Axon Enterprise, Inc. Q4 FY2021 Earnings Call

Hello, everyone. Welcome to Axon’s Fourth Quarter 2021 Earnings Call. We appreciate you tuning in today amid considerable market volatility and geopolitical risk. Today we have available Axon CEO, Rick Smith; President, Luke Larson; CFO, Jawad Ahsan; Chief Revenue Officer, Josh Isner; and Chief Product Officer, Jeff Kunins. I hope you’ve all had a chance to read our Shareholder Letter, which was released after the market closed. You can find it at investor.axon.com. Our remarks today are meant to build upon the information in that robust letter. During this call, we 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 they are not guarantees of future performance. All forward-looking statements are subject to risks and uncertainties causing actual results to differ materially. These risks are discussed in our SEC filings. Okay, so before we go to Rick, we are going to play our quarterly update video. This video was pre-recorded before current global events escalated. But we’re making the decision to share it today because there’s important information about our quarterly update in the video. Thank you.

All right. Thank you, Andrea. I was just waiting for the queue here. I love watching those videos. We’ve got the most creative finance team in the business. As you can see from that video, we’ve been looking forward to sharing results from the best year in Axon’s history. But we’re heavy-hearted to do this on a day when democracy is under attack and wars are breaking out in Europe. We don’t get to choose whether the times we live in will include geopolitical instability or global pandemics. What we can choose are our principles and how we respond. We stand for transparency, truth, and protecting life. Our products are designed to strengthen trust in the rule of law, and they support the United Nations 16th Sustainable Development Goal to foster peace, justice, and strong institutions. My thoughts are especially with the U.K. and Ukraine national police who are our customers, as well as our excellent teammates in Ukraine. As we kick off 2022, I’m confident Axon’s best days are ahead of us. We are prioritizing our people and giving them a platform to further excel at what they do. Last month, Dr. Richard Carmona announced he will be retiring from Axon’s Board after 15 years of service. Dr. Carmona has been a tremendous contributor to Axon, helping us shape strategy and positioning Axon as we evolved from a single product company known as TASER to where we are today. He is simply a wonderful human being. We’re incredibly grateful to him not only for his 15 years of service, but also for the way forward he helped us to define. As I reflect on what is driving our strength, it is a powerful combination of solving real challenges for our customers, creating a better user experience, and attracting passionate talent. Our emphasis on building software at the core creates a great user experience. Historically, our competitors built software to fit RFPs, which check a lot of boxes but ultimately does not function well in the hands of users. We’ve been dedicated to understanding our customers’ needs and building software and products that delight them when they use them. When customers test Axon solutions, we stand apart. One of the most important factors that sets us apart is that we truly have a highly integrated suite, a high-performance ecosystem that seamlessly connects hardware, software, and our community of users to achieve our mission of delivering a safer world. When competitors talk about winning market share, it’s mostly focused on lower-margin hardware buyers who don’t get great software value and usually aren’t ready to advance to the cloud. We look forward to welcoming those customers down the road, just like the many agencies here in the U.S. that are upgrading from continuing platforms to the Axon ecosystem. Perhaps even more important than the technology we’ve built is the mission mindset of our employees that sets us apart. I regularly hear from chiefs raving about their positive experience with our employees because they are so passionate about helping our customers succeed. I recently received a call from a State Police Colonel asking me to come to their headquarters for a surprise award ceremony where they recognized Axon rockstar Project Manager, Jenny Schupp, for seamlessly upgrading them from a competing platform onto Axon. Great work, Jenny. I’m so proud to have you on our team. Great tech and passionate people is just a magical combination, and it works. Our momentum with Fleet 3 has allowed us to continue to capture share with major cities, county sheriffs, and state controls here in the domestic market. We’ve converted several major agencies in the last year from competing platforms onto our network, joining our community. The whole ecosystem ties together our body cameras, fleet cameras, TASER weapons, drones, and third-party centers with a growing suite of software capabilities, and I’m glad to see it’s delighting our customers. We’re laser-focused on pursuing our mission and driving growth. It’s clear that our people are our best asset. As you’ve heard from Luke over these years, we have been fortunate to attract people who are among the best in the world at what they do. I’m incredibly grateful and thankful to have these people on our team contributing to our success. Now, over to Luke to take you through some of our 2021 highlights in more detail.

