 17,000 of 18,000 U.S. law enforcement agencies. You know, TASER has been the foundation in cross-selling sensors and cameras, which are seeing really strong underlying growth and has really helped open up an entire platform of services and software. So to start, could you just talk a little bit about the evolution of Axon and the strategy for growth over the next five years? Yeah, absolutely. So, Axon's been around for 30 years. They really invented the market for TASERs and the concept for TASERs, so that's probably part of why we're the leading company doing that and providing non-lethal alternatives. It has been an unbelievable journey to watch, everything from 30 years ago, our founder, Rick Smith, trying hard to find product market fit and having to really go out and convince people and find the right market to, you know, where we are today, where he has just shown a relentless path of innovation and creativity around solving some of these challenges and some of these problems that we see out there. While TASERs continue to be a really important part of our business, we have seen unbelievable growth from our body camera market, where we were really one of the first companies to talk about body cameras and the need for body cameras, and the transparency that they provide when you do have one of these events where you need to pull some kind of weapon. Beyond that, just the software business that we've been able to overlay on top of that, there's really been three incredible acts to the business that you see showing up in our numbers today. Our software business continues to grow incredibly quickly, as we do see the adoption of some of our tools around managing the video data that comes off of the body camera. We have a lot more software tools than that, but our core product is the digital evidence management software that really handles the body camera video. And then I would say, we continue to see a lot of opportunities in front of us, and we talk about those, whether or not it's using AI in our tools to continue increasing productivity going forward, or robotic security measures, as we try and keep more and more people out of harm's way on both sides by using technology. So great growth, great development, amazing 30 years. I'm excited to see what we continue to do next. Great. That's a fantastic overview. You know, Axon has a really wide range of customers for TASERs, and the largest customer base is U.S. state and local law enforcement. You know, my personal view is that a lot of Axon's market leadership in TASER and also in software and sensors is driven by the strength of these relationships. Could you just talk a little bit about the nature of your relationships with law enforcement agencies as customers, partners, and collaborators, and how important that is to the foundation of the business? It's incredibly important, and it's what our CEO continues to spend a huge portion of his time doing, is just going out and meeting with our customers and talking to our customers, and listening to the challenges that they have. Using them as sounding boards when we come up with ideas of a technology or a tool that we think would solve a problem. Do they agree? Would they adopt it? Does it actually solve their pain point? Is there something we haven't thought of? So our relationship with customers is incredibly important, and we invest an enormous amount of time with them, understanding their needs and their business. Great. While appreciating there's an opportunity that's well beyond U.S. state and local, could you just talk a little bit about how penetrated Axon is in U.S. state and local? And, you know, what's gonna be driving growth there? Is it gonna be growth in the install base? Is it gonna be, increased revenue per user, just as you, sell more value-added products and, you know, increase the penetration of things like software and sensors? Yeah. So I would say in our core U.S. state and local law enforcement customer, not everybody, but for the most part, they have adopted TASERs and body cameras. What a lot of them have not done yet is upgrade to our fully integrated suite of software products. So we talk about how less than 20% of our customer base is on our bundled hardware, software product. We call it our Officer Safety Plan or OSP. So we still have a very significant opportunity to continue to migrate our customers up, and it's not just up from a price standpoint, it's up from a features, functionality, capability standpoint. And I think that's really important, 'cause a lot of the software tools we're providing actually improve their productivity or allow them to do things, you know, better or more easily than if you only have a manual solution. You can think about auto-tagging video or transcription. A lot of the software tools that are in that OSP bundle that we're migrating people towards unlock capabilities for our customers. And then I would say, I do want to say that there are big opportunities outside state and local law enforcement. We sort of have a two-pronged approach. One is adding technology and capabilities that could be valuable to our existing customers, and the other is taking our existing technology and finding new customer opportunities for those. I think a great example, there are more, but I will say federal is a great example where there's lots of parts of the federal government that you might not think of as being, you know, really great customers for us, like Customs and Border Patrol or Veterans Affairs or, you know, there's, there's other markets where and other customers where they are running their own police force or they're influencing police forces, or they really have something, you know, much like our core customer base, that's an opportunity for us. Great. How do you think about, customer demand against the backdrop of, you know, domestic law enforcement budgets? You know, what share of the budget is dedicated to, you know, equipment like, TASERs and sensors and, and cameras? You