Hello, everyone. Welcome to our Q3 2022 earnings call. Thank you for being with us today along with our executive team. We hope you have had the opportunity to review our shareholder letter available at investor.axon.com. Our prepared remarks today will expand on the insights provided in that comprehensive letter. During this call, we will discuss our business outlook and share forward-looking statements. These statements are made in accordance with the safe harbor provision of the Private Securities Litigation Reform Act of 1995. The comments reflect our predictions and expectations as of today, but they are not guarantees of future performance. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ significantly, and we address these risks in our SEC filings. Before we hand the call over to Rick, we will present our investor video.

Thank you, Andrea and Angel. Our year-to-date results are pretty exciting with revenue growth of 32% in the first 9 months. So what's the secret sauce that's driving this revenue growth? Josh and Brenda will provide color on the details, and we also outline them for you in our shareholder letter. But at the highest level, we provide products that solve real-world problems. Our solutions work; we make our customers happy, we keep them safe, and the public benefits. So we benefit and our shareholders benefit. I've been spending a lot of time with customers and communities on our Moonshot goal because helping the public to dream with us deepens our relationships and answers broader questions about why we invest in the areas that we do. It also paves the path for us to keep innovating in areas that will make a difference. We have been really heartened by the buy-in we've seen on the Moonshot, bringing together groups that you don't normally see alongside each other. These include the Fraternal Order of Police, the African American Mayors Association, the Major County Sheriffs of America, the National Organization of Black Law Enforcement Executives, and the National Policing Institute, to name just a few. A common reaction I've been getting about our moonshot is, well, this all sounds great, but how are you going to do this? Look, we don't have all the specific answers just yet. Just like when Jack Kennedy challenged the nation to put a human on the moon, not all the technology existed yet. But we have a good idea of where Axon can invest to move the needle. Using technology to solve deeply entrenched challenges is why I founded the company and why we're here today. Axon has been and will continue to double down on our investment in things like nonlethal tools, such as our enormously successful TASER platform. We believe the majority of TASER adoption remains in front of us. We're still under 10% penetrated in terms of our global Total Addressable Market (TAM). And we're working on some really exciting technology over the next 10 years to help hit our goal. Number two, virtual reality; we're seeing a lot of interest in our VR training, which we sell on a subscription basis to customers. Number three, cameras and sensors that never miss a moment. Over the next few years, you're going to see us introduce next-generation body cameras, and we'll keep them tied to our real-time operations and our devices, which brings me to number four, real-time and remote response. The public safety sector deserves public safety-grade communications tools that are as easy to use as consumer technology. They deserve better situational awareness, and it will help them improve their decision-making and their ability to respond effectively. We also believe that remote response can limit human exposure to danger. Our thinking is that moving the officer from harm's way leads to safer outcomes for everyone. This is why we're investing in Axon Air, our drone solutions as a first responder, as well as counter-drone technology. Number five, we're investing in community impact, engagement, and feedback tools, such as My90, which is a tuck-in acquisition we completed last year of a company that essentially allows the public and rank-and-file officers to anonymously deliver feedback to police leadership. This tool is already helping police departments deepen trust with their communities. Number six, we're investing in more comprehensive and actionable responses to resistance reporting. This includes both traditional use of force and de-escalation data. Data collection tools today either don't exist, or they don't communicate with each other very well, or the data is just not collected in a way that's very useful. We believe the public is hungry for better data, especially on incidents involving use of force. We believe we can meet this need. We need this data to reach our Moonshot. Now we know the Moonshot goal will not be easy, but we also know that the private sector and companies like Axon have a unique role to play. As I look at our team, which includes leaders like Josh and Britney, I'm confident that they'll ensure we continue to invest prudently with a high degree of accountability to all of our stakeholders, driving the business model that creates impressive value, solves some of the most challenging problems facing modern society, and delivers great shareholder returns. So with that, I'm going to turn it over to Josh.