Thanks, Rick. In 2021, Axon focused on our commitment to our mission, our customers, and our employees. We continue to be in a period of rapid scale. Last year, we hired more than 900 new Axon teammates and we set new company records by filing more than 100 patent applications. We also supported our customers through a period of turbulence. One of our initiatives included the creation and launch of Family First, a free and confidential mental health resource and training package for the families of law enforcement. Another fantastic initiative we launched last year was the Axon Roadshow. We hosted 200 events over the course of six months, where we visited customer agencies and gave demos of our products. We also grew our international markets with São Paulo Military Police adopting a large body camera deployment and the Dutch National Police undergoing a large TASER deployment. On the product front, last year we launched Fleet 3 and ALPR, and demand has exceeded our expectations. As a result, Fleet bookings for 2021 far surpassed our projections, and customers have raved and served as incredible references, and our first launch of the Attorney Premiere in December opens up an entire new software category for us in the justice sector. While we’re quick to highlight key wins in new market segments, our entire business has been able to achieve record results due to the stellar work that continues to be done by our state and local teams. Operationally, last quarter, we told you about industry-wide chip shortages that impacted our TASER 7 platform. We told you we had line of sight to clear the backlog in the first half of 2022, and that remains the case. We continue to manage through challenges, including delivery delays, and our supply chain team is navigating extremely well. We also called out in today’s Shareholder Letter that approximately $15 million of AB3 is also shifting into 2022 as a result of an elongated supply chain. I want to note that we have been intentional about our preparedness, investing in manufacturing capacity and flexibility, thereby improving our ability to meet customer demand. We feel great about our pipeline and bookings in what continues to be a very dynamic environment. As Rick noted, you often hear me post about our teams and the incomparable talent we have at Axon. Recruiting is a major focus for us as we grow. We recently announced that we are opening an R&D hub in London, which will be our fifth after Scottsdale, Seattle, Tampere, Finland, and Ho Chi Minh City, Vietnam. If you know someone fantastic who wants to make an impact, we want the best people in the world to come to Axon, so please refer them to us. Now, with that, I’ll turn the call over to our Chief Financial Officer, Jawad Ahsan.

Excellent. I’d like to start by recapping some of our financial highlights over the past few years. This is our third year in a row of 25% plus revenue growth. Our annual recurring revenue has tripled over those same past three years to $327 million, and looking back over five years, our revenue has grown at a CAGR of 26% from 2016 to 2021. Over the same period, our adjusted EBITDA has grown at a CAGR of 32%. We’ve delivered both exciting topline growth and strong operating leverage, all while making investments that will not only continue these trends for years to come but, more importantly, help us achieve our mission to protect life. As we look ahead to 2022 and beyond, we intend to use this momentum to our advantage and stay on offense. What does that look like? We’re introducing today a third pillar of our financial strategy, in addition to topline growth and bottomline leverage, and that third pillar is cash generation. We’re laser-focused on building an enterprise that will deliver 20% plus revenue growth for years to come, return increasing amounts of profitability to our shareholders as we grow and build a free cash flow generating machine that will make our businesses sustainable for the long term and keep us nimble and flexible. This flexibility will be built on the stable foundation of a subscription-based business model that generates highly recurring cash flows. We recently talked about investing for growth in terms of R&D. We’re still making those investments. But we also know that our continued growth at this pace will depend on more than just R&D. We’ll need new sites and new offices around the world as our global footprint expands. We’ll need new facilities with new capabilities, both in terms of automation and streamlined manufacturing, as well as showcase spaces for our technology, where we can collaborate with and gather feedback from our increasingly diverse customer and partner base. And finally, we’ll also need the ability to move quickly when the right inorganic opportunity presents itself. It’s for these reasons that we gave you more color than usual in our Shareholder Letter about our cash flow and CapEx expectations, including formal guidance for 2022. Transparency is of paramount importance to us, and you can expect to hear more from us on this topic. We’re incredibly proud of how we’ve positioned the business to be cash generative for years to come. To recap, the three pillars in terms of what you can expect from us going forward are: number one, continued strong performance on the topline; number two, continued discipline in our operations, which will be evidenced by outperforming the rule of 40; and number three, a strong ramp in operating cash flow that will lead to a strong ramp in free cash flow. Looking ahead, we’re also very excited by the next wave of new products and technologies that are going to become an important part of our growth story in their own right. Before we move to questions, I want to echo Rick’s comments about the geopolitical crisis we are all facing as global citizens. Our thoughts are very much with the citizens of Ukraine today, and we at Axon have never been more proud of our mission to protect life. With that, Andrea, let’s move to questions.

