Earnings Call Transcript - AXON Q3 2023

Operator, Operator

Hi, everyone. Welcome to our Third Quarter Earnings Call. Thank you for being here. Today, our prepared remarks will expand on the information provided in our shareholder letter published at investor.axon.com after the market closed. We hope you have had an opportunity to read that letter. During this call, we will share our business outlook and make forward-looking statements. Any forward-looking statements made today are in accordance with the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. These comments reflect our predictions and expectations as of today and do not guarantee future performance. All forward-looking statements carry risks and uncertainties that could lead to actual results differing significantly, and we discuss these risks in our SEC filings. Each quarter, we start with an earnings video to give you a sense of our business performance each quarter. This quarter, we are excited to focus on our federal business, which presents a promising expansion opportunity for us. Last month, we had a strong presence at the AUSA Conference, which is the Association of the United States Army Annual Conference. We will now play a two-minute video from that event before handing it over to Rick.

Rick Smith, CEO

All right. Thank you, AJ, and great job to Richard and his team at AUSA. It's truly exciting to see the energy that our team brings to these events. I was on the ground at AUSA and I'm super excited about what Richard Coleman and our entire federal team is doing. Welcome everyone to our third quarter 2023 earnings call. It's great to be coming back to you with another fantastic quarter. We also celebrated the company's 30th anniversary in September. Let me take a big step back for a moment and reflect on our founding ethos and how that translates to today. We've just driven seven consecutive quarters of 30%-plus revenue growth while growing profitability. And the formula has been very simple. First, we start by identifying a challenge or a problem that our customers face. Staying very close to our customers is part of our secret sauce. Every company says that, but we've institutionalized it through frequent technology summits at our headquarters where we bring in a couple of dozen customers at a time to listen to them and to share with them our prototypes and ideas that might not even be products until 2025 or later. We also have an annual user conference. Our engineers go on ride-alongs and sit-alongs and we foster many other touch points with our customers. I cannot overstate the importance of calibrating research and development decisions off of direct customer feedback. When we develop alongside our customers, it helps us get it right on the big picture like moving towards robotics security, virtual reality, fused intelligence, for example, and also helps us get it right on the millions of small details and user experience decisions to create a delightful product for our customers. This should reassure you, our investors, that our investment decisions are sound. They are geared towards products that customers want and they've told us that they will buy and it's designed to drive growth for years to come. We also stay close to the forefront of the innovation curve. So we can identify how technology can make things better, or fix problems entirely. This is how we were the first to evangelize cloud software to public safety in the early 2010s and why we believe we'll be first introducing generative AI tools in the 2020s. Our engineers are some of the best and brightest in technology. Like me, they are energized to go out and fix problems and they work hard at it. As a result, we end up with undeniably best-in-class product market fit. Strong relationships with our customers and employees who are motivated to partner with our customers to drive their success. Our growth today is driven by decisions we made five years ago. And while we enjoy an undeniable time advantage, while competitors are trying to catch up, we're now thinking five years ahead. We believe the R&D decisions we're making today will continue to drive growth for decades to come. And then, of course, we must execute on all fronts. So that's the formula, customer closeness, plus long-term vision, plus day-to-day execution equals value creation across the board, for the public, for Axon, for our employees, and for our shareholders. It's a winning equation and we're excited about that decade ahead of us. Before I turn it over to Josh, I'd be remiss if I did not acknowledge the wake of escalating global events. These conflicts, wars, violence, and unspeakable acts, we're all seeing them today. We commiserate in the pain and suffering many people are facing around the world and because we are a globally connected company, the personal pain faced by our own employees and many of you listening to this call. Axon's mission, our mission is to protect life and we're focused on continuing to execute and grow that mission.

