Earnings Call Transcript - AXON Q2 2022

Operator, Operator

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. These risks are discussed in our SEC filings. And before we go to Rick, we will open with our earnings video.

Rick Smith, CEO

Awesome. All right. Well, I will launch in. Andrea and Angel, great job, as always, on the quarterly video, that’s fantastic. Great way to share all the exciting stuff with our shareholders. Okay. We're executing on what is shaping up to be a really excellent year. And our confidence in our growth extends well beyond 2022. We emerged from the pandemic and civil unrest of 2020 in our strongest position ever. And now we're fortunate to be able to leverage that position and strength, while many parts of the economy are experiencing uncertainty. We're seeing broad-based strength across our product numbers, and we're really energized by the growing number of agencies that are buying nearly everything we offer and signing up for 10-year contracts, sometimes even 12 years. It's exciting to see an agency go all in with Axon. We set a vision several years ago that an agency wouldn't just say, well, we have a TASER device or maybe we have body cameras and Evidence.com, but would instead simply describe Axon as their technology partner. And that's starting to happen now. When agencies sign up for all of our software solutions, plus our body camera, dash camera, the TASER 7, the VR training, our drone solution and so on. Customers are increasingly demonstrating their confidence that we are the right technology partner for them for the next decade. We made it easy for our customers to bet on us, because our team delivers. Now on to some other hours. We expect profitability to improve in the back half of this year. We expect to drive increased leverage coming out of Q2, when we had some expenses that won't repeat, more on that coming from Jim in a moment. Also, we recently launched an internal campaign called, spend it like it's yours to climb down on some low-hanging fruits such as travel expenses and swag. In fact, we created a new position of pointing a swag czar who must approve all purchases. Being scrappy is not new to Axon. We're just taking it to another level of rigor. I was recently quoted in the Wall Street Journal last week saying, it's good to go on a swag detox. Not every event needs a T-shirt, and we need to balance the need to travel against what we can do over Zoom, such as maybe sending one or two key representatives to be in the room and having others join online. We're continuing though to hire and invest in this environment, and we're disciplined about it. Our bar for talent continues to move higher, where we have seen other technology companies slow down their hiring that presents us with opportunity. And you'll see some of that in our increased headcount spending in the second quarter. Thinking back to 2008 in that downturn, we invested in creating the cloud and body camera business, while our competitors were pulling back. The results of that decision are measured in billions of market cap. I say ages favor the adaptable, and we see times like these when the work for talent pools as an opportunity to advance our mission, so we will come out of far stronger and more competitive. Our commitment to generating strong cash flow and operational discipline is shared among the entire leadership team. You'll see in our shareholder letter that we've revised our expected capital expenditures this year to reflect slower pacing on our net campus investments. We're adjusting our pacing to reflect a world that is still in flux, as we determine the best and highest use of the campus, optimizing for the new world of hybrid work, as well as the best and highest uses for our capital. It's more important that we get it right than we get it fast and we are preserving optionality. Finally, I feel great about the trajectory of our C-suite. Since our last call, Josh Isner was appointed COO; and Isaiah Fields, an 11-year veteran of Axon, was promoted to our Chief Legal Officer. Also, we've made a lot of progress with our CFO search, which Josh will highlight in a little bit more detail. In the meantime, Interim CFO, Jim Zito, hasn't missed a beat. Before turning over the call to Josh, let me take a moment to share my thoughts about Josh's leadership skills. First, Josh's promotion to COO was really a natural progression for him and for Axon. Josh has been a rockstar since the day he got here, and he exudes sheer confidence. He built the revenue stream and embodies our core value to own it. For the past 7 years, Josh has owned quarterly revenue delivery, where he helped us establish an excellent track record. Josh is highly focused on delivering results and executing and exhibits excellent discernment. I'm thrilled with our partnership and our working dynamics. We have a rigorous and healthy back-and-forth, and I'm very confident in his leadership during the next phase of rapid growth. And with that, now let me turn it over to Josh Isner.

