Rick Smith:

All right. Thanks, Erik, and thanks to all of you, our shareholders and analysts, for joining us today. Welcome to Axon's Second Quarter 2024 Earnings Call. I am again proud to report another great quarter and to show you that video to highlight some of the incredible outcomes our team is delivering to our customers with Draft One. Our story is to build a world where we help our customers achieve better outcomes every day, and it still feels like we're just at the beginning. There are two things that I believe are critical to our success and ability to differentiate in the market. We move fast and we take risks. It is our speed and willingness to tackle the toughest problems that drives our innovation and allows us to recruit the best people. I think we're at the forefront in several technological areas that will define the next decade for our company. You've probably heard me talk about them before. First and possibly the most significant is artificial intelligence. We are positioning ourselves as the indisputable leader in delivering the power of AI in practical, usable applications to our customers. We've been at this for many years and our progress is accelerating as the underlying technology and the interest to adopt reaches critical mass here in the US and around the world. One year ago, I shared with you our vision for generative AI applications as we saw commercially available LLMs, large language models, coming to the market. I told you we would be ready to catch the ball. Well, in April, we launched Draft One, a powerful new AI service that writes the first draft of a police report, extracted directly from Axon Body camera recordings. Our customers' response to Draft One is better than anything I've seen, better than we could have imagined. They want to put more data into the cloud with Axon, they want to better access that data, and they trust us to protect their data. And they can see that we can help them do their jobs better, put their data to use. Our unique position to define this category comes down to three key advantages that I believe we hold. One, the sensor network. We run the largest sensor ecosystem by far, including tasers, body cameras, in-car cameras, drones, robotics, and third-party cameras and sensors through Fusus. This vast network generates the data needed to drive the future of AI. Second is the data. Our expansive ecosystem of software and sensors has generated the industry's largest and most valuable data set. Now it's not our data, our customers own their data, and we protect it rigorously, and we provide them the tools they need to manage and leverage their data. We help them make their data accessible and usable, securely managing hundreds of petabytes of audio, video and imagery in the cloud. And third is trust. We work tirelessly. For decades we have to earn our customers' trust. We've led three major tech revolutions

Brittany Bagley:

Thank you, Josh. As both Rick and Josh highlighted, we had a great quarter. We grew revenue 35% year-over-year on top of 31% growth in the same quarter last year, and we delivered strong adjusted EBITDA. I am particularly impressed that the growth comes from all our business segments, driven by our powerful ecosystem. Our customer-centric approach solves real problems, which drives us to innovate, and you can see those results in the business. Cloud and Services remains the fastest-growing segment at 47% year-over-year. Our software growth stands out and has continued to drive mix shift with 39% of revenue coming from software and services in Q2, up from 35% last year and 29% the year before. TASER 10 and Axon Body 4 also contributed an impressive 28% year-over-year growth in both our TASER and sensors product categories. These products are performing incredibly well and we're still in the early innings. Overall, our future contracted revenue sits at approximately $7.4 billion, which is up 41% year-over-year, and ARR of $850 million is up 44% year-over-year, while maintaining 122% net revenue retention. Along with continuing strength in Axon Evidence, the new products we talk about are helping drive our consistently high NRR. Adjusted gross margin of 62.5% increased by 10 basis points year-over-year. This was supported by mix in our software business, as well as the benefits of automation in our TASER business. We cleaned up some of our older inventory on the sensor side, given the better-than-expected demand for AB4, which was a partial offset to our strong gross margin in the quarter. At this point though, we expect to see stable gross margins for these segments going forward and expect overall gross margin around this level for the remainder of the year. Below the gross margin line, we continue to focus on scaling the business, both to drive profitability and to successfully deliver on our top-line growth. This has included adding a new manufacturing facility to increase production capacity for TASER devices and cartridges, as well as integrating our acquisitions and investing in R&D. We've been able to invest in and grow the business while driving operating efficiency. Increased revenue, gross margin, and operating efficiency drove adjusted EBITDA to $123 million, which was 24.5% margin in the quarter, up 270 basis points year-over-year, and surpassing our highest level in over three years. We also had free cash flow conversion above 60% in the quarter, leading to $75 million of adjusted free cash flow. Turning to our outlook, we are pleased to raise guidance again on both revenue and adjusted EBITDA. Our full year 2024 expected revenue guidance is increasing to $2 billion to $2.05 billion, which represents 29.5% annual growth at the midpoint. This is up from our prior guidance of $1.94 billion to $1.99 billion, which represented approximately 26% annual growth at the midpoint. And it's a result of the strong performance we saw in Q2 and the strong pipeline in the second half of the year. We expect full year 2024 adjusted EBITDA of $460 million to $475 million, implying an adjusted EBITDA margin of 23.1% at the midpoint. This is up from our prior adjusted guidance of $430 million to $445 million and it expands our expected margin by 80 basis points. The increase in our adjusted EBITDA guidance includes better-than-expected performance in Q2 and our increased expectations for the remainder of the year. Consistent with last quarter, our guidance incorporates an immaterial amount of revenue and adjusted EBITDA margin impact from our planned acquisition of Dedrone, which we still expect to close in the current year. Overall, we saw strength across the board on the P&L, shipped a record number of tasers and body cameras, generated strong cash flow, made additional investments into our drone partnerships and remain on track to close Dedrone, and strengthened our bookings pipeline for the back half of the year to record numbers. I'd say we're quite proud of this quarter, and I want to give a huge thank you to the incredible team we have for making it all happen. And with that, I would like to open it up to questions.

Jonathan Ho:

Hi there. Good afternoon, and congratulations on another quarter of strong results. Can you give us a little bit more color on the adoption of your software applications? And maybe what are some of the biggest contributors now? What are sort of the incremental add-ons where you see the biggest inflection point? I definitely appreciate the AI commentary, but just wanted to get a sense of maybe what's driving the performance this quarter and what you're most excited about going forward?

Rick Smith:

Yeah. Let me speak briefly. And then, Jeff, I might have you speak a little more in detail as well sort of the breakout of our current software. I tend to focus on the sort of the leading edge, and then as things kind of stabilize -- by the time they're bigger, I'm spending less of my time personally on them, and Jeff is really leading the large teams. Obviously, AI is a really interesting space right now. The -- what is -- what was impossible 18 months ago is now, frankly, easy in some cases. Things like Draft One is nearly magical in the user experience. The first time I turned it on was in, I think, February I got access to it in beta. I was at the Texas Department of Public Safety doing a demo -- actually, I probably shouldn't have given the exact name. Anyways, I was at a large agency in Texas doing a demo, and they were saying, "oh, there's no way this will work" with an East Texas accent. And they started teasing each other. And I said, "Well, I don't know. Let's try it." And we had this officer come up, and, literally, this guy could have been on Saturday Night Live. He did the best, like, kind of hillbilly voice skit, was completely non-linear in answering questions, was all over the place. I was sure it was going to be a disaster, and I was just shocked at how well the AI turned all of the nonsense into a professional looking report in, like, literally 15 seconds. And we're seeing that reaction from customers across the board. We had some customers say that the time savings alone from Draft One justifies paying for the entire Officer Safety Plan. So, while it's not -- because of the nature of these things, the -- we write contracts upfront. It takes time for the revenue to kick in. I think Draft One is a real accelerator. It brings transcription. You need to have respond. You have to have the wireless connectivity for us to be able to push this up to the cloud, have it ready in time. So, it pulls other products with it, and then there's a whole suite of other stuff that we are now working on across the board. I would just tell you, Jeff and I sat down, and we said -- we kind of pulled the emergency brake and said across the entire business, every team is now researching what are the AI possibilities that justify changing our priorities so that we're nimble and that we're moving things that our customers couldn't even imagine are now moving to the top -- a year ago, are now at the top of our product development priorities. So with that, Jeff, I don't know if you have anything else you want to add.

Jonathan Ho:

Excellent. I'll keep it to one question. Thank you.

Trevor Walsh:

Great. Thanks, team. Appreciate you taking my question. Josh, maybe for you, but feel free anyone else to jump in. Good to see the international bookings up 100% in the quarter. It's a theme you've obviously been talking about for quite a while now. Can you maybe just give us or reiterate kind of the why now? You think that international opportunity is sort of seems to be gaining some speed? And then, depending on how you answer, are there things that might kind of even accelerate that further geopolitical wise or just everything kind of going on kind of globally that might help to either make that -- those dynamics increase or maybe create a headwind if things kind of turns more towards the negative? Thanks.

Rick Smith:

Hey, Josh. If I could jump in as well, something that's really different in the past three months is AI. I met with a senior -- a very senior government leader in continental Europe in a country where everything I had heard up until now was cloud [indiscernible], just showing Draft One. And look, we're able to film it and do it in French, no problem, because the underlying large language models from OpenAI, like they handle 100 languages without breaking a sweat. And I had this presidential advisor look at me and said, I've never -- like, I've understood the value of the cloud historically. It's been somewhat compelling, but, like, this is a game changer. And when you think about the complexity of deploying AI at scale and the massive GPU clusters you're going to need and the connectivity into the cloud just eases all that. So, we've been almost religious about our cloud fervor. In the US, our customers told us early on the cloud was illegal and that we -- they couldn't do it. Of course, we pressed through that, and now it's become ubiquitous. Europe's been harder. They've been very resistant to the cloud, and we've stuck to our guns, but it's taken a lot longer than we thought. I think this is still theory. We haven't seen a [indiscernible], but the early reactions are AI services like Draft One and some of the new stuff you'll see in a few months, could be enough to tip it over and start to make the cloud sweep through the rest of the world that's been very resistant to it. That'll be a real game changer, if that pans out.

Erik Lapinski:

Thanks, Trevor. We're going to go up to Josh Reilly at Needham next.

Brittany Bagley:

Yeah. You got it. It's just timing. It depends on when the new revenue starts turning on in the quarter. And bookings in Q1 were relatively light as we go through the year, and so you just see that rolling into ARR in this quarter. So, I wouldn't read any more into it than that. We're still really happy with the 40%-plus year-over-year growth in that ARR number, and that's what we're looking at.

Brittany Bagley:

Yeah. I was happy to say, I think, our margins generally are starting to stabilize around the levels you're seeing them at now, and so that's both inside of our segments and for our overall gross margin. So, hopefully, some of the noise that we've been seeing in past quarters is stabilizing a bit. And I would say some of that benefit you're seeing in the TASER gross margin this quarter is, we've talked about automation coming online, and you're starting to see the benefits of that. So, I think you'll see that benefit going forward. And then, just as we go through the year, mix does always tend to move things up or down a little bit, both inside the segments and for the overall gross margins.

Erik Lapinski:

Thanks, Josh. We got Joe Cardoso at JPMorgan up next.

Josh Isner:

Sure thing. Thanks for the question. Ultimately, the pipeline is very strong. Of course, that's something we track as a company and as a sales team. And it all comes down to just the conviction that we have and how accurate it is. And look, like, we have the best sales team in this industry. The sales team is one of our strongest teams in the company, and I would bet on them all day. And so, I think we are going to have a massive back half in terms of bookings. We see the pipeline everywhere across the business, but more importantly, the names next to the pipeline are names that I have a ton of conviction and belief in, and I think everyone's going to be really pleased to see what the team is -- puts up in Q3 and Q4 here.

Erik Lapinski:

Thanks, Joe. Up next, we have someone new to us. Welcome, Jordan. We're going to take Jordan Lyonnais at Bank of America.

Rick Smith:

Yeah. So, I'll take that one and then see if Jeff needs to clean anything up. We've -- our strategy around drones has been to be very dynamic and flexible. DJI, up until now, has been the market leader, and through our partnership with DroneSense. Basically, DroneSense created piloting and data management software that would be able to use Chinese hardware with US software and data flows, so that it could be more secure, and that's been very successful. I'd say DroneSense is currently the market leader in terms of the number of drones flying on their software. The hardware bans have been instituted in some states already, like Florida, and Skydio is the clear US market leader. They're also the clear leader globally in autonomy, in terms of the drones being able to fly themselves without operator intervention. And so, Jeff really spearheaded the efforts around negotiating this new partnership, combining the best of DroneSense, Skydio, and Dedrone. So, we think we're well positioned either way this pans out. There was a movement towards a federal ban. It looks like that has, at least for now, been paused on DJI. So, we are prepared for either outcome, and we think we've got the best strategy we can that's optimized, and not betting on political outcomes because you can't bet on those. Jeff, anything you'd want to add?

Jordan Lyonnais:

Got it. Thank you.

Meta Marshall:

Great. Thanks. Rick, maybe, further detail. You guys were talking about that there would be a lot of pull-through of additional kind of products with Draft One. Just can you give a sense of like how you would monetize either other sensors you were bringing in or other amounts of data you were bringing in? Or do you mean that in -- that you would monetize it through product announcements that we'll kind of hear about over the next six months or a year? That's the main question.

Josh Isner:

No. I think the beauty -- like Rick just described, is the fact that adopting one product often opens up increased value for the next product to come in and solve an additional problem. So the bridge from respond to transcription to Draft One, and I think we will see that in other parts of the business. Rick mentioned real-time operations and participating in that market to a larger extent. I think there's similar opportunities there between Respond and other AI offerings to drive additional value and solve additional problems. So, I think it really nicely fits together when one solution leads to the next.

Brittany Bagley:

Meta, the one thing I'd add to that is you asked about new product announcements. I would just say, like, you can imagine given the enthusiasm that Rick and Jeff and the teams are actively working on new products also. And so, like, yes, stay tuned for new areas that we develop and we go into in this in the future.

Brittany Bagley:

Yeah. I mean, I think that our domestic law enforcement business continues to just put up really incredible numbers and just deliver. And you see that from all of the things that the team has been talking about in terms of the ability to upgrade, to move on to OSP to continue making those migrations, but we are seeing great traction outside, right? Josh mentioned we had some big corrections wins. We're seeing big international wins, especially with TASER 10. Some of our biggest deals have been outside that domestic LE business. And so, we really are seeing nice traction in some of the other parts of the markets we've been investing in.

Meta Marshall:

Great. Thanks.

Keith Housum:

Good afternoon, everybody, and thanks for the opportunity here. And I'll echo congratulations on the quarter. Guys, you had a lot of commentary on Draft One. Much appreciated. Perhaps, can you provide some similar color to Fusus? Now, it has been under your belt here for several months. I understand that's [successful for your guys] (ph), but hoping you can provide some equal color to Fusus that you guys did for Draft One.

