Good afternoon. My name is Mike, and I will be your conference operator today. At this time, I would like to welcome everyone to Axon Reports Q1 2019 Financial Results. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] I will now turn the call over to Luke Larson, President of Axon. You may begin your conference.

Thanks, Mike. Good afternoon to everyone. I’m Luke Larson, the President of Axon. Welcome to Axon’s first quarter 2019 earnings conference call. Before we get started, Andrea James, our VP of Investor Relations will read the Safe Harbor statement.

Hello, everyone. Here in the room in Scottsdale, we have Luke Larson, our CFO; Jawad Ahsan and our Chief Revenue Officer; Josh Isner, and CEO; Rick Smith who is joining us from San Francisco. This call is being broadcast online and is available on the Investor Relations section of the Axon Enterprise website. You can find our reported results and our quarterly shareholder letter, which is available at investor.axon.com and we’ve also filed with the SEC. Today’s call will include forward-looking statements, including statements regarding our future expectations, beliefs, intentions or strategies including projections for revenue growth, profitability, and products development. We intend that all forward-looking statements be subject to the Safe Harbor provided by the Private Securities Litigation Reform Act of 1995. Axon’s forward-looking information is based on current information and expectations. Our estimates and statements speak only as of the date on which they are made, are not guarantees of future performance and involve certain risks and uncertainties and assumptions that are difficult to predict. All forward-looking statements that are made on today’s call are subject to risks and uncertainties that could cause our actual results to differ materially. These risks are discussed in greater detail in our Form 10-K and 10-Q under the caption, Risk Factors. You may find these filings, as well as our other SEC filings at investor.axon.com or at sec.gov by searching under the Axon ticker, AAXN. All right, go ahead Rick.

Thanks, Andrea, and thanks for joining us to our investors today. This is a symbolic quarter for Axon because it is the first quarter where we are recognizing high margin software revenue on our TASER program. The revenue will grow as we move TASER 7 through the installed base and drive subscription contracts. And the marginal cost of that revenue is so low that this quarter it rounds to zero. So that feels pretty good. That's why you build software businesses, our recurring revenue is now more than $122 million, up 47% from a year ago. Our shareholder letter is pretty robust this quarter because our team accomplished a lot since our February update, including significantly retiring product launch risk on Axon Body 3 and moving closer to day zero with a major city agency deploying Axon records. Our software product launches, Axon Performance and Reduction Assistant are setting new industry standards for using AI to drive efficiency managing body camera programs. And I'm especially excited about that FedRAMP certification. That's a stealth initiative we've been working on for three years. Securing FedRAMP opens up the federal market for us. Last month, Luke and I attended an Axon Salute to Federal Law Enforcement on Capitol Hill formerly kicking off our entry into the federal market. Any of these accomplishments we're announcing this quarter could have been impressive on its own. And I'm really proud of Axon's teams who continue to push hard and deliver on behalf of our customers. Every products we bring to market is the result of extensive discussions with our customers. In the early days of TASER, we would develop new products in a black box and unveil them when they were finished. That's a model that could result in spectacular successes or failures. We spent millions…

Thanks, Rick and thank you to everyone who can make it out to Axon Accelerate last week. We had nearly 2,000 attendees largely representing the top 1,200 U.S. agencies in law enforcement as well as the attendees from police forces around the world. Our Axon Accelerate attendance was very intentional to get the right customers there. We also invited several analysts and investors and it was great that they got to see the excitement as well. One of our key goals for the year is to create a rabid fan base and I'm here to tell you at the event we've sold out our swag easier to have stuffed animals of canines, we sold over $30,000 worth of T-shirts and Axon branded swag. We will never be complacent with building on our customer relationships but selling out the stuff really blew me away. Of course, the purpose of the conference is not to sell T-shirts, we also generated more contract pipeline at Accelerate than we generated at IECP, a conference with over 10,000 people. Now IECP is still a very important conference to us, but to me these numbers are a great leading indicator that we're building the preeminent tech conference in public safety. In February I told you that I was laser focused on three main execution items this year ensuring the success of the TASER 7 launch, bringing Axon Body 3 to market and launching Axon Records. Let’s drill down on the first one. We feel confident that TASER 7 will be a major revenue and gross profit driver for our business over the next several years, in Q1 TASER segment gross margins were pressured by two main factors ASP, average selling price and scrap rates both will improve over time and we're improving even as we speak.…