Josh Isner, COO

Thanks a lot, Rick. I appreciate that and it's good to see everybody. In my new role, I'm humbled by the trust our team, our customers, and our shareholders have placed in me. We are working hard every day to deliver on our mission and drive exciting growth in tandem with margin expansion. Here's what that looks like in terms of where I'm investing my time and focus. First, I'm working on building a world-class team from top to bottom. As opposed to focusing on simply filling the needs of today, I'm working with our leadership team to build the team we need for the next 5 to 10 years. We will focus on a next-play mindset, versatility, mental toughness, and the capability to deliver outsized outcomes as the core characteristics of our team. That starts with the search for our new CFO. We have made a lot of progress in this area, and we are very excited about the candidates that we have attracted. We hope to have someone to announce shortly that I am personally thrilled about. As Rick said, I couldn't be happier about the partnership we've had with Jim. His steady leadership has allowed us to take our time with the search for a permanent CFO. He has been the consummate teammate and done whatever the team has asked. I sincerely appreciate Jim's leadership. Second, I'll be driving discipline and prioritization across the business. The one thing each of us truly controls is where we focus our attention. We have a lot of exciting opportunities to go after. And as you all know, we will unlock maximal value by focusing our efforts only in the areas where we can have the most impact and deliver the most value for our customers. That is the optimal path for shareholder value creation as well. For every opportunity we say yes to, we will say no to dozens. And when we do say yes, we will win. From there, our job is to block out the noise and execute. Third, I will be ensuring that we are aggressively pursuing our total addressable market opportunity. We value that at $52 billion, and it continues to grow as Axon unveils new products and unlocks new markets. We view our channel as one of Axon's core differentiators, and we will continue to invest into new geographies and customer segments such as commercial enterprises, federal and adjacent markets. We will also be scaling our VR, drones, records and dispatch businesses. For every single one of our product lines, our best days are ahead. That includes the TASER business, which is changing the world for the better, and it’s just getting started internationally. I think you're going to be very pleased with what you see unfold here over the next couple of years. And finally, the entire management team is looking forward to turning on the free cash flow spigot over the next several quarters, which opens up a lot of options for us as a company. This is totally within our control, and we are implementing a plan to optimize the level of execution in this area. We can do a lot better here. With that, I'll hand the call over to Jim.

Jim Zito, Interim CFO

Thanks, Rick and Josh. Hello, everyone. It's great to see you again. We had an excellent quarter, as you can see in our shareholder letter. Let me put some context around the results and how we are thinking about our outlook. Top line momentum continued with growth of over 30%, and gross margin improved sequentially. We delivered second quarter adjusted EBITDA of $50 million, a margin of about 17.5%, largely reflecting some expenses that were unique to this quarter. Let me unpack that for you. During the second quarter, we spent about $1 million on Axon ACCELERATE, our annual user conference, which has become strategically important to our sales pipeline, technology leadership and ecosystem expansion. Additionally, we committed more than $3 million in incremental mid-year bonuses to employees at the senior director level and below. This was an intentional decision given the team over-delivering on results in an environment where inflation was impacting their lives. We did so precisely because we had line of sight to stronger-than-expected revenue, both in the quarter and in the back half of the year, which is reflected in our updated outlook. We are especially pleased that we could issue this bonus without affecting our projected adjusted EBITDA margin percentage for the year. The fundamental strength of our business allowed us to demonstrate our commitment both to our shareholders and to the team members who work so hard for our customers. With that context on the quarter, we are already focusing on moderating expense growth going forward to help drive adjusted EBITDA margin expansion. Our working capital needs were $23 million in the quarter, and we have already started to see some of that reverse in July, which is driving us to maintain our full-year adjusted free cash flow outlook. Finally, I'd really like to highlight our commentary in the shareholder letter about our technology partner ecosystem, which was exciting to see in action this past May at ACCELERATE. In June, we renewed our strategic technology partnership with Microsoft Azure, who will continue to be the primary host of our software platform and cloud. This is a great partnership for us in many ways. Microsoft is a global leader in cloud technology. Of course, they need no introduction. Our customers trust Microsoft and thereby feel secure putting their data into our cloud. As part of the renewal, we extended our contract term for another six years, which gives us long-term pricing certainty and cost visibility for our Axon Cloud business. The renewal supports our software gross margin target of more than 80% and also paves the way for faster international cloud expansion without diluting this target. And what's also excellent about this partnership is the ability it affords us to offer pricing predictability to our own customers. So it's just a winning deal all around.

Operator, Operator

All right. Thanks. Here, we all are in the gallery. We will take our first question from Will Power at Baird. Go ahead, Will, you're up.

Will Power, Analyst

All right. Great. Thanks, Andrea. I propose the two that maybe the next Analyst Day would be at the racetrack and we can help you test ALPR. I'd like a couple of quick questions. The cloud growth continues to be strong. Obviously, Evidence.com is a key component of that. But I'd love to unpack any of the other kind of key drivers there. What are you seeing with record management, any of the other kind of key pieces of the software portfolio, what does the traction of trends look like?