Jeff Kunins:

I think that's spot on. I mean, I think we're just hugely we are -- customers are as bullish on Fusus as we are, and I think they're just voting with their feet. And across the board, it is the fulcrum for the journey you've heard me talk about for a long time. Like, ultimately, the real-time operations journey is two things

Rick Smith:

Yeah. Hey. Let me actually double down on that one. Sorry to keep going Keith, but you wanted some more detail. So, Fusus, initially thought of it is, oh, this helps a police department connect to third-party cameras like a school or a business. Yes. It does that. But we've been really interested to learn is there's many large enterprises. Some are private businesses. Some are big federal government agencies that have hundreds or thousands of their own facilities. And over the last decades, they've installed a bunch of different systems at all these different facilities, and they can't even manage their own cameras. But with Fusus, they don't have to come in and reinstall it all. They can basically use this same sort of network, appliance. They can plug it in, and so you could have a large agency, whether it's public or private, suddenly they don't have to go replace all their cameras. With Fusus, they can aggregate those feeds themselves and be able to share it to public safety partners. So, that's where I think the magic is coming in. We're having enterprises that are looking at Fusus for their own internal use in addition to being able to partner with agencies. And I think, Brittany, I don't know if you wanted to add anything in terms of the numbers on this.

Keith Housum:

All right. I've got tons more [indiscernible]. I'm going to actually pass it off because I know...

Keith Housum:

I think so. That's why I'll pass it off. But thanks, guys. Appreciate it.

Jeremy Hamblin:

Thanks. And apologies if we've already covered some of this, but I actually wanted to get into another piece of winning moments in -- get into the DFR space in Skydio and Dedrone. And just in terms of the ramp opportunity and kind of the timing as you progress through, this acquisition and moving forward with this particular space, I wanted to get a sense for the inbound kind of interest that you're seeing in this, the timing of when you feel like this could potentially add in at least somewhat of a material fashion to your business, and whether or not any of the events are creating more opportunities or more inbound interest in this particular category.

Jeff Kunins:

No. I think that's all well said, but maybe if, Josh, you wanted to talk to the materiality question and sort of, like, you think about the pipeline over time...

Josh Isner:

I think Rick said this before, and I certainly agree with it. I don't know if it's in the next 5 years, but in the next 10, we believe there'll be a one-to-one relationship between drones and police cars.

Josh Isner:

Thanks a lot, Jeremy. Appreciate it.

Mike Ng:

Hey. Good afternoon. Thanks for the question. I just have two. First on Axon cloud services, up really strong in the quarter, $19 million sequentially, which I think is the highest on record. Is that a good way to think about sequential growth from here? And when you think about cloud services and cloud revenue, like, do you think about it as a function of number of seats and revenue per seat, or do you have a different framework in terms of teasing out the longer-term opportunity there?

Jeff Kunins:

That's right. I think that's spot on. And so, it's another place where OSP factors in because it's a great -- as we've used that Amazon Prime analogy for a long time, it's a way for agencies when they have that procurement moment to buy a package that feels to them like a great deal even if they only have in mind a subset of the things in the package. And so, they're making a purchase decision that feels like a great deal even for a subset. And then, from that point forward, all the things that they aren't using yet feel free because they're already rolled into what they're already paying. And so, those procurement moments to get people on higher and higher tiers of OSP continues to be a pivotal part of our flywheel.

Brittany Bagley:

Yeah. No, it's a great question. I think probably the best we can give is we give periodic updates on how we're doing on our OSP penetration to give a sense for how much more room do we have to go. And we actually luckily shared an update this quarter that our OSP penetration went above the 20% mark. And so basically, that's of all OSP, not just premium, but it means that just over 20% of our potential customers are on our OSP plans. You can imagine with that, there's lots of room to go. That talks more to getting any customer at all onto our OSP plan, but then as you think about revenue per customer, that can be the most basic plan, and we move them up to our OSP premium plans over time. So, my punchline has lots of room to go on that one.

Erik Lapinski:

Thanks, Mike. And last but not least is Will Power at Baird.

Josh Isner:

Yeah, absolutely. Thanks, Will. Good to see you. It is exciting to see so much adoption and growth outside of state and local. I'd say there's -- the biggest dynamic in play there is in corrections even, but then more so in federal and in international, you just end up with these customers that are 2 times, 3 times, 4 times the size of NYPD. And so, the pension for large volume orders is so much larger outside of the state and local customer base. And that's what we're starting to see. We saw a large correction -- correctional facility purchase. We're also seeing a lot of international governments for the first time really ordering our devices in larger volumes, and same for the federal government and the federal civilian space. So, I think it's a function of just the work we've put in over the last five years to expand beyond state and local law enforcement. And now a lot of those -- a lot of that effort is starting to pay off, and I think it will pay off for years to come because there's still going to be plenty of upside in selling more and more TASER devices in. But like we said before, that's going to kind of open up the opportunity to sell body cameras in, to sell fleet in, sell drones, VR, et cetera. And so, I think this is promising in a lot of different ways to see TASER 10 so well adopted outside of the state and local customer base.

Rick Smith:

Are you calling me old, Will? Just completely [indiscernible].

Rick Smith:

I'm teasing, of course. Having a little fun with you. Always good to see you. Thanks for the question. I think the same dynamic we've seen in the past, we're in this kind of a bubble in some ways. And I mean, not like a frothy bubble, I mean just it's different. It's -- we haven't seen the economic swings really impact us one way or the other. When things are really great, it doesn't really lift us because of that. And when things are rough, we don't get hit downward with that. And I think it's because in our customer base, the -- whatever they're spending on tech, it's still a fraction of their overall spend. Almost all their money goes into personnel, vehicles and gas. And then, tech is relatively small. So, when times are really good, the agencies are typically hiring more people and expanding if the tax revenues are allowing it. In the tough times, I think in 2008, we had a quarter or two where they were really trying to like tighten their belt, but became clear, oh, yeah, we're going to have to actually make personnel cuts. We then found them investing more in productivity. And now back then, we are still primarily the TASER company, and body cameras were super new. I think what's different at this time, most of our revenues on these long-term contracts, we're an essential service, so we don't see agencies, better knock on wood when I say this, I can't fathom them like cutting back contracts. And in fact, things like Draft One, many agencies are still struggling to fill their approved budgeted seats. The post George Floyd sort of impact the difficulties around recruiting and kind of the negative energy around policing is improving. The pendulum is swinging, but many of them are still 15% to 20% below their targeted force numbers. And so that's where we're hearing the sort of magical feedback where they're like man, with Draft One, if it's freeing up 20%, 25% of my officer's day from writing reports, that's almost like a 20% bump in my force power overnight. So, I certainly hope we're not in the beginning of a big economic swoon. And I'm not going to tell you we're immune. I don't think anybody is immune, but historically, it just seems to be that we just -- we're in this different universe over here where those economics just don't seem to matter as much for good or for bad.

Will Power:

Okay. Thank you.

Rick Smith:

Thanks, Will.

Rick Smith:

All right. You got to knock on wood when you have results like this. And Josh, Jeff, Brittany and the team, just so many people work so hard and have delivered so consistently quarter in, quarter out. I was waiting for Erik to throw up the screen with the forward-looking statements when Josh was expressing his effusive enthusiasm for the back half of the year, but it's been just a phenomenal run with the team. But it really does feel like with Draft One and some of the other things we're doing, we're in the early innings in a lot of really exciting new stuff and new markets that are now really taking off as well. As Josh likes to tell me, there are so many different pathways to be able to make our numbers work. And just it's a really exciting time to be in the business. So, we're delighted to have been able to deliver these results. A little inside baseball. Brittany sort of joked that we didn't prove out to be very good at forecasting again this quarter, because the sales team overperformed where we thought we were going to be. Again, I tend to like those problems. Brittany would like to see us be a little more accurate. But we got to be...

Rick Smith:

So of course, I challenged Josh, the sales, hey, let's keep overdelivering. Of course, we want to do that. So anyway, sorry for all the enthusiasm. We are having a good time. You got to enjoy the good quarters. And obviously, we're feeling good about the -- certainly the near term. And I'm super excited about the long term with all the stuff that's, frankly, unproven yet. That to me is the exciting stuff. A lot of good stuff that -- Draft One's off to a phenomenal start. And with that, I'm going to stop talking. Hey, Erik, are we doing anything at IACP with analysts this year? I should have asked that before I bring it up in front of everybody.

Rick Smith:

Okay. So for those who can't stay tuned, IACP is going to be great in Boston this year. Check in with Erik on that. And we're just grateful to have you all supporting us with our shareholders. So thanks, and we'll see you on a couple of quarter -- oh, no, I'm sorry, in a couple of months for the next quarterly results.

Patrick Smith:

Thank you, Eric, and thank you all for joining us here today. I want to welcome you all to our first quarter 2024 earnings call. We have kicked off what is shaping up to be another incredible year at Axon. You saw me talk about my vision in the video we just showed you, and I'm energized by the updates we're bringing you today.

Joshua Isner:

Thank you, Rick, and good afternoon to everybody. I'm humbled to share more about another excellent quarter at Axon.

Brittany Bagley:

Thank you, Josh. We're very proud of the results again this quarter for both revenue and adjusted EBITDA. We had 34% top line growth on top of 34% growth in Q1 last year, supported by our cloud and services revenue, which grew 51.5% year-over-year. This came from growth in both users and premium product add-ons driving upsell.

Unknown Executive:

Thanks, Brittany. I think we're all up in [ gallery ] with you. We'll take our first question from Meta Marshall at Morgan Stanley.

Joshua Isner:

Yes. Thank you very much for the question. Rick, did you want to lead us off? I saw you speaking there.

William Power:

Congratulations on the strong Q1 results. I guess first question really probably for whoever wants to take it. Obviously, strong mid-30s percent revenue growth in Q1. If you look at the full year guide, while raised, it does imply some deceleration. So just love to get a perspective on any level of pull forward into Q1 versus conservatism for the remainder of the year? Any broader thoughts on that front would be great.

William Power:

Yes. That all makes sense. If I can just ask a quick second question on TASER. Maybe -- can you just update on how the automation process is going? Where you are with respect to having enough supply to meet demand? Maybe any other color on the gross margin commentary there because as you automate and over time, that should help gross margins, but it sounds like it's probably the initial investment maybe that's impacting it. Just I wanted to get some color on that front.

Unknown Executive:

We'll go to Keith Housum at Northcoast.

Joshua Isner:

Yes. Yes, Keith, great question, and I appreciate it. I think ultimately, a very similar story as Q1 last year, where bookings were kind of the low point of the year in Q1. Its a hard quarter to really rack up bookings for a couple of reasons.

Joshua Isner:

These -- a lot of these large federal bookings, they are phased into multiple years. And so we tend to recognize revenue when the product is deployed or when it's shipped on the TASER side. And so of those phased deployments that are previous bookings, there's just some noisiness and when the shipments are sent and when the deployments are done, but Federal is in that bucket of when I said we had a really, really healthy pipeline for the rest of the year. We're feeling great about where the federal business is headed. We've got some large opportunities here in the next few quarters and certainly expect federal to register another awesome year.

Joshua Reilly:

So following this body cam issue with the New York Department of Corrections from a competitor solution, the NYPD, as we know, is a customer for you guys in other areas of their police force with body cameras. Can you just speak to how quickly you could move in, if asked with the replacement product there? And maybe just from a higher level, like what have you done from an engineering perspective to ensure that your cameras don't catch on fire from battery malfunctions?

Joshua Isner:

Yes. Maybe I'll cover the demand and then we talk about the automation after. I mean, TASER 10 is a monster, Josh, like it's the most popular TASER device we have ever brought to market. It's out cycling the TASER 10 -- or TASER 7 demand by double. We continue to see strong indicators from all over the world that this product is the one that is a meaningful step in outperforming a firearm, and it puts us on that moonshot journey that we've talked a lot about, and it's a credit to Rick and our entire TASER pillar for all the great work they're doing to ramp this product and do so with high quality.

Unknown Executive:

We'll go to Jeremy Hamblin at Craig-Hallum.

Jeremy Hamblin:

Got it. Helpful color. And then just following up here on Draft One, which the demand for this sounds incredible. In terms of thinking about the competitive set, there are lots of other solutions out there, although maybe not quite rolled out in the way that law enforcement is looking for just yet.

Patrick Smith:

Well, this is the entire reason that we invested in a record management system 6, 7 years ago was entirely because we saw this coming, but the ability to not only have your video evidence and your written records in one system, but to be able to extract one from the other would be critical. And I think we're really seeing that come to bear. So we always want to stay a little paranoid about competition. It's a very competitive market.

Trevor Walsh:

Rick, maybe one for you. It was great to hear all the commentary around kind of opportunities around AI coming out of Axon Fleet. I wonder if you could just ponder or kind of pontificate a little bit for us around the kind of nature of data and AI versus the sensors that sort of drive that. Is there any worries for a product for such as Fusus, for example, it's relying on not just Axon proprietary data, but things coming from other places where vendors don't necessarily start to play as nice in the sandbox when we kind of realized -- or [ I think I ] realized that AI is kind of the new -- or the data for AI is kind of the new gold. So that become an issue in terms of people kind of sharing that data kind of on a more longer-term basis.

Jeffrey Kunins:

Sure. No, and thanks so much for the question. Again, I mean, you're right on both fronts, right? One is it is the case that having aggregated access to large amounts of data are a really powerful differentiator. And one of the things -- one of the reasons why we put so much into everything we've built over the last years, and it's one of the things that we think enables us to keep building and building in differentiated ways.

Trevor Walsh:

That's terrific. I really appreciate the color there. Maybe one quick follow-up, maybe one quick follow up, maybe piggyback a bit about some of the Dedrone comments. How much do you intend to kind of lean into the more counter UAS counter-driven type use cases, whether that's for [ safety ] or some of the non kind of[ public ] safety customers that [indiscernible] either?

Unknown Executive:

Up next, we have Joe Cardoso at JPMorgan.

Patrick Smith:

So Jeff, do you want to take first crack at that one?

Jeffrey Kunins:

Yes. And then just building from there, again, great question about the ecosystem. I've personally spent my sort of 3 decades across lots of the businesses I worked in on these kinds of ecosystems that are always this delicate balance between thinking about where do you build by partner, et cetera. And those things evolve over time and you're always trying to decide at each layer of the stack, where they're the best opportunities to really, really partner well with other fantastic teams and other fantastic providers and where, over time, can you get the most leverage by self-building or by growing organically.

Michael Ng:

I have two as well. First, just on Axon and Cloud Services, it was up $12 million quarter-on-quarter. Can you talk a little bit about how we should think about the sequential growth in this line? Is this low double-digit dollar growth sequentially still a good way to think about it? Qualitatively, is this more user base driven with the growth in the installed base across body and fleet? Or are we beginning to see more software and, I'll call it, ARPU uplift from records and standards in dispatch? And then I have a quick follow-up.

Mike Garnreiter:

Yes. Thanks, Mike. Great question. I'm going to give you a little bit more of a general answer on them. I think we've said this a lot about our international business that we aren't going to be and we're not aspiring to be the kind of low-cost vendor in the space. We believe what we've built is really, really valuable. And we believe that we can perform and our products can perform in the field just as we say they will in the written solicitations. And that's not always the case for other vendors in this space.