Thanks, Luke, and thanks to all of you for joining the call today. April month made two year anniversary with the company and also coincided with the two year anniversary of changing our name from TASER to Axon. I'm really pleased with our execution and how we’ve strengthened the business model over the past 24 months and I believe we're just getting started. As many of you know we made a commitment to our investors to drive strong growth on the top line while also demonstrating levels. And a lot of my day to day is spent ensuring we do exactly that. I've done that before, grown the SaaS business while driving leverage and I'm thrilled that Axon is also proving that it can be done. In Q1 we were reported strong revenue and you'll notice that we're raising our full year revenue outlook by $5 million while holding adjusted EBITDA guidance in line. This is very much by design. We've told our product team that the way to earn more R&D budget is through the top line, but we're confident we can deliver $80 million to $85 million in adjusted EBITDA for 34% growth at the midpoint. The adjusted EBITDA margin will vary depending on revenue as we look to accelerate our investments in R&D. With that said, as you can see from our guidance with Q2 looking like Q1 in both revenue and adjusted EBITDA, we've set ourselves up for a strong back half with much higher margins versus the first half. Another important area of focus for us is corporate strategy including ways to grow our total addressable market or TAM. Today, we have an $8.4 billion TAM, which primarily reflects our four strategic areas of investment, TASER, cameras and digital evidence management, Axon Records and Axon Dispatch. As we look out longer term, we see a great deal of potential to extend Axon’s growth outside of our existing scope. Our successful transition to both a technology products in SaaS business leaves us incredibly well-positioned to develop new revenue streams. We have a unique opportunity to take the same products and feature set we've developed for law enforcement and find applications for enterprise users who want similar capabilities. Axon has the right balance sheet, the right customer relationships and the right foundation of law enforcement technology products from which to expand. We’re continually thinking about the best way to steward our capital and exploit our market leadership and ensure we do that in a disciplined way to drive shareholder value. Thank you everyone. And with that, we'll go to Q&A.

[Operator Instructions] Your first question comes from Jonathan Ho from William Blair.

Hi, good afternoon, and congratulations on the strong results. I just wanted to start out with a question on I guess the TASER 7 impacts from I guess the credits that are being offered. Can you maybe quantify for us a little bit how that works and help us understand maybe how that works through the next couple of quarters as well as maybe over a longer timeframe?

Yeah. So when we launched TASER 7 and this is actually historical practice that we’ve used is we offer trading credits for customers that have weapons that are under the five year useful life and we have kind of a prorated calculation where if you were to let's say buy TASER X2 three years ago or two years ago and now you want to upgrade to a TASER 7 we'll give you some of the value of that useful life back in the trading credit. We usually users to make sure that we smooth out good customer relationships and again I actually view this as a strong positive in that we're seeing major city customers that want to upgrade to the TASER 7 because it's such a fantastic weapon.

Got it. And then just talking a little bit about Axon records you noted that the initial launch customer is getting pretty close at this point towards the back half of the year. But can you maybe highlight what they can do with your system versus what could not be done before in particularly since you're integrating some of the camera capabilities as well.

Yeah. I'll take that one. So the first I would say we just came out of our axon accelerate conference and I was talking with the head of records just a few moments ago and we have a ton of customer interest across the board and we've been doing some demonstrations with various prospects across the country and getting very positive feedback. So the way to think about Axon records and it’s our launch product will have a couple of very unique features. Probably the most unique feature is the ability to integrate your digital evidence seamlessly in with the Axon record so we call it video at the heart of the record. So if you think about it having your video in a totally separate system you have to log into it is just a much clunkier experience whereas the way human beings communicate now we don't really send text only messages or documents very much. We tend to communicate using pictures, video, text evenemojis, even our correct record system won't have emoji, it will have a very integrated audio video capability along with the text elements. So that's sort of the way to think of it at the outset. And then we just really got a nice job. The team has been hitting all of the basic foundational work that you're not doing duplicate data entry for three different forms that there's that dynamic input from experience, so you're inputting only that data that’s necessary based on the type of report you're filling out and that can grow, if one incident ends up being a stolen vehicle, and a felony assault and some other thing historically might require several different reports be filled out in sort of duplicate data entry. So that's sort of the foundation. But what…

Thank you.

