Axon Enterprise, Inc. (AXON) Q1 2023 Earnings Report, Transcript and Summary

Hello, everyone. Welcome to our First Quarter 2023 Earnings Call. We hope you have had a chance to read our shareholder letter, which you can find at investor.axon.com. Our prepared remarks today are meant to build upon the already robust information you find in that letter. During this call, we will discuss our business outlook, and make forward-looking statements. Any forward-looking statements made today are pursuant to and within the meaning of the safe harbor provision of the Private Securities Litigation Reform Act of 1995. These comments are based on our predictions and expectations as of today and are not guarantees of future performance. All forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially, and we discuss these risks in our SEC filings. And before we turn the call over to Rick, we will play our quarterly update ideas about a 5-minute video today. [Video Presentation]

Alright. Thank you, and great job, Andrea and Angel. Hello, and welcome to our shareholders. We feel great that 2023 is off to a fantastic start after announcing our moonshot goal last year to produce gun related deaths between police and the public by 50% over the next 10 years. We brought to market two major product releases that can serve as the workhorses to help get us there. When we talk about our moonshot goal to cut gun deaths, TASER 10 is our Saturn 5 rocket. And Axon Body 4 is mission control. Customer reception to TASER 10 has been great. We began shipping in March and many customers have called the product a true game changer. For those of you who are new to our business, new TASER devices take a few quarters to ramp in terms of sales as our customers need to trial and get trained before they can go into full deployment. Next, as you saw in the video, as Axon Accelerate last month, we announced Axon Body 4. 4 years ago on our earnings call, I told you about our vision for the future of body cameras and public safety. And once our cameras can talk over wireless networks, they’ve become something more like an Alexa on your chest as opposed to just a camera you wear to record, and that would open up a whole host of really interesting services. Well, now for the first time ever, officers and remote support teams can communicate with one another in real time with a two-way device. We think this is going to provide an entirely new level of awareness and situational support, especially when officers are dealing with mental health crises or battling language barriers. Our customers are already thinking of new ways to apply this technology, and we can’t wait to see what they’ll do with it. Our vision for the future of public safety technology is coming together. When our new TASER and body cameras are paired with Axon respond, the full power of our real-time operational capabilities is unlocked. We can solve so many of the decision-making challenges public safety professionals space today. And I’m fortunate to be leading a company that has attracted the best talent across the globe to achieve what we set out to do. We believe people are inspired to do their best work when they are truly inspired to solve the problems that they care about. So we hire people who are passionate about our mission. And we saw big problems. We create value and everything else falls into place. Finally, I’d also like to take the opportunity to acknowledge Axon’s inclusion in the S&P 500 as of May 4, a testament to Axon’s stable business model, our growth mission and our global impact. Thank you to our customers, partners and employees for making this positive. We founded Axon 30 years ago in the Tucson garage, and it has been a remarkable journey and our best days are yet to come. And so with that, I’d like to turn over to our Chief Operating Officer, Josh Isner.

Thanks a lot, Rick. Enthusiasm from our customers has been infectious. What really moves me is when our customers see our passion and they become a part of it. Our annual Accelerate conference this year was the biggest and best we ever hosted. When customers tell me that we are motivating them and changing the way they approach their jobs for the better, I know we are doing our job. We see a strong and growing demand pipeline for 2023 and beyond, and we remain focused on doing our best work. In February, I spoke about 4 areas of focus for 2023 and I am pleased to report we are executing well on each of these objectives. Our number one operational focus is revenue. Top line growth remains a priority. We grow our business so that we can invest and deliver more value to the market. Our investments are paying off. We grew the top line 34% year-over-year in Q1, achieving a record quarterly revenue for the company. Our cloud business grew 51% year-over-year, and it’s remarkable to reflect that just a few years ago, cloud applications were nearly unheard of in public safety. We’ve been proud to evangelize public safety cloud adoption in the U.S., and we will continue to do so globally. Our Taser weapons business grew 17% year-over-year, and most of that was tied to continuing strong demand of our TASER 7 platform. We are only in the early stages of shipping our newest product, TASER 10, which is seeing the strongest initial demand of any TASER weapon in the history of the economy. I have seen several TASER product launches at Axon and customer enthusiasm for TASER 10 trumps any previous model. Our second operational focus is profitability, which we measure by adjusted EBITDA margin. Brittany will take you through the details in a minute, but at a high level, I’m pleased with our performance in Q1. Number three, new market expansion. In the first quarter, our international booking grew double digits, driven by nearly 100% year-over-year bookings growth in Europe. And we also saw triple-digit bookings growth in our Justice segment, an emerging market for us. We’ve invested heavily in our sales force and continue to support new capabilities in these new markets, and we’re seeing leverage from these investments. Finally, number four, new product adoption, we are tirelessly investing to ensure that the products we build continue to be adopted by our customers. We saw double-digit bookings growth in a number of our emerging product categories, including ALPR, air and virtual reality. The foundation underpinning all of these priorities is our ability to attract and then retain world-class talent. We cannot accomplish any of this without the help of a team who brings financial discipline, a next play mindset and the skill sets to launch us through the stratosphere of our moonshot journey. We enjoy high employee retention rates, which outperformed tech averages, and this is a testament to our mission and our ability to focus on solving real problems. In sum, we executed strongly in Q1, have launched into two new products. Our pipeline is solid and we have line of sight to a very strong back half. I’m proud of our team for driving such a strong start to the year, but I am even more proud that they have quickly turned the page and are focused on sustaining the momentum in Q2 and beyond. And with that, I’ll turn it over to Brittany to take us through our financials in more detail. Thanks a lot.

