Axsome Therapeutics Q2 2024 Earnings Call Transcript

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Provided by Quartr
August 6, 2024

There are 18 speakers on the call.

Operator

Hello, everyone, and thank you for joining Axon's executive team today. I hope you've all had a chance to read our shareholder letter released after the market closed, which you can find at investor. Axon.com. Our prepared remarks today are meant to build upon the information 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 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 will 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

Speaker 1

can be found in our shareholder letter as well

Operator

as in the Investor Relations section of our website. Now turning to our quarterly update. First, we'll start off with a quick video to share some of the feedback that we've gotten from early users of Draft 1. It'll be just 2 minutes. Let's pull it up.

Speaker 2

My experience using Draft 1 really blew me away. The normal report, your thefts, your shopliftings, your damaged property reports, those really does a good job of breezing through.

Speaker 3

You come on this job wanting to make an impact. You don't come on this job wanting to type reports. So this AI feature, I'm super excited about it.

Speaker 1

When we introduce new technology, there's obviously a skepticism on, you know, this is something I have to learn. This has changed. I don't necessarily like this. I like the way I'm doing it now. But once they use the technology, they see how beneficial it is to their day to day operations, and then there's buy in.

Speaker 2

I logged in. I hit the narrative, and I wanted to see just how it was gonna do in summarizing that report. I mean, all these little minute details was all in there. It was very thorough and very eloquently done. There were a few things that we had to edit, but I would say it probably wrote 90% of that first report.

Speaker 2

That's probably a 25 to 30 minute long report, and you hit the narrative button and it cranks something out in a few seconds. It does force you to go through the report to make sure that you agree with everything that's written.

Speaker 3

We make sure we're checking our work when we do AI report writing, but ultimately, it is clean process. And some of the reports that we've seen are, you know, maybe better than an officer could write.

Speaker 1

I'm most looking forward to is the increased efficiency that this technology provides from line level all the

Speaker 2

way up to commander level. There's a plethora of things that you can do with that extra hour or 2 hours in a in a 12 hour period.

Speaker 3

Ultimately, we are here to serve the community, and this helps us with that job.

Speaker 4

All right. Thanks, Eric, and thanks to all of you, our shareholders and analysts, for joining us today. Welcome to Axon's Q2 2024 Earnings Call. I am again proud to report another great quarter and to show you that video to highlight some of the incredible outcomes our team is delivering to our customers with Draft1. Our story is to build a world where we help our customers achieve better outcomes every day, and it still feels like we're just at the beginning.

Speaker 4

There are 2 things that I believe are critical to our success and ability to differentiate in the market. We move fast and we take risks. It is our speed and willingness to tackle the toughest problems that drives our innovation and allows us to recruit the best people. I think we're at the forefront in several technological areas that will define the next decade for our company. You've probably heard me talk about them before.

Speaker 4

First, and possibly the most significant, is artificial intelligence. We are positioning ourselves as the indisputable leader in delivering the power of AI in practical, usable applications to our customers. We've been at this for many years, and our progress is accelerating as the underlying technology and the interest to adopt reaches critical mass here in the US and around the world. 1 year ago, I shared with you our vision for generative AI applications as we saw commercially available LLMs, Large Language Models, coming to the market. I told you we would be ready to catch the ball.

Speaker 4

Well, in April, we launched Draft1, a powerful new AI service that writes the first draft of a police report extracted directly from Axon body camera recordings. Our customers' response to Draft1 is better than anything I've seen, better than we could have imagined. They want to put more data into the cloud with Axon, they want to better access that data, and they trust us to protect their data. And they can see that we can help them do their jobs better, put their data to use. Our unique position to define this category comes down to 3 key advantages that I believe we hold.

Speaker 4

1, the sensor network. We run the largest sensor ecosystem by far, including TASERs, body cameras, in car cameras, drones, robotics, and 3rd party cameras and sensors through FUSUS. This vast network generates the data needed to drive the future of AI. 2nd is the data. Our expansive ecosystem of software and sensors has generated the industry's largest and most valuable data set.