Thanks so much, guys. Matt, can you bring everyone up into gallery view? Let me know when we’re all in gallery. Are we in gallery view? Okay. Awesome. Great. We’ll take our first question from Jonathan Ho at William Blair. Go ahead, Jonathan.

Hi. Good afternoon. I wanted to start out with sort of maybe what was different between your supply chain expectations around backlog and what ended up materializing around the quarter? And what’s sort of giving you the confidence that you’ll be able to sort of maintain clearing the backlog by the second quarter?

Jonathan, thanks for that question. Yeah. We had just some material delays that impacted some of our original thinking. We still feel really strong about the total year outlook, and our supply chain teams have done a phenomenal job ensuring that we have line of sight to key revenue drivers. If I had to summarize it, I would say we may see some quarter-to-quarter mix based on some of those material delays. But we still feel very strong about the year guidance that we published.

Okay. And then just as a follow-up, you referenced 25% of bookings coming from new types of customers. I just wanted to get a sense of how much those customers can continue to contribute going forward, as we look at sort of that increasing ratio? What can that get to over time? Thank you.

Thanks, Jonathan. Nice to see you again. I’d say for international specifically, our goal is to have international outperformed the United States in bookings long-term. So I think we’re just scratching the surface right now in that segment and the federal government will acknowledge our entire federal team. Just two years ago, we were kind of a $15 million to $20 million bookings business every year, and last year we were just short of $100 million in that segment. Again, we think we’re closer to the beginning than the end of that growth. We have a lot of confidence, especially in those two segments. The Justice segment, the correction segment, and enterprise, where we’re starting to see some encouraging momentum as well. One of the things that makes it challenging at times is our domestic segments still grows pretty substantially. But certainly, we hope and expect those new segments to outpace domestic and become a bigger part of that mix over time.

Thank you.

Okay. Thanks, Jonathan. Next question from Josh Reilly at Needham. Go ahead, Josh.

Hey there. Thanks for taking my questions, and nice job on the quarter and year. So, I think, given the news in Ukraine here over the last week, I’m curious how this maybe impacts your European opportunity, given the pipeline there in that region? And I know it’s early, but do you anticipate any potential business disruption as a result of what’s going on?

We’ve spent years and years building up a really strong team and pipeline in Europe. Last year the team performed really well against our goals. In terms of normalized five-year bookings, we are up about 35%. In terms of 10-year bookings, we’re up close to 60% in international. These are deals that take a lot of time and energy to move through the sales cycle. So the ones that we expect to close this year, largely we’ve been working on already for quite some time. I think we’re in a place now where we feel like they’re insulated from some of the uncertainty. But having said that, no one can predict the future in terms of how this will play out longer term. So, of course, there’s a little bit more risk there today than there was last week, but we still feel really confident in our international and EMEA business throughout 2022.

Okay. And then if you look at the increasing guidance and adjust for the $15 million of AB3 revenue that’s pushed to 2022. How much of that $40 million increase is related to increased assumptions around TASER versus other products?

I think it’s a healthy mix. I think we believe the TASER business is going to grow this year across both domestic and our newer segments, and then video shipments and some other products, both on the software and hardware side will contribute there. The team did a really nice job of not only closing out a strong Q4 but continuing to develop a pipeline for this year. In Q1, we expect really significant bookings growth over Q1 of last year, and we’re pushing really hard to make that trend continue throughout the year. So we think it’ll be a mix of factors that drive that revenue and bookings result there.

Got it. Thanks, guys.

All right. Thank you. Will Power at Baird. Go ahead, Will.