Unknown Executive:

Thanks Mike. I thinks that's it for questions today. We'll turn it over to Rick to close this out.

Rick Smith:

All right. Thank you, Erik, and thanks all of you for joining us today. Welcome everyone to our fourth quarter 2023 earnings. It's great to come back to you with another incredible year in the books for Axon. We kick off these calls with those videos to help you understand what we do. Sometimes seeing these kinds of scenes brings out different emotions. But that's what our customers face every day. And making those complex situations safer for everyone involved is what energizes us in our work. I've talked about my abhorrence for violence many times in the past. [Technical Difficulty] everyone who chooses to come to work here. We envision a world where violence is just far out thought, but we are constantly trying to find new forms of technology to make this a reality, and we're really proud of the progress we've made over the last year. First, with seemingly small things like adding a warning sound to TASER 10 to help communicate to someone on the other end that something unpleasant is impending with the hopes that that person will rethink their decisions and alleviate the need for a use of force action at all. And adding a watch me button to our body camera so that an officer can proactively request a second set of eyes for them during their most high risk situations. Next, we thought a bit more outside the box, introducing individually targeted probes, enabling far more effective range on TASER 10 and making our innovative TASER technology more effective in more situations. And we reimagined real-time operations, introducing two modern communication capabilities with two-way voice communication through our body cameras to help complex decision trees in real time. As we look ahead, we're solving for higher level challenges like enabling better decision making in potentially life threatening encounters, or effectively expanding a police force by reducing the extensive time that they spend on paperwork. And we envision accelerating the speed of the entire justice system. We're innovating in diverse areas from robotic security to Generative AI to virtual reality. And there's really so much more that's still left for us to do. When I think back to the video we just showed you, think about what would happen in those situations if an officer didn't have one of our TASER devices or was not wearing one of our body cameras so we could all understand what unfolded and why. It excites me that we made huge strides and that our technology is driving better outcomes. I think a lot of what we're working on now has the opportunity to become so pervasive in the future, it will be hard for us to remember life without it. Highly disruptive technology, that's the beauty of it. When you get it right, it quickly becomes difficult to imagine what things were like beforehand. But we're not always going to get it right by ourselves. We rely heavily on feedback from our customers, their challenges in the long term, rather than what's simply in demand today. While present needs do matter too, I spend most of my time with our customers on the vision beyond tomorrow, which is what I believe will drive our growth for not just the next one to five years, but the next decades. What energizes me in my time with customers is they provide us with the best and most actionable feedback on our roadmap, the snags and problems we may run into, and they help us think through the way to overcome those challenges and the best avenues for us to deliver them what they need. Most critical for us is making sure we have the right people to help us deliver for our customers. When I look at our team, I know we have attracted some of the best and brightest to come and work here. If it's not me meeting with a customer about a new product we have in development, it's somebody from our team. Our team works together, relays feedback and understands our common goal. We don't accomplish what we're doing in silos. We join forces across the company and together with our customers. This goes beyond our current team, extends into key partners like Fusus, who we're thrilled is now part of Axon. Our partnership with Fusus began a few years ago and we've really been impressed with their people and the product they've built. I'm traveling with their founder as we speak today. Together, we're taking our real-time operations to the next level and opening our ecosystem to an even larger network of sensors and devices which will unlock entirely new solutions for our customers over time. Before I hand it over, I'd like to say that I'm grateful that I've been trusted to lead this company for the past 30 years and that we've been able to maintain same drive and energy we had when we started. I might be a little atypical as a CEO as my day-to-day responsibilities align more with my background as a Founder than as a Senior Manager. I'm focusing on what's next. What's always important in driving any enterprise from a startup to a $20 billion public company is that we need to encourage people to be the best versions of themselves, but also to challenge each other, just as our customers will challenge us, and to share in a common mission with a culture that encourages us to do our best work. I'd like to provide one last comment on something near and dear to me. We've talked about our intent to invest in our new headquarters over the past few years. And we mentioned last quarter, we were revisiting those plans after we had paused work in September -- I'm sorry, in the summer of ‘22. Part of revisiting that has been working to bring our vision of a corporate campus to life. We would like Axon to remain headquartered in Scottsdale where we own a piece of land and where we have built this business. I love Scottsdale. However, it's not clear that Scottsdale wants Axon as we're seeing the political environment become more challenging and frankly, anti-development. It's unclear if we will get the approvals we need to execute our project. So we're exploring several geographies and other options. As a result, and it may take some time before we have a definitive decision on our next steps. We will keep you updated in the coming quarters as we resolve our plans and we make progress. Now, I know we're not a startup anymore, and that also means we need people focused on execution, making sure that what we do is viable and is executed to world-class standards. And I am beyond fortunate that Josh and Brittany and their teams here to help me in our execution. And with that, I'll turn it over to them now. You're up first, Josh.

Brittany Bagley:

Thank you, Josh. As Josh mentioned, 2023 was another great year for us with revenue growth of 31% year-over-year and Q4 revenue growth of 29%. We continue to be incredibly pleased with all segments of our business and continue to see enormous opportunities in front of us. In addition to continued strong top-line growth, we expanded our profitability with a 21% adjusted EBITDA margin for the fourth quarter and full year. This represents 160 basis points of improvement versus 2022, largely driven by leverage in our SG&A function. As we've talked about before, we continue to focus on expanding gross margins and expect improvement over the course of 2024 as we see the benefit from enhanced efficiencies with TASER 10 from manufacturing automation and cost initiatives as well as continued benefits from software growth. We're also going to continue investing in our R&D to support the opportunities we see in front of us and to make sure we can keep delivering strong growth for years to come. You've heard today and read in the shareholder letter the significant growth opportunities we see in federal, international, and enterprise, as well as for Axon Air, real-time operations, and new software capabilities to name just a few. We think we're hitting a nice balance of investing for the future while also increasing profitability and driving towards operational excellence. While we have leveraged SG&A, we have also continued to invest in expanding our sales and marketing teams to address new markets, improving our internal technology capabilities, and bolstering our financial strengths, including the fact we remediated our material weakness this quarter. This positions the business well to continue growing and scaling. Now, as I turn to our guidance, we expect 20% to 24% total revenue growth, or $1.88 billion to $1.94 billion for 2024. This is quite strong guidance for us and is the result of increased visibility for 2024. The strong visibility is driven by TASER 10 demand, as well as the continued strengths in our future contracted bookings, which has reached $7.1 billion as of the end of Q4, growing 54% year-over-year. Our software, which provides us with strong visibility, recurring revenue, and attractive gross margins, also contributes to the strength of our guide. In Q4, our ARR was $697 million, which grew 47% year-over-year. We continue to have a 122% net retention rate and strong customer satisfaction. We expect adjusted EBITDA of $410 million to $430 million, which implies an adjusted EBITDA margin of approximately 22%, up another 100 basis points from this year, on moderate gross margin improvement as well as continued SG&A leverage. This guidance includes the impact of Sky-Hero and Fusus, though we aren't going to comment specifically on either of their financials. Finally, last year we put out a 2025 target model of $2 billion in revenue and 25% adjusted EBITDA margin. As you can see from our 2024 guidance, we're pacing to well exceed our revenue target in 2025 and tracking nicely to our adjusted EBITDA margin target. As we look to 2025 and beyond, we expect to continue targeting a 20% annual revenue CAGR and a 25% adjusted EBITDA margin. We think this is achievable and represents a very healthy, sustainable, and attractive long-term model. We're comfortable in maintaining this long-term growth rate based on the opportunities we've discussed and think this is the right balance of investing back into the business and generating attractive profitability. Also, while we have fantastic organic growth opportunities, we're very excited to be able to strategically make acquisitions in markets that will continue to support and grow our TAM like we have just done with Fusus. Finally, we are also continuing to target 60% free cash flow conversion on adjusted EBITDA and approximately 3% average annual dilution from stock compensation expense for 2025 and beyond. As you can tell, we're all incredibly excited about what we can deliver in 2024 to both our customers and our shareholders. We're looking forward to another great year. And with that, I would like to open it up to questions.

Trevor Walsh:

Great. Thanks, Erik. I'm going to thank Erik and thanks everyone for the question. Maybe for either Josh or Rick. Excuse me. I appreciated the TAM outline in the shareholder letter as far as how that's expanding and kind of where Sky-Hero and Fusus are coming in. But there wasn't, unless I missed it, I didn't see any details around the Axon Body 4 Workforce kind of component or contributor to that. Can you maybe just give us generally kind of how you see that opportunity unfolding and especially curious to see kind of an adoption rate there, given it's a kind of a new vertical or user experience and how -- does it look like the body camera kind of adoption rate within law enforcement or does it kind of feel different from what you're seeing?

Brittany Bagley:

And just to jump on a little bit, so we gave enterprise a $15 billion TAM in our update, so that's where we see that playing in. And a lot of the Body Workforce camera really came because we were getting feedback from our customers as we were trialing it, largely in retail and in healthcare, about sort of the size and the weight and how they wanted to wear it and how they wanted to use it. And so we really took that feedback and we reflected it in the updated product. And that's what you see, We announced Fairview Health as an early customer there but we're really looking to be able to provide this solution into the retail and the nursing part of the market where they're facing a lot of challenges today around associates and nurses feeling safe in their work environment.

Erik Lapinski:

Thanks, Trevor. We'll take our next question from Joe Cardoso at JPMorgan.

Brittany Bagley:

Yeah, great question. Thank you. We had a one-time event in TASER in Q4 where we had a bit of a manufacturing issue largely related to a batch in March of last year. And so that is impacting our growth margins in this quarter in TASER by about 420 basis points. So absent that one-time impact, they would still be down slightly on mix, but they would look much more stable sort of quarter to quarter. And so as we go into next year, that one-time impact comes out and that's where you start to get the commentary about how the TASER gross margins, overall we expect them to improve and they really are improving around our efforts for TASER 10. As TASER 10 mixes in, that's an impact, but then we're offsetting that by the fact that we're getting benefits from automating the line and doing cost-down initiatives as we go through the year.

Joe Cardoso:

Got it. Totally makes sense. And then maybe just quick clarification on that front just in terms of the TASER 10 improvement, not to harp on it, but maybe just in terms of the improvement you're expecting through the year, is the expectation that it happens more linearly or is it more back-end loaded? Just curious just in terms of, like, as you bring on this automation equipment, is that more subject to being in the back half or is it more first half? Just curious how we should think about linearity through the year?

Joe Cardoso:

Thanks, Brittany. Appreciate all the color.

Jonathan Ho:

Hi, good afternoon. Congrats on the strong quarter. Maybe just starting out with a high level question. How should we think about the impacts from the Fusus and Sky-Hero acquisitions? I know you're not giving financials, but in terms of your ability to either sort of approach your longer-term vision or to cross-sell the products, just wanted to get a sense of the synergies that you see here with these acquisitions?

Rick Smith:

Yeah, and starting to respond there, I had muted myself. The other thing I would say is on each of them, they are highly strategic. So Fusus, what they really bring is, I described them at a high level, like the Switzerland of cameras. They've integrated with every imaginable sensor and CCTV camera, and we met them. We were introduced by customers who really loved what they were doing and said, hey, we want you to integrate Axon cameras onto the Fusus map because we don't want to have to open a different map and a different interface for every different vendor of cameras that we're using. And that's a lot of work to build something, Fusus has stayed away from building first-party cameras. And we really do want to keep that solution very open so that it can be broadly compatible with virtually any type of sensor, any type of camera in the market. We think that's critical to expanding the utility of our ecosystem to our customers. And then on the Sky-Hero side, long-term, this is probably not going to be big revenue in the short-term, but they are one of the, if not the leading tactical drone maker in the world used by special forces, by SWAT teams, and we think if we want to eradicate violence from society, we've got to get out of this mindset that the way you stop a person with a gun is sending more people with more guns and have a gun fight. And we think drones and robotics have a huge role to play there. I'd say that's probably a little longer term. It's not going to be a 2024 or maybe 2025 revenue impact, but 10 years out, we think it could have an enormous, both societal and revenue impact, especially in the space around private security where there's millions of people worldwide whose job is to sort of observe, report, and secure facilities. That's a highly monotonous job and one where drones and robotics -- we need to do a much better job at those monotonous jobs and when those jobs become dangerous, they could do a much better job than putting a human in danger when a threat does emerge.

Erik Lapinski:

Thanks, Jonathan. We'll take our next question from Will Power at Baird.

Josh Isner:

Sure thing. And I think the answer, Will, really depends on the market segment. I think for state and local, that's where we're really, really focused on selling the officer safety plan and this bundled set of enterprise software from digital evidence management to reporting software to all of the key software add-ons, all in one place. And so, that's one of the true measures of success in the channel domestically. Internationally, it's really about, hey, how do we get folks on the cloud for the first time? And then, for some of these governments, it's literally the first time they're on the cloud in their professional lives. We're starting from a place of just arriving at that moment and then building from there over the next several years. Of course, in enterprise and federal, it’s somewhere in between where we might not exactly sell some version of the OSP that we sell to domestic, but it might be some more tailor-made software offerings that are the right fit for those customers. And so for us I think, we always end in the same place, which is highly valuable, highly useful, high ROI software being deployed to customers that remain happy with it. It's just a question of the path that it takes to get there, and in each segment it might be slightly different. And so that's a bit of a summary for you.

Will Power:

Got it. Thank you.

Rick Smith:

Looks like she might be muted as well.

Alyssa Shreves:

Can you hear me?

Alyssa Shreves:

Great. Good afternoon, guys. Just a kind of quick question on the T10 demand. Is it -- are you seeing existing customers looking to upgrade? Is it penetration into new markets? And how much is this VR training kind of moving the needle in terms of T10 adoption? Thanks.

Alyssa Shreves:

Yeah, how much of the VR training is kind of driving customer interest? Is it more nice to have or are customers kind of viewing this now as a need to have once they trial it?

Alyssa Shreves:

Great. Thank you so much.

Erik Lapinski:

Thank you, Alyssa. We'll take our next question from Mike Ng at Goldman Sachs.

Josh Isner:

For sure. I don't think there was anything abnormal about Q4 other than it was a record quarter for us. And there is some seasonality in our business. It was our first quarter of $1 billion plus dollars booked across the business in five year booking. So we're really excited about that. We don't necessarily share much more than that on our total bookings, but that was a pretty big milestone for our team. So of course that'll represent itself in future contracted revenue and we're excited about that trend and certainly aiming to outperform that record this year.

