Axsome Therapeutics Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 6, 2024

There are 18 speakers on the call.

Operator

Axon's executive team today. 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. Our prepared remarks today are meant to build upon the information and financial tables in that letter.

Operator

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 our predictions and expectations as of today and are not guarantees of future performance. All forward looking statements are subject to risks and uncertainties that could cause actual results to differ materially. We discuss these risks in our SEC filings.

Operator

We also discuss certain non GAAP financial measures. A description of each non GAAP measure and a reconciliation of each non GAAP measure to the most directly comparable GAAP measure can be found in our shareholder letter as well as in the investor relations section of our website. Now turning to our quarterly update. We like to start off every quarter with a video because we think it's a great way to show you more about our business, and there's no shortage of highlights to share from our team. We've got a good one this quarter.

Operator

It's about 5 minutes. Let's pull it up.

Speaker 1

The young president inspired us to look to the stars, launching a mission that wasn't just about reaching the moon, it was about bringing people together, aiming for the impossible. And from this, the term moonshot was born. Today, we're driving toward a new era in public safety. One where we can protect more people in more places, more of the time. This is our product portfolio.

Speaker 1

We have built the leading operating system, a vast ecosystem for public safety. The new TASER 10 indeed takes this to a new level. It is critical to our moonshot, but it's only part of the equation. As we introduce new tools, we also need to rethink how we train to master them. So with Axon VR training, you're now able to train more effectively anytime, anywhere.

Speaker 1

Earlier this anytime, anywhere. Earlier this year, we were very excited to announce our acquisition of Fusus, the people who created real time crime centers in the cloud. I'd like to take a moment now to introduce the founder of Fusus and their CEO, Chris Lindenau, to talk more about the platform.

Speaker 2

It's so great to be a part of the Exxon family. We created Fusus to bring communities together with law enforcement, allowing public safety to leverage the most expansive network of cameras available anywhere in the world. We're now also layering in artificial intelligence on video sources. This camera is picking up every single blue Honda Sedan that has passed in the past 24 hours, and it's doing it at a click of a button.

Speaker 1

7 years ago, we released this vision video. We were imagining what it would be like if artificial intelligence could extract the police record from the body camera video. Now, back then, there was a lot of skepticism, and look, we did not know when the technology would arrive that would make this possible, that day is arriving. We are entering into the age of AI. We are so excited to introduce Draft 1, a truly revolutionary system that leverages Axon body worn cameras, and it uses AI to create a narrative with all the details in seconds.

Speaker 1

I believe drones will become first responders, and many agencies are now doing that. It's called DFR, drone is first responder, and it's gonna revolutionize public safety.

Speaker 3

The fire at Saudi Aramco facilities. Remember, we just

Speaker 4

Investigators say a drone dropped a phone and marijuana.

Speaker 5

A sharp jump in global oil pricing. Frustration as every single flight is delayed because of the drone. 2 drones to be exact.

Speaker 2

Cell phone video captured a drone exploding in midair.

Speaker 5

Low grade attacks are disproportionately effective and are becoming a global threat.

Speaker 6

We need to think about that threat. It's gonna come in swarms.

Speaker 3

Around 10 o'clock on Around 10 o'clock on Monday night, officers were called about 2 suspects breaking into vehicles around the Walnut area, but the officers were able to keep an eye on them, thanks to advanced technology.

Speaker 5

Drones helping police deescalate gun confrontations, catch drug dealers, and put away violent criminals.

Speaker 7

Police in Robbinsville Township, New Jersey used a drone to find a child who was lost in the woods.

Speaker 5

In beachside, Santa Monica, police can survey a city block for a reported suspicious person from a command center a mile away.

Speaker 6

Seconds are lives in our line of work. Generally, as you're walking to a situation that you are getting second or third hand information on. A drone in this setting enables the law enforcement officers to change their approach. To actually see the situation they're walking into.

Speaker 8

Currently on Highway 5, I just heard it be crash 1 train 3 off road. Do you want to start that way?

Speaker 9

I'll be down on I-five now.

Speaker 4

About 90% of the time, the drone is first on scene before any of our officers in the field arrive.

Speaker 6

We're getting on scene in 3 minutes from the time the call comes in to dispatch. It provides situational awareness that cannot be replaced by simple eyes in the ground. It revolutionizes the way we respond.

Speaker 9

All right. Thank you, Eric, and thank you all for joining us here today. I want to welcome you all to our Q1 2024 earnings call. We've 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.

Speaker 9

First, one of the areas I'm obviously very excited about is drones, robotics and aerospace security. I believe drone as a first responder or DFR is a massive opportunity ahead of us. We anticipate that it will drive faster response times and improve decision making, giving us extra seconds and more information before we act in critical situations. As we push forward into this new era of aerial innovation, drones are not just helpful tools, they're becoming indispensable. At the same time, drone tracking and countermeasures become equally, if not even more important, and we believe a critical element to enable widespread drone as a first responder programs.

