Axon Enterprise, Inc. (AXON) Q2 2021 Earnings Report, Transcript and Summary

All right. Great job on the video, Andrea. And folks, I'm giving for Andrea a heart-attack today; I was supposed to be safely in my home office connected to the internet, but I've been out all day, with most of the summer doing customer demos. I'm in the fleet three demo vehicle, and we had a bunch of great meetings today. In fact, we're going to do this live without a net, I am going to do a quick screen share and show you what we're seeing live from the fleet vehicle here; hang on a second. All right, so as you can see there, hey, Garrett wave; in the backseat, we have our prisoner transport area, that's Garrett Langley, the CEO of Flock Safety, an incredible partner of ours, they do -- they are all here with another customers. They've told us today about a number of crimes they've already solved, thanks to Flock cameras. And then we do the mobile; so it's [indiscernible] has been a great investment for us, and really brings powerful capability through partnership; you'll see on the upper left there is a wide angle camera, and then on the right is our high resolution 4K camera that we use for the license plate reading, gives us great resolution at closing speeds of upto 140 miles an hour. Yes, we've got our Product Manager here as well. I'll show you -- here is an example of a plate read; this is from -- just a sample list we use not from criminal data; so this is just a sample we did earlier today. And you'll see -- this will pop an alert; the officer can then check and make sure that it's got it correct, they can go in and they can do things like categorize their existing videos, whether it's the in-car body cameras, etcetera. It's a really intuitive simple user interface, and we're getting fantastic customer reviews. All right, so with that -- I have been traveling a lot seeing our customers which has been great. We've also been encouraged to see this summer at The National Conversation Ramp; policing is evolving to reflect what we've known all along, i.e. police reform and progress bars investment, and focused attention from our best and brightest minds. We're obviously pumped about our quarterly performance, and I couldn't be prouder of how our team is executing and it's translating into growth that we've sustained now over the last few years, and we intend to keep doing it. I'm also proud of our product development team. They have been working really hard as we've invested to build these transformative capabilities. In the fleet three, which I just demoed right here; we're able to bring artificial intelligence, to bring ALPR to every car. Within 90 days of launch, we've already been done deploying 550 vehicles at Pinellas County [ph], and to my awareness, I -- as far as I know, that's the largest ALPR in the country, and it's happening literally within weeks our product launch. And we're already late stage negotiations with another major city to deploy over 1,500 license plate readers, more than doubling what we're doing right now, tech analysis. So you all know, you know, you shouldn't text and drive; those who are doing this all the time they're typing in license plates while they're driving, or they've got to read it in over the radio. Fleet Street [ph] does that for them at a dramatically lower price point, allowing them to deploy this to every car making driving safer, and reducing crime. We've already had customers just in the first few weeks catching serious offenders and finding missing children. On another front our Axon evidence software continues to grow well beyond simply being a backend for our cameras. We want highly competitive digital evidence program in EMEA with an EMEA government encompassing the management of all digital evidence, independent of body camera programs; and this builds on to similar success we've had in Canada and paves the way for us to continue to lead with our software solutions. We feel really well positioned for the back half of the year and beyond as we see traction beyond core, U.S. municipal law enforcement moving into counties and state patrols, federal government and private enterprises. International revenue grew 60% in Q2 and international bookings, which are our forward looking indicator nearly tripled. So in some my part, at Axon, we're excited, we're leading the way in creating a work environment where employees can maximize their happiness and productivity. We offer remote hybrid options; you can work from the office, you can work from your home, you can work from your car; I'm showing you today even on the earnings call. So, we're focused on doing whatever it takes to get the best top tier talent, keep them focused, keep them rested, keep them happy, keep them energized, keep them creative and that's how you get great products and breakout capabilities. So our leadership is now supported by an exceptional workforce that is almost 2,000 people and that's what is going to help drive us to long-term profitable growth; this continuing to build and maintain and groom a fantastic team. And with that, let me turn over to the President of the Company, Luke Larson.