Speaker 4

Now it's not our data. Our customers own their data, and we protect it rigorously. And we provide them the tools they need to manage and leverage their data. We help them make their data accessible and usable, securely managing 100 of petabytes of audio, video and imagery in the cloud. And 3rd is trust.

Speaker 4

We worked tirelessly. For decades we have to earn our customers' trust. We've led 3 major tech revolutions: TASER energy weapons, wearable cameras, and cloud software. And we have several more in progress, like virtual reality training, drone as a first responder, and real time sensor fusion. Our customers trust us as their thought partner, guiding them into the future, an AI driven future.

Speaker 4

This trust is our most enduring advantage, built over decades, and we are dedicated maniacally to maintaining that trust by being reliable and trustworthy partners. AI is a hot topic right now. And there is concern about the commoditization of the underlying models. Some major tech companies are investing 1,000,000,000 of dollars and then open sourcing their models, making some of the LLMs, these foundational models, free and potentially demonetizing the foundation model layer of the AI ecosystem. We believe we are uniquely positioned to leverage our position as the application and network layer to create significant value through time and cost savings that we deliver from the underlying technology through a world class UI to our customers.

Speaker 4

By combining top tier AI models with our sensor and software ecosystem, we can deliver exceptional workflows, all within a secure gov cloud environment. Our AI products not only offer tremendous growth opportunities for us, but also immense value to our customers. Solutions like Draft1, automated license plate reading, transcription, video redaction these services quickly pay for themselves. I'm particularly excited about upcoming announcements that we have planned for the Annual Police Chiefs Conference, the IACP, in October. So stay tuned.

Speaker 4

Our next focus is real time operations, which we see as a major opportunity. From what we have learned in our work in legacy dispatch systems, combined with our acquisition of Fusus, we believe we are positioned to redefine real time communications and real time operations for our customers. Our strength lies in innovation, not iteration. Therefore, we are shifting, we are pivoting from command line dispatch console software to instead focus on sensor fusion and AI. This approach will integrate multiple data feeds, both human and technological, into a unified single pane of glass.

Speaker 4

Strategically, we are refocusing to align our unique innovation capability with the emerging technologies. Acquiring Fusus has given us a platform to accelerate our progress, and we're doubling down on this investment. We plan to leverage the fully integrated Fusus MAP experience to provide critical real time information, enhancing decision making and improving communications. We're excited to embrace this new vision and deliver exceptional results for our customers. Lastly, we remain highly enthusiastic about drones and robotic security.

Speaker 4

Last year, we acquired Sky Hero in the tactical robotics space. Recently, we announced an expanded Drone as First Responder, or DFR, partnership ecosystem with Skydio, D Drone and DroneSense, each the leaders in their niche of the ecosystem. This collaboration offers the most advanced and comprehensive solution for drone as a first responder programs. We look forward to completing our acquisition of D Drone later this year, further expanding our footprint in this dynamic space. I'm excited about what's ahead and see these updates as validation of our strategy.

Speaker 4

I believe we are uniquely positioned to achieve remarkable outcomes, driving immense value for our stakeholders across the board while solving real world problems that matter. And with that, let me turn it over to the guy who leads the phenomenal execution you see quarter over quarter. Josh Shisner, over to you.

Speaker 5

Thanks a lot, Rick, and good afternoon, everybody. I'd like to start today's remarks on a personal note. In June, I celebrated my 15th year work anniversary at Axon. In 2009, Axon, the name TASER, was much smaller, carrying a market cap of $245,000,000 It is a testament to Rick's vision and leadership that Axon is in a much different place today, both in terms of size and impact. I feel very lucky to have been part of this awesome team for so long, and I'm thrilled to witness the tremendous results driven by such a talented and mission oriented group of individuals.

Speaker 5

I'm pleased to report that our team delivered again in Q2, and we feel great about the momentum we are seeing in the second half and beyond. While Rick continues to focus on our vision and make sure that we're headed in the right direction, I continue to focus my time on our execution and ensuring we have the right team to help us achieve that vision over the long term. I have a few updates from the quarter that I am particularly excited to share. First, we achieved record second quarter revenue and bookings. It was our Q1 with over $500,000,000 in revenue, a number that represented our full year revenue just a full a few years ago.