Speaker 9

DFR programs are designed to deploy drones to an emergency in advance of human first responders, enhancing situational awareness to improve response strategies, optimizing the allocation of already limited resources and reducing the risk of harm to first responders and communities. But limitations exist that to date have hindered the use of DFR at scale. Namely, current FAA requirements mandate the presence of a human virtual observer standing on a rooftop to ensure each drone remains in a direct line of sight. That means operators must be positioned in relatively close proximity to the scene, usually on rooftops, and operating primarily in clear daytime conditions. That's one of the reasons I'm so thrilled about our planned and announced acquisition of D Drone.

Speaker 9

We believe D Drone's technology solves for these limitations, allowing law enforcement to operate in low visibility conditions and at times of day without the need to maintain a human observer with a line of sight. The planned combination of dd drone with Axon is a natural extension of our strategy with several tangential applications already deployed in the field, including stadium, aerospace security, along with robust military, critical infrastructure, and other civilian protection applications. Another area I'm very passionate about is the realm of artificial intelligence. I believe that we will one day look back on these times as the beginning of the AI era. AI has applications across every element of what we do and offers the potential to unlock our human capital resources to accomplish more than we've ever been able to in the past.

Speaker 9

In the video we showed, you briefly saw us introduce our most recent innovation here. Born from our visionary initiative 7 years ago, Draft 1 leverages AI to produce police reports from body camera, audio and video. Our studies have found that officers in the U. S. Spend about 40% of their time or 15 hours per week on what is essentially dead entry, writing reports.

Speaker 9

This is valuable time they could be spending in their communities, with their families, in training or on their own well-being. With Draft 1, we're giving them a new lifeline that we expect will save them critical hours each and every day. And while these two developments are massive in their potential, they're just two examples of where we're focusing our innovation and we are not slowing down in several other areas that we believe will also be critical to achieving our moonshot goal. We've introduced real time operation solutions that bring situational awareness into the modern age, expanding our ecosystem to ingest networks of cameras, sensors, and fuses and raising the bar for communications beyond monolithic audio to include live streaming, video and two way voice communications through video and audio feeds. We introduced our new mobile application, which allows our customers to seamlessly work together on Evidence Management and report writing while they're on the go.

Speaker 9

And we're giving agencies new capabilities and next level training to improve human performance under pressure in the most high stakes events with our continuously improving and expanding VR portfolio. As I reflect on what we've delivered to the market and where we're investing, I think we're still in the early chapters of an epic story. And before I pass it over, I want to take a minute to acknowledge that our mission is more important than ever. We've seen a number of truly unfortunate and devastating tragedies between the police and the public over just the last few months. Our thoughts are with families and departments who are experiencing these difficult times that we are out to end.

Speaker 9

We're innovating for a better future and remain dedicated to our mission to protect life. And with that, I'll turn over to Josh.

Speaker 10

Thank you, Rick, and good afternoon, everybody. I'm humbled to share more about another excellent quarter at Axon. While we continue to build out the operating system of public safety, the team has not lost focus on the importance of execution. There's no doubt in my mind, we have the best and most well equipped team in our industry and our Q1 results are further proof of that. I feel really good about our momentum to start 2024.

Speaker 10

We started the year running at full speed as the team closed out 2023 with our strongest bookings quarter in company history. In Q1, we worked hard to set the stage for the remainder of the year. Since it is the only quarter in which very few budgets close, we focus on pipeline development and key customer facing hiring initiatives. I am happy to report that our pipeline is the strongest and it's the healthiest it has ever been across all major customer segments. This is a testament to our awesome R and D teams that continue to 0 in on strong product market fit across our entire portfolio driving this type of record demand Whether it's TASER 10 now being more directly linked to VR training within our TASER platform or our on body cameras changing the game for real time operations or draft 1 revolutionizing the RMS category.

Speaker 10

There's so much for us to bring to the market and we are just at the beginning of what we think will be a deep increase in the ways we leverage technology in public safety for the better over the next decade. Looking ahead, I see many opportunities for continued growth. We believe our domestic, state and local law enforcement customers are eager to adopt the new products that we have brought to the market and we are seeing our emerging markets become more meaningful contributors to our results. One of the many things that gets me excited about D drone is their strong international presence, which could accelerate our international channel expansion. On that note, I'd like to share our excitement in welcoming Cameron Brooks as our new Chief Revenue Officer.

Speaker 10

Cameron came to us from Amazon Web Services, where he most recently led their Europe, Middle East and Africa business for the public sector. As we look to drive more cloud adoption across the world, Cameron's wealth of experience in spurring international cloud adoption will be a powerful asset to our team. Cameron joining Axon is a perfect example of how our mission and our unique approach to the market helps us attract the best talent from some of the most successful companies in tech. Before I pass it over to Britney, I want to briefly highlight how grateful I am for my teammates at Axon. We have spent the last 2 years fortifying and rebuilding our leadership team and we are ready to move faster than ever.