All right. Great. Thanks. Rick, maybe starting with you, you all rolled out a bunch of new exciting products, whether it’s VR, Bolt 2, Fleet 3, and on and on Digital Evidence Management for justice. You look over the next five years, what should these new product categories get you most excited and what can be the biggest opportunity, I guess, growth for the company?

Sorry, I had myself muted there; it’s my patented move. That’s kind of like asking me again, which of my children I love the most. It’s hard to pick. Over on the TASER side of the business, we’ve got some incredible new technology coming over the next 10 years. We are going to outperform a 9-millimeter pistol by 2030. I am highly confident. On the other side of the business, solving problems for attorneys in the criminal justice system, that’s high-margin software. It’s scaling rapidly. We’re passionate about the opportunity to really impact fairness and efficiency in the justice system by having tools that enable public defenders, who may only have literally minutes with their clients to work out plea deals, to efficiently process the video evidence and find what they need. Across our whole business, pretty much everything we do impacts people’s lives in an important way, because public safety is really important and foundational work for modern society. I’m excited across the board. I mean, consumer, I started this business to focus on the consumer space after a private citizen killed two of my friends, ruining their lives and now spending his life in jail. We need to give people something better than a bullet. It’s 2022, and across the board, whether it’s improving the efficiency of the justice system or saving lives or just moving medieval technology onto the shelf, because we’ve given the world something better, we’re just excited across the board. Forgive my enthusiasm, but I actually love my job. I just got back from a two-and-a-half-day roadshow, saw 12 major agencies, and I always come back super pumped. I literally got home about five minutes before the call. It’s just such an awesome business to be in. I can’t help but think about what’s happening in Europe. The world is looking at this quite differently, like what is this capricious use of war? It doesn’t feel like it fits the modern world, and I think we were all hoping it was gone. The global revolts, you can feel it, and I’m hoping we’re turning a corner here. I think we’re seeing even in military circles that the acceptance of killing people is not what it was 100 years ago. Hopefully, we can eradicate it being accepted at all in the next century.

Yeah. Okay. Thank you. That all makes sense. Maybe if I can just ask the second one, either for you or Luke or whoever wants to take it. It has been a challenging hiring environment, especially for R&D talent and technology. I know you’re opening a new hub in London, which presumably helps. Maybe just talk about what you’re seeing in terms of employee retention, difficulty hiring, and how that factors into plans and outlook there?

Yeah. I’ll take that first, and Luke, I’ll have you take the ball. Part of what we’re doing in London is really important. We’re continuing to expand our global footprint to source talent around the world and putting that talent closer to our customers. This helps with sourcing talent, but also increases customer intimacy. With that, Luke, can you take the rest on retention?

Yeah. Great question. In the last two years, we’ve seen this acceleration of remote work, and that’s given every employee in the world a lot of opportunities. I think many companies are scratching their heads, wondering how to retain people in this environment. I’m super excited about Axon because I think we’re going to benefit from this, given we’ve built an amazing company. When we talk to candidates, we highlight our purpose and mission, and the great team we’ve built and the talent we’ve attracted. I think one really exciting part of the business is the future growth we see ahead of us. That’s not only for prospective employees but for existing employees as well. I feel really confident about the team we’ve built. It’s definitely a challenging hiring environment, but we think it’s one where we’re going to thrive because we built such a great business.

Stay tuned at the end of the call. We’ve got one more video for you that the team put together, which showcases a bit of who we are, and we’re getting rave reviews from people seeing it online, who don’t even know what we do, and who want to come work for us. We aspire to have a place that not only works on big problems, but really has a good time doing it. It recognizes and celebrates the humanity of our people. We’re all in this together working on problems we care about, and that is resonating with our current employees and with folks we’re trying to recruit.

Yeah. Thanks. We’re really excited to share that video with you at the end, so do stick around. Okay. Mita Marshall at Morgan Stanley. You are next.

Great. Thanks. You mentioned several international agencies that had success this quarter. I wanted to understand where you’re seeing the most traction, whether with TASER or body cameras, and if there’s a tendency to bundle products upfront or if the software needs vary for those customers. Could you provide more insight into the international side and the traction there? Additionally, it seems like you managed to find alternatives for many products, but do you anticipate any price increases that will need to be passed on to customers? Thanks.