know, how much stability or volatility is there in law enforcement budgets kind of year to year? Yeah. So the nice thing for us is, that while it's always helpful to have, you know, tailwinds in customer budgets, and those have done well for the last few years, and, you know, from what we see, they're continuing to be fine from a budget standpoint, we only make up about 1% of our customers' budget. In customers where we're particularly large or particularly penetrated, maybe that's 3%, 2%-3%. And that's really because technology is still a small slice of the pie in terms of what they're spending, relative to something like salary or training. And so, again, while budgets are nice to have good budgets, for us, it's really about this piece of enabling productivity, enabling them to be more efficient at their job. That has an ROI on it that's really measurable for our customers. Great. So before we get into some of Axon's marquee products, I want to talk about the OSP, the Officer Safety Plan, which allows customers to bundle TASERs and sensors and software in various combinations. So first, you know, on the plan itself, you know, what does it do for Axon's revenue visibility? You know, how is the OSP program structured, and, you know, what's the adoption been to date? You mentioned 20%- Yeah. I guess of U.S. state and local here. Yeah. So for the most part, we sell all of our products as a subscription. So about 90% of our 2022 revenue was tied to a subscription or a recurring revenue bundle. So that's really how we sell, whether or not it's just a TASER, or a TASER and body cameras, or a TASER and body cameras and software. What that does for our customers is it really makes it easy. They know what they're getting. They know how much it's gonna cost them per officer per month, per month. They tend to lock into long contracts, five years, 10 years. We've got some 12-year contracts. So that gives them a lot of visibility in terms of what they're spending and what it looks like. What our Officer Safety Plan really does, which we think is great, is it just makes it all work better together. So if you've got our products and you're on the full bundle, you have a lot of features and capabilities that really make your TASER or your body camera and the software, you know, work well together. So you take your TASER out of its holster, and it automatically activates your body camera and starts recording, things like that, that just make it a very seamless experience. Great. You know, when I think about the structure of the OSP as well as some of the higher margin software revenue that you've been able to attach, it does a tremendous amount for revenue visibility. Axon has $5.3 billion of future contracted revenue on the balance sheet as of last quarter, which is more than three times consensus revenue for next year. I certainly appreciate that. There's a lot of years over which that contracted revenue will be recognized, but could you talk a little bit about, you know, the stickiness of future contracted revenue, how you guys think about it internally, and, you know, some of the revenue visibility that it provides? Yeah. It does provide really nice revenue visibility. It's, it's a very nice feature of having this long-term, long-term contract subscription revenue. So it gives us a good amount of comfort with at least a baseline of revenue over the next, you know, call it 10 years. We expect about 15%-25% of that future contracted revenue to convert in the next year. And then what we do on top of that is we go out and we look at our pipeline of new customers, you know, contract rewrites, what do we have to go win? Mm-hmm. That's how we come up with our, our targets and our forecast of what we're gonna go do. A lot of that is supported by, you know, new product releases, our software roadmap. When we know we're getting customers to upgrade, we've got 122% net revenue retention on, you know, $559 million of ARR. So that all really helps us understand what our baseline business is and where we can take it. Great. Could you talk a little bit about the opportunity for upselling more premium tiers of OSP? You know, how big of a revenue opportunity could that potentially represent? You know, is the pricing really gonna be driven by things like, you know, TASER 10 and the next iteration of body cam, or is there just more software that, you know, you're kind of packing into each of the premium tiers of OSP? Yes, yes, and yes. So as I think about our domestic business, I think a lot of it, really. First of all, the TASER 10 product is getting very good reviews. We're really excited with the reception we're getting for that product. That should be a very strong upgrade for us. AB4 is still a little bit newer than us, but has some really nice new features and capabilities we're excited to introduce to the market. And then we continue to invest in and innovate on our software roadmap, and talk about a lot of the new software features and capabilities that we're coming out with. So that gives us comfort that there continues to be a big opportunity to continue to upgrade our customers and migrate them into our OSP bundles or into the more premium versions of our OSP bundles. As I mentioned, we're still less than 20% penetrated on getting our customers into OSP, so we think that that's a big opportunity with our existing customer base. We continue to land new customers, and then landing new customers goes back to the federal opportunity I talked about. It goes to international. You know, over time, I'm not going to say near term, but over time, we think the international opportunity is about five times as big as the U.S. opportunity, and that's just based on how many officers there are out there and what the math of that could look like. But we think that there's a big federal opportunity, big international opportunity. We're continuing to take our products into adjacent markets, like the Justice Department, who's a very logical evolution of our police officers