Brittany Bagley:

Yeah, of course it's a great question. It hasn't changed such that, that 15% to 25% percent guidance of what converts for the next year has been pretty consistent over at least the last few quarters. I think in general we have seen a trend towards some longer contracts. So again, Josh, Josh will correct me, but I think historically there were more five year contracts and now we're seeing more 10-year contracts and some that are even longer than 10 years. So that's certainly a factor in there. But nothing has massively changed in terms of how that future contracted revenue converts in for the next year. I do think it helps in terms of us having visibility and giving a strong guide for next year. And so I think that's where you see some of that come through.

Erik Lapinski:

Thanks, Mike. We're going to go to Josh Riley at Needham next.

Josh Isner:

Yeah, I'll take that. The good news is, it's a combination of the two. So right now out of the gate, one of the reasons why we were so excited about Fusus as a partner and then moving to the acquisition is that their product turnkey out of the box today is ready to go very broadly across state, and local in the US and then beginning internationally as well. It's absolutely a groundbreaking change for the ability for agencies with their real-time crime centers and command staff and even right in the dispatch center to get unparalleled situational awareness by partnering with CCTV cameras from [enterprise] (ph) and the like. So right out of the box, it is just selling and growing like gangbusters. And it's a fundamental part as we go forward of our overall real-time operations vision you've heard us talk about for a long time where our real strategy is to provide the best full stack and open ecosystem we can to help agencies with the entire lifecycle of an incident. And it's ultimately about our play to earn the right to win more sockets, meaning win more sensors, and win that pane of glass where they review the information from those sensors, and to win more and more communications moments as both first responders and the businesses where things happen work together to resolve as quickly as possible things when they occur.

Brittany Bagley:

I would say it does, yes. The more automation we have, the more it helps our capacity. I would say that's pretty much factored in as we think about next year though. So I wouldn't necessarily expect any surprises coming from that.

Brittany Bagley:

Thank you.

Keith Housum:

Yeah, thanks guys. Appreciate it. Can you guys unpack international a little bit more. Perhaps I missed this in the release. Perhaps talk about, if you don't mind, some trends that you're seeing with international. Obviously, I know there's a very strong bookings [query] (ph) for your last quarter. But how did it look this quarter both in bookings and are we starting to see some of that revenue that you booked last year come to fruition?

Keith Housum:

And, Josh, maybe this one's for you as well, but in terms of the [Technical Difficulty] obviously you guys spent a lot of time on that again in the release today. But are you seeing new products and what's the strategy in terms of growing corrections and how you guys achieve the success you are having?

Keith Housum:

Great, thank you.

Meta Marshall:

Great. Thanks. Maybe, you talked initially just about kind of the drone business maybe not contributing necessarily this year. I just wanted to kind of get an update on, you had quotes in terms of feedback that you had gotten from certain customers, but just what are some of the hurdles to kind of greater drone adoption and just kind of an update on what was going on with the integration of Sky-Hero or just kind of early traction there? And then maybe just a second question just to kind of give them all at once. Just on -- it sounds like there's a little bit going on with headquarters decision. Just, is there a kind of drop-dead deadline when you're hoping to kind of make a decision on what city to do the expansion in? Thanks.

Josh Isner:

That's right. And there's also a really exciting hybrid between the sort of drone in a trunk thing Rick talked about and full DFR as the whole industry tries to sort of find their way forward as fast as they can. And this is a thing that actually, Adam Bry, the CEO of one of our other partners, Skydio, and he and I talked together about it, their keynote of their launch a few months ago of their newest drone, where you combine the physical drone being with a patrol officer who can go to scene, but then the instant that they need it, you have that remote pilot who's able to manage it on scene in a DFR style. And so what you're seeing is innovation and experimentation to try to move as fast as possible while navigating around these various short-term constraints. And so it's just a keep watching the space.

Meta Marshall:

Great, thanks so much.

Rick Smith:

Yeah, we hope to have a decision by sometime this summer to make the call. This has kind of [dragged] (ph) on for a while, so we're -- we like to get moving on it.

Erik Lapinski:

Thanks, Meta. We'll take our next question from Mike Latimore at Northland.

Josh Isner:

So the question, just so I'm clear on it, Mike, is what type of growth are we looking at for 2024 relative to ‘23 in our software offerings?

Josh Isner:

Yeah. Jeff, feel free to follow on with your thoughts. But my instinct is DEMS is essentially built out, and we're on the right track there and we'll continue to build out that ecosystem into new markets and so forth. But, productivity is really the one that stands out to me as the huge opportunity for the year. I think we've bared all the pain of coming to market with enterprise software, especially historically custom enterprise software over the last couple of years. And now we really believe we found product market fit when we deploy this product to customers. We're getting fewer calls in the weeks following that are, hey, this didn't quite work the way we thought it would, or a new feature request, whatever the case may be. Customers are very, very happy with their early experiences with the product. And now we feel like, hey, we can start to dump a little more gasoline on the fire and deploy faster across more customers in a year. And then, the one aid of that, I'd say, is our response product, which is our live streaming product. And that's part of our real time operations pillar. And there, that's all the live streaming from the body camera that's where Fusus slots in as well. There's interesting things we can do you know between Fusus and in our DEMS -- sorry, our real-time products. So yeah, very excited about each of those. But in the short term, I think you know the biggest growth relative to 2023 year-over-year will come from productivity.

Mike Latimore:

Great. Thanks. And Just on the future contracted revenue, 15% to 25% in next 12 months. Can you just talk a little bit about the variables that would move that 15% versus 25%?

Josh Isner:

And, Brittany, would you also say it's the number of TAP upgrades of hardware that would ship in a current year? So our upgrade cycle…

Josh Isner:

…is 2.5 years. So if we have a outsized number of contracts that year where these customers hit 2.5, we'll see more revenue because we're shipping all that upgraded hardware. And if it's a year where it's more software and the upgrade is next year, then that will be closer to 15% versus the 25%.

Erik Lapinski:

All right. Thanks, Mike. We've got one minute left. We'll go to Jeremy Hamblin for our last question at Craig-Hallum. I believe he dialed in on the phone. Jeremy, can you hear us?

Brittany Bagley:

Yeah, of course. So I think the TASER automation as well as initiatives that we're doing around cost improvements are a lot of what gives us comfort talking about how we think we'll have moderate gross margin improvement for 2024. And then we don't have any long-term margin guidance out beyond that. Our long-term guidance beyond ’24 is really focused on the 20% revenue CAGR and the 25% adjusted EBITDA margins.

Brittany Bagley:

I think the goal and the range is to really improve the TASER 10 margins, so that you see sort of stable TASER gross margins over time rather than some of the fluctuations that you've seen. But again, we don't have a long-term target out there specifically for TASER gross margins.

Josh Isner:

Yeah, thank you, Jeremy. And it's nice to hear from you. I would say it's really a tale of two product lines there. On the TASER side, we're actually seeing Continental Europe already start to outpace the Commonwealth countries in pockets. And so, we're really excited about that. We had some large orders last quarter on the TASER side and we see the path here where, the nice thing is, in these Commonwealth countries, they're set up much more like the United States, where they either have states or territories or whatever the case may be. Some of these larger markets in Europe, they buy from the federal level. And so the order volumes are just much higher and you can really build with one customer with a much bigger kind of white space in front of you. And so we do believe you'll start to see Continental Europe really rival or outperform the Commonwealth markets as soon as this year or in the coming years. On the cloud side, that's where the Commonwealth were very early adopters, really across the board, UK, Australia, and Canada. And in Europe, I don't think it's secret, it's been slow. And maybe slower than we would have expected upfront. I'd say that's fair to say, but at the same time, we've really zeroed in on three markets in continental Europe where we really are starting to break through on the cloud. We've got trials going on or paid pilots even. And there, I think our thesis is, there's plenty of work to do and plenty of upside just amongst those few markets, but having a few really break through in the next year or two will be the kind of tailwind we need to start to steepen that adoption curve in other markets as well. So still some work to do on the cloud side, although we're seeing some really encouraging signs there. And on the TASER side, I think things are happening as we speak, which is encouraging.

Josh Isner:

Thank you, Jeremy. We'll see you in a few months at your conference.

Rick Smith:

All right, thank you to our investors for joining. Thank you to our incredible employees that I'm so fortunate to work with. Thank you to our new team members from Fusus and Sky-Hero. And actually today, we had one of our employees who had joined through an acquisition of iNPUT-ACE a few years ago. And I was just delighted to hear one of the things that is really important to me is that those new team members and employees find a new and exciting home where they want to stay. We don't buy companies because we're going to go in and slash and burn, cut costs and make money through the traditional synergies. We buy these companies because they are critical to our mission, their people are doing great work, they're innovating in ways that we're excited, we'll continue to inject that sort of late stage startup energy back into our own bloodstream and keep us going. So couldn't be more excited and grateful for the team of investors, employees we've got. Was out with Chris today showing Fusus to some customers and maybe some things Jeff was hinting at. I might need our redaction tool to cut out all the positive expletives I got today on some of our new capabilities. There's never been a brighter time to be at Axon and I can't wait for the rest of the year to unfold. I can't wait to be at Accelerate here in about a month. And I look forward to talking to you all again in May. So, thanks and have a great night.

Rick Smith:

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 a 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 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 a 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. You're up, Josh.

Brittany Bagley:

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% adjusted EBITDA margin for the full-year or $302 million to $306 million. Our increased revenue guidance factors and 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.

Unidentified Company Representative:

[Technical Difficulty]

Keith Housum:

Good morning -- good afternoon, guys. Appreciate it. In terms of your guidance for the fourth quarter, you know, level precision that we have traditionally not seen from you guys with the $417 million to $420 million, I guess, perhaps comment on what gives you the, I guess, the level-off of that level of precision today and then what has to happen in order for you guys to perhaps, you know, be at the top end or ups even exceed that guidance?

Keith Housum:

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

Trevor Walsh:

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.

Josh Isner:

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.

Trevor Walsh:

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

Andrea James:

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.

Rick Smith:

Yes, so, I would start out by saying what's resonating is our existing product suite, which has been more focused on like military policing and protecting basis. You know, this year, I think the -- I saw the light bulb click at AUSA. In previous years it felt like we were, maybe a little bit of an outsider company from, you know, from over in law enforcement that was coming into federal. This year it felt like we were home. The promotional video showing how you use live streaming cameras, counter drone, you know, TASER 10, all in an integrated way. Our vehicle-based, you know, fleet solutions, our partnership with Fusus on integrating multiple cameras from both, you know, partner agencies as well as existing agency, really resonated to where it just -- it felt like people saw what we could do in base security. What I'm really excited about for the future is, we want to get into combat operations. And, you know, you may first say, well, jeez, you know, if your mission is to protect life, why would you want to do that? Well, because I believe successful military operations in the future will be those that kill the least, right? We racked up a big body count in Vietnam, and it didn't work. We killed a lot of people in Iraq and Afghanistan. And the more people we killed, the less successful our mission was. You look at what's happening in the Middle East right now with Israel. You know, imagine if they had more precise drones and robotics that could be going into those tunnels rather than dropping 2000 pound bombs with tons of collateral damage. You know, we will stay true to our mission to protect life. And I think, look, when I wrote my book the End of Killing, I believe we were closer to the end of war than it turned out. I was tragically and catastrophically wrong. You are seeing what's happening in Ukraine. But I think, you know, I wrote, I believe, in our shareholder newsletter last year or so. Imagine if we had invested in counter-material drones that we could have provided to the Ukrainians, where those drones would go out with fully autonomous artificial intelligence, not to kill people, to avoid people, but to destroy equipment. You know, if you could have brought 150,000 Russians to have to walk home because we destroyed the treads and the barrels and the engines on their equipment, while minimizing human casualties, you know, we think about, we have plenty of lethality. We're not giving a lot of it to the Ukrainians because we're actually trying to toe the line of not over-escalating. And I believe that sort of general thought process, how do we deescalate the level of violence and death to accomplish our nation's priorities and those of other sort of civilized nations is a huge opportunity. 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:

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.

Joseph Cardoso:

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

Will Power:

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?

Rick Smith:

Hey, Josh. One thing I'd like to add there is, it's sort of fun to watch the company develop where there's some really healthy internal competition. Our software started out really as an enabler for body cameras. And I remember, we got -- it's maybe five or six years ago, there was a rallying cry, like, we need our software to stand on its own. It's best in class. And so the country of Scotland, basically their biggest move with us was not even with body cameras. It was digital evidence management for their entire ecosystem. And they're not really even using our body cameras at scale. So each area of the business, it all works better together. But we're now seeing the level of maturity across each of the subsegments to where they're winning best in class on their own. And that gives us multiple ways to try to enter any new market.

Josh Isner:

Sure, yes. Our Head of International Sales, named Chris Kirby, is doing a really good job managing the team toward the out-year of pipeline. So the focus has really evolved from like, hey, what can we capture this quarter, this year, to how can we do that and build a pipeline three to four times the size of the goal next year to just make sure that there's a little more consistency there. So, you know, there'll always be some lumpiness, especially in years where we feel like we've got a lot of TASER momentum because of just the nature of the revenue recognition on TASER versus, you know, the SaaS products. And so, you know, if -- you know, if large international police forces are buying TASERs, you'll see some of those kind of lumpy one-time revenue events. But over the long term, you know, I think that's -- we're already starting to see that kind of balance out and that's, you know, buoyed by a foundation of video bookings and more video adoption.

Andrea James:

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

Josh Isner:

Sure. Yes, We're -- 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.

Mike Ng:

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.

Mike Ng:

Wonderful. Thanks for the follow-up. Brittany.

Andrea James:

Hey, Jonathan Ho at William Blair, go ahead.

Rick Smith:

Sure. Hey, look, it always helps when you have new products that people want to buy. Like, that's the underlying, you know, thing there is, you know, again, this goes back to our product team really doing a fantastic job just building new value into evidence.com with new -- with these, you know, new software features that save legitimate time every police officer shift. And so when we can keep showing that type of ROI, every conversation on a renewal or an upsell is not only, you know, a -- driven by satisfaction with what the customer already has, but it's driven by interest in what we're doing next and how they can participate in that. And so when you have that combination, we have a very, very talented customer success organization that, you know, really drives deep relationships with our customers. The -- and any, you know, a side note, any account that is managed by a customer success manager at Axon, their NPS score is 81 right now. So that's, you know, an off the charts high number when you think about the range of NPS going from negative 100 to 100. And so that just shows the type of trust these customers have built in our customer success team, our product team, our sales team, so forth. And so, you know, all those things being true, it actually is, you know, it just comes down to execution in terms of, you know, sales and account management to get these deals across the finish line. And we see ARPUs going up as a result. And then NRR, you know, is also rising as a result of that.