Yeah. Thanks very much for the question. On international, I think our focus is customer acquisition regardless of product. Some customers are better suited at the moment for TASER, are more interested in TASERs and others are pursuing body cameras or in-car video or even interview room products. Our strategy has always been to make sure we delight our customers with one of those products and then over time expand the ecosystem within each agency. We believe that’s become a competitive differentiator for us in the United States over time, and it will internationally as well. It’s a little less common to see bundling of TASERs and body cameras in most markets; the Commonwealth countries might see that a little more commonly. In many of these markets, it’s about how we can get in there with any of our products to delight customers and build strong, productive, trusting relationships. In terms of pricing, we feel really good about where we stand right now. We address pricing every year and meet as a team to decide how best to go to market and be fair in terms of the value we provide. We don’t anticipate passing any pricing increases along to our customers. We announced our new pricing in January, and we feel great about it. Many of our supplier contracts are locked in. Our 10-year deals do contain escalators starting in year six to account for inflation, new products, and new capabilities. We continue to feel good about that.

Great.

I want to add that one thing we are working on, that’s why we laid out for you in our cash estimates, is our investment in automation, streamlining, and manufacturing to help address this from the cost side.

Perfect. Thanks for the context.

Good. Thanks, Mita. Keith Housum at Northcoast. You’re up next.

Thanks, guys. Appreciate it. Can you guys speak a little bit, perhaps, give us a highlight in terms of what to expect for this year in terms of new product rollouts or updating existing ones? Now that AB3 is three years old, TASER is in process. Perhaps, can you give us an update where you guys are on new products or in the improvements or changing or updating the old ones?

I’ve got to contain my excitement here, you know that, Keith. The products are getting to the end of their expected lifecycle, but I can’t give you any specifics. We have a cadence of approximately two and a half to three years on body cameras, and every five years on TASERs. We just launched Fleet 3. There’s a lot going on, but unfortunately, I can’t give you more than that, other than to share my smile with you and let you know we got good stuff coming on the way.

I bought 3s in May 2018 and again in 2019, so I might be missing some details there. I don’t have any comments for you guys. My assumption is about that one. The next question is for Jawad. You mentioned that you increased freight costs in the fourth quarter. I assumed there were other costs and supply chain issues as well. Could you provide some context regarding the impact in the fourth quarter and how we should consider that for 2022?

The impact is fairly muted on our margins. When you saw gross margin compression, it was largely due to the supply chain shortages that we had. We were unable to fulfill demand and that caused a little bit of margin compression. Overall, this was not a big disruption. This points back to the investments we’re making in our manufacturing processes, in automation to really get ahead of that. We’re seeing results. We’ve been making those investments for a couple of years. They’ve been on a bit of a smaller scale, and now we’re ramping those up because we’re seeing such great benefits. This is something we expect to continue paying dividends in the short-term and over the next few years as we drive towards that long-term margin target of 30%.

Okay. So to recap, Jawad, you don’t expect any significant compression in 2022 because of either of those issues?

That’s correct.

All right. Thanks, guys. Appreciate it.

Thank you, Keith. Next up it looks like Eric has dropped off, so we’ll go to Paul Chung at JPMorgan. Go ahead, Paul.

Thank you for taking my questions. I would like to discuss the delay in 4Q revenues and how it affects your TASER contributions in 2022. What is your visibility on the weapons side? With the higher subscription bundles, do we anticipate a bit less volatility between the quarters? I have a follow-up.

I think it’s a good question. The teams worked really hard to get as much line of sight into the TASER supply chain as we can, and they deserve a lot of credit for that. We feel very much that the outlook on supply chain does support our new revenue guidance. As you remember in Q4, we did guide to around $204 million and surpassed that, which speaks to the team really doing a good job pulling in every component they could to be able to beat that guidance, and we think we’ve got a promising path forward in that regard. In terms of quarter-to-quarter flux, last year it became fairly consistent between Q2 and Q4. There was less kind of swing in the revenue results overall. I believe that’s because the team is getting better at building a more substantial pipeline across segments and that allows us to have a little less execution risk quarter-to-quarter. Every quarter, we start with how can we maximize the percentage of the pipeline that we close, and that’s going to continue to be a focus. I really believe the team is primed for another strong year in that regard.

