Edited Transcript of AAXN earnings conference call or presentation 7-May-20 9:00pm GMT

SCOTTSDALE Jun 1, 2020 (Thomson StreetEvents) — Edited Transcript of Axon Enterprise Inc earnings conference call or presentation Thursday, May 7, 2020 at 9:00:00pm GMT

Axon Enterprise, Inc. – VP of IR & Corporate Strategy

* Jawad A. Ahsan

Axon Enterprise, Inc. – CFO

* Jeffrey C. Kunins

Axon Enterprise, Inc. – Chief Product Officer & Executive VP of Software

* Joshua M. Isner

Axon Enterprise, Inc. – Chief Revenue Officer

* Luke S. Larson

Axon Enterprise, Inc. – President

* Patrick W. Smith

Axon Enterprise, Inc. – Co-Founder, CEO & Director

Robert W. Baird & Co. Incorporated, Research Division – Senior Research Analyst

Andrea Susan James, Axon Enterprise, Inc. – VP of IR & Corporate Strategy [1]

Hello, everyone. Welcome to Axon’s First Quarter 2020 Earnings Conference Webinar. I’m Andrea James, Vice President of Corporate Strategy and Investor Relations. Thank you for joining us today. Today, we have available Axon’s CEO, Rick Smith; President, Luke Larson; CFO, Jawad Ahsan; Chief Revenue Officer, Josh Isner; and Chief Product Officer, Jeff Kunins.

We’re really pleased to bring you the whole team. This team has done dozens of earnings calls together as a public company, but this is the first one where we’re all in a different location. Just like you, we’re all adapting, and we thank our analysts and our investors for joining us today over Zoom. We do appreciate that today is a particularly crowded earnings day, and I know there’s a lot of calls going on right now. Our company has really embraced video conferencing technology to keep connected. We’re using custom Zoom backgrounds today, and you’ll see 7 of them with our executives. 5 of the backgrounds are actual offices of Axon all around the world, and then 2 of them are not real backgrounds. So for analysts, if you’re joining us today, if you want to guess at which backgrounds are not real, we’ll send you some Axon swag if you get it right.

Okay. So today, first, management will give prepared remarks, and then we will bring our analysts on camera for questions. (Operator Instructions) I hope you’ve all had a chance to read our shareholder letter, which was released after the market closed. You can find it at investor.axon.com, and our remarks today are meant to build upon the information in that robust letter. If for some reason there’s an Internet outage beyond our control or we lose Zoom connectivity, we’ll make every effort to post a copy of our prepared remarks to investor.axon.com this evening.

During this call, we will discuss our business outlook and make forward-looking statements. Any forward-looking statements made today are pursuant to and within the meaning of the safe harbor provision of the Private Securities Litigation Reform Act of 1995. These comments are based on the predictions and expectations as of today. They are not guarantees of future performance. All forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. These risks are discussed in our SEC filings.

All right, now let’s hear from Rick.

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Patrick W. Smith, Axon Enterprise, Inc. – Co-Founder, CEO & Director [2]

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Awesome. Thanks, Andrea, and thank you to everyone for joining us today. We last spoke with you on our Q4 update call on February 27 in what now feels like a very different world, where people ate in restaurants and flew to business meetings and vacations. 3 days later, we curbed all nonessential travel for our employees, but our message to our team was very clear: though we may curb travel or work from home, it does not mean that we are reducing the vigor with which we pursue our mission. Far from it. We are aggressively adapting to new conditions in the world as we zoom into all our meetings, and we will seek opportunities to use this changing environment to leverage our superior adaptability to gain ground against less agile competitors.

In the past weeks, Axon has brought forth some major initiatives to address this crisis, including giving free global access to Axon Citizen for the remainder of 2020 and using our supply chain to source PPE for first responders in a nationwide campaign and partnership with the National Police Foundation, which even got the attention of Vice President Pence, who tweeted about it. A large number of Axon employees donated money or personal time to this cause. Our first responders still face significant risks, and we are continuing to match donations for PPE. If you, our investors, are able to support the cause, please do. Help us protect those who keep us safe. Go to axon.com/COVID and scroll down and hit the Donate Now button. Even though I’ve been working from home and getting a lot more time with my kids, including some pedicures from my daughter, Fortnite lessons from my son and helping film product demos with my teenager, I personally have had more face time with customers over Zoom than I’ve ever had even in person. I’ve been doing about 5 different Zoom customer meetings a day, and that’s far higher than was possible when we had to travel in person to in-person meetings. So my personal customer engagement velocity is way up. And Jawad and I will be attending more investor conferences this quarter than at any time in the past years, as we can now Zoom into those as well. We’re proud to be thought leaders on driving technology adoption. And I’m pleased to see how well our customers have adapted to using this technology to be increasingly productive. I was on 3 customer meetings earlier today, and most of them had never used video conferencing before the COVID crisis, and now it’s become standard.

Here’s what I’m learning from those customers and what they’re telling me. They’re working with reduced staff due to personnel being out sick. Customers are seeing this crisis. It’s forcing them to adapt and change more rapidly than ever, and technology will play an even larger role as a cornerstone in every new business process needed in the world post-COVID. Whether it’s using Axon Citizen to gather evidence from the public or our prosecutor portal for sharing digital evidence for prosecutors in courts, the world is changing. And Axon thrives on change.

We’re even helping some key industry thought leadership group replace their canceled conferences and move them online. Luckily, we have a bit of a reputation for being both innovative and pretty good at throwing great events. So we’re loading our expertise to industry partners to help them thrive in this new world with us.

Now let’s talk about the future. Our best estimates for the year remain unchanged, and our pipeline remains strong. However, customers are relating to us that they’re facing large budget shortfalls and uncertainty in the macro environment, unlike anything any of us have ever seen. Currently, our sales pipeline remains solid. But we cannot see over the horizon any better than the rest of you to know how the economy will shake out or if the federal government will step in to provide additional aid to state and local governments. Giving guidance implies a level of certainty that is simply not possible to ascertain right now. To be blunt, in an environment where we see so many companies acknowledging the uncertainties ahead by pulling formal guidance, we believe it would be most prudent to recharacterize our best estimates to acknowledge the higher-than-normal uncertainty. Hence, we’re telling shareholders that even though our business has been very resilient to-date, and our best estimates have not changed, the level of uncertainty has increased to a level where we are no longer comfortable characterizing those estimates as guidance until the macro environment stabilizes. We don’t want to imply that we know something the rest of the world doesn’t, namely how the economy will unfold in the coming months.