Speaker 5

We booked over $1,000,000,000 in new business, closed our largest ever contract with a US state and local customer, closed our largest ever corrections deal, and we are seeing an uptick in our international momentum. Our international bookings are up a 100% year to date versus last year. And just a couple weeks ago, we signed our largest records contract ever with that segment. Next, I'll briefly share some detail on where we are seeing accelerating demand for our products. Our new introductions over the past year have ignited.

Speaker 5

TASER 10 is the fastest selling TASER device in our history. Not only is demand pacing at over 2x the rate of TASER 7 on the order side, but we've been able to scale shipments each quarter since launch. We've eclipsed more than a 100,000 units shipped, and we have a long runway ahead. Something I find particularly encouraging here is that our top 4 TASER 10 deals have come from customers outside of our US state and local customer base. We have a massive Taser user base within state and local, but we also see strong demand from our customers in other segments like federal, international, and from corrections customers as well.

Speaker 5

The order book for TASER 10 is strong across the board. In q2, we shipped the most body cameras we've ever shipped in a single quarter. Along with TASER 10, Axon Body 4, and our expanding set of premium software, adoption of our officer safety plan is growing as 7 of our top 10 domestic deals in the quarter included premium officer safety plan options. Finally, we are seeing the early indicators of success supporting our investments in newer areas within our software business from revenue or I'm sorry, revenue from productivity, AI products, real time operations and drones and robotics drove almost half of the growth in our software revenue in Q2. Early traction within Draft1 is a great example.

Speaker 5

In the 3 months since launch, Draft1 has generated over $100,000,000 of pipeline, the fastest of any Axon software product to do so. We believe demand for products like Draft 1 will only grow from here. Halfway through the year, we are pleased to be well positioned to deliver another year of growth and sustained impact. However, we're onto the next play and nobody is letting up. We have a fantastic opportunity to deliver a similar bookings number over the next 6 months that we achieved in the entire 2023 campaign.

Speaker 5

The team is relentlessly focused on executing, and we're excited to show what we can do in the second half. Over to you, Brittney.

Speaker 6

Thank you, Josh. As both Rick and Josh highlighted, we had a great quarter. We grew revenue 35% year over year on top of 31% growth in the same quarter last year, and we delivered strong adjusted EBITDA. I am particularly impressed that the growth comes from all our business segments driven by our powerful ecosystem. Our customer centric approach solves real problems, which drives us to innovate, and you can see those results in the business.

Speaker 6

Cloud and services remains the fastest growing segment at 47% year over year. Our software growth stands out and has continued to drive mix shift with 39% of revenue coming from software and services in Q2, up from 35% last year and 29% the year before. TASER X and Axon Body 4 also contributed an impressive 28% year over year growth in both our TASER and Sensors product categories. These products are performing incredibly well and we're still in the early Overall, our future contracted revenue sits at approximately $7,400,000,000 which is up 41% year over year, and ARR of $850,000,000 is up 44% year over year while maintaining 122 percent net revenue retention. Along with continuing strength in Axon Evidence, the new products we talk about are helping drive our consistently high NRR.

Speaker 6

Adjusted gross margin of 62.5% increased by 10 basis points year over year. This was supported by mix in our software business as well as the benefits of automation in our TASER business. We cleaned up some of our older inventory on the sensor side given the better than expected demand for AB4, which was a partial offset to our strong gross margin in the quarter. At this point, though, we expect to see stable gross margins for these segments going forward and expect overall gross margin around this level for the remainder of the year. Below the gross margin line, we continue to focus on scaling the business, both to drive profitability and to successfully deliver on our top line growth.

Speaker 6

This has included adding a new manufacturing facility to increase production capacity for TASER devices and cartridges as well as integrating our acquisitions and investing in R and D. We've been able to invest in and grow the business while driving operating efficiency. Increased revenue, gross margin and operating efficiency drove adjusted EBITDA to $123,000,000 which was 24.5 percent margin in the quarter, up 270 basis points year over year and surpassing our highest level in over 3 years. We also had free cash flow conversion above 60% in the quarter, leading to CAD 75,000,000 of adjusted free cash flow. Turning to our outlook, we are pleased to raise guidance again on both revenue and adjusted EBITDA.