using our software products. Commercial markets, so, you know, CHRISTUS Health, which is about the tenth largest hospital chain, is using our products, so that's on the enterprise side. So there are these very logical extensions for us of where we can continue to take our products into new markets and start the land part of the land and expand. Great. Your comments around TASER 10 doing well to date is a good segue into some discussion around product-specific initiatives. So could you just expand a little bit more on the rollout of TASER 10 to date? You know, what's been the feedback? You know, how has adoption paced relative to you know, upgrade cycles in the past? And, you know, ultimately, you know, what portion of your existing install base upgrades to TASER 10 over you know, whatever time period you think is appropriate to measure it against? Yeah. So we've got a couple of paths for TASER 10. We have new customers who aren't using TASERs. We have customers who are coming up on their five-year refresh cycle and are ready to upgrade, and TASER 10 is the natural evolution for them to upgrade to. And then we will have customers who maybe want to upgrade early because they like TASER 10 so much. It really is a product that is getting a very good reception from our customers, largely because you have 10 shots rather than two shots, so it increases, you know, your chance that you'll be able to successfully use a TASER rather than having to go to an alternative. And it shoots from 45 ft, so significantly more distance than our TASER 7 could shoot from. So again, it just goes to it can be effective in many more situations. And so I think when you look at all of those opportunities, we said in Q2 that most of the growth in our Q2 revenue in TASER was coming from TASER 10. So in our first quarter out of the gates, we started to see some nice, nice product adoption. We had a nice press release with Lincoln, Nebraska, who just refreshed up to the TASER 10. So we're still early, but we're starting to see really strong positive signs for TASER 10 adoption. Great. Could you talk a little bit about the financial implications of the TASER 10 upgrade cycle? You know, what does the gross margin for TASER 10 look like relative to the broader TASER business? How will that scale and change over time? Yeah. So it's been a little lower than our TASER gross margin average out of the gate. A lot of that is because we're still doing the manufacturing by hand. We're not fully dialed in on the design. We don't have the automation fully scaled up. And so as we continue to dial all of those things in and get our automation equipment up and running, we would expect that it starts to look like our overall TASER gross margins, you know, sometime middle of next year is sort of a best average guess for that. So, a short near-term headwind, but, you know, not a long-term headwind. Should start to be a tailwind on gross margins for us as we go into next year. Great. Maybe switching gears, you know, cross-selling Axon sensors and cameras, such as body cameras and vehicle cameras, and related software has been a really important part of the growth narrative. To start, could you just size the opportunity for the sensor market? You know, what products does Axon offer today, and how does integrated software play a role in differentiating the offering? Yeah. So we've gone through sort of all of our markets and think we have about a $50 billion TAM for our products based on what we have out there today, and we do that in a very bottoms-up way, where we think about, you know, where some of these products are truly able to be deployed and what that looks like. It's about a $22 billion software TAM. It's about a $10 billion TAM for our sensors market. So I think my punchline is there's, there's lots of opportunity out there relative to where we are today that we're going after. And then as we add new product categories, you know, whether or not that's AI or that's robotic automation, that opens up new categories for us. Like, many of the categories that we're in didn't even exist when we went into them, so we created the category and created the TAM opportunity associated with it. That's just deep in the DNA of the company, is to continue to innovate and continue to drive new product categories. Great. You touched on this a little bit earlier in our discussion, but why don't we spend some time talking about your latest generation of body camera, the Axon Body 4, the AB4, which I believe began shipping at the end of June. What's been the response that you've seen to date, and, you know, how does the success of AB4 play into your outlook? Yeah. Yeah. So AB4 did begin shipping at the end of June, so it's, you know, a quarter or so behind TASER 10 in terms of really being out there with the customers and getting feedback. But feedback we've gotten to date has been good. I would say that there's a couple of things that we did with AB4 that make it a nice upgrade for the customers. One is we changed a little bit of the point of view, so you get a better point of view from the actual AB4 body camera. Basically gives you better quality in terms of what you're able to see. It's got better battery life, and then it's got two-way communications. So, you can actually use your AB4 to go back and communicate with your supervisor, or get their eyes on a situation as it unfolds. That's where we're excited for a lot of potential opportunities around, you know, capabilities or, opportunities to do a job better or to make a situation better. Just to have that sort of real-time communication tool between the officer and somebody watching them. Great. And what does the competitive environment look like for body cameras? It appears to me that your, you know, leading competitor is Motorola. You know, what are some of the key differences in product or go-to-market that helps Axon stay differentiated in body cams? Yeah. I mean, I think it comes back to this real culture of innovation and coming