We do have Chief Revenue Officer, Josh Isner, on the line. And during the Q&A, he can speak to the strength of our pipeline, if you’re interested.

All that said, I couldn’t be more bullish on Axon. We are change agents. Our adaptability and innovation-centric approaches are unique advantages for us when the world changes rapidly as is happening right now. This isn’t the first time Axon has faced diversity. Myself, our President, our Chief Revenue Officer, we were all together managing through the last recession from which we emerged far stronger. In 2008, as the financial crisis gripped the world, we decided to lean in and transform our entire business from being a simple TASER device manufacturing business into an integrated tech company making wearables and cloud software. That transition was anything but easy. And we’ve had many difficult learning curves to overcome. But as competitors in the public safety space retreated, that’s exactly when we advanced into new opportunities and we established ourselves as the clear market leader in cloud-hosted digital evidence management, software and camera sensors.

In the past year, we have now shipped 2 major software products: Axon Records, which is now live or signed with in-flight deployments at more than a dozen agencies; and Axon Dispatch, which just went live at our first customer. Today, Axon is stronger than ever. We ended Q1 with nearly $400 million in cash and equivalents, 0 debt and an underlying business that generates strong cash flow and high-margin recurring revenues.

Our Q1 revenue grew 27% year-over-year. And while net income was affected by stock-based compensation expense, our adjusted EBITDA more than doubled year-over-year to $30 million, reflecting a 20% margin. We have several moonshots in progress. Before this decade is out, we will launch a TASER weapon that will outperform a 9-millimeter pistol in stopping power. We will continue to make policing transparent and effective, and we will extend our reach across the criminal justice system, making it both more fair and more efficient. We will continue to create great social value for society and great value for you, our shareholders.

And with that, I’d like to turn the call over to our President, Luke Larson. Luke?

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Luke S. Larson, Axon Enterprise, Inc. – President [3]

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Thanks, Rick. Since COVID, as a leadership team, we’ve been laser-focused on 3 key priorities: number one, the health and safety of our employees; number two, doing our part to help flatten the curve; and number three, keeping key initiatives going to support our customers. I want to give a shout out to all of Axon’s employees. They’ve really stepped up the last 2 months. I want to give a specific shout out to Josh Goldman, our VP of Ops; Elizabeth Hart, who heads up our People team; and our entire IT team for their ability to shift our entire workforce to work from home for all of our knowledge workers as well as keeping critical mission lines open with CDC-recommended guidelines. These actions have allowed us to keep the business up and running to support our customers who are truly on the front lines. Early on in the crisis, we began receiving messages from law enforcement around the globe asking Axon if we will be shipping out TASER 7 and Axon Body 3. From major city police departments to small departments, many of our customers were anxiously awaiting to get their mission-critical devices, making sure that our first responders have the tools that they need to keep communities safe was a key factor in our decision to keep mission-critical manufacturing lines open. To keep our employees’ health and safety and to do our part to flatten the curve, we added a lot of precautions and continued paying employees in high risk groups, even though they couldn’t work. We detailed that in our shareholder letter, and it compressed our TASER gross margins by 110 basis points. If there were no COVID-19 beyond our phenomenal Q1 results that kicked off a strong start to the year, the secondary headline this quarter would be that Axon Dispatch went live. This is a major milestone for our company and shows Axon’s ability to keep key initiatives going even throughout a global pandemic.

We told you last quarter that we would be live by midyear with our first paying Dispatch customer, and we’re thrilled that we launched even a bit sooner. Dispatch is our entry into a $2 billion rapidly growing real-time command and control software market. We’re pretty thrilled to be powering the 911 dispatching operations for the city of Maricopa, which is our first launch partner. This software is also critical to our mission to protect life, it empowers everyone involved in an incident response: dispatchers, call takers, command, patrol officers, firefighters and medical personnel. The goal here is to shorten the time from hello to hello. That’s what the industry calls the time between when somebody first calls 911 to the time an officer arrives.

Another key initiative for us is hiring. And I couldn’t be prouder of the hiring velocity that we’ve seen and we continue to accelerate, particularly in this last quarter, as always, leaning in rather than holding back. In particular, Chief Product Officer, Jeff Kunins, who’s on the call with us today, has rapidly filled key senior tech leadership roles, including our new SVP of AI, VP of Digital Evidence Management and our GM of Axon Air, and more while doubling down to rapidly grow our engineering bench with bar-raising talent in our global software hub in Seattle as well as in Vietnam and Scottsdale. I started out with a shout out to the Axon employees, and I want to end my section with another one. This is a great team that has really leaned in during the crisis to support each other as well as our customers. Thank you to all of our dedicated employees.

And with that, I’ll turn it over to our CFO, Jawad Ahsan.

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Jawad A. Ahsan, Axon Enterprise, Inc. – CFO [4]

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Thanks, Luke. The world has changed since our last earnings call and the challenges we face today are unprecedented. As I reflect on our Q1 results and take stock of where we stand today, 3 words come to mind: pride, resilience and confidence. We have made no secret of our love for our customers, and I’m proud of the way we stepped up to source PPE for first responders in a nationwide campaign in partnership with the National Police Foundation. I’m proud of the way our employees contributed to that campaign. I’m even more proud of the way that our employees adapted to our new reality, continuing to work cohesively and productively, even with the distributed workforce. It’s a testament to the internal tools, systems and support infrastructure, we’ve worked hard to put into place.

At this stage in our growth as an enterprise SaaS and connected device company, we have purposefully chosen to be aggressive with our investments and conservative with our balance sheet. This strategy has brought us the resilience that will allow us to weather this storm and emerge stronger than ever. Our investments in both product and channel are yielding exciting returns, and our liquidity position is exceptionally strong. We are also seeing 3 trends emerging that add to our resilience. First, the current crisis is fostering discussions about cloud software usage with agencies that wouldn’t have previously considered it, and we’re demonstrating the value and utility of Axon Citizen to agencies across the globe. Second, we’re seeing more agencies move to Axon devices as standard issue rather than pooling or sharing devices. And third, we’re seeing the federal government step in to bolster law enforcement budgets and committing stimulus to law and order spending, which may have benefits that outlast the crisis.