Thanks, Rick. The business is firing on all cylinders and we are focused on sustaining momentum. Operationally, we're doing really well, even in the face of global supply chain risk. The reality of the current macro situation is well documented, from geopolitical factors to semiconductor and resin shortages, to logistics, import stoppages are the continued impact of COVID. There's never been a more complex time to make electronics, we have risen to the challenge, and we monitor conditions daily and have put risk mitigation strategies in place that are supporting a rapid growth. While these headwinds persist, our teams are definitely navigating and effectively positioning the business to continue to meet our increasing demand pipeline. In fact, our teams are delivering Olympic level execution on behalf of all of our stakeholders, most notably our customers and our shareholders. Another area where you will see this is our teaser segment gross margins, which are up 500 basis points over last year, as we sell into strong demand; we have engineered costs out of our building materials, and the effects of that continued into this quarter. As you saw in our video and read in our letter, we are ecstatic about the fleet 3 launch and that it's shipping; and we're getting ecstatic reviews from our early customers, as Rick mentioned earlier. And we believe we're just getting started with virtual reality training, with booking nearing $8 million in the first six months, up less than $1 million in the first six months of last year. You've heard me talk about virtual reality on the last several earnings calls, and we're pleased of the demand that we're seeing, and that validates our excitement. We're looking forward to a strong back half of the year and continued momentum into 2022. And with that, let me turn it over to our Chief Financial Officer, Jawad Ahsan.

Thanks, Luke. The results we're sharing with you today reflect the straightforward and consistent nature of our strategy, which is threefold; execute in the near term in a focused and disciplined way, identify and invest in future areas of growth, and then finally, reinvest the upside from our strong top line performance back into the business to accelerate that growth. We believe that the goals we're working towards are profound, and that our success will be measured by metrics such as the number of lives saved and the level of transparency in the justice system. This is why last quarter, we invited you to look at our business the same way that we look at it; with a long term view. It's why we move to giving two-year annual guidance, because we're thinking about in building the business for the long-term. As you saw in our shareholder letter; today, we are raising our outlook for both fiscal year's 2021 and 2022, which reflects our confidence in our growing global demand. We now expect to deliver between $825 million to $850 million in revenues in 2021, and $960 million in revenues in 2022. We're also pleased with how our investments are seeing traction on three fronts; in international sales channels with new products in a new non-municipal law enforcement markets. Rick highlighted the international strength; now, I'd like to touch upon the traction we're seeing in these latter two categories: new products and new markets. New product bookings are up more than 100% year-over-year. We like looking at bookings as if they forward looking indicator as Rick mentioned, and we typically signed contracts with an average five-year life. These products are largely fast centric and are helping drive our net dollar retention of 119%. They're the result of more recent R&D and include software products, such as records, in standards, respond, VR, citizen, performance, transcription, Axon Air and others. We're also expanding outside of law enforcement into new markets, including federal, enterprise security, consumer and fire & EMS. Bookings in these new markets doubled year-over-year and we see substantial runway for expansion. We focused a lot on financial discipline, which means balancing investing for growth while also demonstrating leverage. This is an area where we feel a strong sense of accountability. So I'm pleased to point out that Q2 adjusted EBITDA grew at 83% year-over-year, and we were able to do that while investing to scale into a broader global profile. Finally, I wanted to highlight that I'm not only proud of how the business is executing, but also of the corporate strategy capability that we've built, where we're partnering with and investing in other innovators and thought leaders in our space. Our recent partnerships and investments are reflective of our vision for the Axon brand to become synonymous with public safety. And equally important, allow us to leverage and expand our platform in a transformative way. To build a public safety ecosystem of the future, we're aligning with other innovators and technology disruptors. For example, our expanding ecosystem relationships with Celebrate and Rapid SOS were driven by our focus on customers and their growing needs for digital evidence management and real-time operations. Our strategic investments in companies, such as Flock Safety, have done well and even more importantly, supported our fleet three go-to-market by allowing us to bundle and co sell our solutions, which you can literally see on display today. Our partnership with Skydio makes their drones in autonomy software solutions available to agencies through AXON. It also paves the way for the integration of Skydio's offerings with AXON product suite, giving customers groundbreaking evidence management, real-time situational awareness, and scene reconstruction capabilities. We take our role as capital stewards very seriously and I'm thrilled to share these exciting updates that demonstrate how our investments are creating real value for the company, our customers, and our shareholders. With that, Andrea, let's move to questions.

Thank you, Jawad and team. Moderators, can we pull everybody into the gallery view, please? We're all in the gallery view, so everyone is on camera. Just remember that. We'll take our first question from Jonathan Ho at William Blair. Go ahead, Jonathan. You are up.

Hi, good afternoon and congratulations on the strong results. I just wanted to start out with some of the comments around supply chain and whether you're seeing any specific impact on product lines and what some of the mitigations, you mentioned, are that you've put into place around supply chain?

Great question. Supply chain constraints are a reality for every manufacturer, as we all know. We're managing through it because a lot of intention internally, specifically for me and my teams that as we work to mitigate that risk. Some of the things that we've done to mitigate risk is we've bought out and we bought in advance and beefed up our supply chain and our guiding factors is in the reality. Even with the supply chain constraints, we still feel really strong about the guidance that we put out earlier.