Josh Isner, COO

Yeah. Thanks for the question, Will, and nice to see you again. I'd say for us, we've talked about this a lot in the video. I mentioned our flywheel for us. The biggest thing we can be doing quarter-to-quarter is driving the number of officer safety plan subscriptions up. That bundles essentially all our products outside of dispatch that we sell – sorry, dispatch and fleet. And it provides optionality for customers to opt into records, but it provides a nice base for ARR between the license, all the software add-ons, the TASER, the virtual reality. And so for us, that's really the major focus in our state and local business is to drive as many renewals and purchases of that plan as we can. In addition to that, I think we are seeing exciting growth in some of our newer segments, one of which is federal, another is international. And then even in newer ones like justice and corrections, we're seeing an uptick. And so I'd say, all of those are combining to just provide a lot of wind in our back, as we go on here, and we certainly still feel like our best days are in front of us.

Will Power, Analyst

That's great. Josh, maybe just one more for you. As you look at the international opportunity in front of you, any perspective on how the macro climate is or isn't impacting sales cycles, demand trends, et cetera, that's kind of the broader question. And then number two, tied to international in your prepared remarks, it sounds like you're feeling better and better about the TASER opportunity. What – maybe just any other color or perspective what's driving that optimism?

Josh Isner, COO

Yes, absolutely. So internationally, in general, to answer your first question, I don't think we're seeing any kind of macro impacts at this point in terms of adoption, interest, buying cycles and so forth. I think we've performed in the TASER segment. We are seeing national police forces buy larger order quantities of TASERs than we've seen in the past, which is really exciting. Because when we're talking about a national police force, five, six, seven times the size of NYPD, and they're starting their purchases and in the thousands, the high four digits into five-digit, thousands of units of orders, like it's very exciting, because we know that we're very good at kind of the land and expand type of playbook. And so, we look at these as really good indicators for the future of our TASER business, and we are working with more and more national police forces across the world. And I'd say on top of that, our execution in our Tier 1 markets, the UK, Canada, and Australia has been really strong, where we continue to see more adoption of Evidence.com and body cams, but also kind of our newer features on Evidence.com like real-time streaming and transcription. And so, the next step for us internationally is going to repeat that same level of execution in Tier 2 and Tier 3 markets. And there, we've got to do a really good job of evangelizing the cloud and helping customers understand why the cloud is far, far better as a mechanism for storing and sharing digital evidence. And so, we're working through that process. We'll continue to build there. But we're really excited about all the work our International team is doing and they're really focused right now on driving the results upward.

Will Power, Analyst

That’s great. Thank you.

Operator, Operator

Thank you. We'll take our next question from Erik Suppiger from JMP. Go ahead, Erik.

Erik Suppiger, Analyst

Thank you for taking my question. It was a good quarter. First, can we assume that backlog increased from the end of Q1 to the end of Q2? How should we view the backlog that carried over from Q4 into Q1, and did that carry over into Q2? Secondly, could you provide any updates on supply constraints? Has the situation improved, and what is our current status regarding supply chain constraints?

Josh Isner, COO

I can still –

Jim Zito, Interim CFO

I take the first half of that. I guess, yes, so we can disclose future contracted revenue, Erik, in the letter. So that grew to $3.3 billion. So it was up versus a little bit less than $3 billion as of the end of Q2. And then, yes, there's really no – nothing – in Q4, we had some unfulfilled demand that rolled into the first half of the year, but we're sort of back to more normalized levels, obviously, quarter-to-quarter order inflows. And I guess, Josh, do you want to take the supply chain, please?

Josh Isner, COO

Sure, thing. And I'd just add to that, just traditionally in the back half, revenue performed stronger than the first half. So we're – we see plenty of demand still and certainly are going to execute against that demand. In terms of supply chain, in general, our supply chain team has been one of our top-performing teams at Axon. As you can see in other businesses, companies are getting hit hard by supply chain constraints. Our team has just done a masterful job navigating through some of those challenges. And frankly, this is one of the reasons we do keep some inventory on the shelves to get through periods like we've had over the last few quarters. And so we think at this point, things look better and better each quarter. Like we do feel that we're through the worst of it, and that will continue to be able to build the supply orders, but also start to build a little buffer there as well on our TASER and core body camera lines.

Erik Suppiger, Analyst

Would you care to guess as to timing when supply chain might be relatively normalized? Any thoughts where we'll be as we enter 2023?