Our go-to-market model is increasingly resilient, as we sell more products that agencies pay for out of their operating budgets rather than being treated as an unpredictable capital expense. And the majority of our revenue is tied to bundled recurring contracts, 71% in 2019. In our SaaS business, net revenue retention over the past 6 months has trended at about 120%. This has become an important metric for us in terms of how we look at the business, and that is why we’re sharing it today.

The metric captures 2 key factors. First, our annual churn is almost 0, as our customers typically sign 5 to 10 year contracts, giving us more resilience in contracting than most other SaaS companies. And second, Axon’s retention rate captures that in any given year, some portion of our agency customers are upgrading their contracts to take advantage of all of the new software tools we have to offer. Some major cities are committing to SaaS upgrades with Axon at 300% of their prior contracts, and that’s a testament again to our resilience and to the value proposition we offer our customers.

Finally, as we look out at the remainder of the year, we are feeling confident. We are withdrawing our guidance today for one reason: the full extent and impact of the current crisis on the markets we serve and on our business simply cannot be known at this time. What we do know is that we are evaluating a wide range of scenarios with respect to the potential ongoing impact of the pandemic, and we feel confident in our ability to manage through this crisis. In fact, our internal 2020 goals that we’re managing to remain the same. In recent weeks, our federal and international pipelines have strengthened. We continue to hire bar-raising tech talent at an accelerating pace, and we continue to execute upon a robust pipeline, closing large multimillion dollar, multiyear Officer Safety Plan contracts.

These are uncertain times, and our customers and employees are being impacted in significant ways. We’re grateful to all of our employees around the world who continue to show incredible commitment to our mission, ingenuity and resolve in their execution. While we’re facing unprecedented adversity today, one thing is for sure. Our best days are still ahead of us.

With that, I’ll turn it over to Andrea to take us through questions.

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Questions and Answers

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Andrea Susan James, Axon Enterprise, Inc. – VP of IR & Corporate Strategy [1]

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Thanks, Jawad. Moderators, can you bring everybody up on the camera view. Analysts, we want to see your pretty faces. Can you turn on your cameras?

Okay. Our first question is from Scott Berg at Needham.

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Scott Randolph Berg, Needham & Company, LLC, Research Division – Senior Analyst [2]

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This is a little different for Q&A. Hope everyone is doing well. Apologize, I was a couple of minutes late to the call. So if I ask a redundant question, I guess, you’ll see it in my face, at least. So I guess a couple of questions. On the net revenue retention metric that Jawad just gave at 120%, good metric. Can you help us understand how that compares maybe over the last couple, 3 years in terms of trending? Has it been around that 120%? Has it been up? Is it down? That would be helpful.

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Jawad A. Ahsan, Axon Enterprise, Inc. – CFO [3]

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Yes. Scott, it’s been around that. It’s one of the reasons that we’ve started to disclose it is that it’s been stable enough over the past few quarters that we’ve decided to start disclosing it. But it’s something that we’re very proud of.

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Scott Randolph Berg, Needham & Company, LLC, Research Division – Senior Analyst [4]

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Got it. And then from a follow-up question perspective, the inventory increase was something in the pre-scripted remarks that kind of caught my eye at least is how high do you think inventory levels go over the next couple, 3 quarters? I think it’s a prudent move that you’re doing, obviously, given the uncertainty around some of the global trade components there. But does that reach a really large level? And are you doing it because you’ve seen issues? Or are you just kind of protecting yourself from that opportunity?

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Luke S. Larson, Axon Enterprise, Inc. – President [5]

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Scott, great question. We have a big upgrade cycle ahead of us with TASER 7 as well as AB3, in addition to expanding in adjacent markets, corrections as well as international expansion. And so we went through an exhaustive exercise to say what is the right level of inventory for us to make sure that we can fulfill customer demand, derisk our supply chain and also have enough for these expansions. That actually ended up being a great strategy and has helped us in the last few months. We’re going through another analysis now to see what the right levels are throughout year-end. We want to ensure that we’re managing our free cash flow, but also have the right inventory levels to support customer fulfillment.

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Jawad A. Ahsan, Axon Enterprise, Inc. – CFO [6]

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Yes. And I want to add, Scott, to that just so you know how to think about it from a financial perspective. It is going to be something that’s going to be fairly material use of cash this year. We think it’s the right thing to do for the reasons that Luke mentioned. But that’s one of the advantages that we’ve got with the balance sheet that we have to be able to be in a position to fund that inventory build.

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Andrea Susan James, Axon Enterprise, Inc. – VP of IR & Corporate Strategy [7]

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Thank you so much, guys. And we’re going to take our next question from Charlie Anderson at Dougherty.

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Charles Lowell Anderson, Dougherty & Company LLC, Research Division – VP and Senior Research Analyst [8]

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Great. Can you guys hear me all right?

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Jawad A. Ahsan, Axon Enterprise, Inc. – CFO [9]

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Yes.

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Charles Lowell Anderson, Dougherty & Company LLC, Research Division – VP and Senior Research Analyst [10]

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Excellent. Well, congrats on a great strong start to the year. I wanted to — it sounds like just to characterize things, it sounds like you’re not seeing the effects of COVID-19 as of yet on the pipeline, the demand profile. I want to make sure that, that’s correct that you haven’t seen any push-outs or cancellations at this point. Just want to sort of characterize what you’re seeing real-time as far as those conversations as cities are evaluating their revenue?

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Joshua M. Isner, Axon Enterprise, Inc. – Chief Revenue Officer [11]

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Charlie, that’s a great question. Before I answer it, and I’ll come right back to it, I just want to acknowledge Breann Leath, who is an officer out of Indianapolis Metro Police Department, and we’ve been very active in supporting the department and her. She passed away in April due to an officer-involved shooting. And very sad time for one of our longest-standing customers and we just want to acknowledge her and her family. We also want to acknowledge all of the first responders around the world who didn’t have the luxury of sheltering in place or quarantining, and they’re out on the front lines, putting themselves and their families at risk every day. And we’re here to support our customers and our thoughts and prayers are with them during this time.

Now as it pertains to pipeline, it is accurate to say there have been some minor adjustments to the pipeline. We are hearing on a qualitative basis that some agencies do expect impact on their budgets. And there’s tax revenues that are in question and so forth as well as federal support for state and local. On the flip side, we’re also hearing from some customers that COVID is the reason they’re thinking about going to standard issue for our products. So whether it’s body cams or TASER, one way to limit contamination is not sharing equipment, and we’re hearing that sentiment as well.