Josh Isner:

Sure, I'd say within the federal government, there's certainly a network effect there. No question. You know, once we've started with being FedRAMP authorized, that was kind of a big breakthrough for us. And then, you know, Impact level 5, et cetera, just all the kind of table stakes, clearances that our products needed to achieve. And then, you know, once, you know, the Customs and Border Protection has been a really great customer of ours. We heavily value that relationship. And having a lot of momentum there has just kind of permeated out into other branches of the federal civilian space. Rick talked about the opportunity in the military as well. I think there is something there to leveraging our success federally into other international governments. That's happening a little bit here and there, but there is potential that that could accelerate. So, yes, I'm really pleased to see, you know, the types of network effects we've seen in the federal space.

Meta Marshall:

Great, thanks. And congrats on the quarter. Maybe just as a first question, just in terms of kind of the increase, ways that you guys plan to use AI and automation, just where are kind of customer conversations on just ways in which they want to see you incorporate some of these features, ways in which, you know, they just kind of want to get their heads around some of that. And then just maybe as a second question for you, Brittany, you know, gross margins obviously took a small step down quarter-on-quarter, but were better than expected. Is that -- some of that just from kind of the scale, or is some of that just the ramp of Fleet 10 just kind of having smaller headwinds than expected? Thanks.

Brittany Bagley:

Okay. Which leaves us with gross margins? So I would say gross margins were better than expected, really, on the incredibly strong software performance in the quarter. So our software business is gross margin accretive for us. And so the more we build up there, the better overall impact for our gross margin. So I would drive most of the outperformance there. As I think about, you know, why was it down, you know, still a bit year-over-year or quarter-over-quarter? That's really just on mix of our sensors business and the fact that our sensors business also performed incredibly well and the fact that our TASER 10 is also performing quite well. Our TASER margins overall improved quarter-over-quarter, but the mix in there of TASER 10 was quite high.

Josh Reilly:

All right. Thanks for taking my questions. In terms of the Department of Veterans Affairs Records win, can you just discuss what some of the factors were in that win? That's obviously a very large deployment. Curious if your openness to third-party or best-of-breed modules was a factor in that one.

Josh Isner:

There are two other things, I would add. One is just the customer relationship, namely, as they deployed our evidence.com and our other products, they just had a great experience that they shared with us was just different than they had with previous technology. So that set us up for the win. Then the other piece I would say is, we made a decision years ago when we are building records that we were not going to go try to win in RFPs for Record systems because we believe that's a recipe for building bad software. If you go build, you know, 800 checkboxes that all the great on the paper report you submit for the RFP, you're going to build a lot of breadth and there's almost no reward for good user experience. And we structured a lot of our go-to-market around how do we win in the hands of the user and set this up where we can build great software that does the most important things really, really, really well and then integrate other systems to handle sort of the fringes and the breadth of it. And I think that was a, you know, pretty important here where what we were able to show them was a functional system that they could test out and go, wow, this just works great in the hands of the user because we spent the time to build it that way, you know, bringing in people with consumer backgrounds that are used to building UI. That's got to be super intuitive, not built to a large government spec document. No offense to government, you know, procurement specifications, but there's a reason government spec software is typically not great, and that's because, you know, you're building it to very large specs. And in there, there's typically not a real easy way to quantify the user experience. And we focus on user experience first and then identifying which of those specs are the really important ones to the people actually using it. And I think that philosophy, we did not expect to win a federal agency this early in Records lifecycle. So it was a really pleasant surprise.

Brittany Bagley:

I think a bit of both. So we're absolutely going to keep hiring. I think, first of all, our stated goal in R&D is to invest basically top-line growth back into R&D. You can hear all of the exciting things that even with what we're doing, we still feel like we can work on and we have in front of us. And so there's going to continue to be a very robust pace of hiring from an R&D standpoint. Again, we won't get ahead of our revenue growth, but we're really investing there. Then on the SG&A side, we will absolutely get leverage in SG&A, but we can't do what we need to do with flat headcount from where we are today. We do need to continue to invest. Some of that is in sales, but honestly, a lot of that is really on the G&A side as we, you know, figure out how we can get this company to support the level of top-line growth that we're delivering on. You know, better IT systems, get our material weakness remediated, do a lot of that housekeeping that hopefully we very much keep in the background and you don't see, but will overfire investment to deliver nicely on all of these opportunities in front of us. And will give you some leverage too, because we still have our 25% adjusted EBITDA margin target out there. So hopefully this year shows that we can deliver and head towards that. And you all believe us that we're going to hit that. But there is a balance to do between here and there.

Josh Reilly:

Awesome. Thanks, guys.

Jeremy Hamblin:

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.

Jeremy Hamblin:

Yes, no, that's to the crux of the question. And then just a follow-up also on comment that Brittany had made. You know, in terms of the cloud portion of the business and thinking about these slightly larger jumps that we're going to see in that business. Just wanted to understand, in terms of thinking a year, two years down the road on your gross margins given what you're generating on that portion of the business and the bigger jumps, is that something that we should expect the model to iterate as we drive towards 25% EBITDA margins, is that going to be a decent portion of what gets us there?

Jeremy Hamblin:

Yes, absolutely. Thanks for taking the questions.

Brittany Bagley:

Of course.

Jonathan Ho:

Thank you. Just one final question for me. Just given the TASER 10 strengths that you referenced on the call, you know, have you been able to shift to the demand or is there, you know, potentially an accumulation of backlog here as well? Thank you.

Brittany Bagley:

I was going to say it's a great question. We are working really hard to ramp our capacity, but I think you can see from some of the growth numbers and some of what we have been delivering that we're doing a nice job getting our capacity ramped up. As we continue to go into next year, what we're really working on is getting more of that capacity automated.

Rick Smith:

All right, before we sign off, I want 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. And back around 2013, when my kids were in preschool, I had the wonderful opportunity to go spend a year in Europe and walk my kids to kindergarten every day And talking with AJ about her budding and growing family, I couldn't disagree with the assessment that how she spends her time might be to take advantage of some of the success from Axon. So we talked about her doing advisory and board work, given the amazing experience she's had at Tesla and here at Axon. So I'll be keeping on speed dial. AJ, and, you know, just very personally and professionally grateful to have you a colleague and a friend and want to acknowledge your great service towards our mission. I know you've -- she's also formed relationships with so many of you and it's not fully goodbye. She'll continue to support us behind the scenes in an advisory role into at least the middle of next year to ensure a smooth transition. And we are thrilled that Erik joined us earlier this year to help -- to lead our IR efforts. He's really hit the ground running, He is really there to catch the baton from one of the greats. And having been an analyst in our industry for several years, Erik, that is before joining Axon. And with that, I want to thank all of you for joining. We're proud of our team's execution. We're confident in our profitable growth. We look forward to a strong finish to the year. I wish you all a happy and wonderful holiday season. I hope the world finds more peace and we will see you all in February.

Patrick Smith:

All right. Great job, Andrea and Angel and welcome, everyone, to our second quarter 2023 earnings call. It's great to be coming back to you with another excellent quarter and an even brighter outlook. I'm fortunate to spend most of my time talking to customers. Reception to our new products has been fantastic. Recently, I met with police chiefs who said, once their officers take TASER 10 out in the field, they will not go out again without it. After trials and successful de-escalations in the field, some have even joked that their officers are saying, you'd have to pry my TASER 10 from my cold dead fingers. This is the type of feedback that motivates us and keeps us moving forward. Axon Body 4 began shipping in June and we're also getting a great response. Later, you will hear from Brittany, who we recently promoted to Chief Operating Officer in addition to her role as CFO. Bringing these two roles together under Brittany sets us up for our next phase of operational excellence. As COO and CFO, Brittany will oversee our margin profile from end to end to ensure we execute on our ambition to deliver profitable growth for many years to come. Brittany has been a star addition to our team. She brings operational rigor, foresight, stewardship and candor. We also promoted Josh Isner who previously served as our CRO, then COO and is now President. Josh has been an instrumental leader at Axon for more than a decade. And during his tenure, he and I have worked side-by-side evolving and growing the company. I have given Josh many challenges over the years and he's never failed to exceed my expectations. As President, Josh will continue to oversee day-to-day operations while taking on an expanded role within the executive team and with our Board members. Expanding responsibilities for my team allows me to focus on what inspires me

Brittany Bagley:

Thank you, Josh. And thank you, Rick, for the kind words. I'm very excited to take on more of the business and to continue driving the next stage of operational excellence at this fantastic company. Turning to the results. We reported another strong quarter, reflecting broad strength across our business. Our top line grew 31% year-over-year and we saw EBITDA margins of 22%. Second quarter gross margin of 62% improved sequentially, primarily reflecting business mix from software. As you saw in our shareholder letter, we did have some noise in our segment margins this quarter as we worked to more closely align our overhead costs with our specific product lines and had some onetime adjustments. On an aggregated basis, however, most of that is allocations between segments and our overall gross margins reflect a mix benefit from software. Axon Cloud and services revenue made up 35% of total revenue this quarter compared with 29% a year ago. As we noted last quarter, we would expect full year gross margin to remain approximately flat or improve modestly from Q1 2023 levels due to continued professional services related to Fleet 3 and the continuing ramp of Axon Body 4 and TASER 10. We continue to believe there are opportunities next year and over the long term to improve our margin profile as we invest in automation and recognize scale efficiencies from recent product launches. We also expect to continue to see mix benefits from our software growth. We believe we will exit this year at a more normalized run rate demand for our Fleet product, having largely caught up on our backlog. Turning to our operating expenses. We saw leverage out of both R&D and SG&A. We continue to invest absolute dollars to drive our product road map and to scale our business rapidly. We're pleased with the adjusted EBITDA margin of 22% in the quarter but given the second half gross margin profile and timing of some OpEx investments, continue to keep our guidance at 20% for the year. With our increase in revenue, this does result in us dropping more to the bottom line for the year and we're continuing to focus on how we can better leverage our OpEx, especially in SG&A over the longer term. Turning to our guidance. We are increasing our full year revenue outlook to a range of $1.51 billion to $1.53 billion, representing about 27% to 29% growth. We continue to target full year adjusted EBITDA margin of 20% which implies an increased range of $302 million to $306 million of adjusted EBITDA. In terms of the healthy guidance increase, we always want to make sure we can deliver on what we say we are going to do. And that continues to be our focus while at the same time, making sure we're doing our best to accurately reflect what we're seeing in the business. We had 2 major hardware product launches this year and the successful rollout of these products as well as the robust customer response to these launches has given us the confidence to increase our forecast after a strong first half of the year. We do expect most of the increase relative to our prior forecast to occur in the fourth quarter due to typical seasonality. With that, I would like to open it up to questions.

William Power:

Well, I guess, first, congratulations on the strong results and congratulations, Josh and Brittany, on your promotions. That's great to see. Maybe, I guess, 2 questions. I guess, first, I'd love to kind of dig into the cloud success. I mean really strong growth there, over 60%. I think in the shareholder letter, you said about 50% of the growth was driven by body cameras. And so I want to just get a perspective of how you think about the continued opportunity just looking at that piece of it. Then the other -- second part of that question is what are the other key drivers within cloud right now? Because it's clear you're having a lot of growth outside of just that body camera piece.

William Power:

And if I can just fit in just a second question. You raised guidance pretty significantly for the year. Anything else you can add with respect to the visibility in the second half and particularly the fourth quarter, given the seasonality that I think Brittany just alluded to, too, just to provide investors confidence in that increase?

Andrea James:

Okay. Next question from Tim Long at Barclays.

Brittany Bagley:

Yes, of course. So there's a lot of moving pieces in our gross margin, as you can tell, from going through our shareholder letter. I think the biggest thing is we have had some headwinds on gross margin this year, really from 3 main pieces. One, getting TASER 10 ready to go, ready to ramp, ready to be scaled in production. And we expect -- we continue to ramp and scale that business as we go through the year but that's really a next-year event when we think that that's fully scaled and ramped up. So factored into our gross margins this year but should be a gross margin benefit for next year. I think it's similar on the launch of AB4. There's just a period of time while we go through a transition of bringing a new product up and getting it ready to get launched that again, weighing a bit on this year should be nice for us next year. And then probably the last piece that we talked about last quarter, it's continuing to impact the cloud and services gross margin which you noted for this quarter, is just the professional services on our Fleet installations. So our Fleet has been a phenomenal product for us this year. Some of that was because we were inventory-constrained and had some backlog coming into this year and we've really been working through that. But with Fleet, we sell the hardware. We have professional services to install the hardware. That is a bit of a hit to gross margin for us in a onetime way. And then we turn on software associated with the Fleet product. And so once we're through the professional services install, we have nice recurring software revenue attached to the Fleet camera. But our volumes of Fleet are so high this year, you can view that as a bit of an investment in gross margin to unlock nice long-term software revenue sort of next year and beyond.

Joshua Isner:

Yes, great question and thank you. First of all, one that we're really excited about is a deal in our justice segment. So here, we're talking about prosecutors buying kind of enterprise licenses for Evidence.com and tightly integrating with the police departments. And so that was 1 of the 4. A couple were federal. And certainly, we continue to see those become more common and at larger dollar amounts as well which are both very encouraging signs and speaks to all the great work Richard Coleman and his team are doing in our federal business. And then lastly, in international. In our Tier 1 markets, the U.K., Canada and Australia, we still see very meaningful orders coming out of those markets, both across TASER and body cams and Evidence.com. And then we continue to start to make more headway in some of these large markets outside of those 3. And generally, at those -- at this point, those have been more taser-oriented orders as we continue to evangelize the cloud and work with our early kind of opportunities on getting some of these major customers on to the cloud. So that's a little bit of background around where some of those are coming from.

Andrea James:

Josh Reilly at Needham. Go ahead, Josh.

Joshua Isner:

Yes, Josh, thank you for the great question. A couple of ways to think about this. So coming out of the first half of the year, as everyone remembers, we're a little more conservative on what our guidance would look like for that reason because there's this period when you launch new products where you don't know if customers are going to want to just continue with what they have or trial the new product before buying it or just switch right over to the new product. And so I think we've kind of cleared out a lot of those uncertainties at this point. And I think it's fair to say that a lot of the interest has converted from TASER 7 to TASER 10. And so customers that were on order for TASER 7 kind of pumped the brakes, wanted to trial TASER 10 and now we're moving in that direction. AB4 is a separate -- a little bit of a separate motion because the early volumes of those cameras are driven by hardware upgrades in our TASER Assurance Plan, not as much book and ship like right out of the gate. And so 2 kind of slightly different stories there. But yes, as those things become better in focus, it allows us to get a little more aggressive with our guidance. And as the year comes together and that, combined with a really solid back-half pipeline, gives us a lot of confidence moving into the last 2 quarters of the year here.

Josh Reilly:

And then just a follow-up on the Fleet 3. You mentioned you're going to catch up on demand by year-end. How much of the catch-up is around manufacturing the hardware versus actually getting the product installed at the end vehicle? Where has the greater bottleneck been in the last couple of quarters here?

Andrea James:

Mike Ng at Goldman Sachs. Go ahead, Mike.

