AGB 2024.5 - Axon Enterprise (AXON)
Technology Driven Growth for Public Safety
Subscribe to AGB - One analysis of a good business in each issue.
Axon Enterprise
“Our company's reason to exist, our mission, is for exactly moments like right now - to protect life. We are on a mission to make energy weapons so safe and so effective that we make bullets obsolete. We preserve truth. Body cameras protect officers from bad claims and citizens from bad behavior, increasing transparency and reducing social conflict. We accelerate justice with advanced cloud software and AI that have potential to make the entire justice system more fair and more effective. When you think of gun violence, social conflict and a fair justice system, most people don't think of these as technology problems, but as political problems. We frame them as problems where technology can play a transformative role.”
– Founder and CEO, Patrick Smith, on the company’s 2Q 2020 earnings call
Axon Enterprise is the leading provider of conducted electrical weapons under its TASER brand. The company also sells sensors (mainly body and fleet cameras) and software solutions (evidence management, records, justice discovery, etc.) to its customers. Over its history, Axon has transformed from mainly a hardware provider to a subscriptions based hardware + software solutions provider. In 2023, the company’s Software and Sensors segment accounted for 61% of its $1.56B in revenues. By contrast in 2015, this segment was just 18% of its $198M in revenues.
Axon was founded in 1993 with the goal of reducing unnecessary gun-related deaths through the use of TASER weapons instead of lethal firearms. TASER devices when triggered shoot a set of probes that shock a person on contact. This usually temporarily immobilizes the target, leading to quick de-escalation. One of the main benefits is that TASER devices have much less risk to cause injury or death. In a study conducted by Axon, TASER devices have saved almost 300k lives and resulted in minimal injuries, especially when compared to other methods of de-escalation like firearms, batons or physical force. The company has a goal of cutting gun-related deaths between the police and the public in the U.S. by half over the next decade.
Axon’s TASER products have improved over time, leading higher adoption rates and more frequent usage. TASER 7 was introduced in 2018 and this was the first version that came with the feature to automatically record every use of the device and upload the data to Axon’s digital evidence management solution. This alleviated the task of officers needing to upload the discharge logs manually. And it also meant that officers were more accountable for each use of the device. This also benefited the company’s software division since a subscription to Axon’s evidence software was necessary to use the device.
Axon introduced TASER 10 in 2022, which improved upon the TASER 7 in many ways. TASER 10 holds up to 10 rounds (vs. just 2 in TASER 7) and can be shot from up to 45 feet away (vs. 25 feet for TASER 7). So far orders for the TASER 10 are surpassing the TASER 7 by a factor of more than two and many of the incremental orders are coming outside of the company’s core customer base. TASER 10 should also lead to more cartridges being used, given the increased range and shots available per device. Axon’s TASER segment generated revenues of $610M in 2023 (39% of total).
Axon’s software and sensors segment ($951M in 2023 and 61% of total) is mainly comprised of its cloud based evidence management software, and its body and fleet cameras. Body cameras are becoming much more prevalent with law enforcement, both to ensure that there is less unwarranted physical violence against civilians but also for the safety of the officers, especially to protect them from bad claims against them. At its 2017 Analyst Day, Axon claimed that complaints against officers were down 93%, use of force down 80% and guilty pleas up 20% for officers that used body cameras.
AB3 was introduced in 2019, which came with improved battery life and camera resolution vs. the previous generation. This version was also the first to come standard with internet connectivity, which allowed live streaming capabilities. AB4 was introduced in 2023 and the main improvement was two way communication, so that other parties have the ability to interact with persons at the incident through the camera feed by voice.
Fleet cameras are installed on vehicles and have similar capabilities as the body cameras. They can also automatically read license plates with an added software subscription. These ALPR (automated license plate reading) enabled cameras read license plates as they come into the cameras view and will indicate if there are outstanding warrants or something else associated with the vehicle in real time.
Axon’s evidence management software makes up the majority the software and sensors segment. Evidence.com is a repository of all video evidence that’s created from the various body and fleet cameras as well as the data logs from the TASER devices. Customers also can add other software modules like Transcription, which automatically transcribes spoken words in a video, and Redaction Assistant, which automatically removes of certain faces, screens and license plates from videos, and Performance, which provides statistics for camera usage and logs.
Customers of Axon are primarily U.S. state and local law enforcement agencies. The company has over 17k law enforcement customers. Axon has also made meaningful strides to penetrate the Federal government after achieving the required certifications like FedRAMP Compliance, FedRAMP Moderate, FedRAMP High, IL4 and IL5.
Competition for Axon varies depending on the product line. For TASER devices, the company competes with other less-lethal alternatives to firearms like rubber bullets, pepper spray and stun guns. These are generally less effective or have much lower range than the newest TASER devices. For body cameras, there are many other manufacturers like Digital Ally, Motorola Solutions, Wrap Technologies, Wolfcom, etc. And for the software segment, there are vendors like OpenText, Oracle, Central Square, etc.
As mentioned earlier, Axon has transformed the business from a razor/razor blade model, i.e. TASER devices + cartridges, to a subscription model with very low churn. Software modules are seeing high attach rates to TASER devices and the company’s camera products. To solidify this even further, Axon introduced Officer Safety Plan (OSP) subscriptions with the launch of TASER 7. This plan allows the costs to be smoothed out over a 5+ year period, reducing the impact of upfront costs when purchasing the hardware. Included in the plan are the evidence management software, and the various software modules like Transcription, Redaction, Performance, etc.
This benefited Axon in two main ways. First, it made the future financial profile of the company much more predictable due to the subscription model. This is evidenced by Axon’s growth in remaining performance obligations (RPO) and deferred revenue. As of 2023, RPO increased to $7.1B. This was $900M in 2018, when it was first introduced. RPO growth has outpaced revenue growth by more 2.5x during this time period.
And second, it reduced the sharing of TASER devices among officers. Because every user on an OSP is assigned his or her own TASER device and body camera, sharing is not necessary. Furthermore, because discharges of TASER devices are automatically logged into the evidence management software, it makes less sense to share devices.
In 2022, TASER provided guidance of to reach $2B in revenues by 2025 with an adjusted EBITDA margin of 25%. The company is tracking to reach a revenue number much higher than that given 2024 guidance. It’s likely that Axon will come close to reaching its 2025 target a year early. Going forward, the company expects +20% revenue CAGR and 25% margins as the long-term model.