And so I think there’s a little on both sides here. So there’s nothing material either way at this point that we view as a major disruption to the pipeline. But we do have respect for the unprecedented risk that exists right now with COVID. And so we’re certainly focused on executing, fulfilling all of our goals this year and continuing to build our long-term pipeline not only in terms of state and local, but also federal, international and some of our newer channels as well. Thanks very much.

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Andrea Susan James, Axon Enterprise, Inc. – VP of IR & Corporate Strategy [12]

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Charlie, do you have a follow-up? We can unmute his line.

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Charles Lowell Anderson, Dougherty & Company LLC, Research Division – VP and Senior Research Analyst [13]

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Yes. Great, I do. Yes. So I guess I was also curious to — as it relates to software, so on Records and on dispatch. I wonder if this presents potentially an opportunity for you guys as it relates to your pricing strategy relative to the incumbents there. So as you sort of consider the pressures that they may be under, I’m sort of curious if that creates any opportunities that you’re seeing.

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Joshua M. Isner, Axon Enterprise, Inc. – Chief Revenue Officer [14]

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Yes. To some extent, certainly, we view this as an opportunity. We continue to invest. We’re investing in the channel and the product. And we are using creative ways to continue to connect with our customers more virtually than ever. I think with or without COVID, we still feel like we are certainly a force to be reckoned with, both on the product side and the channel side in any new product that we’re investing in and bringing to market. And so we’re definitely confident in the long term that we’re going to be very, very competitive in all of these markets, whether it’s DEMS, CAD, RMS and so forth.

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Patrick W. Smith, Axon Enterprise, Inc. – Co-Founder, CEO & Director [15]

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Yes. I would actually — if it’s okay, Andrea, I want to add one thing there. I don’t know that COVID is impacting so much, but I would say my confidence in our strategy and how we approach developing software products is getting stronger by the day. And sort of the key element of that strategy is we decided not to try to go broad to win the battle of the RFPs with 800 check boxes, but to really build fantastic user-centric software that does the things those officers do every day really, really well. And that allows through our Officer Safety Plan officers to try elements of the system and basically win through a fantastic user experience. And I think long term, that sets us up to have a really strong market position by focusing on the things that ultimately makes it a great experience for the cops in the field, and that strategy appears to be playing out as every time they’re touching our software, we’re hearing, oh, wow, like this is a great experience, and we have procurement plans to allow them to start small and expand with us.

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Andrea Susan James, Axon Enterprise, Inc. – VP of IR & Corporate Strategy [16]

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Okay. So our next question will come from Jonathan Ho at William Blair.

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Jonathan Frank Ho, William Blair & Company L.L.C., Research Division – Technology Analyst [17]

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Can you hear me okay?

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Andrea Susan James, Axon Enterprise, Inc. – VP of IR & Corporate Strategy [18]

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Yes.

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Jonathan Frank Ho, William Blair & Company L.L.C., Research Division – Technology Analyst [19]

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Perfect. One of the things I wanted to understand a little bit better is with the new CAD system that you’re rolling out, can you talk a little bit about maybe the feature set and what segment of the market that you’re potentially targeting since there’s pretty much a high end, mid-range and low end of the market. Just want to get a sense of what you guys are looking at with that system.

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Jeffrey C. Kunins, Axon Enterprise, Inc. – Chief Product Officer & Executive VP of Software [20]

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Yes, absolutely. Great question. So first, the first thing I say is we’re incredibly excited to be live in the market with our first happy customer in Maricopa and Chief Stahl. And at the end of 2020, just to put it in context, for this first year, our goal is to be GA with a product that’s a fantastic bit for a significant percentage of U.S. agencies, be live or — and/or active deployments with the next handful of customers beyond Maricopa and be en route to steadily growing SAM coverage with strong sales pipeline to match. And so specifically, what that means to your question is, in the same way that for records in RMS, kind of the unit of currency for building up coverage of which customers for which you are a great fit for what they may need, which we’re now well on our new journey and continuing to accelerate on. For CAD, the main dimensions are: one, whether a given jurisdiction, the key staff that serves the jurisdiction only serves law enforcement dispatch or also serves fire and EMS. And then the second primary dimension is whether it’s serving a single jurisdiction at a time or if it’s an aggregated key staff that serves multiple jurisdictions at once. And so what you’ll see on there in the same kind of playbook we’ve been doing with records is starting with a whole great product for a subset of agencies that fit in one of those, so specifically like single jurisdiction law enforcement only, and then we’ll progressively from there becoming an awesome excessive tranche of potential customers. So that’s our overall approach.

Of course, it’s early days. I’m very confident to Rick’s point that over time, Axon will probably become the #1 share leader in both records and dispatch. And then along the way, we’re going to wind up-leveling the buying criteria for these categories to be much more about end-to-end agency productivity in the case of records and real-time operations in the case of CAD. So the multiyear journey, no one shouldn’t have any illusions it’s going to be overnight. But just as Rick said, customers are loving what we’re building. They’re loving the OSP 7 Plus bundling approach and the way that makes things easier to buy and adopt. And those 2 together are helping us skate to where the puck is going.

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Jonathan Frank Ho, William Blair & Company L.L.C., Research Division – Technology Analyst [21]

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Fantastic. And just as a follow-up, with some of the potentially challenging macro environments that are coming up, how do you think about balancing between operating leverage and maybe investing when your competition cannot? Any color there would be helpful.

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Jawad A. Ahsan, Axon Enterprise, Inc. – CFO [22]

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Yes. Jonathan, that’s a great question. And that’s something we actually very purposefully went into 2020 with — our budget for the year as we had disclosed in our previous guidance is that this is a year in which we’re getting very aggressive about making investments in the R&D team and our product team in our sales channel. A lot of the open positions that we have are geared towards those groups as we’re seeking to very aggressively put the pedal to the metal and try to continue to grow, bring new products to market, continue to expand our footprint. And it’s because of the proof points that we’ve seen in products like Records in some of the international markets that we’ve started to enter is that we’re going to double down on those debts.

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Andrea Susan James, Axon Enterprise, Inc. – VP of IR & Corporate Strategy [23]

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Our next question will come from Keith Housum at Northcoast Research.

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Keith Michael Housum, Northcoast Research Partners, LLC – MD & Equity Research Analyst [24]

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Probably, this question is for Josh. Josh, the international sales was very good this quarter. I was hoping you could provide some perspective, is that more widespread across the board? Or was it targeted with just a few different agencies? And then second, what’s our strength in software and sensors or the weapons business? But some more color there.