Joshua Isner:

Yes. Ultimately for us and we've talked a little about this in the past but the big kind of focus for our sales team is selling our Officer Safety Plans which have a number of different software features in across DEMS and Records and Standards, product which is kind of a use-of-force tracking product. So there's a lot in those plans. And ultimately, the more of those bundles we sell, the higher our ARPU will be in software. And then when we combine that with kind of picking up momentum, both on the records management side and in the justice segment and then in some of our new markets, those things combined to offer a nice uplift over just kind of our base Evidence.com licensing. And so it's really a combination of those 2 things.

Michael Ng:

And I did want to follow up on that along with the comment that Josh made earlier about good momentum in justice. So is it right to interpret that there are customers that are buying the software or the E.com licenses that may not necessarily be part of the body camera or the TASER installed base? And if that's the case, I was just wondering if you could expand on that a little bit more and talk about the opportunity there?

Joshua Isner:

And I totally agree with Rick and the only thing I'd add on that is there are extra licenses every agency buys for non-sworn personnel and that number will only go up with Axon Records. And so that's a big piece of the puzzle here as you think about the police officers on the street choosing our body cameras and tasers but then all of the people in the back office that need access to records and evidence, that's a substantial uplift as well. So in addition to some of the new market and kind of DEMS-only features that Rick talked about, there's an element of just our domestic customers adding on more and more as our product portfolio grows.

Andrea James:

Thanks, Mike. And before we move on, we've used the term DEMS a couple of times. That means digital evidence management system. So that's the acronym for everybody. Keith Housum at Northcoast.

Patrick Smith:

So it's actually not changing a ton. Over the past 5 to 6 years, I've been wanting to put more and more focus on customers and technology, really creating -- understanding the pain of our customers, conveying the story that is our existing ecosystem and writing the story for the next 10 years. And focusing on that requires just frankly a very different mental outlook than running a business day to day. So if I went back 5 or 10 years ago, to be honest, I was getting quite burned out. It's just very difficult to run a large organization and then go, oh, in between this endless e-mail inbox and all the to dos of managing the business, let me now pause and shift to creatively looking at understanding what does the next phase look like. And so I think these promotions just sort of clarify those roles and this is giving basically Brittany more control over the operational excellence of our margins and our -- everything in the manufacturing supply chain to really make sure we're delivering. It's giving Josh -- he's actually taking a little bit more of -- some of, for example, my interactions with the Board that are more operational in terms -- Josh actually tends to lead most of the Board meetings in terms of the agendas, et cetera. And what that allows me to do is focus less on what we're doing and much more engaging -- so during Board meetings, for example, I'm very focused on driving discussions at a highly strategic level. And I think we play to each other's strengths. So my wife will tell you, I'm working harder than ever and I'm traveling more than ever out with customers and large expos because I don't have a list of to dos I've got to do around internally in the office. And I know we've got a team and I've got a very long relationship with Josh and with Brittany so only having been here little over a year, I think now, we've rapidly developed that same connective tissue, where we kind of understand each other's strengths. And that allows me to focus on the thing that I'm uniquely able to do as a founder CEO and that is -- as I mentioned in my script but I just want to really call attention to it. The reason I think founder-led companies outperform and the academic data kind of shows that, is when we focus on what -- like what is the next big leg that is not obvious, like, a traditional large business. Most of our competitors are focusing on basically running up kind of a profit-driven machine and each product manager is sort of asking the customers kind of what they want. My job is to predict what the customers aren't asking for yet and to match that up to various technologies. And there's a fair amount of risk that comes with that but the rewards are significant and we saw that when we created the taser market, the body cam market, the cloud market. No customers were productively asking for those. I think we're ahead of the ball on AI. We think about overall how we communicate. When I was a child in 19 -- in the early '70s, I communicated with a rotary dial phone in my house and police had push-to-talk walkie talkies. Today, I don't have a rotary phone, like we're doing Zoom with people around the world and our customers' primary mechanism of communicating is still push-to-talk walkie talkies. Like I think in the next 10 years, that will no longer be their primary method of communication. Police will be using audio, video sensors and AI to manage the massive amount of data flow so that we're collecting what is happening in the field, distributing that information to the right people and then cycling back to that officer in the field in a very focused way the information they need to know through the media that is most efficient for them to do it. It's least distracting while they're doing this difficult job. So it's solving those sort of problems. And frankly, Jeff has done such an amazing job of building an amazing team. So when I talk about solving that problem, we've got people like Ron McCatty [ph], who built Alexa drop-in, calling that revolutionized personal communications for 100 million people, including me, right, probably far more than that now so I could talk to my mom when she was -- had mental dementia and couldn't answer a phone and my kids could drop in on her from our kitchen, that sort of disruptive communication experience is part of what we're looking at now in the next 10 years. So that's where I spend my time and that's why I'm not answering many questions about margin and budget because I've got a strong team that I know is all over that, so I can focus on the future.

Joshua Isner:

Maybe I'll talk about a little bit of the demand and I'll hand it over to Brittany to talk about the mix and margins. In terms of demand, yes, we absolutely see customers and I've said this maybe in the last call and to others as well, like this is the first product where our customers have a genuine interest in upgrading early to it. Usually, because there's a training uplift and there's challenges around deploying it across thousands and thousands of users, you kind of kick the can down the road to the end of your useful life before you upgrade to the next one because it's a lot to bite off to deploy a new taser. In this case, agencies are willing to accelerate that process in favor of getting this weapon on the streets faster. And so the early feedback continues to be very strong. Customers that -- there were even some customers who didn't move to T7 from X2 who are now jumping straight to T10 with the 10 shots and increased distance. So very, very bullish on T10 adoption over the next a couple of years here. Now keep in mind, internationally and in some domestic markets as well, there's still a trial period that takes place where agencies want to field it and get enough data. And so it doesn't happen all at once. But I think over the next couple of years, our TASER business will continue to grow on the back of more TASER 10 handles in the field.

Andrea James:

We have 3 analysts that we will get to next. Samik Chatterjee at JPMorgan.

Brittany Bagley:

I think we're largely getting through our inventory supply constraints. And now we're really looking at what it will take to get Fleet installed. And so as you go through this year, you'll see basically what is normalized healthy run rate for Fleet from a demand standpoint. Remember, as I said earlier on this call, we have 3 pieces of Fleet revenue. You have the hardware which is showing up in the Fleet line item of our reporting. So you've got the hardware. You have the professional services which goes into our services line item. And then you have the software revenue that gets turned on once we have it installed. So as we come out of this year, you'll see a really nice level of run rate demand. And I would expect as we get through this year, we're at a good level of run rate demand for professional services installations as well on that Fleet product. Josh, did you want to jump in?

Samik Chatterjee:

On the Evidence and cloud services growth, obviously, very robust growth that you're experiencing there. Can you talk to what the underlying customer count sort of trends are? Because I'm trying to sort of parse out how much of this is land and expand with customers that are already using and sort of upselling to them versus actually going into new customers and them trying out the product? Like can you talk about sort of the underlying customer count a bit more?

Brittany Bagley:

The only thing we do give and we gave it in our shareholder letter, is that the penetration rate of our Officer Safety Plan is less than 20% relative to our potential state and local law enforcement installed base. So I think we have both great ability to land as well as expand, to Josh's point.

Jonathan Ho:

Congrats on the strong results. I did want to maybe get a little bit of additional color on AB4 and what your customers are most excited about in terms of new use cases around the AB4 capabilities?

Jeffrey Kunins:

That's right. I mean I think just echoing on all of what Josh said. This is a category where the meat and potatoes matters a lot and there's tons of exciting innovation. The -- no one -- everyone always wants more battery life and we're delivering there, bringing -- turning the POV from a separate product to a no-compromise simple accessory that's an add-on, we think is a game changer for a lot of agencies. And then full circle back to Respond and really moving live streaming in this future of modern multimodal communications from a thing that feels like an add-on to a thing that feels central and native to the product itself. And 2 very specific aspects that we think resonate and the customers are telling us loud and clear they love. One is frankly, the notion of it being hands-free. The fact that not only do you have 2-way voice but I'm there in the middle of a scene having hard things go on and I can, in a hands-free way, both talk back to who's talking to me while I'm hearing. And so that enables just a new kind of freedom and interaction that complements and adds to the other communication options they have available to them today. And number two, this idea of the watch me button, you've heard us say it but from a psychology standpoint, one of the things that has been an opportunity for agencies to think about how they'll adopt live streaming is simply who is starting it. And psychologically for an officer, there's something incredibly compelling about the notion that I'm the one who gets to say, I'm asking for help. I want someone to watch my back as opposed to, I don't know when someone might choose to drop in on me. They're both critically important but the psychology of empowering officers to say I want someone to watch to my back right now. We are hearing loud and clear that they're super excited about.

Andrea James:

Thank you. Jeremy Hamblin at Craig-Hallum. You're up.

Brittany Bagley:

Yes, I'll jump in. It's been great to see and great to watch. We last gave that penetration stat in Q3 of last year and it was less than 15%. So we have seen a nice increase in that over the last 9 months. And I think you're seeing that get reflected in some of the increase in our software revenue. I would say that there's also things where we're adding new products, right, this call out I made on standards. This is a product we've been investing in. We've been testing with customers we've had out there and we got it to the point where we could start recognizing revenue on it. And so those are exciting things that start to feed into our software business and our software recognition. I think if you're modeling it, for modeling purposes, we would still say a good 6 quarter average and maybe Q4 and Q2 of this year were particularly high because of onetime revenue in Q4 and the Standards piece in Q2. So I'm not sure it's fair to fully average those in. But I think your macro point of we're having great momentum in our software business and our customers are loving it. And they're adding more and we're upgrading people to premium bundles, I mean that is the heart of the story around the software cloud business and we're really excited to get to tell that story and to give those products to our customers.

Joshua Isner:

Yes. Thanks for the question, Jeremy. I would say that the international market is kind of bifurcated between our Tier 1 customers in the rest of world right now. In Tier 1, I think we are getting closer to OSP-like offerings. And that's because generally, you're not talking about one federal government buying everything. You're talking about cities like London and Manchester and Calgary and Edmonton and Ottawa or states in some cases and provinces in some cases. So -- and same in Australia. And so where there's heavy adoption of both and it's not all federal purchasing, I think we will see OSP adopted in those markets over time. In the rest of the world, the focus is really just landing in a large way with one product and then starting that journey which is go from one product to multiple products. And then when both of those products are more well adopted, that's when we talk about this kind of bundling concept. But the fact that you've got these large federal governments doing the buying in a lot of cases, it's both a good thing and a bad thing. It's great that the volumes can be way more exciting upfront but it's also harder to pair 2 products like that together because it's just very different processes relating to the procurement of each. And so we're working through it. And hopefully, over the next year or 2, we'll start to see OSP kind of take a foothold in some of those Tier 1 markets.

Joshua Isner:

Before Rick closes us out, just one more thing, if it's all right. As we do the call backs tomorrow, I hope all of our analysts will wish Brittany a happy birthday. And happy birthday to you, Brittany.

Patrick Smith:

It's delightful to be able to share these results. Obviously, a ton of hard work went into this. I pinch myself every day that I get this fantastic job. These things don't happen by themselves. My view of this is this what happens when you have an amazing mission, you attract just unbelievably talented people, give them the freedom to operate and bring their own diverse backgrounds and talents into the team and let them run. And we're running hard and we're going to keep running hard for you, our investors and for our customers and, knock on wood, we'll be back to keep telling you about some of the great work our team is doing. You only get to see a handful of us. But behind the scenes, there's a cast of thousands of really talented people working really hard. So for those of you who on our team that are listening in, thank you for letting us bask in the light of results like these from the work you do. I look forward to seeing you all next quarter.

Patrick Smith:

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

Brittany Bagley:

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

Tim Long:

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

Josh Isner:

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

Andrea James:

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

Patrick Smith:

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

Josh Isner:

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

Andrea James:

Next up, Mike Ng from Goldman Sachs.

Josh Isner:

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

Josh Isner:

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

Andrea James:

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

Mike Ng:

Thank you, Jeff.

Josh Reilly:

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

Josh Reilly:

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

Jeff Kunins:

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

Josh Isner:

Thanks, Josh.

Andrea James:

Will Power at Baird.

Jeff Kunins:

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

Will Power:

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

Will Power:

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

Will Power:

Okay. Thank you.

Andrea James:

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

Andrea James:

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

Brittany Bagley:

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

Jeremy Hamblin:

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

Josh Isner:

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

Josh Isner:

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

Jeremy Hamblin:

Thank you.

Josh Isner:

Erik, it looks like you are on mute.

Josh Isner:

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

Andrea James:

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

Josh Isner:

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

Paul Chung:

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

Andrea James:

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

Rick Smith:

All right. Thank you, Andre and Angel. Great job. And to our investors, I hope you can feel the passion that comes through in that video. And I'm just so humbled to be a part of this team. And the formula is really work for us is when we focus on one of the most important problems we can solve that gets us solving the things that are also the most valuable problems for our customers. And that ultimately is what puts up the results that you see from last year. So TASER 10 is the most sophisticated, accurate and effective TASER energy weapon we've ever created. It's a huge leap forward. Future generations may simply take for granted the existence of these truly capable less lethal technologies as if they had always existed. And like all technological advancements that drive our society forward, that is our goal. Now the customer reception has been fantastic. We are incredibly humbled to be at the forefront of breakthrough technology and societal change. Our 2022 standout performance with revenue up 38% and strong profitability and cash flow follows multiple years of exceptional results even through difficult macro environments. Axon's history of superior execution can be traced to a few key things

Brittany Bagley:

Thank you, Josh. It's particularly gratifying to see broad-based strength across the business and our strong 2022 execution. Both software and hardware are driving robust performance. Notably, Axon Cloud now represents about one third of our business, carrying best-in-class metrics on growth and net revenue retention. In 2022, cloud revenue grew 50% to $368 million with a 73% gross margin. Annual recurring revenue has grown to $473 million and the net revenue retention is 121%. In addition, we are incredibly proud of the fantastic job Axon has done selling hardware and subscription bundles. 9% of total revenue in 2022 was tied to a subscription compared to just a few years ago when less than half of revenue was subscription-based. Following on Josh's commentary regarding the GAM opportunity, our updated analysis more closely aligns with our focus as an organization. Axon's core TAM of $45 billion across SaaS categories cameras, professional TASER, Axon Air and VR reflects opportunities and a customer base includes public safety, U.S. federal, international and commercial enterprise. At the same time, the consumer personal protection market remains an opportunity, and I'm currently recruiting for a permanent GM to lead the business. However, as we noted in our shareholder letter, we are refarming our analysis on this market from $18 billion to $5 billion in terms of total TAM. Almost $5 billion is still large opportunity that we're interested in pursuing, but we are rightsizing our focus to better reflect the normal opportunity we see in our core business. You'll also note that in Q4, we recognized $8.5 million of cloud revenue that we had previously underreported. This revenue relates to work that was completed in prior periods and was unrecognized due to our ERP implementation in 2021. While the impact is immaterial to our financials, it did result in a material weakness. Remediating this will be a focus in 2023, and we have laid out a detailed plan in our 10-K. Against the backdrop of an exceptional 2022 and an improving demand environment, we are thrilled to be sharing another robust outlook for the year ahead. Additionally, now that I've had some time to dig into the business, we are introducing 3-year financial goals. Looking at 2023, my key financial priorities for the year are the following

Sami Badri:

Just have a couple. First one is for Rick. I think Brent just mentioned that TASER 10 is going to be ramping up in 2023. But one thing I think that you laid out in the video is just the feature set and what TASER 10 actually proposes to a lot of your customers would there be customers that feel very strongly about maybe an early shipment or an early refresh of their actual TASER nonlethal weapon, or would they have to stick to kind of the plan or subscription type time line that they've already signed and are subscribed to?