Josh Isner, CRO

Thanks a lot, Rick. Every quarter here at Axon leaves me more impressed with our team. As Rick highlighted, we just reported our seventh consecutive quarter with over 30% top-line growth. This kind of growth does not happen automatically. It's fueled by our ability to drive value to our customers and the momentum we have built over many years. While I'm pleased with our results for the quarter, I'll share with you a few things that keep me confident in the long term. First, I'd like to share my vision of where we will execute over the next five-plus years. We mainly sell into four key customer categories; state and local, U.S. Federal, International, and Enterprise. Each of those has a different path for how we tackle go-to-market, yet the overarching way to think about Axon is we are building the operating system for public safety and security across the board. A few years ago, we would say that we envisioned every officer carrying a TASER device or an Axon body camera and having a seat on our software network. As we built out this network, the vision, as you can see it, is expanding, so that from when an officer first interacts with the civilian to when a case is adjudicated, we are powering that workflow from start to finish. We have the team and the capability and we're going to continue to challenge ourselves to execute on that vision. And we remain really excited about the opportunities that we're seeing in state and local. Agencies across the United States are facing growing challenges. They're understaffed, navigating increasing training requirements, and have to do one of the most difficult jobs in the world every day. This segment remains our core and we are investing and delivering solutions to help our customers. We brought two new devices to market this year, invested in productivity-enhancing software features, and relaunched a disruptive VR training portfolio. When I think about our mission to protect life and look at the inefficiencies in the existing training landscape today, I think VR can be one of our most exciting long-term opportunities. We're also spinning up more customers on our records product, getting TASER 10 in the hands of early adopters and ramping shipments of Axon Body 4. Something I find particularly encouraging is our new order book for TASER 10. I've talked about my excitement here for the past few quarters, and even my expectations have been exceeded. Simply put, we have found product market fit very quickly, and the credit goes to Rick and our TASER pillar team led by Pat Madden for driving tremendous early results. Orders for TASER 10 after three quarters have already surpassed the first six quarters of TASER 7 orders. Even as I read that, it boggles my mind. That means three quarters in, our TASER 10 orders are pacing at over four times the order rate we saw for TASER 7. What is encouraging is our top three TASER 10 orders, each came from customers outside of our core state and local base, two being international customers and one in corrections. Another customer area that has me confident in our long-term strategy is our U.S. federal business, as you just saw in the video. Our products are meeting the needs in several applications for federal customers where safety goes beyond the traditional state and localities and expands into the global footprint of our military bases where we can help protect those who have chosen to protect us. Five of our top 10 deals booked in the quarter came from federal customers, growing from a base of essentially zero a few years ago. Finally, I will talk about the traction we are seeing internationally, which grew 52% in Q3. We think international is one of the largest opportunities in front of us today, and we are evangelizing the cloud, hiring in-country heads in new markets, and spending a lot of time growing our brand and presence overseas. We've got line-of-sight into a strong close to our year, and we are building a pipeline to support long-term growth. It's been an incredible journey, and it's easy to look back at what we've accomplished so far, but we don't spend a lot of time on that stuff at Axon. We're onto the next play. Now, I will turn it over to Brittany to go through our financials in more details.