Speaker 10

We are focused on the right areas to continue delivering in the quarters years to come, both on our financial commitments and on our mission. We just recorded our 9th consecutive quarter of greater than 25% revenue growth, and our business has approximately quadrupled over the last 5 years. We're also delivering our strongest adjusted EBITDA margins in more than 3 years as promised. This kind of compounding does not happen without the best people and the best products and without a lot of things going right behind the scenes. While it's always encouraging to deliver such strong results, we continue to embrace our next play mindset and put our collective organizational energy behind the most important metric of all, and that is lives saved.

Speaker 10

And with that, I'll pass it over to you, Brittney.

Speaker 7

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. Demand for TASER 10 also remained robust and drove 33% growth year over year in our TASER segment, supported by increasing supply availability.

Speaker 7

Sensors and other revenue grew 14% year over year with the adoption of Axon Body 4 driving camera revenue, somewhat offset by lapping the big catch up in fleet revenue from Q1 last year as we're now at more normalized deployment levels. In addition to healthy growth across all our categories, we see strength across our end markets. In q1, over 25% of our revenue came from outside domestic law enforcement, including international, federal, other adjacent markets like Corrections and Justice, and the enterprise. Our ARR for the quarter is $825,000,000 up almost 50% year over year, and it now includes Fusus and our TASER warranty revenue. We continue to maintain a net revenue retention of 122%.

Speaker 7

In Q1, we introduced adjusted gross margin to normalize for increased stock based compensation resulting from the grants we made to employees whose compensation was under a specified threshold, many of whom are in manufacturing. As a reminder, we've committed to keeping our stock based compensation at or below an average annual dilution of 3% for 2025 and beyond, and this is in keeping with that commitment. Adjusted gross margin for the quarter was 63.2%, up from 61.5 percent in Q4. This improvement was from product mix benefit as well as the fact we didn't have any one time reserves this quarter. We do expect some pressure on gross margin for the rest of the year as we continue to balance mix shift and ramping T10 capacity.

Speaker 7

Q1 adjusted EBITDA margin increased year over year from 19% to 23.6%, representing a 460 basis point improvement. In addition to the benefit of strong gross margins, we saw operating leverage contribute approximately 110 basis points year over year. As Josh mentioned, this is our strongest adjusted EBITDA margin quarter in 3 years since COVID. We continue to balance driving strong top line growth with investing in the business. We're pleased to be able to do this both organically and inorganically and are thrilled about our plans to welcome the D drone team to Axon.

Speaker 7

Rick did a great job talking through the strategic rationale. From a financial standpoint, we expect to close the deal sometime over the summer and to have approximately 1 full quarter of financials included in our 2024 results. This timing is subject to customary closing conditions. We expect that the potential acquisition of D Drone would increase our TAM by $14,000,000,000 bringing our overall addressable market to 77,000,000,000 dollars Dedrone is still investing for growth, and we expect incremental costs from their business and from integration that would have a slight impact to our core adjusted EBITDA margin. We've tried to factor this into our updated guidance and should be able to further refine these assumptions next quarter.

Speaker 7

Today, D drone is small relative to our overall D drone highlights another step in our M and A strategy of acquiring talent and technology that complements our roadmap and expands our addressable market. In total, our acquisitions of Sky Hero and Fusus and our planned acquisition of D Drone have expanded our TAM by more than 50% over the last year from $50,000,000,000 to $77,000,000,000 The acquisitions also increase our capabilities in robotic security and real time operations, both areas we view as critical to the future of policing and our other markets, and we are excited to continue delivering on our product vision. Finally, I'll turn to our guidance. We are increasing our full year 2024 expected revenue guidance to $1,940,000,000 to 1.9 $9,000,000,000 which represents approximately 26 percent annual growth at the midpoint, above the prior high end of our guidance range of 20% to 24%. This incorporates both our outperformance in Q1 and our increased expectations for the year.

Speaker 7

While future contracted revenue was down slightly quarter over quarter to $7,000,000,000 in Q1, we have a strong pipeline for the year to underpin our forecast. We have also included an immaterial amount of revenue we expect to come from D drone this year, reflecting everything we currently know. We expect adjusted EBITDA of $430,000,000 to $445,000,000 which implies an adjusted EBITDA margin of approximately 22%, up year over year and approximately in line with our prior guidance on margin. This includes our best estimate of integration costs and impact from M and A on the year. Finally, we've also increased our expected investment in CapEx to $80,000,000 to $95,000,000 for the year as we are continuing to ramp our capacity investments to meet the strong demand for TASER X.

Speaker 7

We're very pleased with these results and think the quarter demonstrates continued execution on our business across both the top and bottom line, as well as strong investments for the future so we can continue to deliver outsized performance. And with that, I would like to open it up to questions.

Operator

Thanks, Britney. I think we're all up in gallery view. We'll take our first question from Mitu Marshall at Morgan Stanley.