Your next question comes from Mark Strouse from JPMorgan.

Hey, good afternoon. Thanks for taking our questions. So it sounds like you can't divulge too much information yet about the major city that's adopting Axon Records, but are you able to say was that a competitive displacement? And then are they adopting your entire solution as it stands today or they kind of cherry picking certain modules?

I'll take that one. So this was a customer that’s been a development partner. They did look at the available options in the Records space, but there we've been primarily focused heavily on developing the Records system with them. So you can think of it with them as a standalone that is not part of a big – a bigger economic package. This is really focused on developing the Records system.

Okay. And then congrats on getting the Redaction Assistant out the door. I guess can you just kind of talk about based on the trials that you've run so for kind of the efficiency gains that the customers are seeing? I think you guys are throwing out this data of multiple hours in the past for certain minutes of video. I mean it is that process now down to minutes of Redaction. Maybe you can compare that to kind of your prior Redaction tool and see some of the other competitors thereafter.

Yeah. So, great question. So, we just launched. One of the launch partners was a city prosecutor that was meticulously tracking the time that we’re spending on redaction and before the redaction assistant compared to afterwards, once they deployed the redaction assistant, the city attorney reported they were spending 80% less time per video on redaction and that actually was going to lead to a change in how they budgeted. They wouldn't need to budget for more people to be able to do the redactions. So that's the one that comes to mind. We're a little early in the game in terms of having a bunch of agencies. But that first be back at 80% was pretty enlightening. Our target was to reduce redaction times by at least 50%. We’re looking graph for performing that.

Go ahead. Okay. And then just one more quick one if I can for Jawad or Josh. Can you just remind us when the TASER 7 upgrade your credits end and I guess kind of secondary to that do they kind of dwindle down over time each quarter?

Hi, Mark. Yes, absolutely. They do go down over time. They will start to – so we had an offer in Q4 of last year and it went down as Q1 and it’s been flat in Q1 to Q2 and then it is declining every quarter after that. So, essentially that's done to be fair to customers but also to draw some urgency around upgrade cycles. So you'll see in lower trading credit as of July 1st compared to what we're offering this quarter.

Are you able to say does that completely end though by the end of 2019 or does it drag on into the 2020?

We are planning to assess that decision at the end of the year. So I think I can’t really give an answer there other than they will continue to decline through the end of this year and we will assess it in December.

Okay. Thank you very much.

Your next question comes from James Lizzul from Morgan Stanley.

Great. Thank you very much. I wanted to ask may be for Jawad. Can you just walk us through a little bit on one thing that kind of looks - I look at is when you see the magnitude of upside versus your guide for the full year I don't think it's a big deal but I just want to make sure I understand the puts and takes of why may be the guide for the full year isn’t – as a least as much as is what the upside was in the first quarter.

Yeah. So what we're actively doing or we're making a conscious decision to reinvest the upside from revenue into the business. When we came in at 2019 as you put together our budget process we were oversubscribed there were more things that folks wanted to do than we had the budget for. And so what we said was that as we progress throughout the year as we feed on revenue we're going to let basically take that and reinvest it into the business. And so that's what we're doing. We've raised our guidance for the year on revenue but we've held it on EBITDA.

Got it. Got it. Okay, that's clear. And then I guess I’ll open it up to whomever but as you're rolling out just thinking about long term as we're rolling out the different software products and it’s that adapt capability beyond just police forces et cetera. How do we think about the opportunity beyond that and what needs to happen to even start to expand it further into whether it's court systems, prosecutors offices or even more broadly to within the emergency response, within your emergency response deal. Thank you.

Yeah, so oftentimes, these first responder units will use the same technology platforms, and we've actually seen some very interesting inbound demand from these adjacent markets. We are being pretty tight lipped for competitive reasons on our exact approach, I would say we're definitely looking at the adjacent public safety spaces in addition to making a strong push into the federal space as well as international markets as well.

That's great. Thank you.