Thank you, Josh. We are pleased to report another strong quarter, reflecting broad-based strength across our business. Our top line growth of almost 34% year-over-year supported by 51% growth in our cloud business continues to demonstrate the value of our offering. Given Q1 performance, we are confident in our outlook and raising our revenue growth rate from 20% to 22% for the year. On gross margin, we had some sequential headwinds in Q1 coming from revenue mix as we grew Axon Fleet sales and the professional services associated with those and did repeat the gross margin benefit of catch-up software revenue that we saw in Q4 of ‘22. Gross margin also reflects an impact of onetime items related to inventory and other cost adjustments. Over the remaining quarters of ‘23, we expect fleet demand to remain strong. And as a result, we would expect gross margins to remain approximately flat or improve only modestly from Q1 level. To double-click on the impact of fleet, demand for Fleet 3 has consistently exceeded our expectations since we began shipping in 2021. Our fleet business carries a lower margin upfront and transitions to high-margin recurring software revenue over time. In the first quarter, for example, fleet revenue grew 139% year-over-year. Fulfilling this demand solidifies our market leadership and sets us up for long-term success. When our customers buy more of our hardware, they are also investing in our broader ecosystem of high-margin software offering. We also continue to invest in automation and improving our manufacturing efficiency, and we’re pleased to see the supply chain stabilizing in 2023 as expected. Over time, these efforts along with ongoing growth in our high-margin software business should continue to benefit gross margins. Regarding operating expenses, R&D investment remains a priority to support our long-term revenue growth. We continue to digest SG&A investments we made over the past year and are balancing OpEx discipline with the investments needed to scale our business to $2 billion in revenue and beyond. As we had anticipated, travel expenses have also increased as everyone returns to in-person meetings and events. I am pleased to upwardly revise our outlook. We are increasing our full year revenue range of $1.44 billion to $1.46 billion, representing 22% year-over-year revenue growth at the midpoint. We continue to target full year adjusted EBITDA margins of 20%, implying a range of $288 million to $292 million. We remain focused on delivering on both our near-term and long-term financial commitments. In addition to the above, these include free cash flow, moving towards long-term sustainable equity dilution, responsible management of our balance sheet and continuing to support our partner ecosystem. All of these are in great shape exiting Q1. Longer term, we continue to focus on delivering on our top line growth while expanding our gross margins leveraging our OpEx and increasing our adjusted EBITDA as we work towards our 2025 target of 25% adjusted EBITDA margin. Great new products, including TASER 10, Axon Body 4, fleet and our software will all continue to support this outlook. I look forward to updating you further on our continued progress next quarter. And with that, I would like to open it up to questions.

Thank you. [Operator Instructions] We will take our first question from Tim Long at Barclays. Tim, you are up.

Thank you. I was hoping I could sneak two in here. First, on the full year outlook, if you could just talk a little bit, obviously, growth in Q1 was pretty strong so implying a little bit of a decel in the second half of the year, I guess, towards the end, the compares get tougher. But can you just talk a little bit about the rest of the outlook and why – what’s built into a little bit more conservative growth than we saw in Q1? And then second, if you could just touch on kind of the new products coming out. Obviously, it sounds like a lot of demand. How does that fit into those that have subscriptions if someone’s not on a subscription, they want to upgrade or accelerated and upgrade. Can you just talk about how you could see a benefit from these new products even if people are tied into a medium to longer term subscription deal?

Maybe I’ll take guidance and then turn customers over to Josh. Okay. So as we look at our guidance for the full year, obviously, we’re really pleased with our strong Q1 performance. Part of what goes along with introducing new products, though, like TASER 10 and near term for Axon Body 4 as there is a transition period as our customers transition to those new products and are buying less of our existing older products. So as we look at our guidance, we’re baking that transition into our guidance we’re also baking in the fact that we had a really strong back half of last year, and so the comps get more difficult as we look at the second half.