Brittany Bagley, CFO

Thank you, Josh. We are pleased to report another strong quarter of top-line revenue growth and improving profitability in 2023. Q3 2022 was my first earnings call with Axon, and we were still talking about hitting an adjusted EBITDA dollar target. So watching the team move seamlessly, the margins over-deliver and drop significantly more to the bottom line has been an exciting change that we're all proud of. I continue to be impressed each quarter by our team and the focus on operational excellence. We set hard expectations for ourselves and we exceeded them again in Q3. Our topline revenue grew 33% year-over-year and we saw adjusted EBITDA margins expand to 22.2%, which is 35% year-over-year growth. Software remains the largest driver of growth in our business with our cloud and services revenue growing 55% year-over-year. Our software business model remains a powerful growth engine. Our customers subscribe to a bundle of our products. And over time, we improved these products and delivered more new features and technology enhancements. Our strong software growth is tied to multiple drivers. We see growth from new customers, who sign new licenses and adopt feature add-ons. We also see many existing customers expanding their needs and growing with us over time. This is a result of our relentless focus on solving customer problems and driving innovation in the ecosystem as Rick discussed. You see that impact in our excellent net revenue retention rate of 122% and ARR growth of 54%. Axon cloud and services revenue is now 36% of total revenue, compared to 31% last year. We are also seeing our new hardware product launches drive growth in our business. TASER 10 grew more than 50% sequentially, representing healthy demand and our ability to scale to meet that demand. Axon Body 4 made up the majority of our body camera shipments in the quarter and drove our growth in devices along with continued strength in Fleet 3, supporting 45% annual growth in our sensors hardware business. Our third-quarter gross margin of 61.7% exceeded our expectations on a higher mix of software revenue. Relative to last year, we saw our margins mix down slightly on increased TASER 10 revenue, as well as increased revenue from sensors and professional services. We expect this impact to continue in Q4 with margins slightly below Q2 and Q3, on mix. Turning to operating expenses. We saw some leverage from both R&D and SG&A supporting expansion in our adjusted EBITDA margin. We continue to invest to ensure we are positioned for a multiyear growth opportunity and to support the continued scaling of our business. As I turn to our guidance, you will note our strengthening outlook on both revenue and adjusted EBITDA. We are pleased to increase our outlook again. We expect revenue for the fourth quarter to be in the range of $417 million to $420 million and fourth quarter adjusted EBITDA margin to be approximately 20%. Our Q4 guidance implies an increase in our full-year revenue outlook to approximately $1.55 billion or 30% growth year-over-year, which is up from our prior guidance of $1.51 billion to $1.53 billion or 27% to 29% growth. Our fourth quarter adjusted EBITDA margin guidance implies a full-year adjusted EBITDA margin expectation of approximately 20.8% or $322 million. This outlook is raised from our prior expectation of approximately 20% full-year adjusted EBITDA margin or $302 million to $306 million. Our increased revenue guidance factors in growing demand we are seeing across our product categories, including our premium bundle offerings and the successfully executed launches of TASER 10 and Axon Body 4. For 2024 and beyond, we remain confident in our ability to scale globally to unlock new customer segments and to introduce even more new products that drive highly profitable revenue growth. And with that, I would like to open it up to questions.

Andrea James, Analyst

Thank you. Can we go into gallery view, please?

Unidentified Company Representative, Unidentified

Given the growing demand across our product categories, including our premium bundle offerings and the successful launches of TASER 10 and Axon Body 4, we remain confident in our ability to scale globally to unlock new customer segments and introduce more new products that drive profitable revenue growth. Now, I would like to open it up to questions. Thank you. Can we go into gallery view, please?

Andrea James, Analyst

Let's take our first question from Keith Housum at Northcoast. Go ahead, Keith.

Keith Housum, Analyst

Good morning, good afternoon, everyone. Thank you. Regarding your guidance for the fourth quarter, you’ve provided a precision level that we have not typically seen, with numbers between $417 million and $420 million. Can you share what contributes to this level of precision and what needs to happen for you to potentially reach the top end or even surpass this guidance?

Brittany Bagley, CFO

I think a lot of what you're seeing is, we're just coming into our fourth quarter. And so there's only one quarter left in the year. As we look at that range in terms of what we're seeing on revenue, it just doesn't give a particularly wide range as you look back at the full year. So the look at the full year looks more precise and tighter based on what we're looking at for Q4. And then in terms of, you know, what we're baking in for Q4 or what we would need to see, it's really our estimate looking at our pipeline of customer deals we think we have in the quarter. We have good momentum, as you've seen across TASER 10, across Axon Body 4. And so we're factoring those in as we look at Q4, as well as, you know, we think we'll be able to do from a software standpoint. So again, it's the best guess. We don't always know perfectly, but that's what we're looking at as we look at Q4 guidance.

Keith Housum, Analyst

Great. I appreciate it. I'll turn it back over. Thanks.

Andrea James, Analyst

Thank you. If you are on this call, we have you covered. You don’t need to raise your hands, as we will call on you in the order determined by the random number generator. Now, let's hear from Trevor Walsh at JMP. You are next.