In response to your question about visibility, we have visibility to a little over half, approximately half is booked. This is one of the reasons we emphasize our bookings number, as it serves as a strong indicator of our future revenue growth.

And then on cash flow, very strong, so despite some of the component shortages here, talk about the working capital dynamics you expect over the year; the benefits of a larger subscription base and then the shape of cash flows as we move through the year would be helpful. Thanks.

Yeah. This is one we’re really excited about. I’m personally extremely excited. We’ve built a business that is going to be hugely cash generative for years to come. This is something we’ve been building the foundation for many years, and it’s really starting to manifest itself in our cash flow statements. Last year, we had a bit of a use of working capital, and we expect that to work itself out in the first half of the year. We obviously laid out the investment in the new campus, the automation, manufacturing initiatives. We have new sites and facilities opening around the world. That’s one of the reasons we’ve given more visibility into our capital expenditure. We’ve broken that out versus sort of like recurring business ongoing, excluding the one-time items. We are going to give you visibility to those one-time items over the next couple of years, and we expect that once we’re through the next couple of years with those investments, we’re really going to be throwing off pretty significant amounts of cash.

Thanks, Paul. And it looks like we have Astrid who has joined us from Raymond James. I don’t mean to put you on the spot, because your video is off, but do you have a question, Astrid? Okay. I’m going to assume not. I’ll give you another second. Is there anybody else who has a follow-up? You can kind of come off mute. Don’t all jump up at once. Oh, Will Power has his hand up. Go ahead.

There was a follow-up; I was intrigued with the corrections market looking like a nice one in Ohio, I believe. I’d love to get further color as to what the pipeline of opportunities looks like. It seems like that’s been a kind of a budding opportunity for a while. Are we finally at the cusp of more significant wins? How do we think about that opportunity moving forward?

Absolutely. Deploying body cameras at every correctional facility in Ohio was a huge win for the corrections team and one that took multiple years to deliver. There’s a big market here. We often talk about internally that the California Department of Corrections is about the size of NYPD and office account, so there’s a vast market out there to capture. We’ve reworked some of the offerings, packaging, and bundling to better suit our corrections customers, and we’ve continued to build out that team over the last year and a half here. We’re really excited about the progress. There is still a lot of work to do, and it’s a different sale for sure than a lot of our more conventional law enforcement customers, but we expect that to be not only a part of our state and local growth moving forward but also a part of our federal growth moving forward.

Thanks, Will. Jonathan has a follow-up. Go ahead, Jonathan.

Hi there. Given when we started the call in VR, I thought it’d be appropriate to just ask, just given the success that you’re seeing there. Are there any stimulus funding or programs that can maybe drive even faster adoption in that VR space? Can you remind us of how much of a step up in ASPs you can see from VR adoption? Thank you.

Absolutely. So, right now, if you buy a VR, our VR offering with TASER 7, it’s about a $17 monthly uplift from the TASER 7, and we have some a la carte packages as well. I’d say, like all of our products, we’re far more focused on adoption than ASP right now. We believe that this is an extremely emerging and disruptive technology that is going to further our mission, obviously, the bullet. We can do that through building a better TASER, and we will. But the other side of that is ensuring we’re able to simulate the type of stress that officers experience in the field. We believe this is kind of our next big product category, and we’re focused on becoming the market leader in this space. Our product has outperformed both our body cameras and X26 in year one of sales, which is a great indicator. The team is focused on driving this business segment up past $100 million in bookings as fast as we can here.

Thank you.

Rick, you’re off mute, so you’re going to close this out. Go ahead.

We’re obviously thrilled with the performance the team has been able to pull together over these past two years despite the pandemic, social unrest, and now these new geopolitical challenges. I have the great fortune to work with some really awesome people who get out of bed, regardless of what’s happening in the world, and just get after our mission. We want to conclude by sharing a really special project. Our team shot some drone footage of our current headquarters this week, and we’d love to take you through our Scottsdale office R&D and manufacturing facility. It’s pretty cool. Check it out.

Our team shot some drone footage of our current headquarters this week, and we’d love to take you through our Scottsdale office R&D and manufacturing facility. It’s pretty cool. Check it out.