Thanks a lot, Rick. During last quarter's call, I mentioned that the primary thing we can control is where we collectively focus our attention. Our sights remain set on continued top-line growth, which I will address, and margin expansion over the long term, which Britney will cover. We are increasingly confident that we can do both well in parallel. On the top line, we are very pleased with quarterly revenue of 34% and our Q4 outlook for 40% growth at the midpoint. We're having a strong year, and we are seeing a strengthening of demand across all product lines. Britney will unpack the revenue growth in the quarter for you shortly. But I'd like to take a moment to touch upon what we believe will sustain healthy growth rates of 20-plus percent for the years to come. We're growing along two axes. The first is expanding our product suite for existing customers. Both Rick and the shareholder letter talked about a product roadmap where we believe we can continue to deliver premium solutions to customers at a compelling value proposition for them. We want to make it super clear that our state and local law enforcement business is nowhere near saturated, and we see a long and wide runway for continued growth. We believe that in the next five years, you will see Axon emerge as the leading operating system for public safety, strengthened by our strategy of focusing on the customer experience and not cobbling together point solutions that don't work well together, which is the current state of the industry outside of Axon. The second axis is deferred buying into new markets by both adding new types of customer profiles or users and by expanding our core customer base. You can think of our core customers as falling into roughly four categories of funding sources: the U.S. state and local governments, the U.S. federal government, international government customers, and commercial enterprises. Simultaneously, the types of users we are adding to our platforms are expanding beyond law enforcement. We are adding attorneys, fire and EMS personnel, corrections, and the U.S. military, and the funding for those types of users generally rolls up into the four sources I mentioned. I'd like to update you on two of those four. First, our progress with the U.S. federal government and second, touch upon international growth. We are very excited about our U.S. federal government business. In the first three quarters of 2022, the federal government has booked contracts exceeding $200 million, up from an approximate $15 million to $20 million run rate just a few years ago. Annual revenue has grown to the tens of millions, and our deliverables now extend over the next several years. Our progress with the federal government is a direct result of our intentional investments in both sales channels and products. We have been building trusted relationships with agencies that are now finding value in our products and missions, and our commitment to helping them be successful. While we can't necessarily name all of those customers, the breadth and depth of the federal government's interest in our entire product line continues to excite us. Now, turning toward global expansion. We continue to refine our international go-to-market strategy. We see two things as being the drivers and even the accelerators to international growth. The first is continuing to innovate on our TASER platform. We believe the total TASER installed base has room to grow by more than 5x over time. As we continue to develop technology that potentially matches a pistol in terms of stopping power, we think we have the opportunity to become the primary defense weapon in several international markets. The second thing we are focusing on is helping European customers overcome their historical resistance to cloud solutions. This is a playbook we ran in the U.S. starting in around 2012. Domestic state and local customers at first were very averse to cloud-hosted software, and we successfully evangelized the cloud to build a business that now tops $400 million in annual recurring revenue. We are starting to chip away at cloud acceptance in the EU, and we see European governments starting to adopt other commercial services for cloud, and we believe that this bodes well for our international SaaS business. Just like in the U.S., once we overcome that initial aversion, strong adoption of evidence management will follow. Finally, last quarter, I told you that I am working on building the team that Axon needs for the next five to ten years. We are thrilled to introduce Brittany Bagley, our Chief Financial Officer and Chief Business Officer. She brings a wealth of experience not only as a public company CFO but also as a seasoned board member and investor in the technology segment. We sought to attract an executive who brings a Next Play mindset, versatility, mental toughness, and a strong capability to deliver outstanding outcomes, and we are excited that Brittany brings all of those qualities to Axon. Based on working with Brittany over the last 40 days, I can say with confidence and excitement that the future of Axon's core strategic and financial functions is very bright. Now I'll hand it over to Brittany.