Yes, absolutely. And just to add to that, we never want to get out over our skis on guidance. I think certainly, there are paths to outperforming guidance and like we are working towards those. But until we see that actually materialize in the pipeline and a way we can feel a lot of confidence in, it’s important to be measured as to how we look at the data we have today. And so certainly, the focus is delivering as good of a year revenue-wise as we can, and we feel confident that we have the team to do that and on top of that, in terms of how we build in new products into our bundles and offerings. I think those are actually the opportune times to rewrite a lot of contracts. And so whenever there’s a new product that comes out either a flagship product like a TASER, new TASER CW or a new body camera or something like a new software offering that gives us the opportunity to go back to those customers and demo those products and as customers kind of value them, they start asking questions about, hey, how do we build this into our contract and that leads to conversations about upgrading the bundle or adding on to the bundle. So those are great opportunities for our sales team to rewrite these contracts for the longer term. So that’s how we look at kind of new product introduction into the sales process.

Okay. Thank you. Very helpful. Thanks.

Okay. We’ll go next to Keith Housum at Northcoast. Keith is in a public space doing our earnings call. So maybe we will come back to Keith. Okay. We will go to Sami Badri from Credit Suisse. Go ahead, Sami.

Alright. Thank you. I had first a tricky question and then maybe some less tricky questions. So first one, maybe to Rick, one thing that has been really clear is, as a company, you’ve released many products at various price points, many software capabilities and you’re introducing virtual reality training and software. The kind of the big question is how are police departments making space for all these budget line items that they are now having to pay for? And maybe the justification could be very straightforward, but perhaps you could explain to us maybe how your customers are building this into their budgets? Is it taking away from other categories? Is it replacing some things? What have been the conversations in the field and the way that they are actually justifying this? And then I have a follow-up.

Yes. Great. So all these new services is we look at developing them upfront. We first asked ourselves is this solving a valuable problem that our customers will see great value in. And then we also look at, okay, where will the funding for these come from? So you mentioned VR. So that’s a great example. Especially with our international customers, we’ve been looking at this very closely where the training costs associated with the TASER rollout can actually be several times greater than the cost of all the hardware in terms of logistics of bringing officers in, backfilling when they are off the street, all the time and effort that goes into it. And with VR, we’re going to be able to dramatically streamline the training of officers by creating virtual training spaces, where a lot of it could happen without direct even human oversight from an instructor as they are learning the base its skills. We need a lot of repetition in. So for example, right now, agencies may fire somewhere between 6 and a maximum of maybe 18 cartridges per year. We compare that to the thousands of bullets that they hire. But with VR, they can fire unlimited numbers of rounds. So our anticipation is by next year, every office are going through TASER certification training, will fire over 100 cartridges in VR, really building all the muscle memory and the skill and we will be able to do it in a much more time-efficient way, and we can distribute that training. So for example, a lot of this training, including better recurrent training can happen out at the precinct level or the station level rather than having to bring officers into centralized training locations. If I look at some of the things we’re doing around, for example, some of our AI services around transcription, for example, many of our customers, for example, in Canada, have to provide transcripts of every piece of evidence that is submitted, particularly in murder cases and I believe in other high-level felony type cases. So our ability to provide a machine transcript that’s linked in with the video greatly reduces the amount of time. And we think over time, we will be able to get to a point where there will be no need for human intervention. So everything that we’re doing is designed to create value that will find a place somewhere where we’re displacing inefficiency in the current budget or in some cases, competing products like what we did with our ALPR service, that historically, agencies might pay $18,000 to $20,000 per vehicle to put a bespoke ALPR dedicated hardware camera system. We’ve turned that into a virtualized service offering, which just sits as a layer on top of our existing in-car camera. So our in-car camera is cost competitive, all on its own and provides really great value. And now they can choose to turn on ALPR just as a software service layer running on top. So I hope that’s helpful. Just in general, as we’re looking at all of these we both make sure we’re solving problems that are valuable to solve and that there is a path for the budget to either come from increased efficiency, reduce costs or displacing some existing competitors.

Got it. Thank you for that. And then for a follow-up, it’s for Josh. You talked about international bookings really ramping up and I was hoping you can kind of give us a bit more color and context in terms of what your international customers are buying? Are they buying fleet TASERS, body cameras? And how are they consuming everything? Are they assuming it within a bundle, or are they consuming it all kind of a la carte one by one product by product?

Yes. Thanks for the question, Sami. I think our strategy is really unchanged. It’s one of landing and expanding. So we’re – there are some customers that start on the body cam side, and they say, hey, this is the number one problem we’re looking to solve right now. Then over time, our job is to make them really successful in their first deployment, and then evangelize our other products to in tandem with the body camera. And in a lot of cases, probably more commonly in international start on the TASER side and build a lot of trust and drive great results and then have kind of earned the right to sell other products in our product portfolio in. And so I think it’s a healthy mix of those things. It usually starts with one of those two core products. And I think what you’re seeing is some early signs that customers are getting a little more open to cloud internationally, which is exciting, but that will be a long-term process to move kind of major federal governments of these international customers over to cloud. And we’re seeing more openness to deploy our next-generation TASER devices as well. So team is doing a great job executing, certainly playing the long game internationally, and there’ll be some really exciting quarters where we have double-digit or triple-digit bookings growth, and then there’ll be others that are kind of more par for the course along the way. But when we add them all up at the end of the year, we’re really excited about the year-over-year growth that we will see internationally.