Yeah, this is Rick. Let me add one more detail. One thing that I think will be -- will really help make body cameras more appealing in additional markets is once they are real time connected and can live stream, I think that just opens up a whole bunch of additional use cases from the traditional work then so far which has recorded an event and then some hours later, you dock the camera and that information becomes available. Being able to live stream that information opens up as you can imagine just a whole host of different types of services that I don't think we even understand yet. Once the camera is out there, we believe this is one of the things that will evolve and we'll iterate together with our customers. But I think that both in law enforcement and for these other markets like for emergency medical services, being able to live stream video from a scene using a system that has made law enforcement public safety and [indiscernible] types of regulations to be extremely valuable for emergency room positions where others will be able to see what's happening out in the field. So it’s just one example of where that live connectivity we think really could open up the available markets that will be interested.

Great. Absolutely. Thanks.

Your next question comes from Scott Berg from Needham.

Hi, everyone. Congrats on the good quarter and thanks for taking my questions. I guess we'll start with on the FedRAMP side Rick or maybe Luke wants to take the question, how should we think of what products are going to be sold into that area? Is going to be TASERS, cameras, drones, software? Help us understand what that opportunity looks like?

Yes. Basically all of the above. Our options now we have been selling TASERS historically federal market, but they've not been using our cloud services. So FedRAMP now opens up the entire platform up to FedRAMP Moderate, which covers most of the use cases for all of the above for fleet, in-car systems for body cameras, or federal agencies to start using Evidence.com for managing their TASER weapons and certainly we think drones could be an interesting space there as well.

Got it. Helpful. And then on the I guess Jawad on a future contract value is up nicely a little bit less than 50% year-over-year. But your new bookings in software and sensors is down. How should we think about that metric? My guess is there's some camera movement in there given the expectations of some of those sales are being pushed off to the second half and AB3 is ready.

Yeah. The first thing I'd say that Josh is here with us today I’d love to frame the way in but one of the first things to note is that in Q1 last year we had a large a very large international booking about $30 millions, if you strip that out we’re actually up year-over-year and then Josh would you like to add color?

Yeah. I think the Q1 results in video bookings are purely at this point seasonality. I think Q1 is kind of our softest quarter of the year. Sometimes there is a large one-time like it was the case last year in Q1. But I certainly have a lot of confidence that this is not a sign of kind of anything to worry about. I actually think we're going to have a very strong rebound in the next few quarters in terms of Axon booking. So Q1 people get new regions, people have new quotas. We have the sales meeting first week of the year is kind of dead week, so it’s just naturally kind of our slowest quarter of the year. And again I think there's a lot of reason to be optimistic of that number bounces back.

And I would just add, your – I think your comment on AB3 was correct. We announced AB3 [indiscernible] at ICP in October and then re-emphasized some of the – all of the capability that Rick addressed with the ware and live streaming. And so we expect that to start shipping at the end of Q2. And we think that will end of Q2, beginning of Q3, we think that will drive to high demand.

Great. That’s all I have. I’ll jump in the queue. Thanks again.

[Operator Instructions] Your next question comes from Will Power from Baird.

Yeah. Great, thanks for taking the questions. Yeah, first one maybe a bit of a follow-up perhaps for Rick or Luke. But just qualitatively love to get your perspective or color on conversations that accelerate around AB3 and how you're thinking about the pipeline and what your customers are perhaps most excited about with that product, I guess as part of that should we expect something similar to AB 3 to what we will see in TASER 7 with respect to potential tradings and credits how do we think about that. What that might mean for gross margins in the back half of the year.

Got it so yeah. One of the one of the really nicest surprises I would say at Accelerate this year was just how much interest there was in the live connected services when we first really started talking about Live services with our customers there was a lot of questions about whether that's something that they would actually use and we decided to go all in our customers almost all of our customers on a hardware upgrade program and we could have chosen to do AB 2 plus where we could have done a next generation body camera and focused on cost optimization on the hardware and met our financial obligations. But we felt the right thing to do was to extend ourselves and actually make this a really powerful camera upgrade so while our customers are effectively on the iPod upgrade program. We're giving them an iPhone and we believe that was the right thing to do because it basically enables a whole host of new services that we could begin to sell once the hardware can support real time connectivity. I would say a year ago that was a little bit dicey it was not the super easy decision to make in that as we are calibrating with customers it was not universally clear that they would basically value those connected services enough to want to pay for them. And I think we put that concern largely to rest this year. I think our team has done a really good job of understanding what the customer use cases are and I'll give you one example. So one of the downsides you worry about sometimes with police union management relationship is if it seen as a micromanaging tool where the Chief is going to be walking in on his…

Okay. Great. Yeah. And just any color from, I guess, anyone on the team on how to think about gross margins were just really the broader sensor segment in the second half of the year as [indiscernible] rolls out?