Got it. Then just in terms of a follow-up, can you give us a little bit more color on how you're reaching some of the newer markets, like federal enterprise and non-traditional customer types? Maybe if you can give us a sense of what could drive faster adoption in these markets? That'd be great as well, thank you.

Thanks for the question, Jonathan, nice to see you again. For us, it's really about focusing on building the right teams to enter these markets and we've talked about in the past on our federal team as well as Mike Shore on our enterprise security team and a lot of folks around the business that are opening up new segments for us. It's really just putting in the work. There's no shortcut to that and we're building stronger relationships. We're identifying stakeholders early in the federal space, we're identifying opportunities within the budget cycles within congress to fund some future projects. I think the team is just executing really well across all of those fronts. So very, very excited for what the future holds for our newer markets.

Thank you.

Great. All of our analysts, we have you in our queue already. So, you're good. We were going to assume you're going to ask a question and if you're not, that's fine. Scott Bird from Needham. We'll have you up next. Go ahead, Scott.

Great. Thanks for taking my questions and congrats on a fantastic quarter. I guess lots of questions will set on one here international. You all highlighted international extensively in your prescriptive remarks. How should we think about that opportunity unfolding maybe from a product perspective over the next one to two years? TASER sales look good, camera sales generally look good. Are all of the markets facing big massive opportunities or is it really going to be led by one or the other over the near or intermediate term?

I think there's opportunity across the across the globe, Scott. Three or four years ago, when we started really explaining how we're thinking of going to market, we focused on three individual markets UK, Australia, and Canada and all of those continue to perform really well. What we're seeing in those markets is there's wider adoption of our product line. So, body cams, TASERs, and new developments [indiscernible] without body cams, meaning managing other types of digital evidence that are not generated by body cameras. Of course, longer term, we're excited about things like -- in interview room and in records and so forth. So, in those tier-one markets, they continue to lead the way as we expand our product portfolio. Then there's growing opportunity in tier two and tier three markets just on TASERs and body cameras. The cloud is not a great fit everywhere across the world right now. So, in markets like that, we're really focusing more on the TASER side and building an install base that we can go back to later and sell body cameras in the cloud and it's working out. We're seeing TASER orders in very large volumes. We expect that to continue. It's not necessarily something that will happen every quarter, but every year for sure. We're really encouraged by just the growth in both in APAC, EMEA, and the Americas. So, very excited to see international continuing to grow. A lot of people put a lot of hard work into it and we have plenty of runway left in front of us.

Awesome, if I might, as a quick follow-up to that, Josh, is Axon [ph] body cameras. What's the reception been like for the LTE connectivity on the AV Threes internationally? Obviously, the reception I think has been generally positive here, quite positive. We have the same opportunity to see sales there or just didn't know if their infrastructure is set up the same way as our [indiscernible]?

Absolutely, it's got better than expected is the short answer to that one. We're seeing markets, but we do not necessarily think about our plan is, it's kind of our first candidates to deploy streaming technology. They're expressing a lot of desire to do so. So, our product team is just doing a fantastic job, trying to support as many vendor relationships as we can right now to make sure that we have a viable LTE partner in each market, whether it's an Asia, Europe, or South America. We're seeing demand across all of those markets. We're very excited. I'd like to call you one customer in the UK just signed our largest international Respond-Plus deal to date, which is our live streaming package. That happened in Q2 and we're very excited. There's a few more of those in the pipeline here.

Great. I'll jump back into the queue. Congrats on a wonderful quarter again.

We'll take Mita Marshall from Morgan Stanley. Go ahead, Mita. You are up.

Great, thanks. We echo my congratulations. You noted that you were doing your investments on the federal sales teams. I just wanted to get a sense of have you started to see the opportunities out of the DOJ? It is mandating of the camera policy or are those still things that we'll build in the pipeline as we go along? As you focus on the federal market, are there any unique software capabilities that you could develop for that market? Thanks

Yes, absolutely. I appreciate the question. I think if this was a baseball game, we still feel like we're in the first inning here in federal. So, we have a lot of opportunity in front of us. We've completed some large framework contracts and we expect customers to now order against those frameworks. We're seeing the business grow across DOJ and DHS and other segments of federal. We keep building the team to more specifically approach the different opportunities within the federal government. Just in the federal civilian market, a lot of opportunity for both body cameras and TASERs. Then, longer term, certainly building products specifically for federal customers, including the military, is on our radar. So, a lot of growth ahead in federal and really believe in the team to keep delivering in that regard.