Speaker 8

Great. Thanks. And congrats on the quarter, guys. I wanted to dig into draft 1 and just get a sense of you know, how long you foresee kind of departments meeting for approval processes and, you know, whether you kind of see that once a couple of major departments sign off that the approval processes can go much quicker? And then maybe just a second question for Britney that I'll include just upfront.

Speaker 8

Just the contribution of FUSUS to the year or just what you're kind of accounting for between FUSUS and D Drone for kind of that inorganic contribution to the year? Thanks.

Speaker 10

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

Speaker 9

Yes. I had myself on mute there. Yes, I would start by telling you we've introduced a lot of exciting products over the years. This is probably the most enthusiasm I've seen for any product we've ever introduced. I mean, police officers did not get in this career to be writing reports, and we've done a lot of background work with our Ethics and Equity Advisory Council as well as district attorneys and others looking at what the risks are and testing against those.

Speaker 9

We do make sure that we're putting speed bumps in there, so officers are reviewing the final report. It's really important that it's theirs. But what we're seeing is pretty rapidly they're realizing the agencies and their partners, again, district attorneys and others, are telling us the reports they're getting when officers are using draft 1 are better than the reports that they're writing on their own. And so while it's pretty early for us to make any exact predictions, the overall friction to adoption is low. This doesn't require a lot of professional services and integration.

Speaker 9

It's pretty easy for us to turn it on. It's very simple for officers to figure out how to use. And we're finding, again, as soon as they get experience with it, their feedback is pretty fantastic.

Speaker 10

Yes. Just to add to that, ultimately, there will be a sales cycle associated with it just like anything in selling the government. But I think we're already seeing some early orders come in and the pipeline is building. We think in the second half of this year and especially going into next year, we'll see this start to really contribute to in quarter revenue and ultimately at a high margin as well. So we're very excited about what this will entail for our results, but most excited about the fact that in a climate where it's very hard to add police officers to police forces that we have the propensity to put police officers back on the street instead of behind a computer here without having to make any incremental hires from the outside.

Speaker 10

So very excited about what this product entails.

Speaker 7

I'll take your second question. A great question. I would say both Fusus and Dedron are small. They are growing fast, but they're immaterial to our top line and really immaterial to our overall growth rate. So we've incorporated that all into the guidance we're giving for the year.

Speaker 7

Where you see a little bit more of an impact is us being cautious on EBITDA just, you know, given absorbing those businesses and having integration costs to really make sure we pull them in and do a good job. And so as you see us not pulling the Q1 EBITDA margin through to the rest of the year, you really see us accounting for some of those impacts and where we need to invest.

Speaker 8

Great. Thanks. I'll hand it off.

Operator

Thanks, Meta. We'll take our next question from Alyssa Shreeves at Barclays. Alyssa, are you on? You might be muted on your phone. And we'll skip for now.

Operator

We'll go to Will Power at Baird.

Speaker 11

Alright. Great. Thanks. Congratulations on the the strong, Q1 results. I guess first question really probably to whoever wants to take it, obviously, strong mid-30s percent revenue growth in Q1.

Speaker 11

If you look at the full year guide, while raised, it does imply some deceleration. So just want to get perspective on any level of pull forward into q1 versus conservatism for the remainder of the year. Any any broader thoughts on that front would be great.

Speaker 10

Yeah. Thanks a lot, Will. Nice to see you. I'd say, as usual, we like to see more of the year materializing before we get out over our skis on total revenue for the year. And so we're off to a nice start.

Speaker 10

We see the pipeline very strong. We're excited about, you know, what Q2 and beyond will hold. It's also worth noting, you know, the year over year comp for Q1 is always the easiest comp of the year in terms of, you know, Q1 tends to be the slowest revenue quarter. And so, yeah, we're just, you know, we it's not, we don't have any kind of, you know, pessimism out there or any reason not to think we're going to have another great year. We just like to see that materialize in terms of, you know, throughout the year in the sales cycle.

Speaker 10

And we'll certainly update that quarterly as we always do.

Speaker 7

Yeah. I would just add nothing sort of embedded in there other than the fact that we're lapping a very, very strong year last year.

Speaker 11

Yes. No, that all makes sense. If I could just ask a quick second question on TASER. Maybe any just update on how the automation process is going, you know, where you are with respect to having enough supply, to meet demand? And maybe any other color on the gross margin commentary there because as you automate and over time, that should help gross margins.

Speaker 11

It sounds like there's probably that initial investment maybe that's impacting it. Just wanted to get some color on that front.

Speaker 7

Yes. I think you sort of summarized that really well, which is we're in this balance between focusing on ramping capacity and really working on cost down initiatives. And we continue to see better demand than we've even expected for TASER X. And so we continue to be in that area where we're really ramping capacity. You saw that come through in 33% growth in Q1.

Speaker 7

I mean, that was because we had more supply available. So I think the team's doing a really nice job getting that capacity online and supporting that customer demand. It might take us a little bit longer to hit some of those cost down initiatives as we hit that balance. But ultimately, that's just a matter of timing, you know, 1 quarter to the next as we figure out how to slot that in. I would say overall, it's going nicely and is on track.