Got it. Thank you.

Next up, Mike Ng from Goldman Sachs.

Hey, good afternoon. Thank you very much for the question. It was encouraging to see the strong fleet sales in the quarter. And I have two questions there. First, is there a better way to understand the sharp inflection in those fleet sales despite the fact that Fleet 3 was launched 2 years ago, it’d be helpful to understand not only for fleet but also to potentially just better understand how purchase dynamics may impact how to think about BodyCam 4 and TASER 10. Thanks. And I have a follow-up.

Yes. Absolutely, Mike. Thank you very much for the question. We’re excited about fleet, and we see – we talk about this from time to time, but 5 or 6 years ago when we launched Fleet 1 might have even been a little longer back than that, is really a body camera attached to a windshield. And we learned a lot. We built Fleet 2, which got us to kind of parity in the market. And then Fleet 3 was a product that kind of accelerated us into a market leadership position. And so there is couple of different dynamics there on the ramp of Fleet 3, one of which is just growing demand for next generation in-car video, company by ALPR and we continue to that and feel great about that. Part of it is where customers were in existing upgrade cycles with Fleet 2 that led to a slower ramp and then a steeper climb or a steeper adoption later. Then another one is just the supply chain environment we’ve been in the last – been in the last few years. Fleet 3 is relying on third-party hardware. And the supply chain team at Axon has just done a fantastic job navigating the COVID supply chain challenges. But now we’re seeing the supply chains opening up and we’re able to deploy more at a faster clip to customers. So I think it’s a healthy mix of those. Maybe a distant fourth would be when customers have to upgrade systems across hundreds of police cars that they use every day, just their requirements for how they do that over certain time frames, can be one that’s a little back-end loaded as well for each of those deployments. So we manage things but we certainly think fleet will continue to scale throughout the next couple of years, and we’re really proud of the team for delivering such an awesome product to our customers.

Great. Thank you for the very comprehensive answer. And then the follow-up would be, could you just talk about how to think about the translation between fleet sales into Axon cloud growth. Are there any lagged effects to the benefit to cloud or ways to think about how much of the Fleet 3 sales are upgrades versus growth in the installed base does that even matter as we try to think about how that translates into Axon cloud.

Yes, it’s a great question. It’s really just our hardware strategy paying off, right? Like we really believe that what we’re building at Axon is a network of connected hardware devices, whether they are on the officer’s body in the police car, on the officer’s belt in the skies in the case of Axon Air and so forth. And so whenever we launch a very competitive hardware platform, the biggest value proposition of any one of those products is it connects to the rest of your evidence in ecosystem that you use day-to-day as a police officer or a police administrator. And so that’s really the magic of Fleet 3 is it just – it’s one more thing that plugs into this network that you already use day-to-day. And it leads to a fantastic customer experience. I think this was very much an existing market that we entered into and had to compete against a lot of established incumbents and that took some time. But as we’re really thrilled to be the market leader in this category, and now it’s about distancing ourselves even more.

Thank you for your thoughts.

Mike, the only thing I add, Josh’s answer was very comprehensive, but I think tactically a little bit what you’re seeing this year is that we now have the supply of fleet that we need, and so we’re able to start fulfilling some of that demand. The only thing that’s really limiting us at this point is how fast we can actually get those cameras installed, which is why we called out the professional services component of just how fast can we get them out and installed at our customer. And then that’s really what will trigger being able to turn on the higher-margin cloud revenue is getting the cameras installed and up running at the customer.

One last kind of thing to add there and ties back to what Rick was saying before. In addition to the price inversion that ALPR made for making this broad available versus the traditional peer expensive on a handful of cars thing. What this does, when a department adopts Fleet 3 with ALPR and respond that turns every car all day every day into a cloud software use case. Where all day, every day, every car across their entire fleet and across their entire city, those vehicles and those cameras are being used as active sensors connected to cloud software to help power the results they are getting. So that further reinforces their connection to the value they are getting out of our overall ecosystem.

Thank you, Jeff.

Thanks, Mike. Josh Reilly at Needham. Go ahead.

Hi, there. Thanks for taking my questions. How should we think about the backlog for TASER 10 post Accelerate? I was able to speak with some customers there at the event who were thinking about buying the 7, but they were then evaluating whether to switch to the 10. Is that something that you are seeing coming out of the conference? And is there any implication for the model here for the balance of the year from that?