Josh Isner, COO

Well, at this point, I don't think we're guessing. We're just executing against our plan. And I think by the end of this year, we'll certainly see some buffer in the TASER 7 and Axon Body 3 product lines. And from there, I think it will just be about optimizing the level of inventory we keep on the shelves. And so from an investor results perspective, I wouldn't plan on seeing any kind of abnormal activity in either product shipped or inventory backlogs.

Erik Suppiger, Analyst

Great. Thank you.

Operator, Operator

Great. Thank you. Next question is Sami Badri from Credit Suisse. Go ahead, Sami.

Sami Badri, Analyst

Hi. Thank you. Earlier, there was a mention about profitability being better in the second half of 2022. You also mentioned that revenue growth or production in the second half typically outperforms the first half. Is there a particular segment or product that is showing strong profitable dynamics in the second half, contributing to your operating leverage? That's my first question. My second question is regarding the free cash flow guidance, which has been reiterated and remains unchanged for the fiscal year 2022, but it seems there have been some changes in capital expenditures. Could you elaborate on that?

Josh Isner, COO

Sure thing. I'll talk briefly about the free cash flow element there. Remind me of your first question, Sami.

Sami Badri, Analyst

Products that are enabling better profitability in the second half of 2022.

Josh Isner, COO

Yes, I'll address those two points and then pass it to Rick regarding the campus aspect. Overall, we anticipate stronger bookings in the latter half of the year across all products. This period coincides with the end of the fiscal year for many significant markets in the US, including the federal government. As budgets conclude and funds become available, the initiation of new budgets often includes allocations for our products, making this a notably active time of year. The primary driver of profitability is the TASER business, where we expect promising outcomes. In general, we see substantial potential for growth in the latter half of the year. Regarding free cash flow, we have reiterated our guidance because we believe it closely mirrors inside sales dynamics. We need to connect with customers, adhere to a structured process, ensure our team is well-trained, secure commitments, and follow up effectively to reach predictable outcomes. Jim and I are collaborating on this, and we've recently appointed a new accounts receivable leader. I am personally dedicating time to work with our accounts receivable team to establish a playbook aimed at measuring efficiency and productivity. This aspect is clearly within our control. Additionally, as you pointed out, Sami, when we link this effort with improved EBITDA—both in terms of dollars and margins—there is significant opportunity to enhance free cash flow in the latter half of the year, which is our focus. Now, I will turn it over to Rick to discuss the new campus.

Rick Smith, CEO

Earlier this year, we anticipated an increase in spending on the new campus. However, we are now indicating a slowdown in that spending. This adjustment is due to several factors, including the rise in construction costs due to inflation, which has been more significant than expected. Additionally, with the resurgence of COVID, we've recognized that the future of work will likely be hybrid. This realization prompts us to rethink the utilization of the land, prioritizing collaborative and customer-centric events, along with the necessary space for manufacturing and warehousing. We may shift our focus from a high volume of in-office work to embracing a hybrid work model. Given the current environment, we also want to maintain some flexibility with our cash resources. Therefore, we feel it is prudent to slow down, reassess the post-COVID landscape, allow construction costs to stabilize, and take the necessary time to fine-tune our plans. The world is continually changing, and we want to ensure that we approach this thoughtfully.

Sami Badri, Analyst

Got it. Thank you.

Operator, Operator

All right. Next up, Keith Housum with Northcoast. Go ahead, Keith.

Josh Isner, COO

Hey, Keith, it looks like you're on mute.

Keith Housum, Analyst

Sorry. Thanks, guys. Appreciate it. Looking at the TASER gross margins and your commentary regarding improvement in the second half of the year, I mean, previously, I think the manufacturing automation was going to happen when you're going to build the campus, but it sounds like things are changing. Perhaps touch on what your plans are for the second half of the year of improving the automation in the manufacturing process?

Jim Zito, Interim CFO

Yeah. I would say that's not fully dependent on the campus headquarters. We're already starting to build out that automation. I think part of what we're seeing in the first half was really pressure in terms of growing into our expanded manufacturing footprint. So we've been investing to build out the footprint and capacity to build. And I think as we grow into those build plans, I think we'll see better overhead absorption in there. And I think that's not contingent upon the new building.

Keith Housum, Analyst

Got you. And then the professional services part that hurt the software and sensor gross margins. Was that in advance of the CAD and the systems you're putting in, or where was that spending being done?