Speaker 7

And then as you look at our gross margins for the rest of the year, you also have a general mix shift balance that we do our best to look into our crystal ball and try and figure out software versus our devices versus our TASER business. And I would say devices were a little bit lighter and software was pretty strong in this Q1. And so as we go through the year, I'd expect some health and devices to balance that down a bit. So that's all that's embedded in us trying to say that that gross margin guidance is probably not going to get better for the year than it was in Q1.

Speaker 11

Got you. Thank you.

Operator

Thanks, Will. We'll go to Keith Housum at Northcoast.

Speaker 4

Good morning, guys, and thanks. A question for you, Josh here. In terms of maybe a seasonality to the type of business, you guys have grown so much over the years. If we look at last year, Q4 was a tremendous bookings quarter for you, obviously not so much this quarter. For instance, probably the first time I remember a sequential decline.

Speaker 4

Maybe you can talk about how you're thinking about the seasonality of your bookings as we look for the next this year and the next several years.

Speaker 10

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

Speaker 10

Number 1, like you said, we're coming off a really strong one where we kind of capture the chips in, in Q4 where we can. But then we go through a cycle where we add salespeople. That means the region change, you know, the regions change and that means, you know, just getting up to speed on the book of business. There's not a lot of urgency on the customer side because like I said, you know, in my remarks, Q1 is the only quarter of the year where no major budgets and really only the UK ends in Q1. And so it's Q1 is about kind of building the foundation, rebuilding the pipeline.

Speaker 10

But I can tell you, I see no red flags in bookings for the remainder of the year. I think the team is going to respond really strongly. I think it's always nice we've got a really, really good sales team. And when we can kind of light a fire under them after kind of a so so quarter, that usually tends to lead to some good out quarter results. And that's certainly what I expect here in quarters 2, 3 and 4.

Speaker 10

So yes, I'd say for the future, I'd consider Q1 kind of the seasonal low point to be expected for bookings, but really not an indicator of what's to come here in the future.

Speaker 4

Okay. And a follow-up question in terms of federal. Federal last year had another great year or a great year for bookings. Are we seeing those start to deploy here or are those going to be, like, a little bit longer, I guess, deployment schedule? How do we think about that kind of contributing

Speaker 10

to your overall revenue growth? You know, these a lot of these large federal bookings, they are phased into multiple years. And so, you know, we tend to recognize revenue when the product's deployed or when it's shipped on the TASER side. And so of those phase deployments that are previous bookings, you know, there's just some noisiness and when the shipments are sent and when the deployments are done. But, you know, 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.

Speaker 10

We've got some large opportunities here in the next few quarters and certainly expect federal to register another awesome year.

Speaker 4

Great. Thank you. Appreciate it.

Operator

Thanks, Keith. Up next, we have Josh Riley at Needham.

Speaker 12

Yeah. Thanks for taking my questions here. So, following this body cam issue with the NY, New York Department of Corrections from a competitor solution. You know the NYPD as we know is a customer for you guys and 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?

Speaker 12

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?

Speaker 10

Yeah, Josh, thanks a lot. And the first thing I want to say about this is there's a captain that was injured as part of this. And so our thoughts are with him. It's really, you know, a bad scenario when this type of stuff happens. And, you know, you indicated there might be a business opportunity here.

Speaker 10

We'll see what happens with that. We're certainly, you know, we feel good about our ability to deploy products. We've invested a lot into them. We've invested a lot into the deployment and we have the opportunity. Of course, we'll be ready to ready to go.

Speaker 10

We have the opportunity. Of course, we'll be ready to ready to go. But in the meantime, you know, we're just we're focused on what's in front of us and that's continuing to build great products. Like you alluded to, you know, we've invested a lot into our hardware and into our devices pillar. And we have great people and thinking through all of these kind of fringe and edge case scenarios that could pop up with the hardware.

Speaker 10

And so while we're not going to kind of disclose any trade secrets here, any in-depth engineering, I will say, you know, we've thought through a lot of these potential edge cases and we feel good about how our products will perform in them. And so, you know, in the meantime, we'll keep just doing what's in front of us and what we're in control of and if an opportunity presents itself, we'll be ready.

Speaker 12

Got it. Thank you. And then just a quick follow-up on the TASER revenue strength in the quarter here. Is there anything to call out in terms of, you know, TASER 10 domestic strength versus international being stronger? I know you had some big opportunities there for the 7 in Australia.

Speaker 12

And then just balancing that versus the automation coming on, Was the automation a benefit in Q1? Because I was thinking that was a little bit more tilted for the automation equipment taking hold in the second half. Thank you.

Speaker 10

Yeah. 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 demand or TASER 7 demand by double.

Speaker 10

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. And so, you know, I think with demand, there is a need to ramp faster. We want to get this device out to our customers as fast as we can because we really believe it will save lives. And so we're working through that.