Yes. Josh, as Rick said in his remarks, it does take a little time once we announce a TASER for trials and evaluations to take place. And so you see a little bit of a lag between the interest in the demand and the purchasing. But the good news for us is this is the seventh or eighth time we’ve been through this. We’ve worked through this. We understand what the puts and takes are. We understand how to communicate with customers on this project plan and on how they evaluate and what the timing is. But I think in the back half of the year, you’ll see a really striking kind of demand – or I’m sorry, sales growth in TASER 10, and that will continue for the next several years. We feel fantastic about the product market fit. We feel fantastic about the customer reaction to the product. And now it’s on us to just manage the upgrade cycle from TASER 7 to TASER 10, and we have a lot of confidence that we will be able to do that very effectively.

Awesome. Great to hear. And then could we get an update on the Axon Records pipeline? And maybe highlight some – what are some of the key product development priorities for records here near-term? And then is there any profile in terms of customer size or any other characteristics that’s adopting the platform kind of fully from their legacy system and moving on?

Sure. Maybe I’ll start with the pipeline, and then I’ll pass it over to Jeff to talk about the feature set and some of the differentiators and investments just in the pipeline where we’ve got a 2- to 3-year view of customers that are looking to deploy Axon Records. And part of that is our motion of selling it as part of the Officer Safety Plan and bundle. And I want to give Brian Wheeler and the entire Axon Records team a huge shout out for – we talk about responding to adversity and building really mentally tough teams. I don’t know that there is a better example of this at Axon and the records team hearing a lot of early feedback at times complaints early on in the product’s life cycle. And now we just – we see this as the thing that allows us to become the operating system of public safety for the long-term. And – so we’re very confident in the demand and our ability to deploy customers over the next several years to get closer to a market leadership position there.

Totally. So just on the numbers, right now, actually deployed, we’ve got nearly 60 agencies that represent nearly 20,000 sworn officers who are live on at least one module of Axon Records, and that includes 17 agencies out of today that are already fully transitioned to use – to replace their entirely their legacy RMS. And that already includes some great major cities such as Tucson, Baltimore, Virginia Beach and Fresno with more coming soon. So we feel fantastic about the case of adoption that we’ve got, as Josh said, both in the pipeline as well as what’s already deployed and this overall strategy of getting agencies to get going with at least one module of records, which then very, very frequently transitioned to them wanting to adopt the full product for their – to replace their entire legacy RMS. And you heard me talk when I first joined the company nearly 4 years ago that this was going to be a long journey, but we were confident that over time, exactly as Josh said, we’d be positioned to become the clear leader in this space and both on the strength of the product itself, but again, on its connections and inherent coherence with the rest of the Axon ecosystem, and that’s one of the things that our customers value the most as we sell in.

Awesome. Thanks guys. Fun to see the success on that product there.

Thanks, Josh.

Thank you very much.

Will Power at Baird.

Okay. Great. Yes, I’ll try to a couple of questions. I guess, first, it would be great to get any kind of early feedback you’re receiving on AB 4. What are some of the features, officers are most excited about? And what’s kind of the feedback you’re getting on the bidirectional voice capability? I mean is that something they are really going to utilize? Do they think they are utilized, they won’t utilize, I’d just be curious kind of what you’re hearing so far?

Yes, absolutely. Thanks for the question. So as you saw in the video and a bit in the shareholder letter, it’s, of course, early days, but we’re incredibly excited about the initial response both from customers, perspective customers hearing about it and accelerate as well as the customers that are actively trialing it. So far, there is both the meat and potatoes things of our best ever battery life and sensor and all of those things, there is the return of the POV accessory and having it unified with the court camera in a way that we have never had before. There is a ton of excitement for both of those things. And then on the comp side, you’ve heard us talking about respond for multiple years now in the growing really, really healthy, both sales and adoption of that in the field, even when there is only been the one way, they are consuming streams up until now. And as agencies are trialing and talking about the bidirectional, we’re getting a lot of enthusiasm for what that makes possible, and in particular, a lot of excitement for this idea of the dedicated Watch Me button on the camera. And the reason why we think we’re getting a lot of excitement for that is, as you heard in the video and from Rick, it inverts the control or the perceived control and puts it right in the hands of the individual officer, it makes the conversation for an officer being, hey, if I need help, if I want someone to watch my back, I can request that, and that creates a proactive signal to command staff, support staff, whoever it is, encouraging the and asking them to jump in on that right now as opposed to today’s live streaming, which requires someone to be deciding to be passively watching and deciding to go in or with signal alerts like that might come in from time to time. So there is a lot of excitement about all of that. And overall, we expect it to keep ramping just as response has over the past couple of years.