Thank you, Josh. Hi, everyone. I'm thrilled to be on my first official Axon earnings call. I want to start with a big thank you to the team for making it such a great quarter and to Jim Zito for doing such a nice job in the interim CFO role. It's an exciting time to have joined such an incredible company. I'd like to share a little about why I joined and where you'll see me put my focus over the coming quarters. While there were many reasons to join, three main ones that I would like to highlight include the strong leadership team, the company’s inspiring mission to protect life, and the compelling business model. On that last one, especially, I think the combination of the hardware ecosystem the company has been building along with innovative software solutions creates a powerful flywheel that is both high growth and profitable, providing a relatively rare position in the technology world. Additionally, delivering mission-critical products to public safety customers who purchase on long-term contracts makes Axon's revenue both recurring and dependable. As Josh discussed, we continue to have a lot of growth in front of us, and I look forward to supporting our mission and a profitable growth trajectory. To that point, my areas of focus will be on helping the team continue to execute and deliver strong results over the next several years. As both CFO and Chief Business Officer, I get to take a strategic and holistic view of the business to ensure we're making the right long-term decisions to deliver on our mission and our financial promise. Near term, that means spending time better understanding Axon's gross margin potential and how I can help move the needle on other metrics we care about, including overall profitability and cash flow. We see opportunities to improve gross margin by investing in automation, driving manufacturing efficiency, and improving fixed cost absorption as we scale. Driving the revenue mix further towards software is also a key gross margin lever over the longer term. We are also focusing on controlling operational expenses by enhancing financial discipline while still investing in research and development and sales channel expansion to support future growth. In addition to leaning into operational areas of the business, I am also focused on helping Axon to deliver upon its strategic ecosystem vision, leveraging partnerships and investments in M&A to truly become the leading technology hub for public safety. Turning now to the quarter. Our domestic business grew 37% year-over-year in Q3 and continues to make up more than 80% of our revenue. This strength came across the board, supporting strong TASER segment growth at 19% along with great Software and Sensors segment growth at 51%, which was driven by Sensors growth of 51% and Axon Cloud growth, also at 51%. One of the great things we're seeing domestically is strong demand for the premium versions of our products and bundles. Beyond the strength in our core business and the traction we're seeing on our software and cloud revenue, we continue to be excited about other areas of growth, including our international business, which delivered 20% growth in Q3. We had a strong Q3 gross margin of 62%, which represented more than 100 basis points of sequential improvement. The increase was primarily due to the strength of Axon Cloud and the overall product mix in the quarter. Axon Cloud gross margin in Q3 benefited from our new long-term contract with Microsoft Azure. While this benefit will continue, we also have low to no margin professional services costs that support the setup of these contracts, and the mix can change quarter-to-quarter. That doesn't change our view on exceeding the long-term target of 80% plus for the software business, but we do expect quarterly variations as a result. In addition to the sequential gross margin improvement, the strong top line revenue allowed us to achieve good operating leverage in the quarter, resulting in adjusted EBITDA of $68 million or a 21.7% margin. Finally, I wanted to touch on our outlook. Given the strong quarter, we are raising our annual revenue guidance to a range of $1.15 billion to $1.16 billion, which reflects about 34% annual growth at the midpoint. This also implies Q4 annual revenue growth of 40% at the midpoint. Turning to our adjusted EBITDA, we are raising our outlook from $200 million to a range of $215 million to $220 million, which we believe demonstrates strong performance on profitability. Our Q4 adjusted EBITDA is expected to be in the range of $49 million to $54 million. Implied margins are down slightly sequentially from Q3 on product mix and less operational expense leverage but remained strong overall with an almost 19% EBITDA margin implied at the midpoint for the year. We are proud of our performance and outlook, and they speak to the bigger picture that Rick and Josh talked about, which is the overall strength of the business we are building. We look forward to delivering another strong Q4 and setting ourselves up well for 2023 and as we execute against our financial objective of profitably delivering a 20%-plus top line compound annual growth rate going forward. With that, I would like to open it up to questions back to Andrea.

Thank you, and we have you all in the queue. So if you're on the call, assume we've got you in the queue. Thank you so much. We'll take our first question from Josh Reilly at Needham.

All right. Very impressive results during the quarter. I guess maybe starting off, you had a pretty significant revenue beat here, obviously. How much of a tailwind are you seeing now from stimulus government funds from programs like the ARPA beginning to hit budgets? Or is that something that you see more of an impact in 2023, and beat in Q3 is driven more by budgets that haven't been impacted to date by those budgets?

Yes. I don't necessarily think there's a ton of correlation between our momentum and results in any one-time or kind of recurring government subsidy for products. Ultimately, we're building a very strong business where there's a very high return on investment on our products, and our customers continue to see that and not only buy more of them but buy more and more premium levels and licenses. While those are nice moment-in-time types of tailwinds for some customers, I don't think they have any major implication on our continued growth, and we're very confident that independent of those factors, we're building a very strong and consistent business.