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Joshua M. Isner, Axon Enterprise, Inc. – Chief Revenue Officer [25]

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Yes, sure. And thank you for the question, Keith. So I would characterize it as, look, we — 2 or 3 years ago, we made large investments in our international channel. We were seeing success at that point in Tier 1 markets, but outside of Tier 1, we’re having very little success. And as we look at not only the Q1 results, but also the pipeline for the rest of the year, I’m feeling really good that, that investment of a couple of years ago is really starting to pay off. And so while Q1 — Tier 1 countries were strong in terms of revenue on the CEW side, we also saw some meaningful contributions from Tier 2 and rest of the world, and I expect those to continue throughout 2020. I think especially on the CEW side, we’re starting to see a lot of that work that the team has been putting in coming to fruition.

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Keith Michael Housum, Northcoast Research Partners, LLC – MD & Equity Research Analyst [26]

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Great. And then just as a follow-up. Jawad, maybe if I could go back to a commentary I thought you guys said before. Was there a pressure of 110 basis points on gross margins for, I guess, if I heard it correctly, paying for employees during the COVID time? And then, is that going to continue out into the second quarter?

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Jawad A. Ahsan, Axon Enterprise, Inc. – CFO [27]

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Yes. We’re not going to disclose to what degree it’s going to weigh on margins, but it is going to weigh on margins in Q2. This is one of the trickiest things about not issuing guidance. We still are, as I mentioned earlier, managing to our internal estimates, which have formed the basis for our previous guidance. On the flip side, we’re also seeing savings, right? People aren’t traveling as much. There are some programs that we had committed to that we’re not going to be able to do in person now, and there’s some cost savings that are associated with that. So while we are going to be impacted to a slightly larger degree in Q2 than what we saw in Q1, we also are going to see savings that are going to offset it.

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Andrea Susan James, Axon Enterprise, Inc. – VP of IR & Corporate Strategy [28]

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Thanks, Keith. We did come — question came in from the public anonymously, actually. And we weren’t anticipating that, but it’s a good one, so I thought I would answer it.

It says, great earnings call experience, best one yet. Do you plan to continue providing earnings calls on Zoom instead of a traditional webcast?

I think our answer to that is design thinking, iterate, test and learn. So we’ll come back to you on that one. We’ll see if you guys like it.

All right. So our next question will be from Will Power at Baird.

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William Verity Power, Robert W. Baird & Co. Incorporated, Research Division – Senior Research Analyst [29]

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Great. Yes, a couple of questions. Let me maybe start with the broader question for Rick or Luke, whoever wants to take it. One of the big themes in software, particularly with respect to COVID-19 and the impacts is that is an accelerant to digital transformation more broadly. And I wonder what you’re seeing with respect to the conversations you’re having with law enforcement along those lines as you kind of talk about records, dispatch and trying to move to the cloud. It would seem to feed into that. Or is it just they’re so focused on other things that that’s not really entering the dialogue yet.

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Patrick W. Smith, Axon Enterprise, Inc. – Co-Founder, CEO & Director [30]

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Yes. Let me take this one. I mean there are some really bright silver linings to this — the cloud that is this pandemic. I talked about my customer engagement velocity. Literally, I have never had this many customer meetings, and I think their eyes have been opened to new ways of interacting. I think that our travel expenses should be more controllable in the future that we should be able to engage with more customers over Zoom. They’re seeing that this is an effective way to engage.

I’m also hearing and sensing 2 other things. One, another bright silver lining here is law enforcement is telling me that this has started to shift perceptions of police again, where a few years ago, they were facing a lot of negativity. Now this is almost like a 9/11 sort of thing where people are realizing, hey, those cops are out there. More cops have been killed this year by the pandemic so far than guns and vehicle accidents combined. And that’s a good thing that it’s rebuilding public support for policing, and we’re hopeful that, that will flow in to the federal government actually stepping in and helping fund first responders.

And then the other side of it is, the impetus to do business differently is just strong. The — I was talking with some customers this past week that want to start pushing the courts to start accepting digital evidence instead of forcing them to burn things to disk, right? We’ve been successful in getting prosecutors to start using Evidence.com. The courts have been more resistant to it, where now people are downloading stuff that the prosecutor or the agency to put on disks to deliver to the court. And I’ve been out evangelizing this with our customers, hey, bring — let’s find the alpha patient. Let’s find some judges that are going to break down the barrier and say, hey, look, let’s move it online. And one of the things we hear is, well, courts don’t have great, like, technology systems. That’s music to our ears. They don’t need it. They need a browser. Like, they don’t need to install servers and stuff. It’s a fantastic opportunity for us to upgrade their experience. And everywhere I look, I see that the negatives of COVID are driving change that previously wasn’t possible.

And I’ll give you one — one other example is we — with the push for Axon Citizen in Europe, there’s been just a ton of resistance in Mainland Europe to using the cloud for a whole bunch of reasons we’ve talked about on previous conference calls. And we’ve been really pushing the team hard to engage with customers, look, what could be a stronger reason to move to a cloud-hosted digital evidence-sharing platform than social distancing in a world where you want to minimize the risk of your officers out going to pick up CDs and hard drives or thumb drives from the public. I don’t know that we have anything material to report back other than what we’re hearing is quite different. Customers that have been traditionally quite resistant to change, they’re changing across the board. And we’re looking at how we can help use this to drive positive and long-term change, which can include a lot of digital transformation.

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William Verity Power, Robert W. Baird & Co. Incorporated, Research Division – Senior Research Analyst [31]

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Okay. I guess my second — go ahead.

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Jeffrey C. Kunins, Axon Enterprise, Inc. – Chief Product Officer & Executive VP of Software [32]

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Go ahead, please.

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William Verity Power, Robert W. Baird & Co. Incorporated, Research Division – Senior Research Analyst [33]

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Well, as I was going to say, my second question was just a follow-up on some of the corrections commentary. I know you all have been talking about that several calls in a row. I think you’ve referenced, right in front of me, maybe 5 states that you have relationships with now. Where does that stand in terms of shipments? Any other numbers, quantification? How long that takes to really kind of ramp into a bigger opportunity?