Speaker 10

Of course, we have to invest more in automation to maximize our build capacity every quarter, and we're in the process of doing so. But future is very, very bright on the TASER 10 side.

Operator

Thanks, John. John. We'll go to Jeremy Hamblin at Craig Hallum. Jeremy, I think, make sure you come off maybe. Cool.

Speaker 13

Thanks. Thanks for taking the question. I wanted to talk a little bit more in-depth about some of the acquisition as well as just the new product opportunities. You've had a this is a pretty substantial increase in your TAM, and you've had that on a couple of occasions here over the last 6 or 7 years, but this is among the most significant. And just getting a sense for Diderone, which I gather there's quite a bit of sensitivity out there in how this is going to be used, potential for pushback in the community.

Speaker 13

Give us a sense for how you expect that to be deployed through your customer segments as they stand today? Is this the type of product where while it's immaterial now, do you see it potentially as a material contributor, let's say, in 2 to 3 years?

Speaker 9

Yes, let me take that one to get started. A few years ago, when we were standing up Axon Air, our business leader there had an important insight that as important as drones are, probably even more important is going to be how public safety can deal with the new threats that drones pose. And that was before what we've seen recently in world events where in modern warfare, it turns out these small consumer level drones are a real game changer, but they're also presenting new threats to everyone from stadiums to critical infrastructure to major events. And so actually with D Drone, we don't see a lot of pushback because D Drone is really about monitoring drones in the airspace. And again, especially given the new threat vector that that represents, we're seeing pretty widespread support that people expect their local government, their public safety to be able to protect them and aerial threats are just an entirely new vector.

Speaker 9

Now the drone is a first responder, which can be enabled by D drone. So D drone both helps control aerial threats. And then if you want to deploy your own drones, having really great visibility of the airspace is a key part of that. Now DFR does present some concerns people may have about the government flying drones. But we find gets most people comfortable is if those drones are really being used to respond to 911 calls, and people can understand that that gets police eyes on the scene much more quickly and can help them make better resourcing decisions that these are not being flown just hovering over the population, they're really being used to respond to calls for help.

Speaker 9

That combined with good transparency about drone missions that are being flown and how they're being used in publicizing their policy helps most agencies, I think, really gain a lot of public support. So to finish out, we see this as being very material to the future. We think drones are already proving to be transformative and will only become more so.

Speaker 7

I would just say from a timing standpoint, I echo echo Rick fully. I think there's a question of is it, you know, from a financial standpoint, is it 2 to 3 years from now? Is it longer? I mean, it will certainly be a really big pillar of our business. And you can see us investing heavily behind robotic security.

Speaker 7

I think we are really seeding a long term growth trajectory, though, a business that's going to be, you know, material in for many years in the future more than, you know, targeting a year or 2 years from now.

Speaker 13

Got it. Helpful color. And then just following up here on draft 1, 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. Wanted to get a sense of how challenging you see that market in terms of entering it?

Speaker 13

Or is it that your ecosystem is such where there is a natural fit and it's giving you a competitive advantage simply because of the other product lines that you already have out there?

Speaker 9

Well, this is the entire reason that we invested in a records management system 6, 7 years ago was entirely because we saw this coming that 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, but we think between the combination of the ecosystem just really providing a great user experience and what we invest in earning customer trust and support and the rigor with which we've evaluated the risks and really dealt with all the critical players, whether it's from community concerns to district attorneys and legal concerns across the board. I think we've done this in a way that our customers can know that this is a pretty well vetted approach.

Speaker 9

And obviously, AI can be a bit controversial, and we intentionally chose an area that is very high payback for our customers with very minimal risk compared to some other areas where using AI today may introduce more risk here. We think given especially because it's derived from the body camera video, it's derived directly from the evidentiary record, which we think leads to actually even better, more detailed, more accurate police reports.

Speaker 14

And just building on what Rick said, you know, as always, we obsess about our customers while being healthily self aware about the competitive landscape. And that's one of the reasons we talk about the ecosystem so much as you were talking about. We've had transcription of the audio from body camera video at scale with a very large number of customers building up and up for several years now. We've got the footprint of both our body cameras themselves and dams and the growing momentum and records and all that together is sort of the perfect tee up that makes draft 1 possible. And then the second thing, as Rick was saying, you know, a lot of people talk about the concepts of responsible AI and using these techniques in ways that combine, effective results for customers with doing it in a principled and appropriate way.

Speaker 14

And draft 1 really is that actually put into action. And it's why we're so proud of it and why we believe customers are showing early excitement for it.

Speaker 13

Great. Congratulations and thanks for all the color.

Operator

Thanks, Jeremy. Up next, we have Trevor Walsh with JMP.

Speaker 15

Great. Thanks for taking my questions. Rick, maybe one for you. It was great to hear all the commentary around kind of opportunities around AI coming out of Axon Week. 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.