Yeah. So what we expect is that we’re not going to like it – when we talk about it we’re not going to really see any – there is no trading credit on the body camera and those margins – we're managing that segment to about 25% margin and we expect that that will continue into second half.

Okay. Great. Thank you.

Your next question comes from Steve Dyer from Craig Hallum Capital.

Hey, guys. Ryan Sigdahl on for Steve Dyer. Quick question as it relates to guidance. So in the press release you expect significantly higher growth rates in the second half of 2019. But based on Q1 actual, Q2 growth of 16% to 17% it implies something like 16% to 20% in the second half of the year. So that basically brackets Q2 expectations. What am I missing there?

I don't think you are missing anything. We expect that Q2 is going to look very similar to Q1 and we're really ramping up for a strong second half.

So the significantly higher growth rates in the second half of the year, just maybe some color there on that comment.

Sure. We'll be in full production on TASER 7 and should be shipping and going into Q4 with shipping our records product as well.

All right. It sounds like a little bit of conservatism done in that 2019 guidance. Based on that, secondly just on the TASER 7 what of the orders in the quarter, what percentage were upgrades versus new users. And then what percentage of those TASER 7 orders received trading credits? Thanks.

Yeah. So, just if I understand the question correctly, it’s what percentage – you know we kind of view every customer as being a previous TASER customer. The question is what percentage are using the trading credits at this point. I think the maturity of the deals would have some trading credit.

Yeah, by definition the only one that who never wants that never have to deployed TASERs before.

So just to clarify that so it’s anyone that has TASER goods to credit not just once that are under the five year useful life warranty.

Correct but it's a scale to how was the weapon so by far the least valuable tradings are the ones that are older than five years and most valuable ones are the one that are within one year old and it just need to scales throughout the life cycle of the weapon.

Great. Thanks guys, I'll turn it over from there. Good luck.

Your next question comes from George Godfrey from C.L. King.

Thank you. Two questions. Jawad, is the 300 basis point to 400 basis point margin improvement on an annual basis now off the table.

Yeah. George we at the beginning of the year we changed our guidance. We're still over the three year period managing to driving leverage in the business and what we said specifically for 2019 is that we're going to deliver $80 million to 85 million dollars in adjusted EBITDA. Now the margin rate the reason we don't want to guide to that specifically is that's going to vary depending on where revenue comes in. And given that we are committed to reinvesting any additional revenue into the business the margin rate is going to be really difficult for us to guide you. So rather than guide to that we're guiding to is the $80 million to $85 million in EBITDA.

Okay. So just one want to clear is we could have that type of improvement in any given year. But you’re saying that three year accumulative will average out to that range so that still on the table or no. I just want to make sure I understand that.

When we put together our budgeting for 2019 and for 2020. Our expectation is that we're very much going to be driving leverage. And again if it turns out that is 300 basis points to 400 basis points but what we really are looking at when we set our budget, for example, for the $80 million to $85 million we wanted to stay within that range, when we put together a budget for 2020 [ph] would be in the same range as well, we want to consistently year-over-year continue to drive our EBITDA margins up. But again what we're really more focused on is not so much. What we want to do is invest in the business and make the right investments in R&D to capture this opportunity ahead of us while at the same time driving leverage but it's both of those, we're not prioritizing a specific margin target.

Okay. And then looking at the balance sheet, DSO this quarter 117 days, Q1 two years ago that was 51 days, is that the new level we should expect going forward?