up with new features. We innovated a lot when we came out with our AB3 and, and created products that just work better together. Things like geofencing, where, like, inside of a circle where a situation happens, you can have all of the body cameras turn on. You know, maybe it's 'cause you pulled your TASER. So it's really, it's really that integration between our hardware and software, and the continued innovation, like coming up with something like two-way communication, real-time communications, our Watch Me button. It's, it's that innovation that we use to continue to differentiate ourselves and continue to drive our value with customers. Great. Axon Fleet has been doing tremendously well year to date. I think revenue has more than doubled so far. Part of that trend, to be fair, has been through the reduction of a backlog, just because of supply chain constraints. But this also means that, you know, Axon's been effectively selling all the Fleet that could be manufactured. So could you talk a little bit about the underlying demand trends at Fleet, and also just update us on what's happening in the supply chain environment there? Yeah. So, Fleet is our in-car camera, and the big feature that it enables is automated license plate reading. Not that there haven't been tools and systems for that, but the capabilities and the price point, and the ability to have that be like an in-dash camera is pretty incredible for our customers. And so we saw a very good response to our Fleet cameras. We saw that great response as we were coming out of COVID supply chain difficulties, and so we really weren't able to manufacture as much as we wanted to until we got into the early part of this year. And then there's sort of three pieces of the Fleet camera. There's the actual Fleet camera hardware, then it has to get installed into the car, and make sure it's integrated with all of the software databases on license plates. So you've got to get it installed, and then we can turn on the software capabilities that go with the license plate reading. I would say that we've done a pretty good job of getting caught up on our manufacturing and our hardware backlog. Now we have to get caught up on actually getting those cameras installed in the car, and that we expect that coming out of this year, we should hopefully be at sort of a normalized run rate for that Fleet camera business. Okay. Strength this past quarter was also supported by outperformance in Axon Cloud and services products like Digital Evidence Management, Real-Time Ops, productivity tools. Could you talk a little bit about the demand trends you're seeing in integrated software, and how you would size the opportunity today? And then, you know, could you talk a little bit also about the key features within Evidence and Cloud? You know, what are some of the, you know, killer features or killer apps that, you know, customers are licensing the software for? Yeah. So $22 billion software TAM, as we talked about it. I would say our DEM product, so our Digital Evidence Management platform, which you can think about as really taking the video off of the body camera, that is our... that is our hero product in software right now. And, it's really a great enabler for our customers. We're also working hard on real-time operations and productivity tools for our customers. So one of the things that you probably heard us talking about on the last call was our Records and our Standards product. Those are products that we've been investing in and working on for, you know, a couple of years now, and they're at the point where we've gotten them deployed into customers. We're really starting to ramp up those deployments. Those products are coming online. You know, who are we competing with in those markets? You know, sometimes it's pen and paper, sometimes it's more legacy installed base customers. It's a pretty fragmented market. It's really part of our effort to sort of add technology to make our customers' lives easier and more integrated. So that's really our overarching theme with our software development is sort of adding technology to our customers in ways they haven't had it before. ... Then within software and sensors beyond body cams and fleet, you know, Axon's also on the cutting edge of a lot of other things. Drones, you guys just did the acquisition of Sky-Hero. So, you know, whether it's drones or something else, could you talk a little bit about other sensor product areas that you may be excited about and, you know, perhaps shed a little bit more light on Sky-Hero and the rationale there? Yeah. I think the two I would probably highlight are Sky-Hero and robotic security, and then probably VR. We're doing a lot of investment in VR to help support training. So I would say on Sky-Hero, that's a recent acquisition we did. It's a relatively small company based in Belgium that has been doing a great job with indoor tactical drones. So think about the ability to send a drone into a situation, you know, inside of a house where an officer might not have visibility, might not know what the situation is. You can send in the tactical drone, you can get a camera on the situation, sometimes you can communicate with somebody in the house. You can really, you can really de-escalate the situation. So, in addition to making our officers' lives easier, we also have an overall mission to reduce deaths between, you know, the police and the public by 50%. So when you can add tools like this that take people out of harm's way, it can really help us achieve that moonshot. So we think it's both a big market opportunity, but it's also part of the path to our moonshot. You know, and then it's similar with our, our VR, which is training is a big expense, it's a big part of the budget for police officers. It's also really, really important. When you think about having everybody come out of a situation safe and unharmed, training plays a big role in that. And so the more that we can allow officers to get trained really well, be