Speaker 15

Is there any worries in a for a product for such as FUSYS, for example, where 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 realize or we have, I think, realized that AI is kind of the new or the data for AI is kind of the new gold. Does that become an issue in terms of people kind of sharing that data, kind of on a more longer term basis?

Speaker 9

Well, we certainly haven't seen it yet. And most of the partners that are sharing in through Fusus, I mean, those are really members of the community, businesses, other enterprises, churches, schools, partner government agencies that are sharing that data primarily because they want to be safer, and they want to be able to have that data put to use to be able to help police do their jobs better and identify, you know, whether it's criminal activity or solve crimes. So we haven't seen, you know, people sort of pushing back against using that data, you know, responsibly to protect them better. Jeff, I don't know if you have any color you might want to add on that.

Speaker 14

Sure. No, it's 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 few years.

Speaker 14

And it's one of the things that we think enables us to keep building and building in differentiated ways. At the same time, one of the key incentives that helps us not, or not worry as much about the particular concern you noted is that for the most part, all of this data is in fact our customer's data ultimately, And they're the ones where they choose to work with multiple, you know, multiple vendors and partners, us and sensors and, you know, providers of other kinds, as well as businesses in their community, they themselves get to vote with their feet about how they want the various tools they choose to work with, including us to work together. And so they're a really powerful voice there, that incentivizes all of us, to play, nicely in the sandbox while working to keep making our individual products as differentiated as possible.

Speaker 15

That's terrific. Really appreciate the color there. Well, maybe one quick follow-up, maybe piggybacking a little bit off some of the D'edron comments.

Speaker 16

How much do you intend to

Speaker 15

kind of lean into the more counter UAS counter drone type use cases, whether that's for DoD or some of the non kind of public safety customers that might be there?

Speaker 9

Yes. I would say we intend to lean in pretty hard. So our goal is to protect life. And to the degree that drones are being used to threaten lives, We see that as 100% in our mission set to try to create new ways to protect from those risks. So, we see this could end up being a real opportunity where D drone not only is useful to our existing customers, but D Drone is interesting to a new set of customers.

Speaker 9

For example, major sporting stadiums, critical infrastructure, and indeed militaries, both U. S. And internationally, they have a customer set that is new for us and can bring our ecosystem into those customers as well.

Speaker 15

Great. Appreciate the questions. Congrats on the quarter.

Speaker 11

Thank you.

Operator

Thanks, Trevor. Up next, we have Joe Cardoso at JPMorgan.

Speaker 16

Hey, everyone, and good afternoon. Thanks for the question. First one here, just wanted to follow-up on the D. Jone questions. Obviously, we know you've been working with them for a while, and this isn't the first time you pulled the trigger on acquiring a partner of yours that you guys think there's value in owning.

Speaker 16

Just curious why right now is the right time for you guys to acquire them. Has there been any change in terms of, like, I know you talked to time line, but maybe is there some type of change that maybe we don't appreciate? And then maybe just can you just talk about, you know, has there been any change relative to your thoughts around participating, or sorry, which parts of the technology stack you wanna participate as it relates to the drone opportunity and whether that differs than what you're doing currently around, like, TASER and body cams? And then I have a follow-up. Thank you.

Speaker 9

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

Speaker 7

Maybe I'll do timing of why now, and then Jeff can talk about the technology pieces. So I think there's a couple of things. 1, you know, we knew we were going to get a bit more active from an M and A standpoint. That's why we opportunistically, you know, strengthened our balance sheet and did our capital raise back in the fall of 2022. And so that was really so that we could go out and be methodical and pick up some of these pieces of the puzzle where we really wanted to strengthen, you know, the roadmap and the pillars.

Speaker 7

And Rick has consistently been talking about the importance of robotic security. And so both Sky Hero and D drone fit, you know, squarely into his vision for what robotic security looks like for us in the future, everything from the indoor tactical drones of Sky Hero to having D Drone help support DFR and help support, you know, counter drone in all of those markets. That just goes back to timing of like when does it feel right for them given everything else they have on their plate and, you know, what they're thinking about as an independent company versus when it makes sense to come together with us. And so I And so I think nothing big out there that we're not talking about other than the fact that it, you know, felt right, timing wise for them and for us. They were a partner of ours.

Speaker 7

We had invested in them before. We very much knew when we made that investment that we might make an acquisition. And this is the timing that sort of worked out for both sides from an acquisition standpoint.

Speaker 14

Yeah. 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've worked in on these kinds of ecosystems that are always this delicate balance between thinking about where do you build by partner, etcetera. And those things evolve over time. And you're always trying to decide at each layer of the stack, you know, where are 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?

Speaker 14

And as you see with us, that's an evolving target, but what it combines all of those decisions over time is looking to see, based on where we are now, where we see ourselves going, what's the best combination of where we can join forces with others while self building ourselves at both across the hardware and software side of things. And so you can see, for example, with drones, we made a very surgical and key decision with Sky Hero in bringing in this very focused tactical drone hardware provider. You see the work we've done with Fusus and then all of the organic build UCS do everywhere and we'll continue to evaluate that stuff carefully and be as smart as we can as we go.