No, that's an anomaly. And what we are seeing is that as we expected we did our following offering there was a greater shift to subscription, many of these invoices are paid annually in advance, it's a different model. And as we're making this transition we're working with our customers to make sure that we're working with them and doing what's right for them and helping them transition to these longer-term – or sorry, these recurring contracts. And so that’s something that in that transition we're experiencing a bit of an anomaly but we don’t expect that to continue.

And could you give an estimate of the CapEx? And that's my final question. Thank you very much for the answers.

So we are anticipating in the range of $12 million to $15 million for the year.

Your next question comes from Jeremy Hamblin from Dougherty & Company.

Thanks, guys. Congress on the good results. Wanted to come back to the weapon segment for a second, and you've had some nice traction thus far on the TASER 7 but in terms of thinking about the kind of the units and how they're going to play out the remainder of 2019 the growth that you might see in that segment from the TASER 7 how do we expect that in terms of taking over the total units that you sell in 2019 given the trading credits and so forth versus what we saw in the first quarter, we had about 25,000 of the legacy units and about 9,000 of the TASER 7?

Yeah, I think the expectation is things are starting to becomes a larger percentage of total handles sold in each quarter. I think as we rolled out T&E units and so forth, it's going to take time for TASER 7 to scales to that point. And there is some international orders and it was Q4 in the UK or Q1. So X choose the only legal lesson there. So some of those dynamics led to selling more smart weapons and T7. But over time, our expectations and what we’re driving toward is making sure that T7 becomes the most commonly sold handle as we go throughout the year.

To be more specific, yes we get into let's say Q3/Q4, would you expect T7 to be at least 50% of the total unit sold?

I'm not sure I can give a specific number because again it does rely on like there is large international deals in process with other units or if there's a big one-time order of X26 PRX2 if it’s kind of temporarily skew the numbers. But we certainly expect the trend to be that T7 becomes a larger and larger percentage of total handle sold throughout the year.

Yeah. And I think we have a very illustrative chart from our road show that shows how we've been very effective at transitioning to the new technology from the original X26 to the X26P and the X2 and to the TASER X26P and the TASER X2 and we would expect our execution to be the same as we transition to TASER 7.

Okay. And then one other question on the – on Axon cloud service revenue, you saw your gross margins fall down 90 basis points sequentially and down in almost 500 basis points from where you were a year ago. Can you give me a sense just in terms of that change, what's driving that, and how we would expect that to play out the remainder of 2019?

Sequentially, we're not really seeing much of an impact, all right. There's always – there's some cyclicality, but our pure, the pure software component of that is still flat, it’s a very high margin. It could be driven by the mix of lower margin professional services. So, that's something that that tends to wind up, but again that's part of the cyclicality.

Okay. Thanks, guys. Good luck.

[Operator Instructions] The next question comes from Keith Housum from Northcoast Research. Keith Housum, your line is open.

Sorry about that, how you’re -- can you just provide a little more color on the third ramp opportunity, in the first-off is that included in the $8.4 billion TAM and perhaps as the numbers around how many perhaps production uses out there?

Yeah. So today, our TAM is largely focused on -- forces as we look to grow that overtime we see federal being a very real opportunity to get deeper penetrations into the federal police forces but also our ultimate goal would be to have the actual like big army and more penetration into the larger operating units.

So right now that number is not including of the fed ramp your [ph] $8.4 billion opportunity?

No, it’s not.

Okay. Got you. And then as a follow-up question, can you just provide a little bit color on in the international efforts during the quarter and how they were comparing to last year and how – I guess, some of the RFPs are looking for the rest of the year?

Sorry, you are looking for an update on the international weapons?

International overall weapons and the body sensors inside the country?

Yeah. Certainly that’s been where most of my attention is focused along with the T7 upgrades, I think we're seeing a lot of good indicators, our Q1 – sorry, our tier 1 markets are performing well, upgrading weapons, consolidating video contracts and so forth, I think we're starting to see some really good signs even back in the last year in tier 2 markets and I’d expect to see that momentum continue into some of our tier 2 markets this year. So certainly the expectation we're working towards is…

Great. Thank you.

And there are no further questions at this time. I will turn the call back over to the presenters.

Great. Well, thank you everyone for a good Q1, and we will talk to you on the next earnings call. Thank you.

This concludes today’s conference call. You may now disconnect.