Sami Badri:

Got it. Next one is for Josh. Josh, you talked about how compensation will be measured by four key drivers. One of the drivers was actually selling other products or cross-selling. Will that include ecosystem partners that are part of your Axon cloud feature set also being pulled through in the sales motion? Or is that very isolated to just Axon products and services?

Sami Badri:

Got it. And then one last one for Brittany. I'm burning for the 500 basis points of expansion by 2025. Is this going to be back half loaded across these three years just because of the comment you made regarding some of the products, well, the comments you made and the comments made in the actual press release regarding margin neutrality for some of these products. And then as they ramp up with software, does that [indiscernible]

Brittany Bagley:

Yes. So I'm taking the gist of the question to be when might we get to that 25% margin. And we're really looking to make sure we get there by 2025, Sami, like there are a bunch of those puts and takes that we're looking at both for 2023. And certainly, part of getting to the OpEx leverage that we've talked about is getting to that $2 billion in revenue. And so we need to pull those levers, and it's nice that we have multiple different levers to get there, both from a gross margin and an OpEx standpoint.

Jonathan Ho:

Congratulations on the strong results. I guess I wanted to dig a little bit more into your comments about what's underpinning your confidence for the 2025 guidance. Is there something that's maybe changed with some of your market assumptions or one part of the business that's proving stronger than you anticipated to give you that extra degree of confidence to extend that 20% guidance?

Jonathan Ho:

Excellent, excellent. And then just with regards to the TASER 10 pace of adoption, can you remind us what happened when TASER 7 was released? Do you worry at all about maybe customers delaying orders to purchase the 10 million. Just wondering if there's any sort of linearity that we may worry about here just given the step function improvements that you've made or above step function improvements.

Andrea James:

Next question, Eric Suppiger from JMP.

Josh Isner:

Yes, absolutely. I think it's just timing of shipments and orders. And I think toward the end of the year as we looked at the year and the upcoming product launch. We wanted to be thoughtful about with a product launch a couple of years away, just maintaining flexibility for our customers as we knew some might be interested in the next one. And so we tried to manage that as best we could. And we're very excited to see the supply chain opening up on fleet. I think you'll notice that was a big item in terms of the volume of fleet that shipped in Q4. We expect that to continue throughout the year. We mentioned some of the supply chain challenges historically. We're cautiously optimistic that we're past kind of most of the storm there and feeling good about having the opportunity to ship certainly record-breaking amounts of Fleet 3 this year and of course, plenty of tasers, body cameras and some of our other solutions as well.

Josh Isner:

I don't have the exact number in front of me, but I'd say over the last year, in terms of the amount of CW shipped, TASER 7 was above 80% to 85% of the total there. So I think that speaks to the fact that much of the market had moved over from our legacy smart weapons into TASER 7. And now we have the opportunity to, of course, upgrade all of our early TASER 7 customers. But as Rick mentioned, I think there'll be some that are more recent that will be interested as well. So we're very excited to get as many case tens out there as we can.

Keith Housum:

As we look at the kind of coming out, first off, you guys announced a specific data that's going to be deployed. And then second, if we look at past rollouts of the TASER weapons, there's obviously has been some challenges in terms of the gross margin recognition in those first few quarters. So perhaps you guys going to address steps you guys have taken over the past several years to identify and address the bot issue and what you guys are doing different with this rollout to protect your gross margins.

Rick Smith:

It's a little bit there. The Fleet is the first major product to launch under the new regime with Hansberitz running our R&D and John Graf and his team running engineering and building in and others and NPI. And basically, what we saw with Fleet, we injected probably six to 12 months of additional prerelease testing to really validate the product. And that paid off in a big way where Fleet 3 is a very sophisticated product, but it's had among the lowest out-of-the-box return rates and customer bugs reported of any product we've ever shipped and TASER 7 -- I'm sorry, TASER 10 went through very similar. It has been in testing with a highly automated production line for probably 6 to 9 months leading into the launch year. So the level of testing compared to previously when we were maybe a less mature company and still making that transition from the more entrepreneurial days. that there's just a lot more time, effort and expense that goes into the upfront testing, but that is paying dividends in the stability and reliability at which we're able to scale these without some of the challenges we had with T7 in particular, come to mind.

Josh Isner:

As on TASER 10 will start shipping in March. .

Brittany Bagley:

Yes, of course. One, I would say, as you can tell, because it's been a little bit of time. Now it was very much opportunistic from our side to strengthen the balance sheet and to give ourselves a bit more flexibility from a capital standpoint. And we think we found a time to get attractive terms in the market. So we're very pleased that we were able to proactively get ahead of that. And then I think you heard me talk about how we have been investing in our ecosystem partners, how we might potentially consider M&A as we look going forward. And so we want to make sure that when we find something that is appealing from an M&A standpoint that we're able to be on our front foot and move quickly and smartly going forward on that. We spent a lot of time on that convertible offering talking about what might we look for from an M&A standpoint because that was top of everybody's mind. And so a little color is, I think, if you look at our M&A history historically, that's probably a pretty good indication where we're really looking for either technology or talent that will support our future product road map and/or our moonshot goals and mission.

Paul Chung:

So just another follow-up on kind of the pace of operating leverage through 2025. The pace accelerates a bit in '24 and '25 to get to that 25%. How do we think about the OpEx base kind of relative to gross margin expansion? And longer term, can you still get to that 30% mark you've mentioned in the past?

Paul Chung:

Okay. Great. And then just a follow-up on cash flow. Can you expand on kind of the big upside relative to prior guide and you're above your target kind of conversion rate this year are back in 2022? And then how do we think about free cash flow conversion in '23 and the puts and takes there? And is at least 60% conversion longer term, somewhat conservative given the tough macro backdrop, you guys hit 80% plus mark. Is that -- can we be at that 8% mark pretty consistently?

Andrea James:

Will Power at Baird.

Josh Isner:

Yes, it was just about component availability, I think. Is that right, Will?

Josh Isner:

Yes, absolutely. So our supply chain team, as always, has just done a fantastic job staying ahead of the curve in what are less challenging times than maybe a year or two ago, but any time you launch a new product, there are a lot of provisions and moving parts leading up to that. And ultimately, we feel really good about our capacity not only this year, but continuing to build out our automation capabilities to more exponentially expand our capacity into the future. And so certainly, we have plenty of inventory to support our revenue guidance and beyond for this year and next year, we're aggressively planning for even higher demand.

Josh Isner:

Maybe I'll start with the dentist question and then hand it over to Jeff for records. But the reason I want to take this one will is to give Jeff a huge shout out for the work he's done over the last few years. He's essentially built a team that not only has delivered on the core ecosystem, but continues to build out the last mile types of features and products that make the product, not only that much more valuable to our core market, but also more attractive to our kind of up-and-coming markets in federal and international. And so his team has just done a great job continuing to identify opportunity and market needs and then executing well on the plan to deliver those capabilities and just that flywheel continues to lend itself to more customer interest and more happy customers that will buy more over time. And so that's been the backbone of our dems adoption. And maybe Jeff, I'll take it over to you on records.

Andrea James:

We have three analysts left in the queue and [indiscernible]

Andrea James:

So we have three analysts left in the queue, and we're happy to go past the top of the hour, so we can make sure we get to everyone. We love the engagement. Jeremy Hamblin, at Craig Hallum.

Brittany Bagley:

Yes. No, it's a great question. For us, it really is about either vending technology or teams that fit in well with our mission and/or our business model. And so there are multiple parameters that we are looking to evaluate companies on. And so it's always sort of a multifaceted equation for us as we think through them. That's not to say that we aren't looking at whether or not something is financially attractive to us. but it could be across different metrics. It could significantly increase our TAM. It could help us get conviction on supporting that 20% growth long, long, long term? Or it could be accretive to our gross margins or EBITDA margins. So there isn't sort of one set of things we're looking at, but we're really looking at ways that we can find companies that tuck into our ecosystem. We're looking to really integrate the technology and present a holistic Axon solution as we look forward. And then I'll just note that, that dilution number is really sort of an organic dilution number. So I think we have a strong balance sheet. I think we can certainly use cash for that. If we were going to use equity, I would consider that separately from what we're doing from just an internal stock comp expense standpoint.

Josh Isner:

Yes, absolutely. Thanks a lot for the question. Nice to see you, Jeremy. On TASER 10 ASPs, we're not going to get too prescriptive there, but I'd say you should expect an uplift over previous generations and -- that's part due to the hand price and also part due to the number of cartridges in the bundle relative to previous models. And so I think we published the list prices on the website, so you can kind of derive from that what type of uplift to it will be in our bundles. So there'll be a slight inherent discount associated with any product in a bundle, but at a high level, that's kind of the story with TASER 10. And then with Fleet 3, no outsized orders like just a lot of volume, and you should expect that to continue and and maybe even higher levels this year. The product has great product market fit. It's a well-built, well-designed product. the ALPR functionality associated with it is in high demand. ALPR is one of our fastest-growing software add-ons across the business. I think historically, you might remember our Fleet One system, which was more or less a body cam attached to a windshield and then fleet two was the moment where we got to parity -- but then Fleet 3 was the moment where we really surged ahead of the market and became the highest -- the largest selling in video system and public safety. And so actually, I think that's a path you can expect from a lot of our products over time where we reach parity with one version, and then we really accelerate ahead. And so we're really excited about the progress with Fleet 3, Blake Bullock, our product manager and our entire team on Fleet 3 has just done a fantastic job there, and we're really proud of the progress. Still a lot of work to do, but Encouraging to see that product take shape as the highest demand in-car video system and public safety.

Andrea James:

We have two folks left. Elisa Shreve is on for Tim Long at Barclays. Elisa, you're off mute, but we're not hearing anything come through Okay. Let's go to Josh Riley from Needham.

Josh Isner:

I think, Josh, the nice part is it's a combination of both. We continue to sell high volumes of body cameras to new customers, but we also continue to see existing customers buy more and deploy more widely. And then, of course, by more and more of our features that are on top of the body camera and so -- in peripheral products like fleet and virtual reality and drones and so forth. So it's a nice healthy mix across the board, and we're very excited about that. We want to diversify the number of ways we can achieve these types of results. And I think we're doing that, and we're very excited about that trend.

Josh Isner:

I think, again, like we've got a number of ways to deliver in each quarter. And so it's -- of course, if we start out with strong shipments of TASER 10, then that makes the path easier, but that's not our only path. And so we're excited about the fact that between all of our hardware products and just the growing base of software revenue that we have in the business that we've been thoughtful about our guidance here. We believe it's very achievable. We continue to expect to grow 20% year-over-year and quarter-over-quarter. So we'll continue to to execute here and make sure that between TASER shipments and all of our other products that we're very thoughtful about how we guide.

Andrea James:

Elisa, should we try one more time? Okay. Go ahead. Let's have Rick Smith close us out.

Andrea James:

Good bye.

Rick Smith:

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 about the 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 shares 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 moonshine 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 tech 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. Aon has been and will continue to double down on our investment in things like number one, 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 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 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 a tie between our real-time operations and our devices, which brings me to #4, 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. Also, we believe that remote response can limit human exposure to danger. Our thinking is that we're moving the officer from harm's way leads to safer outcomes for everyone. And 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 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 response to resistance reporting. This includes both traditional use of course, and de-escalation data. Data collection tools today either don't exist or they don't talk 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 in support. And we believe we can meet this need. And we need this data to reach our Moonshot. Now we know the Moonshot Gold 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 creation, 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.

Brittany Bagley:

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, 3 main ones that I would like to highlight include the strong leadership team, the company is 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, which provides 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 OpEx by enhancing financial discipline while still investing in research and development and sales channel expansion to support future growth. In addition to leaning in on operational areas of the business, I am also focused on helping Axon to deliver upon its strategic ecosystem vision, leveraging partnerships, 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 which supports 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 and resulted in adjusted EBITDA of $68 million or 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 OpEx 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 CAGR going forward. With that, I would like to open it up to questions back to Andrea.

Joshua Reilly:

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?

Joshua Reilly:

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 Britney 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. .

Joshua Reilly:

Got it. Congrats again.

Jonathan Ho :

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?

Rick Smith:

Josh, I would add to it as well. What I'm seeing with customers, I haven't -- I can't think of a customer that's been like gone up to a premium bundle and gone down the other direction, that the more stuff they use from us, the more value they see in it and very sort of the flywheel effect where what I'm hearing from customers is they just want to put more of their solutions with Axon. -- they struggle with technology. They're hamstrung by really long, complex procurement rules that make it very difficult for them to be agile in what they're doing. And so I think we've earned their trust and it's really incumbent on us to keep earning it every day. So we don't break this dynamic, but it does seem to me that they're pretty consistently moving up the ladder each time we launch something that integrates with the other stuff. It's paying off, it's working well. And again, a lot of that just goes to awesome execution and Jeff the product team.

Rick Smith:

So I'll start and then maybe hand back over to Josh. I think investing to get that ramp accreditation for the Eves.com system early. It was a bit of a bet when we did it, right? It was expensive. It was difficult to invest in that. And I think to this day, we're still the only Fed ramp accredited or certified system and all these federal agencies that want to use the cloud, that obviously gives us a tremendous advantage. And then we've obviously seen things like the administration moving towards standardization with body cameras. And then Richard Collin, who we hired a few years ago, is really, I think, just done a great job building out a team that really understands the federal space and is building some fantastic relationships.