Trevor Walsh, Analyst

Great. Thanks, team, for taking my question. Rick, maybe for you or even Josh, feel free to jump in. So I know IACP is a pretty, you know, major event for you guys and large builder of pipeline. What were you just hearing from customers there in terms of, you know, priorities for them both kind of finishing out the year, but then looking into '24 and where you see budgets sort of going around either a particular product or just a particular use case of what there, you know, if there was anything that kind of stood out in terms of kind of what's top of mind for customers coming out of that event. Thanks.

Rick Smith, CEO

Let me start by saying that what stood out to me this year was how customers are really embracing the entire ecosystem. Looking back about three years, we had some customers expressing hesitation about consolidating their tech stack with one vendor, worried about putting too much in from a single provider. However, this year, the sentiment shifted. Customers are now excited about deploying products like dispatch, even those who haven't yet seen what we offer in that area. The feedback has been overwhelmingly positive, with customers noting the smooth integration of our products and the high quality of our customer service. It was fascinating to observe this change in attitude, as many customers asserted that they trust us enough to run their entire departments on Axon, believing it will enhance their capabilities in ways they may not have even anticipated.

Josh Isner, CRO

Yes, I'd just add. I think, you know, it was an incredible combination of amazing reception around our newer products, specifically VR, TASER 10, and Axon Records. But then an equally awesome reception to kind of the early showcase products that have not hit the market yet, which gives us a lot of confidence going into the next couple of years here that the things that we will be rolling out have, you know, already, you know, the perception of really good product market fit and should have a lot of demand associated with them. Of course, we've got to do a lot on our end to execute well and to make sure we go all the way to the finish line on those products. But that's always a really exciting thing to see when what you're building resonates so clearly with our customers.

Rick Smith, CEO

I want to mention that this year marked a significant shift for virtual reality, moving from a concept to something that is ready for widespread use. We decided to hold off until all-in-one headsets became available, rather than rushing to market with the complicated, room-based systems that would have required extensive setup. We believed that waiting for all-in-ones would allow for a broader deployment. This decision necessitated considerable hardware development to ensure our TASER weapons functioned properly in a virtual environment. Initially, we explored hand tracking using motion sensors, but feedback indicated that it was unreliable and often problematic. About 18 months ago, we committed to developing specialized hardware featuring integrated infrared tracking lights, similar to those in HTC or Oculus controllers. The response from customers has been overwhelmingly positive, highlighting the improved accuracy and reliability, with fewer bugs and recalibrations needed. Overall, it has been an exciting process as our product evolves from developmental stages to fine-tuning, increasing hardware availability, and scaling content.

Trevor Walsh, Analyst

Great. Thanks, both, for the color, and congrats on a solid quarter. Appreciate the time.

Rick Smith, CEO

Thanks.

Andrea James, Analyst

Thank you. And as I'm going down my list here, if you have video off as a courtesy, I'm not calling on you. So if you do want me to call on you, just come on video when you're ready to be called on. Joe Cardoso at JPMorgan. You're up next. Go ahead, Joe.

Joe Cardoso, Analyst

Thanks for the question, guys. Yes. So maybe a couple questions rolled into one. You showed the video in the beginning and talked to the opportunity in the federal space or the military space. Can you outline perhaps the drivers as to why this opportunity is materializing in a more material way nowadays? Maybe how large this opportunity could be for you guys and, you know, which offerings are really resonating with the military folks? Thanks.