Got it. That's super helpful. And then the TASER gross margin was down sequentially and remains probably below where you guys wanted. I know that's a focus now for Brittany as you're evaluating cost there. But was there anything specific in the quarter that brought the margin down sequentially? Or any color there would be helpful.

Yes. I would say that we have been investing in everything related to our manufacturing capacity as well as supply chain for the TASER. You've seen that impact the gross margin this quarter and a little bit year-to-date. I think it will be one of the big areas of focus as we look to improve gross margins, ensuring we can scale into those costs and gain leverage on gross margins over time.

Got it. Congrats again.

Next question from Jonathan Ho at William Blair.

Let me echo my congratulations as well. I wanted to start out with your commentary around sort of the higher-end bundles and maybe customer behaviors that are leading to more selection of that higher-end bundle. I just want to understand sort of why you're seeing this behavior and whether you expect it to purchase or not?

Yes. Certainly, Jonathan. I think the first thing I'd say on those bundles is, even though we're seeing a lot of demand, there's a white space ahead of us in terms of the adoption of those bundles, especially in state and local. The adoption is driven by the idea that in those bundles, we're adding more and more value-added add-ons. Jeff's team is doing a fantastic job understanding some of what the customers are wanting in future releases of our products and then going back and building those things that are highly valuable. An example of that is transcription. Another example is VR, both of which exist in our more premium version of the Officer Safety Plan, and that's driving a lot of customers toward those bundles. We'll continue to iterate on that strategy and make sure that the most highly valued features appear in bundles in a way that excites customers about the potential of buying all of these items and features at one time and one license.

Josh, I would add to it as well. What I'm seeing with customers is that I can't think of a customer that's moved up to a premium bundle and gone down the other direction. The more they engage with us, the more value they see in it, and there's a kind of flywheel effect where customers just want to put more of their solutions with Axon. They struggle with technology; they're hamstrung by lengthy, complex procurement rules that make it very difficult for them to be agile. I think we've earned their trust, and it's really essential for us to continue earning it every day. It does seem to me that they're consistently moving up the ladder each time we launch something that integrates with the other products, and that's paying off well.

Excellent, excellent. And just as a follow-up, with the U.S. federal opportunity, what has been most impactful in terms of helping you break into this market? I mean, obviously, it's been a target for a number of years, but it seems like things improved from a step-function perspective. What initiatives or what level of education do you have to sort of provide to get further into the U.S. federal opportunity?

Let me start first, and then I know Josh is going to want to talk to this too. I would say this is where we see the advantage of being a mission-focused business. A lot of times, that can sound like puffery, but it really is true. We are running this business to solve problems we are passionate about. We also want to ensure we have financial models that make sense. The finance comes from the problems we solve, and that focus is reflected in every employee. I'm impressed with the team and their emphasis on keeping our customers productive, safe, and happy. We give our teams a lot of latitude to make things right, which pays off in strong customer references and relationships.

Yes. I'd just add to that, Rick, especially on the last point. For us, every problem starts with building a strong team, full of subject matter experts that we can trust their instincts and expertise to execute. When we brought Richard in, that was two years into our business, and we hadn't cracked the code on how to run a growing federal business. Bringing him on along with a very talented team, combined with more product focus, has unlocked this amazing opportunity. Even though we've had a phenomenal year and seen a literal 10x in bookings, we still think we're very much on our own side of the field and have a long way to go to maximize the full opportunity across federal, but we really believe we have the team in place to do that.

Next question, Erik Lapinski. Go ahead, Erik, from Morgan Stanley.

I maybe want to just follow up a little bit on the federal side because it looks like at least the deal with the Veteran Affairs was pretty comprehensive across the product portfolio, whereas I know you're in other federal agencies, maybe with some products but not all of them. I guess just would be curious on that, like as you're moving into newer federal agencies, do you see the opportunity for more of a sizable kind of across-the-spectrum deal upfront? I maybe haven't seen one that included fleet previously, so it would be good to just kind of understand the vision there that some federal customers are having and if you are seeing more of that.