Yes. I’ll jump in with one of my favorite quotes from science fiction author, William Gibson, who says the future is here, it’s just not evenly distributed. Live streaming when we introduced it a few years ago was a totally new concept. And my tech when we first launched body cameras, this is in an industry where new concepts take a little while to really take hold. But there is one agency in Texas called the Texas Medical Center. We had the chief up during my teeno. He is now live streaming every call for service into dispatch, and his results have been just phenomenal. Imagine just for a moment that you’re a police dispatcher in today’s world you’re probably supporting five different calls happening with 10 to 15 different officers. You’ve got to keep track of what’s happening largely through these cryptic radio messages on a shared channel with the officers you’re managing as well as what other people are managing. And you have very little idea about what’s actually happening at these calls. And then flip to a different world where as you’re doing this, you can have a screen where you can see visually what’s happening for all those officers. And it turns out that our visual system is highly tuned to notice things that are abnormal or out of the ordinary. For example, you are sitting next to somebody on an airplane, right. None of us want to you to creepy person reading the phone of person next to us. And you don’t notice it when there is text is going on, but if they get some photo or something, they will just grab your attention. And even though it’s far in your periphery, you immediately who, I don’t even mean to invade this person precut your visual system is really good at that. Well, now if you are a dispatcher, what we are hearing from TMC is that these officers or the dispatchers are rapidly able to wait a minute, something doesn’t look right with what’s happening here, and they will then tune in and focus. They may call for a supervisor to tune in live, they will dispatch additional resources. In some cases, they are helping officers. One of them noticed somebody who would been in a different call, who then gave that officer of fake ID or a false name. So, I have high confidence that in another 5 years to 10 years, the idea of trying to run a police department with only radio voice traffic is going to see just crazy once you can do this with audio and video and more sophisticated integration of sensors. And we believe we are really on the kind of the edge book clubs we made the decision with AB3 to put LTE into every camera and then allow that to start iterating together with our customers to learn about these new use cases. So, the two-way voice, once you can see a video, the next thing frequently you want to do is communicate with that person and not have to do it over a radio that air traffic is very tightly controlled. It’s not one-on-one. You can’t have a rich conversation. You have to use cryptic codes because you are also transmitting to 15 or 20 other people that aren’t involved in that conversation. So, we are still early in AB4 rolling out, but we think the feature set hits both the transformative new capability and then some simple things like some people love to have the head mounted camera, some like to mount it on the shoulder, many officers prefer the body camera. Those have always been two separate SKUs where you couldn’t reconfigure them. We now have one SKU where we can reconfigure if you go from SWAT to patrol or wherever you can now have many mounting options, and the ability to recharge while you are in the car with a magnetic disconnect map gives us effectively infinite battery life. So, we think this has been a great combination of both transformative and just continuing to deliver on the basics.

That’s great. Thanks for that. If I can get a question in for Brittany on free cash flow, has some impacts in the quarter, I think more so than we have seen in the past years. So, any other color there? Just maybe any thoughts just on the free cash flow outlook for the year?

More than what we shared, I wouldn’t say it changes any of my view in terms of our ability to generate free cash flow over the course of the year. We just had some strong seasonality in Q1 in terms of uses of cash, including bonus, commissions, some timing around, permitting stock taxes for stock options, and a little bit of inventory, but mostly some of those more one-time items.

Okay. So, cadence of the year is we will see that price step back beginning in Q2, I suppose, and…

Yes. I think you will still see good healthy free cash flow for the year.

Okay. Thank you.

Of course. Thanks.

So I’m going to read Keith Housum’s question, allowed. He is in a public place with bad background noise. So, Keith Housum at Northcoast asking, can we provide an update on VR in terms of modules growth, geographic availability, number of users over the past year and our goals for 2023.

Sure. I can start there, and maybe Rick can fill any blanks in. The – I don’t think we are ready quite yet to talk about user growth in VR or any kind of detailed financials on the product line. Instead, we are really focused on building a platform here for training police officers at a much higher quality well into the future. And so for us, it’s really about, hey, how do we have the foundation built with the skills needed in terms of training between the TASER, a firearm and verbal communication in our community engagement modules. And over time, what you will see is you will see more specific scenario-based modules being released to the market. In order to start, it will be in the U.S., but we are more rapidly integrating scenarios from some of our growing markets such as international and Federal in corrections and otherwise. But again, the foundation of the product has to be very solid between the sensors the officers use and the software that accompanies the experience for the trainers themselves. And so just like with our other products, whether TASER, body camera fleet, it’s about getting the basics right first and then moving quickly once we have that platform very solidly built. And so we continue to be excited about the bookings we are seeing in VR. It’s one of our fastest growing products ever. And we expect that trend to continue for the long-term, but we want to make sure we don’t get ahead of ourselves and really do things right from the ground up.

Okay. And we have four more analysts in the queue and we are going to try to get to everybody, today. Jonathan Ho at William Blair. Go ahead Jonathan.