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Joshua M. Isner, Axon Enterprise, Inc. – Chief Revenue Officer [34]

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Sure thing. So about 1/3 into last year, we ramped up our efforts specifically focusing on corrections. And this year, we have an independent sales team focused on that market. And I’m really excited about the work that they’re doing so far. It wasn’t a place where we were necessarily focused in the past. But now the use cases are coming much more — becoming much more clear. And obviously, on the body camera side, there are benefits there and on the TASER side in terms of riot control and so forth. And one of the interesting things is, given COVID, officers are actually really risking their safety by going hands on in jails because COVID obviously could spread really quickly through a contained environment like that. So we’re seeing more investment on a faster cadence than in the past, particularly in the CEW segment, to keep officers from having to go hands on and protect them from potential risk of infection. So long term, we definitely see corrections becoming a more meaningful part of our domestic business, both on the federal and on the state and local level.

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Andrea Susan James, Axon Enterprise, Inc. – VP of IR & Corporate Strategy [35]

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Thank you, Will. Our next question is from Joe Osha at JMP Securities.

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Joseph Amil Osha, JMP Securities LLC, Research Division – MD & Senior Research Analyst [36]

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For starters, my compliments to everybody for doing such a good job with this Zoom conference. This has been great. Thank you to the IR team. Two questions. First, I see that the portion of TASERs that was sold in a recurrent payment plan went down as a result of the shift to international. I’m just wondering whether there might be some potential to think about shifting the way those non-U.S. customers behave over time. And then the second question is a more general one. We’ve had chain of evidence, we’ve had CAD, we’ve had records management. I’m just wondering whether this crisis might perhaps cause Axon to sort of resequence how it’s coming at those priorities a little bit. Those are my questions.

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Joshua M. Isner, Axon Enterprise, Inc. – Chief Revenue Officer [37]

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Okay, Joe, thanks for your question, and I’d be happy to take the first one and then hand it over for the second one, likely to Jeff. So on international subscriptions, we actually are seeing that already in our Tier 1 market. So in Australia, the U.K. and Canada, it is relatively common for agencies to sign up for a TASER 60 contract where they pay, just like in the U.S., over 60 months. Especially in the U.K., every agency in the U.K. that is a CEW customer is actually already on a TASER 60 plan. So the team has done a really nice job there transitioning to subscription. Australia is moving in that direction as well. And then Canada is lagging behind a little bit just due to the fact that we’ve commonly sold through distribution in Canada and the TASER 7 has not been authorized there yet.

And so I would say that ball is moving in the right direction. There is some complication in Tier 2 and 3 markets, especially some of the more volatile ones where there might be a little more risk of collectibility on multiyear engagements and so forth. So we’re monitoring that very closely to make sure that we’re very confident in the deals we’re signing. But I would say it’s fair to expect international to continue to pivot more to a subscription-type of setup on TASER business.

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Jeffrey C. Kunins, Axon Enterprise, Inc. – Chief Product Officer & Executive VP of Software [38]

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Yes. And continuing from there on the second part of the question. Obviously, we like to think of Axon as a learning and an adapting machine. So we always continue to reexamine the data in front of us and reserve the right to wake up smarter as we learn more. But I think from what we’ve seen so far, transformation has been validating of our focus and prioritization that we have in front of us. Our R&D investment, which, as you know, we’ve continued to double down on and be aggressive about investment, looking forward to leverage as we go forward. Really on our core pillars of de-escalation including TASER and sensors and signals and the like across our categories for cam and for digital evidence management and the new investments in the categories of productivity with records and communications and real-time operations with CAD. And those have taking up the vast bulk decision to some of these incubation areas like Axon Air with drones and the like. And we evaluate those pretty regularly, and we feel great about the validation we’re seeing like what we’ve been describing with records and CAD and the rest, that we’ve got the right positive attitude and investment in each of those and the right sequencing. But we’ll continue to evaluate as we go and make those small and bigger adjustments if and when that makes sense. But we’re feeling pretty good about that prioritization.

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Andrea Susan James, Axon Enterprise, Inc. – VP of IR & Corporate Strategy [39]

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Thanks, Joe. Our next question is from Erik Lapinski at Morgan Stanley.

Erik, your video is off. I’ll give you another second here…

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Erik Taylor Lapinski, Morgan Stanley, Research Division – Research Associate [40]

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Can you hear me and see me? Hello?

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Andrea Susan James, Axon Enterprise, Inc. – VP of IR & Corporate Strategy [41]

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We can hear you. Go ahead and ask the question. We can’t see you, but go ahead and ask.

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Erik Taylor Lapinski, Morgan Stanley, Research Division – Research Associate [42]

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Sorry. It shows me on mine. But maybe I’ll just kind of ask on dispatch and that first kind of paid customer rollout. From that — from initial trials and interest and rollover of systems and final implementation, like what were some of the learnings you maybe had on what the typical sales cycle would look like with a dispatch customer and kind of anything you could share there.

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Joshua M. Isner, Axon Enterprise, Inc. – Chief Revenue Officer [43]

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Sorry, Erik. You were breaking up a little. Do you mind just repeating that question? My apologies.

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Erik Taylor Lapinski, Morgan Stanley, Research Division – Research Associate [44]

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Yes. No problem. Can you hear me now?

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Joshua M. Isner, Axon Enterprise, Inc. – Chief Revenue Officer [45]

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Yes.

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Erik Taylor Lapinski, Morgan Stanley, Research Division – Research Associate [46]

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Just quickly on maybe what were some of the learnings you had from just the pace of rollout in the sales cycle with your first paid dispatch customer and kind of, I guess, what you could share there.

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Joshua M. Isner, Axon Enterprise, Inc. – Chief Revenue Officer [47]

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Sure thing. Thanks very much for the question. I think just like with all kind of early customers, we’re really focused right now on learning. And so we have a pipeline of customers that we look forward to working with on CAD deployments. But the highest priority for us is gaining some early use cases, references and success stories. And so for the next, at least, 3 to 5 customers, that’s really where our focus lies, is making sure we’re ready to scale, and we continue to build that interest pipeline. So when that pipeline starts to convert, there are plenty of happy customers that can speak to their success with the product. We anticipate a lot of interest in the product from all segments in the market, and we’re seeing it already. And so we’re very, very excited about the potential of our CAD business.

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Erik Taylor Lapinski, Morgan Stanley, Research Division – Research Associate [48]

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That’s helpful. And then if I could just maybe one follow-up. As you look at everything going on and the potential impacts that your customers could see, like are there any actions or promotions you’ve thought through where you could kind of help customers, I guess, from a pricing or a pooled license perspective or kind of accommodations you’d consider this year?