Let me start first, and then I know Josh is going to want to talk to this too. I'd say this is where we see the advantage. We talk about being a mission-focused business. That can sound like fluff, but it's true. We are running this business to solve problems we're passionate about. We want to run a rigorous business with financial models that make sense. The finance comes from the problems we solve, and that focus carries through our team. The team is focused on keeping our customers productive, safe, and happy, giving them the confidence to engage us for a larger portion of their technology ecosystem.

I think Jeff was going to chime in first, Rick.

Yes, sure. I totally echo everything Rick said. And combined with that, you've heard us talk a lot about scale and our flywheel and leverage over time. The same is true as we expand into these markets. You can think of leverage where we've spent a decade on our core cameras and TASER products. We have small, dedicated parts of our engineering team focused on expansion markets like federal who can inherit common aspects of those products that are suitable for all segments we're competing in, but then overlay what our federal customers need to tailor those existing products to unlock opportunities. Over time, as we grow larger and better situated, we may build bespoke products for the federal market after we've established trust.

And I'd just add, finally, to your question about fleet specifically, that in federal, we may start with one or two products that are a nice fit for the customer and expand from there. There will be other customers that see value across the board and want to engage in a more extensive contract upfront. Either way, we believe that longer term, the customer ends up very happy with Axon's full suite of products.

Awesome. That's really helpful. And maybe if I could just sneak in a follow-up. More focused on records. It looks like in the release, you included at this point, you kind of have 40 agencies and 12 doing a full replacement. Just as we think about, obviously, a full replacement, that's a very intensive workload. How much are you being relied on for that type of work? Do you see opportunity to potentially streamline that or build software around it over time that makes it more simplified in moving fully to records and just to understand maybe some of the timelines you're seeing with those 12?

Sure, I'll take that. Like we said, these are big, complex deployments, just like ERP systems, and nothing will change the fundamental physics that those are big, complex systems because they have significant work to do. We're approaching it in a humble and disciplined way, one deployment at a time. We're steadily improving in agencies adopting records overall and for full deployment. Our ability to scale the number of projects we handle simultaneously and the bespoke work required for each deployment is going in the right direction. So I think you'll see continued steady and accelerating momentum there, but we also want to ensure we're not overstepping and getting ahead of ourselves.

Awesome. Congrats on the good quarter.

Keith Housum at Northcoast.

Sure, mute my stuff here. Guys, again, everybody else is saying during the phenomenal quarter. But as we look at some of the individual results, Axon Fleet sales were down 15% from the prior year, and Axon's down as well. Could it core even better? I'm assuming if you had access to some of the materials you wanted there. Perhaps provide a little bit of color on some of those two sides that did not perhaps do as well as some of the other items in your portfolio?

Yes. Certainly, Keith. I don't want to speculate on what the quarter could have been. We're proud of where we landed. But I think it is an indicator that the future looks bright for various reasons, including increased fleet shipments. We did run into one or two minor issues with the hubs that power our fleet unit from our supplier. The good news is in Q4 you'll see that demand rebound substantially, and we expect to see our best-ever quarter of shipments for fleet specifically in Q4, with strong demand continuing well into the future. We're very excited to keep building on our market lead in that product line.

Great. And just as my follow-up and maybe, Brittany, I put you on the hot seat here for your first time. As we talk about the Moonshot goal, how does that fit into Axon's existing R&D budget and the financial profile?

Yes. The way we philosophically think about it is that we can achieve both really healthy top-line growth and head toward that Moonshot and do that profitably, maintaining a solid bottom line. To your point, that will be a balance for us going forward. But of course, with our growth, we're not going to stop innovating. We're not going to stop investing in R&D. We will continue to come up with great new products. A lot of those will be focused on helping achieve that mission while conforming to the long-term financial profile we aim to establish for the company.

So, I guess I hear it in our way: you don't have to see a significant expense increase for R&D as a result of this large goal?

No. There's nothing specifically we're calling out on that. I do think we will continue to invest in R&D, and we've been consistent in saying that, but this wouldn't necessarily change that profile in a way that we are calling out today.

Sami Badri at Credit Suisse.