I will just stick to one question, just to keep things probing. Can you help us maybe understand some of I guess the gross margin dynamics around some of your newer products, and maybe how you expect that to trend over the course of the year?

Yes. No, I appreciate that. So, we have really called out gross margins as probably being very similar to Q1. And if they improve, it will be only slightly. So, we are really expecting that to be the dynamic for the rest of the year. A couple of things that really go into that are this continued revenue mix that we are seeing from fleet and the growth we are seeing in fleet inherently has a lower margin upfront, plus we have professional services to get it installed. So, that’s an impact to us, which will be a benefit over time. This continued growth in our software revenue over time will be a tailwind, but this year, it is a mix impact for us. And then I would say we would expect as we continue to ramp in T10 to see that improve towards the back half of the year like we were talking about, but that will be offset with some of these fleet dynamics.

Jeremy Hamblin from Craig-Hallum.

Thanks. And my congratulations to Rick and the team on this milestone of being at the S&P 500. It’s a pretty amazing journey over the last – where you guys were 15 years ago. I wanted to ask just about your ARR, which is up nearly 50%. I think probably like the fastest growth on a year-over-year basis, maybe in the company’s history, but certainly in the last 5 years. And you provided a little bit of color in the release on that, but just wanted to see if you could add a little bit more in terms of the dynamics between booked seats versus ARPU. You talked about premium packages that you are getting clients to sign up for. But I wanted to see if you could share a little bit more color around that and how we should be thinking about with your product launches around TASER 10, AB4, I imagine you will be getting some higher bundled packages on a go-forward basis. But any color you could share on that.

Yes. I mean I will jump in and then maybe, Josh, we will see if Josh wants to add to it. But I would say it really is the sort of flywheel taking effect, and so you are starting to see the benefits of that. Certainly, moving some of our customers into our more premium offerings is continuing to benefit us in terms of ARR growth. And then I think you are seeing many, many years of work to get people added into this software and the rep we are seeing from some of the hardware products and to move up the curve started to come to fruition.

Yes. The only thing I would add there, and Jeremy, I appreciate all the kind words. Thank you very much, and it’s been fun to have you guys on a lot of these calls for a long time now. But in terms of the ARR growth, it’s really doing two things very well. And I give Jeff a lot of credit for kind of simplifying this upon his entry to Axon a few years ago. So, we got to sell new products to our existing customers, and we got to sell our existing products to new customers. And when we do those things, in parallel very well, you see the types of results that we are seeing now. And so as Brittany said, in our existing markets, getting the flywheel going across OSP, but then supplementing now with great results in Federal and enterprise, and corrections and international, it’s doing those two things in parallel, that’s leading to great an exciting growth.

Got it. And just one other follow-up here with the launch of AB4 and TASER 10, any color you can share in terms of the adoption kind of cycle times versus what you have seen in the prior ramps, whether you want to compare it to TASER 7 or AB3 faster, slower, more depth on that, that would be great?

Sure. I would say in the TASER business in general, it’s generally a 5-year upgrade cycle. So, when you a launch – whenever you launch a new TASER device, you see the customers that bought 5-ish years ago as your customers that have the most early interest. And we are seeing that with T10, but the thing we are most excited about, that’s very different from previous generations of the TASER is that customers that are early on or midway through their cycle with TASER 7 are expressing a lot of interest in upgrading early to TASER 10. So, I think that speaks to the kind of the huge improvements in terms of effectiveness, range and so forth that our customers really see and value, and that’s driving them to maybe not only upgrade early, but line up the resources on their end in terms of training to also allow that upgrade to happen on a faster cycle. So, we are very excited and encouraged. Of course, we have got to execute, and we have got to drive that into fruition, but we have got a lot of confidence that our team is capable of doing that.

One anecdote I will share, forgive my enthusiasm, but we had one customer at TASER 10, a midsize is in several hundred officer agency that was sitting in the keynote and called back to their chief and they actually changed in order that was in process, and they got the order through, I believe the Chief Signature and the purchasing department of the city by the end of that day. We have not seen something like that again, I don’t want to get too excited from a projection standpoint, but that reaction to me was just extremely meaningful that they saw this as something that was worth really disrupting the whole process to stop an existing order pivot on a dime and get the new thing approved. And then the other thing I would tell you is where I think TASER 10 make a really huge difference is in the international markets. TASER 10, for the first time, I think we have a weapon that could become the officer’s primary defensive tool, probably not in the U.S. because we live in a country watch in guns and officers need to have their legal weapons. But picked your average European country where police are all wearing pistols in nations that really don’t have a gun crime problem. And previous versions of the TASER weapon probably didn’t have enough capability range, enough shots that you would rely on it as the primary tool to defend yourself. And I think we are now crossing that Rubicon. And I think that can really open up the international markets where we have the opportunity to become the primary defensive tool.

Thank you.

Erik Suppiger at JMP.

Erik, it looks like you are on mute.