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Joshua M. Isner, Axon Enterprise, Inc. – Chief Revenue Officer [49]

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Sure. Nothing really across the market. Certainly, the customers that have voiced challenges, whether they’re budget or timing of some of those budgets, we’re working through them on a one — kind of a one-off basis. But at this point, we don’t plan on having like an overarching program across the market. Frankly, we just haven’t seen that type of concern yet from the customer base. But certainly, we’re going to continue to monitor it and where necessary, we’ll make adjustments. But right now, we’re still certainly executing as per our normal kind of approach to these deals.

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Luke S. Larson, Axon Enterprise, Inc. – President [50]

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Yes. And I would just add on that. We — today, we have several different ways that a customer can acquire our products from just buying an individual device to multiple plans, our premium plan, the OSP 7 Plus, and the leadership team is very aligned around the benefits of this, as are the customers. They can choose to start using on day 1. And so that’s been very positively received.

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Andrea Susan James, Axon Enterprise, Inc. – VP of IR & Corporate Strategy [51]

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Thank you, guys. Erik, and I can see you now. You popped up.

So our next question will be from Ryan Sigdahl at Craig-Hallum.

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Ryan Ronald Sigdahl, Craig-Hallum Capital Group LLC, Research Division – Senior Research Analyst [52]

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Great. Thanks, Andrea. And to start, I’m going to guess your background is fake.

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Andrea Susan James, Axon Enterprise, Inc. – VP of IR & Corporate Strategy [53]

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Got it. And the others?

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Ryan Ronald Sigdahl, Craig-Hallum Capital Group LLC, Research Division – Senior Research Analyst [54]

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I’m going to guess, Jeff.

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Andrea Susan James, Axon Enterprise, Inc. – VP of IR & Corporate Strategy [55]

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So Jeff’s background is actually the 14th floor at our Seattle software hub.

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Ryan Ronald Sigdahl, Craig-Hallum Capital Group LLC, Research Division – Senior Research Analyst [56]

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Okay. Well, I’ll take 1 out of 2 for some swag anyways.

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Jeffrey C. Kunins, Axon Enterprise, Inc. – Chief Product Officer & Executive VP of Software [57]

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Come visit any time when we’re open.

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Ryan Ronald Sigdahl, Craig-Hallum Capital Group LLC, Research Division – Senior Research Analyst [58]

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Awesome. Two for me here. First off, just a follow-up on corrections. What percent approximately of the 450,000 correctional officers do you think carry a TASER today, and then separately, on the body cams?

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Joshua M. Isner, Axon Enterprise, Inc. – Chief Revenue Officer [59]

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Yes. Qualitatively, both of those numbers are low relative to the overall population. But state by state, we’re really making progress quarter in and quarter out to show some really rapid growth in that department. So at this point, I’m not prepared to give firm numbers on that. But qualitatively, there’s a lot of white space in that market. And we think for the first time, we’re really seeing meaningful momentum there to start to capture some of that white space.

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Ryan Ronald Sigdahl, Craig-Hallum Capital Group LLC, Research Division – Senior Research Analyst [60]

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Care to put in a ballpark of 25%, 50%, 75% just — or innings, if you want to talk baseball?

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Joshua M. Isner, Axon Enterprise, Inc. – Chief Revenue Officer [61]

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Appreciate the sports analogy, but we’re going to stick with the first answer on that one. Natively very well. Thanks.

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Ryan Ronald Sigdahl, Craig-Hallum Capital Group LLC, Research Division – Senior Research Analyst [62]

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Second question, just on TASER 7, it declined for the second consecutive quarter. It seems a bit surprising given the recent launch. So how do you guys think about that product mix within weapons segment over the remainder of the year?

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Joshua M. Isner, Axon Enterprise, Inc. – Chief Revenue Officer [63]

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So Ryan, thanks again for the question. I think that’s just seasonality. Q3 and Q4 are our strongest quarters of the year. So coming off our 2 strongest quarters with what historically have been kind of slower starts of the year in Q1 and Q2, it’s not a huge surprise to us that TASER 7 sales are not going to be as strong here. And we expect that to definitely change in the back half of the year as we continue to build pipeline and work with large agencies on meaningful T7 deployments.

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Andrea Susan James, Axon Enterprise, Inc. – VP of IR & Corporate Strategy [64]

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Mike Latimore from Northland, you’re up next.

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Michael James Latimore, Northland Capital Markets, Research Division – MD & Senior Research Analyst [65]

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Yes. Can you hear me okay?

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Jawad A. Ahsan, Axon Enterprise, Inc. – CFO [66]

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Yes.

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Michael James Latimore, Northland Capital Markets, Research Division – MD & Senior Research Analyst [67]

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Sounds good. Yes, I think you said that you have about 50% visibility into the kind of original guidance for the year. I guess at this point last year, what was that visibility?

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Jawad A. Ahsan, Axon Enterprise, Inc. – CFO [68]

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Yes. In any given year, Mike, we typically enter the year with about that. I think last year is a little less. It’s probably, I think, around the mid-40s, I believe. And this year, we have — every year, as we continue to progress in our SaaS business, it’s been increasing.

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Andrea Susan James, Axon Enterprise, Inc. – VP of IR & Corporate Strategy [69]

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And Mike, you want what percentage our Q1 sales make of the full year? It’s a much higher percentage than would be typical this Q1.

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Michael James Latimore, Northland Capital Markets, Research Division – MD & Senior Research Analyst [70]

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Sure. Okay. Makes sense. And then I believe in maybe third quarter, fourth quarter, you’re going to start recognizing more of the records revenue as different features get launched. What — I think there’s a little bit of a catch-up, even among customers that have already purchased the bundle. So like what kind of ARR bump may you get from that?

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Jawad A. Ahsan, Axon Enterprise, Inc. – CFO [71]

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Yes. Well, the first thing is, we’re actually not going to get a catch-up. The way the accounting works is that we’re going to take the same amount of revenue just over a compressed period of time. So it’s going to step up pretty materially over the remainder of those contracts, but there’s not going to be a cumulative catch-up as like in other long-term contracts. And right now, we had — what we had said previously in our guidance was that our ARR was going to grow $10 million per quarter. We felt that, that was conservative this quarter, it grew about $12 million, $12 million to $13 million. And we think it’s going to be in that $10 million to $15 million range. And as we get towards the end of the year, it’s likely going to be at the top end of that range as more of our software products, specifically records and dispatch come online.