Speaker 6

Our full year 2024 expected revenue guidance is increasing to $2,000,000,000 to $2,050,000,000 which represents 29.5 percent annual growth at the mid point. This is up from our prior guidance of $1,940,000,000 to $1,990,000,000 which represented approximately 26% annual growth at the mid point. And it's a result of the strong performance we saw in Q2 and the strong pipeline in the second half of the year. We expect full year 2024 adjusted EBITDA of $460,000,000 to $475,000,000 implying an adjusted EBITDA margin of 23.1 percent at the midpoint. This is up from our prior adjusted guidance of $430,000,000 to $445,000,000 and expands our expected margin by 80 basis points.

Speaker 6

The increase in our adjusted EBITDA guidance includes better than expected performance in Q2 and our increased expectations for the remainder of the year. Consistent with last quarter, our guidance incorporates an immaterial amount of revenue and adjusted EBITDA margin impact from our planned acquisition of D Drone, which we still expect to close in the current year. Overall, we saw strength across the board on the P and L, shipped a record number of tasers and body cameras, generated strong cash flow, made additional investments into our drone partnerships and remain on track to close D Drone, and strengthened our bookings pipeline for the back half of the year to record numbers. I'd say we're quite proud of this quarter, and I want to give a huge thank you to the incredible team we have for making it all happen. And with that, I would like to open it up to questions.

Operator

Thanks, everyone. It's a minute till I'll come up in the gallery view.

Speaker 1

All right.

Operator

We're going to start off with Jonathan Ho at William Blair.

Speaker 7

Hi there. Good afternoon and congratulations on another quarter of strong results. Can you give us a little bit more color on the adoption of your software applications? And maybe what are some of the biggest contributors now? What are sort of the incremental add ons where you see the biggest inflection point?

Speaker 7

I definitely appreciate the AI commentary, but just wanted to get a sense of maybe what's driving the performance this quarter and what you're most excited about going forward.

Speaker 6

I can start and then maybe turn it over to Rick, who I know is incredibly excited about this. But we made the call out this quarter that we're both seeing terrific continued growth from our evidence.com product, but we're also seeing increasing contributions to the growth from our other suite of software products. And that's really across the board in those other categories. So, you know, calling out productivity and AI and all of those pieces. We did call out the draft 1 while we're incredibly excited about the pipeline with over $100,000,000 in pipeline, it's not actually yet contributing to the revenue in the quarter.

Speaker 6

So continues to be a big area of excitement going forward. But the tremendous increase you're seeing this quarter is really coming from the existing products that we've talked about.

Speaker 4

Yes. Let me speak briefly. And then, Jeff, I might have you speak a little more in detail as well as the sort of the breakout of our current software. I tend to focus on the sort of the leading edge and then as things kind of stabilize, by the time they're bigger, I'm spending less of my time personally on them, and Jeff's really leading the large teams. Obviously, AI is a really interesting space right now.

Speaker 4

The what is what was impossible 18 months ago is now frankly easy in some cases. Things like Draft 1 is nearly magical in the user experience. The first time I turned it on was in, I think, February I got access to it in beta. I was at the Texas Department of Public Safety doing a demo actually I probably shouldn't have given them exactly. But anyways, I was at a large agency in Texas doing a demo, and they were saying, oh, there's no way this will work with an East Texas accent.

Speaker 4

And they started teasing each other, and I said, Well, I don't know, let's try it. And we had this officer come up, and literally this guy could have been on Saturday Night Live. He did the best, like, kind of hillbilly voice skit, was completely nonlinear answering questions, was all over the place. I was sure it was going to be a disaster. And I was just shocked at how well the AI turned all of the nonsense into a professional looking report in like literally 15 seconds, and we're seeing that reaction from customers across the board.

Speaker 4

We had some customers say that the time savings alone from Draft 1 justifies paying for the entire officer safety plan. So while it's not because of the nature of these things, we write contracts upfront, it takes time for the revenue to kick in, I think Draft1 is a real accelerator. It brings transcription. You need to have respond. You have to have the wireless connectivity for us to be able to push this up to the cloud, have it ready in time.