in a lot of situations, know how to use their TASER 7 or their TASER 10, and the more we can do that cost effectively to help with police budgets, sort of the better off everybody is. So those are two big areas we're investing in and talking about a lot. Great. I'd like to ask a financial question. You know, Axon has guidance for this year of revenue of $1.51 billion-$1.53 billion, with 20% EBITDA margins at the midpoint. You know, how is Axon pacing relative to those targets? You know, how do you think about potential upside or risks related to some of the rollouts as embedded in the financial guidance this year? Yeah. I think as we came out of the gate this year, we were appropriately cautious, given that we had two big product upgrades to get through, our TASER 10 and our AB4. I think what you saw us come out with last quarter was a lot more confidence in, not just the guidance we've given, but raising the guidance for the year, as we've really seen very positive customer feedback and successful launches of both TASER 10 and AB4. We are still early in those rollouts. You know, we've we've we just launched AB4 at the end of June. You know, we're still ramping TASER 10. So what some of those curves look like are things that we're still sort of getting good real-time information on, and we'll think about and reflect when we come out with Q3 earnings as we look at the year. Great. Why don't I sneak one more in before I see if there are any audience questions? Could you talk about the drivers of EBITDA margin expansion towards your midterm targets of 25% by 2025? You know, where do you see the, the biggest opportunities for leverage? Yeah, please. So I think we've talked about a couple of gross margin headwinds that we have this year. We have, you know, TASER 10 ramping, we've got AB4 ramping, we have installations on our fleet hardware business. So we've had a few headwinds on gross margins. We should move through some of those. We should get TASER 10 automated, we should get to run rate on AB4, we should get to run rate on our fleet installations. So I think that should help from a gross margin standpoint as we think about that as one critical component to getting to our 25% EBITDA margin target, Adjusted EBITDA margin target. I think the other places then come into OpEx. So we talk a lot about continuing to invest in R&D. You probably heard from the many products that we just talked about, that we have a lot that, you know, we are providing to our customers: software, TASER 10, AB4. I mean, those are all areas that we continue to innovate and do product refreshes, investing in, you know, VR, investing in drones, investing for our future growth. And we continue to see an enormous amount of opportunity in front of us. So keep the R&D investments going so that we are really doing what we need to do for long-term growth trajectory. I think from an SG&A standpoint, we've invested a lot in, you know, last year and this year. Well, that's what's embedded in our forecast of 20% is pretty healthy SG&A increases. We needed to do that because as a company, we had grown so quickly that we really needed to scale up our operations. We needed to make sure we had the right systems in place. I think what you'll see is that we've got a good foundation. So will it continue to grow from an absolute dollar standpoint? Yes. But will you start to see us getting leverage in our SG&A line item? Also, yes. And so it's really that combination of improving gross margins and getting leverage in our SG&A OpEx that will get us to that 25% target. Great. Questions from the audience? We've got one up here. ... Hey, thanks. As you think about the software business, how much of it is, like video storage versus like workflow, kind of per seat-based pricing? I sort of think about it in terms of volume and seats, and just tell me a little bit about kind of those two pieces of the software business. Yeah. We do have a storage component for the video. Some, like, at our most premium OSP plus bundle type of product, we're offering unlimited storage, and so I would say much more of it is focused about seats. It's about getting, you know, more officers using it. It's about getting more customer adoption in terms of driving growth. Okay. So the mix of the software revenues is mostly like a per seat pricing component? It is. Okay. Per officer, per month is how we price it. Okay. And then there's product within that that's not just kind of software storage, video storage, I should say. Okay. Lots and lots of software products that are beyond just storage. Awesome. Thank you. Great. Other questions? Brittany, I was just wondering if you could talk a little bit about the TAM expansion opportunity. You know, there have been a lot of headlines about how cities are approaching, you know, public safety differently, and some of them are even hiring private security firms. So, you know, what's the opportunity to move more into things like private security? And, you know, you also talked about some of the opportunities that you're pursuing in federal as well. Yeah. Yeah, I think federal is a big opportunity for us. I would say that adjacent markets like justice, so, if you think about, the fact that video plays a pretty critical role in, in evidence and cases, so enabling the, the attorneys and, you know, the justice departments to have access to that. We just signed a really big deal with San Bernardino, California. That's a very big, you know, county in California with a big justice department. So we're seeing real traction and real value to customers using it from a justice standpoint. And then yes, to private security. Yes to hospital security, you know, stadiums. A lot of those adjacent opportunities where you, you have some kind of security is a goo d opportunity for us. Okay, great. Well, we're a little bit over, so I want to just take this time and say thank you for all your thoughts and insights. This is fantastic. Well, thank you very much for having me. Thank you, Brittany.