Jim Zito, Interim CFO

I believe it includes CAD and RMS as the software components, but there's also a significant fleet aspect. The fleet installations have increased notably. All these factors combined have caused the PSO revenue to represent a larger share of the cloud revenue, which is driving the growth of high-margin software cloud revenue. This establishes a foundation for future growth. Additionally, I consider PSO to be crucial for managing customer experiences and ensuring long-term customer loyalty.

Keith Housum, Analyst

Okay. Thanks Jim. Appreciate it.

Operator, Operator

All right. Awesome. Thank you so much. Next question from Jonathan Ho at William Blair. Go ahead, Jonathan.

Jonathan Ho, Analyst

Hi, good afternoon. I just wanted to understand, first of all, with your headcount increases, can you talk a little bit about where you're making sort of those incremental hires? And what sort of changed for you to want to make those hires now? I think you referenced a better hiring environment, but just curious in terms of your thinking.

Josh Isner, COO

Yes, absolutely. Over the past few years, we have aggressively expanded our workforce across all segments of the business. Now, in many areas, we are starting to grow into that size and do not need to hire as aggressively. The main exception is in product development. We have many great ideas and prioritize what we undertake based on our potential for growth and the capabilities of our team. As long as we can find talented engineers and product managers who can help us accelerate product delivery and create solutions that can significantly improve public safety, we will continue to invest in that area. Looking ahead to next year, our approach will shift to becoming more streamlined in our hiring plans for SG&A while maintaining a strong focus on R&D where we can be aggressive.

Jonathan Ho, Analyst

Got it. As a follow-up, could you elaborate on the cost-saving initiatives you mentioned, particularly regarding travel and expenses or other areas? I’d like to understand your perspective on opportunities for reducing spending. Are you addressing an oversight issue from the past, or is this more about implementing tighter budgetary controls? Thank you.

Josh Isner, COO

I think it's not necessarily a lack of oversight. We have strong controls and processes in place to monitor expenses. However, at times, we might have become a bit excessive regarding how we approach certain things, such as the number of people who attend customer meetings or the amount we spend on promotional items. With the absence of being in the office, we've relied on these promotional items to connect with our employees. Therefore, there are opportunities to improve efficiency in these areas. This is not a criticism of anyone or anything we have done in the past; it simply reflects that the landscape has changed a bit. We're experiencing significant revenue growth, and it's about leveraging that growth effectively without compromising employee sentiment at Axon. I believe we can manage that balance quite well.

Rick Smith, CEO

Yes. I want to add that in any community, not all messages resonate at the same time. We go through cycles, and a few years ago, we had a challenging year that gave us a chance to lead and say we wanted people to really focus on being efficient. We encouraged everyone to find smarter ways to get things done, rather than just adding more resources to problems. We've welcomed many new employees and have our usual expense controls and training in place. Given the current situation, with the overall market down and inflation up, we're noticing other companies are cutting back their investment plans more aggressively. We view this as an opportunity to engage with our employees and encourage them to be mindful of spending. If we all commit to being efficient, we can continue investing in growth without having to reduce our investment plans. It's important to adapt to the changing macro environment. We want to connect with our employees about their concerns regarding the economy and highlight that being prudent with expenses will allow us to keep investing in what matters. Our hiring has picked up significantly, partly because the macro environment means we have fewer competitors. We're succeeding in attracting talent as we're not facing as much competition from other tech companies at this time. Now is the moment to focus on accelerating our growth, and I hope this provides some context for how we aim to align everyone in the company.

Jim Zito, Interim CFO

The fact one thing I'd probably add to that too is just like overall travel costs, as like everybody is seeing, also went up sort of at the same time as we sort of dealt with that sort of pent up post-pandemic demand. And I think as Rick said, we adjust to sort of how the best way to operate in the most efficient ways from a travel and hybrid perspective going forward. I think we'll thread the needle a little bit better in terms of meeting that. And I think everybody's plays are focused on that.

Operator, Operator

All right. Awesome. Josh Riley at Needham, you're up next.

Josh Riley, Analyst

All right. Thanks Andrea for the questions. So, TASER revenues, obviously, were very strong in the quarter, quite a bit above what we were modeling. You touched on this a bit, but how much of the back orders you expected at the end of last year to be complete? I think you had mentioned previously by the first half or now through, I think you mentioned it was like $30 million. And then can you remind us if there's any seasonality to TASER shipments and if that could affect Q3 or Q4 TASER revenue just so we have an idea sequentially.