Speaker 4

So it pulls other products with it. And then there's a whole suite of other stuff that we are now working on across the board. I would just tell you, you know, Jeff and I sat down and we said, we kind of pulled the emergency brake and said across the entire business, every team is now researching what are the AI possibilities that justify changing our priorities so that we're nimble and that we're moving things that our customers couldn't even imagine are now moving to the top a year ago are now at the top of our product development priorities. So with that, Jeff, I don't know if you have anything else you want to add.

Speaker 8

Sure. I think both you and Britney said it well, but thanks, Jonathan, as always for the question. I mean, I think the beauty of the strength is that it's universal across the diversity of all of our product lines and segments, whether it is continued growth of core DEMS and more and more access to higher and higher tier plans of like unlimited third party storage and all of those things, whether it's the core add ons on the back of DIMMs, redaction, all of those things, the strength and productivity like the pipeline for draft 1, but records and standards and core transcription. And of course, at RTO, the existing strength and respond, the addition of FUSUS, and then VR accelerating and everything across the board. So I think that the thing that is the most interesting is how universal the growth is across the diversity of our product line.

Speaker 7

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

Operator

Thanks, Jonathan. We'll go to Trevor Walsh at JMP next.

Speaker 9

Great. Thanks, team. I appreciate you taking my question. Josh, maybe for you, but feel free to anyone else to jump in. Good to see the international bookings up 100% in the quarter.

Speaker 9

It's a theme you've obviously been talking about for quite a while now. Can you maybe just give us reiterate kind of the why now you think that opportunity is sort of seems to be gaining some speed? And then depending on how you answer, are there things that might kind of even accelerate that further geopolitical wise or just everything kind of going on kind of globally that might help to either make that those dynamics increase or maybe even create a headwind if things kind of turns more towards the negative? Thanks.

Speaker 5

Sure thing. Thanks. Thanks for the question, Trevor. Well, I'd say it's really the convergence of a couple of things that we've been working on for a couple of years now. Number 1 is getting the team right.

Speaker 5

I think this is the strongest international team we've had. We've made some new additions to the team in 2020 4, not only with Cameron Brooks, our CRO, but with some of some new leadership in Europe, some new country managers. And I think that's already showing a different level of rigor and intensity than we've had kind of across the board historically. So very excited about that. I think number 2, TASER 10 is really us allowing us to start and restart conversations around TASER adoption and restart conversations around TASER adoption and that's driving a lot of interest in a lot of the core markets.

Speaker 5

I think the market is moving more in the direction of cloud now, especially certain markets internationally. And I think we've been opportunistic there and continue to grow the pipeline. And so I think those are really the 3 big things. The last one that is kind of a continual effort is making sure we're focused on the right places. I think at times historically, we've gone a little off kilter the volume of opportunities and that's affected our execution.

Speaker 5

And I think at this point in time, we are really locked in on the places we have strong conviction we can be successful and we're investing in those areas and the team is doing a great job in executing in those geographies. And so think all those factors are really contributing to the great results we're seeing internationally. I would say like we're still very much in our own territory here looking down the whole field. We've got a ton of opportunity here and this is going to be essentially the low point of our international results this year and a ton of opportunity to build on into the future here, especially with the right team in place now. So very excited about what the future holds for international.

Speaker 4

Hey, Josh, if I could jump in as well, something that's really different in the past 3 months is AI. I met with a senior, a very senior government leader in Continental Europe in a country where everything I had heard up until now was cloud never, just showing draft 1. And look, we're able to film it and do it in French, no problem, because the underlying large language models from OpenAI, like they handle a 100 languages without breaking a sweat. And I had this presidential advisor look at me and said, I've never, like, I've understood the value of the cloud historically. It's been somewhat compelling.

Speaker 4

But like this is a game changer. And when you think about the complexity of deploying AI at scale and the massive GPU clusters you're going to need and the connectivity into the cloud just eases all that. So we've been almost religious about our cloud fervor. In the U. S, our customers told us early on the cloud was illegal and that we they couldn't do it.