Great. Thanks.

Okay, we'll take question from Will Power at Baird. Go ahead, Will.

Great. Thanks for taking the question. I guess I've got to ask Rick, since he's driving the car. We'd love to just to hear more about the early learnings on fleet three and ALPR, what do you think now in the vehicles? What are the early indications and comments you're getting from agencies and how do we think about the ramp of that product this year or next couple of years?

Yes. So first thing I would say is, this is the first product that we've launched that was developed substantially through our new engineering leadership. Hans Moran's our head of engineering came on right before we launched AB3. He kind of picked that up right at the end and he's really brought in some very talented people on his team and they push pretty hard with me to get an additional six months before we took the product to market to really wring out any of the bugs, so we could go to market at quality and it’s scale. And you never want to jinx it by patting yourself on the back this early, but much more hear from customers is that they're really happy with not only the design, but that the system does seem to be pretty wrung out in terms of pretty reliable, and they're not seeing the types of bugs that they've seen in some of our prior launches. We had find that right balance between innovation and speed and quality and testing pre-launch, as we've gotten bigger, especially in each new market, when we're launching a new product and a new market, you may decide to move a little bit faster. But as you start to hit scale like in the TASER and now in the body cameras and fleet business, you've got to be ready to launch at higher volumes and really at higher quality. So, one of these about customers, they really like the fleet was designed clearly to be an in car camera whereas the previous two versions were really spin offs of our body camera hardware. The ALPR is working much better than people expected, I mean, I think we've had customers telling us they've put some of these side by side with their more traditional and much more expensive license plate reader systems, and we're kicking their butt right now, part of it's just the technology of having a color camera makes it we can do state recognition much easier, a lot of the infrared systems struggle with that. And so you'll get a lot of miss reads because you get the plate number right, but the state wrong or to be able to read things like temporary plates, which are the paper ones that are printed out on a laser printer, a traditional infrared system won't even see those, they don't exist because they don't have infrared reflective coatings on it. So, we've also been able to learn through our partnership with Flock, and we've got probably an 18-months headstart of doing these color AI based ALPR cameras. You know, we've invested in them, we've got a board observer seat, we've done integrations on the back end and we're sharing learning’s across so we can both help each other. And I would just say that we're seeing a higher tax rate than we even thought, we would say, and usually agencies didn't think of ALPR is something you put in every car, because of the price point historically it's been well we have our dedicated ALPR vehicles, we have a couple of them. But I think we're seeing pretty widespread like with [indiscernible], some of these other big customers flipping the switch and it's just a software upgrade to put ALPR in every car.

That's great color, thank you. I just like to fit in one more question for whoever wants to take. I'd love just to hear an update on what kind of benefits you're seeing from some of the federal funding initiatives are designed to help state and local, is that something that's having a meaningful impact today, is most that still on the come from what do you see kind of the funding environment side?

Yes, it's interesting. It's a great question. Well, like, you know, this time last year, the we're wondering, and we're getting a lot of questions about hey what is the shutdowns going to mean for municipal budgets moving forward, and we're very thankful that they didn't seem to have a very large impact and then you tack on some of the federal funding through the different acts including the CARES Act and it's given major cities the opportunity to potentially spend more on technology, I wouldn't say that it's so much of an outlier that it's worth noting though, we're really have the belief that we're able to prove that our products generate a real ROI for our customers and that they're costing themselves money by not deploying our products and so we're really confident that what we're building has real value and that will continue with or without federal support and we're really focused on just continuing to build out those business cases.

Thank you.

Okay, next we'll go to Keith Housum at Northcoast. Go ahead, Keith.

Thanks. I appreciate it. And congratulations for the quarter. Speaking of the quarter a little bit -- you know, the quarter was just [indiscernible]. Was there anything unusual like large core areas that will not be repeated for the rest of the year; it should be taken into consideration?

We had some large CW activity internationally Keith, but I'd stopped short of saying that it was so heavy in Q2 that it wouldn't repeat itself in future quarters, we're very optimistic that the growth is going to continue and that we've got a very strong pipeline across both products in domestic and international. And so, we're really excited to get started in the second half year and continuing to grow.

Okay, great. And then you just had a paragraph in the letter, you talk about [indiscernible] and properly on to a different various partner, you should consider that like a setback in the look on the dispatch, or just kind of planning in the evolution of the work you guys are doing more now. Can you provide some more context there?