Josh Isner, COO

Yes, absolutely, Josh. Thanks for the question. So, I'd say it's fair to say we're caught up on the TASER shipments from Q4 last year and we've shipped those over Q1 and Q2. And because sequentially, TASER shipments go up in the back half of the year that we still feel like Q3 and Q4 will be the highlights of the year revenue-wise. And so I think that's kind of the story Q4 tends to be a little a little higher than Q3, but over the years, we've seen the inverse of that as well. But as a back half, we certainly have a lot of confidence that will outpace the first half of this year in revenue.

Josh Riley, Analyst

Got it. That's super helpful. And then on the Axon Fleet units, those increased nicely as well quarter-over-quarter. Should we assume that all of those are Fleet 3 at this point, or are you still shipping any Fleet 2? And then how should we think about the level of supply constraint versus demand from that product?

Josh Isner, COO

Yes. In terms of the mix of fleet, there's still a little bit of Fleet 2, but mainly Fleet 3 and, of course, a lot of body camera shipments going out. Supply chain constraints, I'd say, we have plenty of supply to deliver on our guidance in the back half of the year. Product-by-product, when we get outside of the core TASER and body camera products, there's a little bit of flux month-to-month there. But in a macro sense, we are feeling great about where we stand from an inventory perspective.

Josh Reilly, Analyst

Awesome. Thanks guys.

Operator, Operator

All right. Jeremy Hamblin from Craig-Hallum. Go ahead, Jeremy.

Jeremy Hamblin, Analyst

Thanks for taking the questions. Congrats on the strong momentum in the business. So federal contracts are clearly a pretty key segment right now, really a big driver of the business, a ton of momentum there. I wanted to get a sense for whereas we've seen executive orders mandating federal agencies to use body cams. I wanted to get a sense for what you're seeing internationally in terms of that type of mandate, that type of adoption. Typically, there's been a decent lag period between instituting that type of policy. But there have been significant incidents, both in the English-speaking world as well as other places with surprises incidents. Japan comes to mind, where we wanted to get a sense for what the pulse is of other government agencies around the globe.

Josh Isner, COO

Yeah. I think it's a good question, Jeremy. And as you'd expect, it varies a little bit. I can say, just like the United States, Canada, Australia, and the UK were relatively early adopters of body cams. So even if a mandate were to come down at this point, I think, I don't know that, it would change the buying behavior all that much in those three markets. I think the market has decidedly already shifted to body cameras there. In other markets, we're starting to see – I position it like international governments are starting to dip their toe a little bit into the body camera world and start to understand kind of what's going to work for them and what's not. And so I think we do have a lot of opportunity there. First, with kind of small and mid-sized orders and then growth over time, and so that's really where we see kind of international going in terms of body cameras. But like I mentioned, we are seeing international governments start to deploy TASERs with a lot more conviction around the globe, and we should expect to see that continue for the years to come.

Jeremy Hamblin, Analyst

As a follow-up question, domestically, federal contracts, in terms of the value that you're getting in those deals, right? You're talking about a huge buyer, a buyer that's been mindful to look at getting best pricing, et cetera. So I wanted to understand, in terms of length of contracts there and kind of the value you're getting the ASPs. How that compares, obviously, without getting into exact specifics, but just understanding that a little bit in terms of that buyer.

Josh Isner, COO

Oh, federal mirrors – our federal government is generally mirroring what our state and local customers are doing pricing-wise. Certainly, we do have some commitments to make sure that we are recognizing the federal government and the most favored nations clauses in some of those contracts. But ultimately, we do feel pretty good that those license types and sizing is similar to what we see. And far, far ahead of where our – when our state and local customers started to buy in large volumes, like the federal government has kind of skipped that phase of basic licenses and TAP, and they're buying a lot more frequently at higher license types, which is exciting.

Rick Smith, CEO

Yeah. And I would add, Josh, as well that we're starting to now invest in dedicated federal R&D. So in many cases, we're seeing the Fed customers interested in premium sort of features that might require a little more investment in certain types of hardening of different devices or software to meet certain federal requirements that in some cases can even lead to premium pricing.

Jeremy Hamblin, Analyst

Thanks for the color. Best wishes.

Rick Smith, CEO

All right. Well, obviously, another great quarter. I'm really proud of what the team was able to deliver. There's a lot going on in the world, and our team just really digs in, and Josh does a great job of keeping people focused and blocking out the noise. There's a lot happening in the world that we can influence, but there are also things within our control, and the more we focus, the better our results tend to be. I appreciate everybody joining us today, and we look forward to updating you in the second half. Have a great day.