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Michael James Latimore, Northland Capital Markets, Research Division – MD & Senior Research Analyst [72]

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And then you touched on this a little bit earlier, but in terms of just international cloud adoption, as you’ve won some of these additional deals internationally, how many are sort of willing to go with Evidence.com in the cloud? I mean is that trending in the right direction?

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Joshua M. Isner, Axon Enterprise, Inc. – Chief Revenue Officer [73]

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Yes. I’d say it is trending in the right direction. I’d say everything in international — and a huge credit to the team here and the team’s leadership in each region. Things are generally trending in the right direction internationally across video and CEW. Again, these are — we’re dealing with governments here, not state and local governments, like federal governments. So these deals do take longer to materialize, but we are seeing more interest in the cloud than we have in the past and more interest in CEWs than we have in the past.

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Patrick W. Smith, Axon Enterprise, Inc. – Co-Founder, CEO & Director [74]

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Andrea, I’d like to reach out and thank Ryan for throwing his hat in the ring to guess on the special backgrounds. And so for any analyst today who would want to throw their hat in the ring, in addition to the T-shirt swag, if you want to get yourself one of these fancy Axon tattoos, I’ll pay for it personally because we want to encourage you all to get your best Axon swag on.

So Andrea, back to you for some more questions.

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Andrea Susan James, Axon Enterprise, Inc. – VP of IR & Corporate Strategy [75]

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Thanks, Rick. Well, actually, to our buy-side investors on the call who’ve been e-mailing me, thanks for guessing. And it sounds like even some of our investors’ kids are getting in on it. So I just — I love that, like it’s super cool. So thanks for e-mailing me, too, your guesses. I’ll respond after the call.

Okay. Next question is from Scott Kessler (sic) [Jeff Kessler] at Imperial. Scott, go ahead and turn your video on for us.

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Jeffrey Ted Kessler, Imperial Capital, LLC, Research Division – MD [76]

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I am hanging out outside. I unfortunately came unprepared and don’t have any questions. So feel free to jump to the next person there.

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Andrea Susan James, Axon Enterprise, Inc. – VP of IR & Corporate Strategy [77]

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Okay. That’s great. We have a 908 number dialed in, and I’m not sure who it is, and I’m wondering if you’d like to ask a question.

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Patrick W. Smith, Axon Enterprise, Inc. – Co-Founder, CEO & Director [78]

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While we’re waiting there, Andrea, I can — I want to take on the elephant in the room that maybe Scott was uncomfortable addressing. And that is, Josh Isner, can you share with the folks what’s going on with that epic beard you’ve got going on? I’m sure folks seeing you for the first time with that beard, may want to know.

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Joshua M. Isner, Axon Enterprise, Inc. – Chief Revenue Officer [79]

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Thanks, Rick, for pointing that out. I really appreciate it. So yes, I made a commitment in early March that I would not shave or cut my hair until the office in Scottsdale reopened. At that time, it looked like a late April, early May start. Here we are on May 7, and it’s been extended to June 1. And I am in a world of hurt right now. And my wife is even in a bigger world of hurt looking at me every day. So thanks, Rick. I appreciate it. And hopefully, the next time I see everybody, it will be a slightly different look.

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Andrea Susan James, Axon Enterprise, Inc. – VP of IR & Corporate Strategy [80]

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All right. So if any of our analysts have follow-ups, go ahead and let us know via the chat window. We have a few more minutes here. We did get some questions from the public. We hadn’t planned on taking them, but I’ll just read off a couple, and we’ll answer them if we have time.

One is, is there a next-generation of TASER 7 in development? And if yes, what will be some of its enhanced features?

Rick, I think you should take that one.

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Patrick W. Smith, Axon Enterprise, Inc. – Co-Founder, CEO & Director [81]

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Yes. We typically don’t talk about new features until they’re launched. I would say we’re continually evaluating some of the programmatic aspects of TASER 7 to make sure that we’ve got ways that it can fit all of our different buyer personas. And kind of stay tuned as always for new product developments with Axon.

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Jawad A. Ahsan, Axon Enterprise, Inc. – CFO [82]

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Yes. I actually — I want to piggyback on this because I know Rick is trying to do his best to not disclose too much, but one of the reasons I joined the company was to help Rick make the bullet obsolete. And the technology that we’re working on now with the next-generation TASER is going to be a big step in that direction. We laid out our goals towards the end of the decade what we want to have accomplished. And one of those is to have the TASER to be the primary means for an officer to stop a threat. And I think that with what Rick and the TASER team have in mind and what they’re working on, it’s going to be a long way towards that.

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Andrea Susan James, Axon Enterprise, Inc. – VP of IR & Corporate Strategy [83]

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Okay, there’s the next one. It’s just an interesting question. Axon sells TASER self-defense devices into the consumer market. Are there any plans to enter the consumer dash cam or body camera market?

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Patrick W. Smith, Axon Enterprise, Inc. – Co-Founder, CEO & Director [84]

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Yes. Let me take that one. The answer is no. The consumer dash cam market is much more of a commodity market. And the elements that make our system valuable for professional law enforcement users would not be particularly applicable in that market, so no.

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Andrea Susan James, Axon Enterprise, Inc. – VP of IR & Corporate Strategy [85]

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Okay. That’s all we have time for from the public. Thanks for submitting your questions.

I’m going to turn the call back over to Rick to close this out.

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Patrick W. Smith, Axon Enterprise, Inc. – Co-Founder, CEO & Director [86]

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Awesome. Well, thanks. I’m really enjoying the positive feedback on the new format. It’s been enjoyable for me to feel a little more connected seeing your faces and interacting online. Sorry for harassing you a little bit there, Josh. It just feels like this is a more human experience. And I’m sure we’re going to evaluate and see if we keep doing it in Zoom. But I certainly found this to be much more engaging. I hope you did, too.

I’d like to thank you all for joining us. As you know, Axon does not shy away from challenges. We view them as opportunities. And we’re trying new approaches in evangelizing our cloud software to public safety and increasing our productivity. And we’re going to continue to lean into everything that 2020 has got to throw at us.

So we hope you all stay safe, healthy and sane during this period of disruption. And we look forward to updating you all again in August. So thanks, and we’ll talk to you soon.

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