There we go. Can you hear me? Just kind of a follow-on from what Rick was just saying. You have talked about the international opportunity for TASER as being multiples of the domestic opportunity. As you said you have seen some strength in Europe, can you talk a little bit about the dynamics of how they are adopting your products, is it more of a shift towards the TASER. Is that getting – is that something that can be a bigger opportunity than the body camera, or what are some of the dynamics in terms of the adoption in Europe?

Yes. To start, Erik, I would say it’s really some of the actions we took 3 years or 4 years ago are really just starting to pay off. And in TASER programs regardless of geography or market, it generally starts with a lower number of units that are aimed at a particular use case, whether it’s SWAT or a certain number of users in a police force. But then once they start seeing early success, that’s really when we see the willingness to adopt the much higher quantities. And really, that’s happening in a number of European markets at this point, and that’s driving some of the exciting growth there. And as we start to reap the benefits of that, we also are planting seeds in other markets where they are, for the first time adopting either dozens or low hundreds number of TASER devices. And then in a couple of years, we will see more proliferation there as well. In terms of the relative opportunity, generally, I would still say body cameras are the longer term, the higher TAM only because you have got higher ARPUs associated with our video business versus the TASER at scale. But they are both very, very compelling opportunities in international and my guess is TASERs will move a little faster as we still – especially in Europe as we still start to evangelize the cloud more and more there. But over the long-term, certainly the body camera and cloud business is very attractive and one that we are really exciting about or excited to continue to grow in some of our international markets.

That’s it. Thank you.

Okay. Awesome. Paul Chung at JPMorgan. Go ahead Paul.

Hi. Can you hear me? Okay. Great. So, thanks for squeezing me in. Just on – most of the questions have been asked, but just on TASER 10, thanks for all the details on the upgrade cycle. So, the use for – use case for the upgrade is pretty clear given the effectiveness we got to try to accelerate it is quite easy to use. Can you expand on more of the cartridge volume dynamics? And you mentioned kind of a boost on overall margin profile there. Talk about the magnitude would be helpful as well. And is this more of a gradual ramp in the second half? Thank you.

I can probably start with just what the bundle looks like, and then I might hand it over to Brittany to talk more about the cartridge gross margins and the ramp. In the bundle on this product, it’s really important since you have 10 shots in the device to be able to train and thus, that drives training cartridge demand up, and because each shot is an individual shot, I think over time, we will see duty volumes go up as well. So, we have priced all that into the bundle and you can go on the website to look at the relative pricing versus T7, but that contemplates some of the growing cartridge demand. And of course, as we get up to speed with selling high volumes of these, that has implications for us on automation and how fast we are able to ramp our manufacturing, maybe if Brittany has anything to add there on the margin side.

I think you pretty much nailed it, which is because it’s starting to get bundled in. We are not really thinking about cartridges versus handles separately from a gross margin standpoint. We are really thinking about the full TASER package together. And so as we talk about teaser margins improving as we go through the year and get to the back half of the year. We have sort of – because that’s bundled together, I would view it as bundled together in our margin outlook as well.

Got it. That’s helpful. And that’s the dynamic for the Axon, the body cam, the new one as well. That’s it from me. Thanks.

Yes. Paul, I think on the body cam, the only thing I would add there is, because respond is the thing that drives some of the features in terms of the streaming and communication features in AB4. There, there is a real opportunity to sell more outside of the core body camera hardware and service. And while we are excited about the growth and respond, we see some opportunity there for the volume of respond licenses sold to grow over time as a result of some of the new capabilities of the AB4 hardware.

Okay. Great. I think that’s everyone. Do we have any follow-ups, I will give it a second. It looks like no. Thank you for joining us. Let’s have Rick close this out.

Awesome. Obviously, excited to be off to a good start, two major new product launches. I think VR, which you guys asked some questions about here was really going to start getting it strived the back half of this year. We have integrated new sensors so that TASER 10 will be first. We will have a really fine-tuned, very smooth, integrated product experience. TASER 7 will follow, and then we will start rolling out various firearms and other platforms. So, we think we are really setting the right stage with these two new products and this progress towards our moonshot to continue to sell value-added premium services and to really go wide with VR. By next year, we think that will be common for pretty much every officer, and instructor who is getting trained on TASER that we believe VR can become the standard. And that’s going to create an opportunity for us to then launch a whole lot more content and services through our VR platform. So, Jeff has just been doing a great job with the team, hiring and bringing in great talent to build all of this and then putting together a strategy for how to layer all the hardware and the software pieces. So, we are just really excited to have you shareholders and analysts who have been of our journey. And we are just getting started. We got an exciting 10-year march ahead of us to cut gun related deaths in half, and I am confident we are going to do it. So, with that, we will see you all next at our shareholder meeting and then at our next quarterly results, I have to wrap up Q2. So, thanks everybody, and have a great night.