Rick Smith, CEO

I would begin by saying that our current product suite, which focuses on military policing and base protection, is resonating well. This year, at AUSA, I felt a shift; in the past, we seemed like an outsider from law enforcement entering the federal space, but this year it felt more like we belonged. The promotional video highlighted the use of live streaming cameras, counter drone technology, and TASER 10 in an integrated manner. Our vehicle-based fleet solutions and our partnership with Fusus to integrate multiple cameras from various agencies struck a chord, showing our capabilities in base security. Looking ahead, I am eager to expand into combat operations. At first glance, it might raise questions about our mission to protect life, but I believe that successful military operations in the future will prioritize minimizing casualties. Historical examples, like Vietnam, Iraq, and Afghanistan, where high body counts did not lead to mission success, support this view. Take the situation in the Middle East, for instance; imagine the impact of more precise drones and robotics rather than traditional large bombs, which often lead to collateral damage. We remain committed to our mission of safeguarding life. In my book, "The End of Killing," I initially thought we were closer to ending war than we are today, and recent events, such as those in Ukraine, have proven that perspective to be misguided. In our shareholder newsletter last year, I discussed the potential of investing in counter-material drones for Ukraine, which could use autonomous AI to target equipment while avoiding civilian casualties. If we could disrupt Russian forces' capabilities without significant loss of life, we would still be providing support while adhering to a principle of minimizing violence. This approach represents a significant opportunity: finding ways to decrease violence and fatalities while addressing national and international priorities.

Brittany Bagley, CFO

And this year at AUSA, for the first time, I had some conversations with people in senior positions in the military and military development programs, and I got a different emotional reaction. Now that's going to be years off. But I think the message is starting to resonate. You know, no matter what the mission is, killing should always be a last resort, and we should put a lot more creativity into how we accomplish our mission while minimizing the loss of life.

Rick Smith, CEO

Totally, and to speak to the timing a little bit, I think, you know, key, as you heard Josh talk about before, to our market expansion and our flywheel overall is this simple, you know, two-phase approach to every new market, which is, first, we earn the right to sell to a new class of customers by taking our existing products and tailoring them in the ways that are needed to make them resonate and have product market fit with that new customer segment while we build out that sales channel. And then once we've done that and have brought them into the fold as an existing customer segment we're strong with, then we've earned the right to go even bigger by building bespoke new products that are really tailored especially for that market segment. And that story is playing out resoundingly in federal. So over the last several years, we've made tons of investments in the background, laying pipe with things like FedRAMP Compliance, FedRAMP Moderate, then FedRAMP High, and IL4 and towards IL5, all of those sorts of things, as well as hundreds of small little adjustments to all of our core hardware and software products to make them viable and ready exactly for these federal customers. And a great example of that is the VA going nationally live with Axon Records this quarter. And then what you'll start to see over time that opens us up into more of that TAM as well in addition to selling more and more of our existing, you'll see us start to develop bespoke SKUs and product lines that are even more tailored just for federal.

Josh Isner, CRO

Yes, I want to come back on one last thing. I don't want my comment to be misinterpreted. When we, for example, say we want to drive down police shootings, we're not passing judgment on whether police are justified or not. And similarly, with what's happening in Gaza right now, I'm not passing any judgment about the appropriateness of the use of force. The fact is, I think what the Israelis are facing right now is in order to get the military targets they're going after. Those targets are embedded deeply in civilian. They're intentionally buried in civilian epicenters. And so if you could imagine a world where a modern military could go in and put everybody to sleep and then sort out the good people from the bad people without a loss of life, that would be an amazingly important capability. Now, of course, I'm doing the imaginary end state of putting people gently to sleep. But there are steps we can begin to think about being much more precise in ways that are certainly causing less collateral damage and less lethality. And those are problems that get us really excited, because I think we're seeing today's technology puts people in unwinnable situations with catastrophic outcomes. And we think, you know, us and other technologists need to give warfighters and police and everybody better tools to be able to do the legitimate jobs that governments need to do to protect their people without such, you know, technology just requires inflicting a lot of death.

Joseph Cardoso, Analyst

No, makes sense. Rick, I appreciate all the color, guys. Thank you.

Andrea James, Analyst

Thank you. Next, Will Power at Baird. You are up, Will.

Will Power, Analyst

All right, great, thanks. Yes, I want to shift gears to international, another area where you saw nice growth in the quarter. It'd be great just to, you know, have you kind of unpacked, you know, what's driving that. And I'd be interested to know, is body camera, you know, four starting to help lead that? Is TASER 10 starting to lead that? What are the adoption trends look like there across the new products? And what are you kind of leading with in any particular geographic areas that are standing out for you?