All right. My first question was on the 20% annualized growth target. I was hoping you could kind of give us an idea of how you're going to get there, either by new subscriptions or existing subscriptions that are seeing some price increases as a function of new features. Maybe you could kind of give us an idea on the composition of that 20% growth. And then my second question is on CapEx. It looks like your guidance was reduced for the year. Could we just go through the puts and takes on that, please?

Sure. I'll start with the revenue growth question and then hand it over to Brittany for the CapEx question. I think, Sami, there are many ways to achieve exciting growth, and it's not just one specific thing. Some of the things you mentioned are very much in play. We'll invest in new products that delight customers and cause them to buy more at higher pricing tiers and more premium bundles. But it boils down to two specific paths. One is building new products for our existing customer base, especially in state and local U.S. markets, and second, applying existing products to newer markets like international, federal, and enterprise. We believe we're doing these things well in parallel and will do them even better next year. That opens up growth opportunities along both axes. I'll hand it over to Brittany.

Thanks, Josh. I think the only thing I would add is I find it exciting how many levers the business has in terms of how it can grow. There is enormous opportunity. You just have to focus on execution and go after the right ones, but the opportunity is there. From a CapEx standpoint, we just highlighted that we are making some CapEx investments this year, and some are getting pushed out to next year. It’s more of a timing issue than a fundamental shift in strategy.

Got it. I have one more question, and it's mainly on working capital and just inventory. Do you foresee inventory levels consistently stepping up until the end of 2023 due to supply chains, components, and other factors that are essentially increasing inventory levels?

I'd say there are two things driving our inventory investments. First, we are still facing supply chain challenges. We have products that remain supply constrained that we want to bring back in stock and restore inventory levels. We also need to invest in inventory to support top-line growth. You should anticipate continued investment in inventory strategically. At the same time, we want to ensure we're managing strong free cash flow while maintaining the necessary inventory.

Paul Chung with JPMorgan.

Yes. Okay. So just another follow-up on the free cash flow. You're posting record numbers here and have seen free cash flow conversion surge as well. Talk about how the firm has driven the higher conversion? Is this kind of sustainable here?

I think it's been a big area of focus. The team has done a nice job specifically improving our collections and paying more attention to accounts receivable. That's a significant part of our free cash flow success. As we progress through the year, we need to balance inventory investments with CapEx while ensuring a solid return on investment. But we should expect some good free cash flow characteristics as we continue to focus on that.

Okay. Great. And then just a follow-up. On the investments you're pursuing, we saw a lot of that at the show. So we're seeing some momentum across your investments. What excites you about the investments going forward?

Yes. I'll start and then let Jeff jump in a little. I'm excited about a few things. There’s an incredible ecosystem that the company has created where hardware and software benefit each other. More customers are buying premium parts of our business, which backs up our software's credibility. We need to invest in partnerships continuing to drive that ecosystem. But with my CFO hat on, we'll be thoughtful and disciplined about where we invest. We have a rare opportunity in front of us with that ecosystem as a growth lever. Bundling these products together makes each more powerful, which is just a fantastic opportunity.

Sure, absolutely. I think of it in three core areas. The power of our bundles is substantial; offering customers fair pricing with great value for a subset of benefits they want. Once they have that, they can access additional product benefits. The Axon network is becoming more real for customers as they adopt both our products and our partners' products. Lastly, the increasing connections from our software services, even for hardware that's already deployed, are creating fantastic synergies. Respond and ALPR-as-a-software connections to Fleet 3 are remarkable opportunities. Customers love the combination of having top-notch in-car camera systems that connect seamlessly with our cloud-powered solutions.

Will Power at Baird. Go ahead, Will, you are up.

I guess a couple of questions. First one is probably for Josh and maybe Jeff, but nice acceleration in the software revenue in the quarter. I'd love to get color around the key drivers of that. How much of that is tied to OSP 7+ adoption, attorneys, and dams? What's leading to that acceleration?

Yes, certainly, Will, nice to see you again. I think it's a combination of a few things driving more users to our premium licenses and expanding our user base for software-only use cases outside of core state and local law. You mentioned attorneys, that's certainly a big one, and there are others in that realm. We're also seeing increased adoption across Evidence.com within state and local, as well as in federal, international, and enterprise markets. We're focused on selling more into existing markets while opening up new markets in parallel, and that's where we're seeing results. There’s a lot more work ahead, as well.