Speaker 16

I appreciate the color there. And then maybe for my second question, just on the CapEx raise today, maybe you can just talk us through what's driving the confidence to accelerate your investment plans this early into the year. Like, obviously, you talk about it as being like a slower, bookings quarter, but the pipeline is growing. So maybe you can just dive into that why I pulled the investments today versus 90 days in the future. Right?

Speaker 16

And then just maybe a second part of that is just as we think about these investments coming online, should we think about it as being more gradual over time, adding more automation and then capacity coming on slowly? Or is this more of a we should expect some kind of inflection and bigger magnitude in a later quarter? Any color around the timing associated with the capacity acceleration or capacity investment acceleration would be appreciated. Thanks.

Speaker 7

Yeah. Sure. So I would focus you on the part of Josh's commentary when he said it's the best pipeline we've ever had coming out of Q1 and really drive you there. I think what you're hearing from us is like, yes, we had slightly softer future contracted revenue in Q1, but that is not at all indicative of how we see the year going, which I think you can see from our guidance and our commentary. And so as we look out at pipeline, as we look at the demand for TASER 10, as we look at the 33% growth in Q1, we basically said that in order to keep meeting that demand, and we don't want our customers to have to wait too long for our products, that we needed to invest in more capacity.

Speaker 7

And then the way we invest in capacity is, you know, we're buying pretty specialized equipment to run our lines and do our manufacturing. And so there's lead times associated with that. So right now we have to start making investments to support capacity increases in 2025 basically at this point. So there's no inflection point. You just see us nicely and slowly ramping our capacity increases.

Speaker 7

I mean, maybe not slowly, but steadily ramping our capacity increases to meet that demand and trying to get out in front of it so that we don't get caught in 2025, you know, saying we don't have the ability to meet, you know, demand and we're going to have to back log our customers for a significant amount of time. So that's really just what we're seeing is making sure we're getting ahead and being prepared for 2025. You know, if we waited 90 days, that would just mean we were bringing it on 90 days later, you know, in 2025 when we got ramped up. And I think we have enough confidence. I'm telling you we have enough confidence in the pipeline and the demand that it's prudent for us to bring that online.

Speaker 16

No. Understood, Britney. Thanks for all the color. Appreciate it. Congrats on the results, guys.

Speaker 7

Thank you.

Operator

Thanks, Joe. We'll take our last question from Mike Ng at Goldman Sachs.

Speaker 17

Great. Good afternoon. Thanks for the question. I have 2 as well. First, just on Axon and cloud services, it was up $12,000,000 quarter on quarter.

Speaker 17

Could 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 and dispatch? Thanks.

Speaker 17

And then I have

Speaker 7

a quick follow-up. Yeah. So our our step up quarter over quarter was almost 13,000,000. I would say part of that was in Q4 last year. We had a really big step up.

Speaker 7

Part of that was from revenue recognition. We've talked particularly about how with records coming online, some of that revenue recognition is going to be a little bit lumpy. So we had a particularly large quarter in Q4, and then that leads to a slightly smaller step, you know, Q4 to Q1. But I also think, you know, 13,000,000 continues to be pretty healthy step and sort of in line with what we've indicated is like if you averaged out our quarters, that feels like a pretty normal step up each quarter.

Speaker 17

Great. Thanks. And then I was wondering if you could comment on some of the Axon wins that have been reported in the media. How is RCMP field testing going? Are there any themes across the wins in Cornelius, North Carolina or Puerto Rico?

Speaker 17

I know some of them were from a large competitor. So any themes in terms of product or costs that are driving those wins? Thank you.

Speaker 10

Yeah. 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 or and we're not aspiring to be the kind of low cost vendor in the space.

Speaker 10

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. And so at times, a customer upfront might focus on cost as you know, and say, hey, this is the lowest price point. And then when they start to use the products and test them out and see you know, what they do well and where the shortcomings are, they might feel like, hey, you know, the ROI is such that we should look at a product that's priced differently even if it's higher. And oftentimes, that's where we've come in internationally.

Speaker 10

And while it takes a little bit of discipline on the front end, we think it's the right long term winning strategy because we do really have a lot of conviction that what we've built, you know, a police officer is lesser served with with something else, you know, in their hands or on their chest or on their belt. And so, so we've got a lot of conviction that's the right strategy and we're starting to see that play out in international markets.

Speaker 17

Excellent. Thank you for the thoughts.

Speaker 10

Thank you.

Operator

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

Speaker 9

Awesome. All right. Well, thanks, Eric. And thanks again to all of you for joining. I'm really proud of our entire team.

Speaker 9

And the incredible execution they continue to show. We'll be really excited to come to you with more updates later this year and we look forward to seeing you all again in August.

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Earnings Conference Call
Axsome Therapeutics Q1 2024
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