Josh Isner, CRO

Sure. Nice to see you, Will. And thanks for the question. I would say, there are a couple of different threads to the story here. The first one is that in our Tier 1 markets, which we talk about a lot, the U.K., Canada and Australia, those markets were just seeing wider adoption of the Axon network. So it's not only about TASERs and body cams and DEMS, it's about our DEMS, DEMS add-ons, and it's about Axon Fleet and Axon Interview Room and moving toward Axon Records. So we're really excited about just the proliferation of our products into those markets that mirror the U.S. most closely. And then we've got, you know, essentially a number of other markets that are starting to adopt one Axon product for the first time. A lot of the momentum has been on the TASER side, but more recently, we're actually starting to see some really encouraging signs in a few European markets adopting the cloud for the first time. So the growth of our international business will really be driven by continued execution in the Tier 1 markets, but starting to see more, you know, historically, you know, rest of world markets start to look a lot more like those markets where, you know, they're adopting cloud, they're adopting TASER, they're using DEMS, they value body cameras and other, you know, wearables and camera technology. And just the combination of those things is really going to provide that, you know, foundation of growth for the international business. I still believe, you know, it's very possible, you know, over the next five to seven years that our international business could be rivaling our U.S. business in terms of bookings. And, you know, once we get to that point, I feel really good about the revenue catching up over time. So that's really our focus right now, Will.

Rick Smith, CEO

Hey, Josh. I want to mention that it's exciting to see the company evolve with strong internal competition. Initially, our software was primarily designed to support body cameras. I recall about five or six years ago, there was a push for our software to operate independently since it is top-notch. Scotland's largest project with us didn't even involve body cameras; it was about digital evidence management for their entire system, and they aren't using our body cameras on a large scale. Each part of the business enhances the others, but we're observing a growing maturity across the different segments, allowing them to achieve top rankings independently. This provides us with various opportunities to enter new markets.

Will Power, Analyst

If I can maybe just follow up quickly. You know, international, you know, has been lumpier generally, I think, for you all over a period of years, and yet it sounds like for your comments, you're seeing, you know, broader traction across a broader, you know, set of products. But how are you thinking about the broader pipeline internationally versus maybe where you were one or two years ago? That might provide confidence that this could be a more sustainable, you know, area of growth above the corporate average.

Josh Isner, CRO

Our Head of International Sales, Chris Kirby, is effectively managing the team to develop a stronger future pipeline. The focus has shifted from capturing immediate revenue to building a pipeline that is three to four times larger than our goals for the upcoming year to ensure more consistency. There will always be some fluctuations, particularly in years where we experience significant momentum with TASER products due to the nature of revenue recognition between TASER and SaaS products. When large international police forces purchase TASERs, we may see some irregular one-time revenue events. However, over the long term, we're beginning to see that stabilize, supported by a foundation of video bookings and increased video adoption.

Will Power, Analyst

Thank you.

Andrea James, Analyst

Mike Ng at Goldman Sachs. You're up next.

Mike Ng, Analyst

Hey, good afternoon. Thank you very much for the question. Mine is just on Axon cloud and services. So it seems like we've seen two consecutive quarters of greater than $15 million quarter-on-quarter revenue growth. I was just wondering if you could expand a little bit about the key drivers of the strength. I know in the letter, you know, you talked a little bit about, you know, moving more towards premium software bundles, the growing install base, just any additional color that you could provide there would be great. And then is that a good way to think about Axon cloud and services growth going forward, kind of this teen sequential growth?

Josh Isner, CRO

Sure. Yes, Mike, we're really glad you asked that question because, you know, that's one of the things we're most proud of here to see in the results is just this, you know, excitement around the Axon cloud suite of products. And, you know, the story here has been just multiple years of investment into new features, software add-ons, new enterprise software products, just finding product market fit and being rapidly adopted by our customer base. And ultimately, you know, more and more customers are buying our premium offerings, starting with the Officer Safety Plan and then going up to the Plus version of that and then the Premium version of that. And we've seen that the last couple of years, but now it's really starting to flow through into the revenue and the results. And so, you know, just, you know, more adoption of DEMS, more adoption of software add-ons, more adoption of Records management, more adoption of our standards product. And it's really exciting to see all that come together. Talked a lot about our flywheel of this idea that really, you know, OSP is the driver of that flywheel into new products and that's exactly what we're seeing right now. So really proud of our product team for doing a great job, you know, understanding where this, you know, where this platform evidence.com can take us and listening to our customers in terms of where they see value and then doing an incredible job building those products. And our sales team is doing a great job selling them on the back end. So things are aligning really, really nicely in the cloud business and we're really excited about it.