Speaker 4

Of course, we pressed through that and now it's become ubiquitous. Europe's been harder. They've been very resistant to the cloud and we've stuck to our guns, but it's taken a lot longer than we thought. I think this is still theory, we haven't seen a pair of, but the early reactions are AI services like Draft1 and some of the new stuff you'll see in a few months could be enough to tip it over and start to make the cloud sweep through the rest of the world that's been very resistant to it. That'll be a real game changer if that pans out.

Speaker 9

Great. Thanks both. I'll get back in queue.

Operator

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

Speaker 10

All right. Thanks for taking my questions. And I'll echo the congrats on the very strong quarter here. I noticed the sequential growth in ARR was down from last year's $39,000,000 that you added in Q2. Is it simply a matter of timing as you did add a record $93,000,000 in AR sequentially last quarter from Q1 to Q4 to Q1?

Speaker 10

And I would assume with the commentary that demand for premium bundles remains pretty robust here.

Speaker 6

Yes, you got it. It's just timing. It depends on when the new revenue starts turning on in the quarter. And bookings in Q1 were relatively light as we go through the year and so you just see that rolling into ARR in this quarter. So I wouldn't read any more into it than that.

Speaker 6

We're still really happy with, you know, the 40 plus percent year over year growth in that ARR number, and and that's what we're looking at.

Speaker 10

Got it. That's helpful. And then the TASER gross margin had a nice bounce back here in q2. How should we think be thinking about the trajectory for the TASER gross margin for the balance of the year? Because I know there's been some, you know, swing factors there that, you know, maybe we should be considering.

Speaker 6

Yeah. I was I was happy to say, I think, you know, our margins generally are starting to stabilize around the levels you're seeing them at now. And so that's both inside of our segments and for our overall gross margin. So hopefully, some of the noise that we've been seeing in past quarters is stabilizing a bit. And I would say some of that benefit you're seeing in the TASER gross margin this quarter is, you know, we've talked about automation coming online and you're starting to see the benefits of that.

Speaker 6

So I think you'll see that benefit going forward. And then just as we go through the year, you know, mix does always tend to move things up or down a little bit, both inside the segments and for the overall gross margins.

Speaker 10

Got it. Thank you. Very helpful.

Operator

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

Speaker 11

Hey. Thanks for the question, and congrats on the results as well. I guess just one for me and just wanted to follow-up. I think, Josh, last quarter you talked about the best opportunity pipeline you had seen exiting 1Q and it seems like 2Q topped that, particularly given your bookings or backlog comment heading into the back half. I guess can you just flush that out a bit more specifically like what's driving your conviction here?

Speaker 11

Is there any particular parts of the pipeline where you've seen a big pickup as it relates to the portfolio or customer vertical perspective? And that's driving basically this view going into the back half. Thank you.

Speaker 5

Sure thing. Thanks thanks for the question. You know, ultimately, the pipeline is very strong. Of course, that's something we track, as a company and as a sales team. And it all comes down to just the conviction that we have and how accurate it is and look like we have the best sales team in this industry.

Speaker 5

The sales team is one of our strongest teams in the company and I would bet on them all day. And so I think we are going to have a massive back half in terms of bookings. We see the pipeline everywhere across the business. But more importantly, the names next to the pipeline are names that I have a ton of conviction and belief in. And I think everyone's going to be really pleased to see what the team puts up in q3 and q4 here.

Speaker 11

Got it. Thanks. Appreciate the response.

Operator

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

Speaker 12

Hey. Thank you guys for taking the question. On the drone market, in particular, the NDA amendment was added potentially that can lead to a DJI drone ban. If that were to go through, how does it change your opportunity with partnerships with Skydio?

Speaker 4

Yes. So I'll take that one and then see if Jeff needs to clean anything up. We've our strategy around drones has been to be very dynamic and flexible. DJI up until now has been the market leader. And through our partnership with DroneSense, basically, DroneSense created piloting and data management software that would be able to use Chinese hardware with US software and data flows, so that it could be more secure, and that's been very successful.