Yes, so I'll take that one. I would say organizationally it’s a setback, we never let our customers fail. And in this case, I think what we just learned together was we have both underestimated how much strain it was going to put on such a small agency. We need hours per week from their dispatchers to be spending with our software developers and then just having IT support to be able to deploy and train people on software updates, because it has been a moving target. And so this is one of those where I think we saw have great respect and great gratitude for Maricopa, they helped us learn a ton about dispatch and they're going to continue to be a customer along much of our product line, we'll see where it shakes out, they have told us at this point, they just need something that's more mature and stable, they just don't have the bandwidth to keep iterating with us. In some ways, there's a little bit of an accelerator for us in that we have a major say partner and a major county lined up behind them. And we're also learning the needs of some of these big, very high volume CAD installations are just different than they are in the smaller agencies and we think that's where the volume of the market is, and so on the bright side of this is allowing us to really focus in on refining and getting the product for scale of these bigger customers.

It was Maricopa your only city or you did you have several other partners there?

No, they were our first and our only partners, they are still running on it. They've just like I said let us know they're fatigued and they've asked us to support them through the transition and we have, and then we're preparing. We're moving towards deployment we expect next year of a major city and a major County.

Great, thanks.

Just to clarify there Keith, we do have several cities under contract for dispatch. We're just working with them one at a time here as we build the product. And so while Maricopa was the only one live, there are certainly many behind that that are already signed up and contracted.

Thank you.

Okay, next, Mike Latimore from Northland. Go ahead, Mike.

Great. One north to the next north I guess here. You've talked in the past about growing cloud ARR $15 million [ph] a quarter; I guess that's still the goal and if so over the next couple of quarters, what would be the main driver of that growth?

Mike, great question. That's very much the plan we're still anticipating about 15 million of growth per quarter this year. And when you look out at the investments that we've been making in all the new products that are launching, the majority of them are SaaS centric, software centric, and they're getting traction that's what we tried to highlight in our prepared remarks in our shareholder letter, we're getting traction across the board. It's not any one product per se. And it's the strength across the depth of products, the breadth and depth of products, it's going to keep driving that ARR, in the near term it's going to be about $15 million [ph] per year, and we're hoping that's going to accelerate.

Great, and then just on the supply chain shortages that are out there, you know, sort of absent those constraints, how much higher might the revenues be in terms of the guidance here.

So we've already factored in the supply chain constraints, as Luke talked about, we spent a lot of time internally trying to mitigate those risks and making sure that it's not going to disrupt operations. And the guidance that we've given reflects any potential disruption we might see from supply chain.

I guess I was wondering if there's without the supply chain how much higher might have that been?

Yes, what we've got to do is what we've got to do and then we're going to.

Yes, Mike. I would just say the guidance reflects a number of factors supply chains, one our demand pipelines another one that there's a number of factors that we take into account in the guidance.

Thanks.

Ryan Kimbrel, we've got you. Let's take our next question; Ryan Kimbrel from Craig-Hallum. I'm sorry, Ryan, it's our first time talking to you. Hi, welcome.

Okay, right. Just one for me, I just wanted to touch on conversion rates. I'm not sure what detail you track conversion, but I'm wondering how that's trended over the last say year and a half and you know if you want to be more general and be started to convert more of those quality leads as your customers budget situation has become a little bit healthier?

So, thanks for the question, Ryan. I think we're not going to disclose too much on conversion rates other than to say of whenever there's an opportunity for body cams, cloud, TASERs, dams, RMS or CAD, we expect to be competitive. It's a very, very competitive market. There's a lot of vendors in it. But we do our best to position our products in a way that the customer will value the most and certainly we expect to win, we want to win. We've got a competitive team and that's the tone we want to set.

All right, fair enough. Thanks, guys. And congrats, again.

Okay, wondering if any of you guys have hopped back into the kill. So go ahead and use the hand race feature. Give me a second here. Now, are we good to go. Okay, great. We'll have Rick, close this out.

All right. Thanks, everybody. It was pretty fun doing this from the fleet vehicle. It was not planned, but we were at a customer site and the customer wanted to keep going and I think it was the right call. So this was an unexpected benefit. We appreciate the new faces. We appreciate those who've been with us for a while. Obviously, the business is really doing well and we're excited to see what happens in the back half of the years, Josh and his team continue to go out and bring in the revenue and our development teams keep launching products, and the new products are scaling. There's a lot of great stuff going on, lot of positive energy. And we'll look forward to seeing you all on our next quarterly zoom. So everybody stay safe. And let's get this delta variant behind us to get back to normal and we can. Thanks, everybody.