Brittany Bagley, CFO

From a modeling standpoint for all of you guys. The only thing I would add is we have historically guided you to take an average of, you know, the last six to eight quarters. And think about that as the size of the step up in that revenue. I think because of this impact that Josh talked about of more and more customers moving to our premium bundles, the size of that step will start to get bigger every quarter. It probably won't be as big as it was this quarter, though, because you are seeing some of the benefit of the Fleet 3 installations start to turn on and come into that. So while there was nothing, you know, one time this quarter, you are seeing Fleet 3 come in. But I think we're also comfortable saying that because of premium, we are going to see slightly larger steps up each quarter in software than we have historically averaged out.

Mike Ng, Analyst

Wonderful. And maybe if I could just have a quick follow-up. You know, if we assume a kind of continued step up in that cloud revenue, you know, is there something that's offsetting that as you think about the consolidated revenue guidance for the fourth quarter on the product side? Thanks, Brittany. Thanks, Josh.

Brittany Bagley, CFO

Yes. So I would say I think the step up in software is particularly large this quarter. So I don't think there's anything offsetting it. As you look at Q4, you know, we're putting forth pretty healthy growth year-over-year, 24% to 25%. That's on top of a Q4 quarter last year that grew about 55%. So I think it's still a very healthy guide that is taking into account the premium software piece. AB4, TASER 10, all the momentum we're seeing.

Josh Isner, CRO

Joseph Cardoso, Analyst

No, makes sense. Rick, I appreciate all the color, guys. Thank you.

Andrea James, Analyst

Thank you. Next, Will Power at Baird. You are up, Will.

Josh Isner, CRO

Sure, our Head of International Sales, Chris Kirby, is effectively managing the team to build a pipeline for the upcoming years. The focus has shifted from immediate goals to creating a pipeline that is three to four times the target for next year, ensuring more consistency. There will always be some variability, especially in years when we have significant TASER momentum due to the nature of how TASER revenue is recognized compared to SaaS products. For instance, when large international police forces purchase TASERs, we may experience sporadic one-time revenue events. However, in the long run, we are already noticing that these fluctuations are balancing out, supported by a strong base of video bookings and increasing video adoption.

Rick Smith, CEO

Let me begin by saying I was mistaken about this. I thought body cameras would replace in-car cameras, believing that their widespread adoption would reduce the need for cameras inside vehicles. I learned that customers with in-car cameras value the additional perspective, especially state highway patrols where much occurs in front of the vehicle. The availability of extra battery power and the capacity to add more sensors for tasks like license plate reading can't be achieved within the battery limits of body cameras. I'm glad to have been corrected, and our customers helped me understand this, leading us to develop a significant, potentially market-leading Fleet product. We're also exploring adjacent markets, such as ambulances and emergency medical services, and even military vehicles that resemble policing vehicles. Over time, as we enhance our capabilities, I believe there will be opportunities to expand beyond just policing vehicles to other types, where we can integrate our network and workflows with our sensor technology and eventually use AI on that data. While I can't provide a precise comparison of the total addressable market between the two, I can affirm that the vehicle Fleet business is set to continue, as it has distinct needs and advantages, particularly when there's access to power and room for more advanced equipment and sensors.