Okay. And then maybe just a second question for Brittany. Just as we look at EBITDA margins going forward, I know you touched on it. It sounds like you expect EBITDA margins to dip. It would be great to get additional color. Is there a seasonal aspect here? Q3 obviously helped by revenue outperformance. But what's your outlook on EBITDA margin expansion over the next few years as we move into '23?

Yes. There are a couple of things in Q4. We talked about having slightly less leverage on our OpEx while continuing to invest as we head into Q4. We also mentioned that it's still a very positive margin for the overall year, approaching 19% EBITDA margins. If you look at last year and this year, gross margins have declined year-over-year, which is affecting our EBITDA margins. We've managed to achieve some OpEx leverage, so looking ahead, my focus is on digging into gross margins and finding areas for continued improvement that can support our longer-term EBITDA targets.

Jeremy Hamblin at Craig-Hallum.

Congratulations, Brittany. I want to follow up on that last point. Gross performance was solid, especially with the revenue upside related to body cameras. Now that you've been here for some time and have recognized the opportunities, I perceive a significant change in perspective regarding gross margin opportunities. I'm curious about the timing. How much low-hanging fruit do you think is available? If you're aiming for 500 basis points, how much is straightforward, and how much is more difficult? What is the potential timeline?

I would say this business has been well-run; there isn't glaring low-hanging fruit. However, it has come through many of the ongoing supply chain challenges. The company has been paying premiums and needing to invest in manufacturing capacity and automation. We're optimistic about seeing benefits going forward as we grow and achieve scale on these investments. You'll recall the software growth has gross margins that are higher. This product mix will be critical in the future. All of these factors will be crucial for driving gross margin improvement.

Okay. Also, it appears your OpEx growth might be changing as you've invested significantly over the last few years. While continuing investment is essential, could it mean that the rate of growth in OpEx might be lower than in previous years?

We hope to achieve good OpEx leverage as we continue to grow. However, I want to clarify we're committed to investing in growth. The opportunity in front of us is too significant not to invest in. We will ensure spending is thoughtfully allocated while achieving a strong return on those investment dollars. We want to keep propelling top-line growth while managing it profitably.

We'll take questions from one more list and then Rick will close this out. Logan Hennen from Northland Securities.

Congratulations again on another great quarter. For our first question, could you provide some insight into the percentage of sales that currently comes from the federal government and how you foresee that changing in fiscal years 2023 and 2024?

Yes. Logan, I appreciate the question, and thanks a lot. I don't know that we're going to go into that level of detail right now. Our focus in federal continues to be on growing bookings and total contract value, with the expectation that flows to the top line and revenue not only upfront but over time. At this point, we're not prepared to break out federal revenue but may reassess later.

Understandable. So our next question is, what should we anticipate for fourth-quarter bookings? What have you noticed so far? Do you expect it to be the highest in any quarter this year?

We do expect Q4 to be our highest bookings quarter of the year for sure and maybe even ever depending on a few factors. So we're certainly excited about it, but that's all we'll elaborate on right now.

Thank you, Logan, and thank you, everyone. We're going to have Rick close us out.

Thanks, Andrea. And of course, thanks to our shareholders. It is with great pride that we're able to deliver results like this, and it’s an amazing team. I have to tell you, Josh Isner, having watched him grow in his career, is an amazing team builder, and he gets a lot of credit for helping us find and recruit Brittany. This is her first call with you guys, but I can tell you we're already feeling the magic she brings to the team. Jeff and the remarkable team he has built over in product keep bringing in amazing talent. There's never been a better time to be at Axon or working toward the Moonshot. We didn't make that promise blindly; we have a clear vision for how to achieve it. You can expect to see a lot of really awesome tech over the next few years as we work. With that, I wish you all a happy holiday season. Thank you for your patience and sticking with us. Many of you have been following the company for a long time. We're thrilled to see past investments pay off and excited to show you how today's investments will pay off in the future. If I don't see you all, enjoy your holidays, and we look forward to talking to you in the new year.