Andrea James :

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

Rick Smith:

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. We talk about being a mission-focused business. And a lot of times, that can sound like puffery or kind of fluff, but it really is true. We are running this business to solve problems we're passionate about. And of course, we also want to run a rigorous business where we have financial models that make sense. But the finance has come from the problems we solve and infusing that in every employee, I'm just so impressed with the team and the attitude they've got where it's all about keeping our customers productive and safe and happy, and we really give a lot of latitude to our teams to make things right. And where that pays off is we don't think of these as just contracts we're going to sell and make a few bucks to move on to the next one. And so we get phenomenal customer references and the investments we make in really delivering a great product to the end user, not focusing on winning the bid RFP sort of bureaucratic process I think, builds the type of things where you see these relationships where people even relatively early on, they're cross checking with their other agency customers that are similar, and they're getting the confidence to give us a large part of their technology ecosystem. So I think that's the underlying thing is the focus of the team on really the passion around the business to build things that really delight and protect our customers that give customers the confidence to go do that. But I'll turn it over to Josh to maybe give a little more color to federal specifically.

Jeff Kunins:

Yes, sure. I totally echo everything Rick said. And then combined with that, you've heard us talk a lot, whether it's in margins or in many other places about scale and our flywheel and leverage over time. But in the way we invent and deliver our products to our customers as we do these market segments, expansion. The same thing is true there as well because you can think of leverage where we've spent a decade on our core dams and cameras products and then even longer on TASER. And at this point, even internally, what we have is small surgical dedicated parts of our engineering team for these expansion markets like federal who can inherit all of the common aspects of those products that are already fit for purpose for all segments we're competing in, but then overlay on top of that in a very focused way what our federal customers need to tailor those existing products to unlock federal. And then over time, as that keeps getting even more and more large and well situated, you'll see us build bespoke products that might be first for federal after we've earned the right by building out those sockets with loyalty to the products that we already had.

Erik Lapinski :

Awesome. That's really helpful. And maybe if I could just sneak in a follow-up. But 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 a very intensive workload. How much are you being relied on for that type of work? And do you see opportunity to potentially streamline that or build software around it over time that makes it kind of more simplified, I guess, in moving fully to records and just to understand maybe some of the time lines you're seeing with those 12.

Erik Lapinski :

Awesome. Congrats on the good quarter.

Keith Housum :

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 Acanos down as well. Could the core even better? I'm assuming if you had access to some of the I guess, materials you wanted there. I guess perhaps provide a little bit of color on some of those 2 sites that did not perhaps do as well as some of the other items in your portfolio?

Keith Housum :

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 I guess, existing R&D budget and the financial profile?

Keith Housum :

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?

Andrea James :

Sami Badri at Credit Suisse.

Josh Isner:

Sure. I'll start with the revenue growth question and then hand it over to Brittany for the CapEx question. I think, Sami, there's -- one of the beauties of our business and business model is there's a lot of different ways we can achieve exciting growth -- and it's not 1 specific thing. I think there are -- some of the things you mentioned are very much in play. We'll continue to invest in new products that delight customers and cause customers to want to buy more at higher pricing tiers and more premium bundles. But I think it really bought boils down to 2 specific things. One is -- we're going to do a really good job of building new products for our existing customer base, meaning state and local U.S., especially, how do we introduce new products into that base over time. And the second one is applying existing products to newer markets like international, federal and enterprise. And we really believe -- we're doing those things well in parallel, and we'll do them even better in parallel next year. And of course, by doing so, that opens up kind of growth opportunity on both of those axes. So I'll probably leave it at that for now and hand it over to Brittany for the CapEx question. .

Sami Badri:

Got it. I have one more question, and it's mainly on working capital and just inventory. Do you foresee inventory levels just consistently stepping up from now all the way perhaps maybe until the end of 2023, just a function of supply chains and components and all those other factors that are essentially increasing inventory levels?

Andrea James :

Paul Chung with JPMorgan.

Brittany Bagley :

I think it's been a big area of focus. The team has done a nice job specifically stepping up what they've been doing from a collection standpoint and paying more attention to our accounts receivable. And so that's a lot of what gets us. I think as we go through the rest of the year to our free cash flow targets. And again, I think it's just -- of course, we need to balance with our inventory investments and making sure we're in the right place from that standpoint, making sure from a CapEx standpoint, we're investing in the business where we need to invest in the business. But there should be some good free cash flow characteristics that we can continue to focus on.

Brittany Bagley :

Yes. Well, I'll start and then maybe I'll let Jeff jump in a little bit, but I get excited in a couple of places. One, there really is this incredible ecosystem that the company has created where the hardware and the software have a flywheel to benefit each other. You heard us talking about how more customers are buying the premium parts of our business. And so that's really proving out the software. And so I get excited that we can make investments in partnerships that continue to drive that ecosystem. At the same time, with my CFO hat, we're going to be thoughtful and we're going to be disciplined about where and how we invest but I really do think we have a unique opportunity in front of us with that as a lever to continue to pull things in. And I think what's great is the more you can bundle some of these products together, the more powerful each one is. And so it's just a great opportunity there. But Jeff, I know you spend a lot of time thinking through the ecosystem and products and where we should make investments. So if you want to add anything.

Andrea James :

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

Josh Isner:

Yes, certainly, Will, nice to see you again. I think it's really just a combination of a few things driving more users to our more premium licenses, expanding our user base to more software-only use cases outside of kind of core state and local, you mentioned attorneys, that's certainly a big one, and there are others along that same realm -- and then just increased overall adoption across Evidence.com even within state and local, we continue to add users every quarter, and we see some of that also in federal and international and enterprise as well. So goes back to really focusing on selling more into our existing markets and then opening up new markets in parallel, and that's 1 of the places we're seeing some of the results. And of course, there's a lot more work to do there as well.

Brittany Bagley :

Yes. So I think a couple of things going on in Q4 are we talked about having slightly less leverage on our OpEx -- we do continue to invest in OpEx as we head into the fourth quarter of the year. We have also talked a little bit about how it's still a very positive margin for the overall year. So we'll get to almost 19% EBITDA margins. But I think if you look at sort of last year to this year, what you really saw was gross margins came down year-over-year, and that's a lot of what was impacting our EBITDA margins year-over-year. So we actually have managed to get some OpEx leverage if you look at some of those numbers. And so as we look and start thinking about what is that going to be like in the future, it's 1 of the main reasons that I'm really starting by digging into gross margins and where can we get some continued leverage in gross margins. That all can then flow through to the bottom line and support what we come out with in terms of longer-term EBITDA targets. We'll have more for you on '23 when we get to our Q4 earnings call, but really looking forward to digging in there and being able to provide some more of that color.

Jeremy Hamblin:

Congrats. Brittany, I want to follow up on that last point, actually. So gross performance was pretty solid especially with a lot of the revenue upside tied to 83 cameras. And now that you've had obviously still getting familiar with the company and the opportunities and so forth. But I sense that there is a notable tone change in terms of opportunity on gross margin and that, that may be like a key focus on a go-forward basis of where there's opportunity. So I wanted to get a sense for the timing of -- well, A, how much low-hanging fruit do you think there is because maybe if you're going to gain 500 basis points, how much of that is easy and how much of it is -- you're going to have work hard? So I wanted to get a sense of how much opportunity you think there is overall? And then also the timing on what you think if -- again, I'm just throwing something out there but how much of the gains do you think could happen in the next 18 to 24 versus a five or six year slot?

Jeremy Hamblin:

Okay. And in a similar vein, then in terms of -- it also sends that maybe your OpEx growth might also be -- there's been a lot of investment over the last few years. And a lot of that was new product rollout and not that you're not still iterating from there. But it does -- I do get the sense that now you're going to mature or realize some of the opportunities in those business that it's taken 4, 5 years to lay the foundation and start to see a little scale. Is that a correct read that obviously, continue to invest, but maybe the rate of growth in your OpEx might be a little bit lower than what it's been in the last few years.

Andrea James :

We’ll go a couple of minutes over. Erik Suppiger at JMP. Go ahead.

Josh Isner:

Sure. I think generally speaking, the focus, Eric, is really to land with 1 product, whether it's on the CEW side, the video side, interview room, in-car video, any of our digital evidence management products, and there we'll bet on ourselves to continue to grow the adoption and numbers and volume of that 1 product, but we'll also grow the adoption and volume of other products along the way. So right now, we still remain focused on doing everything we can to grow in the U.K. and Canada and Australia being our Tier 1 international markets, but also just finding 1 product to fit in all of these other large national police forces and from their supplement with our additional products. And I think it's working well. We've seen a lot of interesting TASER adoption this year in markets where we haven't really participated before, but we also see a tremendous pipeline going into next year and the year after, not only across TASER, but across body cams and cloud. So we're very excited about the prospects of international, and it's really about that land and expand strategy that we talked about earlier in the call.

Erik Suppiger:

Does the TASER take time? You had talked about the Moonshot and getting to the point where it starts to obsolete bullet. Does that imply that the lead product would be the sensors and dams until TASER starts reaching that level or what -- how do you think between those 2?

Josh Isner:

I think that covers it, Rick.

Logan Hennen :

Congrats again another great quarter. So with our first question, we were hoping that you guys could shed a little light around what percentage of sales is currently coming from the federal government -- and how do you guys expect that to change come fiscal year '23 and '24?.

Logan Hennen :

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

Andrea James :

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

Rick Smith:

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 swap. 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 as 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 slowdown 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 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 earn 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's 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.

Jim Zito:

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. We also highlighted several of our ecosystem partners in strategic investments during our Accelerate conference and in today's letter. The investments we make are driven by our long-term product strategy, which is set under the leadership of Rick, Chief Product Officer, Jeff Kunins, and Josh. Our corporate development team led by Andrea has been a key thought partner in enabling Axon to grow into its role as the definitive technology hub for public safety. We take pride in our approach to identifying emerging market leaders in the high-value sectors that we know well, integrating their solutions with ours and combining them with the power of our direct sales channel and deep customer relationships. Importantly, the structures our corporate development team has negotiated on behalf of Axon provide us with significant flexibility and optionality on the investments we make. The ability to obtain customer feedback experiment with product integrations and see how our teams work together, allows us to preserve optionality for our business, delight our customers and expand our technology ecosystem in a highly efficient way. And with that, Andrea, let's take questions.

Will Power:

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?

Will Power:

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?

Will Power:

That’s great. Thank you.

Erik Suppiger:

Yes. Thanks for taking the question. Good quarter here. One, I don't know if you said this, but can we assume that backlog grew from the end of Q1 to the end of Q2, or how should we think about some of the backlog that you carried in from Q4 into Q1? And did that roll into Q2? And then, secondly, any comments about supply constraints? Did that improve or where are we from a supply-constrained -- supply chain constraint perspective?

Jim Zito:

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?

Erik Suppiger:

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?

Erik Suppiger:

Great. Thank you.

Sami Badri:

Hi. Thank you. You made a reference earlier, maybe it was Rick, regarding profitability being better in the second half of 2022. And I think you just made a reference that second half revenue growth is -- or at least second half revenue production is usually better than the first half. So is there a specific segment or a product that's seeing very good profitable dynamics in the second half that's kind of giving you guys that operating leverage? That's the first question. The second question is the free cash flow guidance was reiterated and unchanged for the fiscal year 2022, but it looks like there were some changes in CapEx. Could you kind of give us the puts and takes on that?

Sami Badri:

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

Rick Smith:

Yeah. Thanks, Josh. So earlier this year, we projected an accelerating spend on the new campus. We've -- now we're basically telling you we're going to slow that down. We're pacing it out a bit. There have been a number of things. I'd say one of them is just the inflationary environment. What we've seen as we were getting ready to really move forward with more of the significant build-out on the campus, construction costs are just up pretty dramatically. And when we couple that with, we've also seen COVID resurging, I think, even more than people had expected. And we looked at the whole return to work dynamic, we've come to accept that the future is going to be hybrid work. And so we also see opportunity to really look at what is the best use of the overall land, really optimizing for collaborative events, customer centric events, of course, the land that we need and the space we need for manufacturing and warehousing and all that. But maybe shifting the balance away from the idea of people coming into the office so much and really more the hybrid work environment. And then in this environment as well, like there's a lot going on, and we just wanted to preserve some optionality of our cash. So we basically -- let's slow down a little bit, let's really recalibrate and see what the post-COVID world looks like and let took the building cost cool off a little bit, and now give us a little time to just keep tuning and refining. The world is in a pretty constant state of flux and we'd rather take our time to make sure we get it right.

Andrea James:

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

Keith Housum:

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?

Keith Housum:

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?

Keith Housum:

Okay. Thanks Jim. Appreciate it.

Jonathan Ho:

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.

Jonathan Ho:

Got it. And then just as a follow-up, when we think about some of the cost savings initiatives that you referenced, either on the T&E side or other areas. Can you talk a little bit about maybe philosophically, where you're seeing that opportunity, the spend as if it's your own, I know I'm not saying that right, but that campaign -- yes, I just want to understand, like do you feel like there was maybe lack of oversight there in the past, or is this a situation where you're just trying to tighten the belt a little bit. Thank you.

Rick Smith:

Yes. Let me jump in and add it as well. Like a business like any community can't sort of have all messages all resonate all at the same time. And so you go through cycles, several years ago, we had a scrappy year where -- that was an opportunity for us to lead and say, okay, this is the year we want people to really like it's very similar what we did we spend it like pictures, like old be scrappy was, hey, we want to focus in on finding ways to more efficiently get things done and where more people are being scrappy and not throwing a body at every problem. We've had a fair number of new employees come in. And certainly, we have our standard expense controls and training, but we felt with what's happening, look, the overall market is down, inflation is up other companies are, I'd say, more aggressively cutting back their investment plans. We saw this as an opportunity to communicate with our employees say, 'Hey, spend it like it's ours, right? Like this is a moment, let's take what's going outside, everyone has things in your control where you cut back spending. And by doing that, we'll all be rewarded. The market is rewarding companies that have more financial rigor, and we can also reward you by investing and not having to pull back on our investment plans and the exciting things we want to go build. But we can't just be toned up and continue as if the macro environment hasn't shifted. So, I think this was a balanced way for us to connect with -- maybe even some of the angst our employees are feeling about the macro environment, like, hey, here's something you can do really buckle down on expenses so we can continue to invest over here because we know these are the times those investments really pay off. Our hiring has accelerated, and I think a big part of that is it's the macro environment. We don't have as many competitors. We're having more success recruiting because we're just not competing with as many other tech companies that are as aggressive right now. And so these are the times we want to lean in and accelerate our growth. So, I hope that gives a little bit of context as to how we felt we could position us with the company employees to really get them all rolling in the same direction.

Andrea James:

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

Josh Isner:

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 Isner:

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.

Andrea James:

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

Josh Isner:

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 the – 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.

Josh Isner:

And is that for international, specifically?

Josh Isner:

Oh, domestically. Okay. What was that, Rick?

Josh Isner:

Oh, federal. Okay. Federally 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.

Jeremy Hamblin:

Thanks for the color. Best wishes.

Andrea James:

[Operator Instructions] So we'll take our last question from Erik Lapinski at Morgan Stanley. Go ahead Erik.