Jeremy Hamblin, Analyst

Yes, Hey, thanks. And yes, juggling calls here. You know, I wanted to and apologies if you've gone through this a little bit already, but I wanted to come back into the Fleet product just to understand, you know, where we are in terms of, you know, it looks like you've really continued to gain share in that product and, you know, in terms of where we go in the platform and tying that in, you know, more holistically with, you know, some of the things you're trying to do on the AI side of the business as we move, you know, a couple of, let's say, years down the road. You know, I wanted to just understand in terms of where you think about the TAM on that portion of the business and whether or not just the total value of what the Fleet business is changed from where it might have been a couple of years ago.

Rick Smith, CEO

Well, let me start on this one. This is one where I was just wrong. I assumed that body cameras would obsolete in-car cameras. And I believed that once body cameras became ubiquitous, there would be less reason to have cameras in a car. And that's one where just I was wrong. And what I learned was that, you know, customers who've had in-car cameras want to keep that perspective, especially state highway patrols, where a lot happens in front of the vehicle, and the availability of extra battery power and the ability to put more sensors to be able to do things like license plate reading, which, you know, would be not possible given the battery constraints in the body camera. So I'm happy to have been wrong and had, you know, people who together with our customers who educated me on that, to where now we have a sizable, and I think the market leading Fleet product, and we're finding other areas, you know, in some adjacent markets, and ambulances and EMS, I think even in the military, you know, starting with vehicles that are more like military policing vehicles. But over time, the array of capability and our ability to move at sort of commercial speed to bring AI and sensor capabilities, I think there could be opportunities for us to move up the value chain from just sort of policing vehicles into other types of vehicles where we can integrate our network, all of our workflow together with our sensor development, and of course, in the future, AI running on all that data. Well, let me start on this one. This is one where I was just wrong. I assumed that body cameras would obsolete in-car cameras. And I believed that once body cameras became ubiquitous, there would be less reason to have cameras in a car. And that's one where just I was wrong. And what I learned was that, you know, customers who've had in-car cameras want to keep that perspective, especially state highway patrols, where a lot happens in front of the vehicle, and the availability of extra battery power and the ability to put more sensors to be able to do things like license plate reading, which, you know, would be not possible given the battery constraints in the body camera. So I'm happy to have been wrong and had, you know, people who together with our customers who educated me on that, to where now we have a sizable, and I think the market leading Fleet product, and we're finding other areas, you know, in some adjacent markets, and ambulances and EMS, I think even in the military, you know, starting with vehicles that are more like military policing vehicles. But over time, the array of capability and our ability to move at sort of commercial speed to bring AI and sensor capabilities, I think there could be opportunities for us to move up the value chain from just sort of policing vehicles into other types of vehicles where we can integrate our network, all of our workflow together with our sensor development, and of course, in the future, AI running on all that data.

Andrea James, Analyst

Thank you. I wanted to take a moment to acknowledge and thank you, Andrea James. This is going to be Andrea's last quarterly earnings call with us here on Zoom. So after a fast-paced and transformative six years with Axon, leading investor relations, strategy and communication, AJ is going to take some time to reset and enjoy the fruits of the success that she's had and has driven here at Axon. AJ has been one of my closest personal advisors. And so as we got to the end of the last XSP and we had some conversations about life and the future, I remembered one of my favorite quotes from Ray Kurzweil, the most important decisions we make are how we spend our time.

Rick Smith, CEO

And talking with AJ about her growing family, I couldn't disagree with the idea that how she spends her time might involve taking advantage of some of the success from Axon. We discussed her doing advisory and board work, given her incredible experience at Tesla and here at Axon. I will keep in touch with her. I am personally and professionally grateful to have her as a colleague and friend and want to acknowledge her valuable service to our mission. I know she has built relationships with many of you, so it's not completely goodbye. She will continue to support us behind the scenes in an advisory role until at least the middle of next year to ensure a smooth transition. We are excited that Erik joined us earlier this year to lead our investor relations efforts. He has really hit the ground running and is prepared to take over from one of the greats. Erik has experience as an analyst in our industry for several years before joining Axon. I want to thank all of you for joining. We are proud of our team's execution and confident in our profitable growth. We look forward to a strong finish to the year. I wish you all a happy holiday season. I hope for more peace in the world and we will see you all in February.