Speaker 4

I'd say DroneSense is currently the market leader in terms of the number of drones flying on their software. The hardware bans have been instituted in some states already, like Florida, And Skydio is the clear US market leader. They're also the clear leader globally in autonomy in terms of the drones being able to fly themselves without operator intervention. And so Jeff really spearheaded the efforts around negotiating this new partnership combining the best of DroneSense, Skydio and D Drone. So we think we're well positioned either way this pans out.

Speaker 4

There was a movement towards a federal ban. It looks like that has, at least for now, been paused on DJI. So we are prepared for either outcome and we think we've got the best strategy we can that's optimized and not betting on political outcomes because I think you can't bet on those. Jeff, anything you'd want to add?

Speaker 8

Yeah, sure. I think hands down, like we've talked about for multiple quarters, the role of drones and robotics broadly in public safety is another one of these rapidly accelerating rocket ships. And we intend to continue to play a bigger and bigger role in supporting agencies across all of the workloads for drones and robotics that they're doing. And one of the most important aspects of that is this whole category of DFR or drones as first responder. And within that, you need the right combination of many elements of the stack.

Speaker 8

You need the right drone hardware, you need the right piloting and all that stuff, you need the right mission management, you need the right docking infrastructure, and you need the right airspace protection. And so, as Rick just said, we were thrilled to announce this big comprehensive additional partnership together with Skydio, who is unquestionably the leading US hardware manufacturer. And together with them and us and each and others, we're confident that we are by far the best end to end solution for agencies in the US and steadily over the round of the world there. Plus, we continue to support together with Skydio and our other partners, all of the other workloads that aren't PFR yet in drones, and it's going to keep on growing.

Speaker 12

Got it. Thank you.

Operator

Thanks, everyone. Up next, Meta Marshall at Morgan Stanley.

Speaker 13

Great. Thanks. Rick, maybe further detail. You guys were talking about that there would be a lot of pull through of additional kind of products with Draft 1. Just can you give a sense of like how you would monetize either other sensors you were bringing in or other amounts of data you were bringing in?

Speaker 13

Or do you mean that in that you would monetize it through product announcements that we'll kind of hear about over the next 6 months or a year? That's the main question.

Speaker 4

Yeah. So the monetization as of right now does not rely on any new products. So in order for Draft1 to work, you've got to have our body cameras. And then with those body cameras you need Respond Plus, which is the connectivity layer. You got to turn the service on so that we can wirelessly stream over secure LTE, to get the audio up into the cloud.

Speaker 4

So that by the time you sit down in your patrol car where a lot of officers write their reports, the data is ready. Then you need our transcription service so that we've transcribed that to feed it into the AI model that's going to write draft 1. And then what we have seen is the so Draft 1 is opening basically causing agencies to open their contracts to add draft 1. And anytime that happens, now you're in a contract rewrite. And of course, that creates an opportunity.

Speaker 4

This is an interesting industry in that the effort expended just going through a procurement is almost more important than the amount of budgetary dollars. So once they're in a procurement, I think there's a general customer sentiment of, okay, like what else should we be looking at now? Because if we're going to go through this, let's go through, let's do our evaluation, and we find that opens their minds to doing more with us. And then I think also the they're aware of the speed at which this is happening, just the level of tech shift that's happening across society. And so we're I think we're seeing them these OSP packages are a way to sort of de risk these acquisitions for our customers where they don't necessarily even know how much of the stack they're going to use.

Speaker 4

Kind of like if you sign up for Amazon Prime, like you may or may not use the free videos or you may or may not use the different things in there. But across, we try to make it easy for them. It's like, hey, you don't have to figure it all out. There's a lot to understand here. If you go on the OSP plan, we'll figure it out together what's valuable for you.

Speaker 4

And I think draft 1 is just kind of further accelerating that. Josh, is there anything you'd want to add to that?

Speaker 5

No, I think the beauty like Rick just described is the fact that adopting one product often opens up increased value for the next product to come in and solve an additional problem. So the bridge from respond to transcription to draft 1, I think we will see that in other parts of the business. Rick mentioned real time operations and, you know, participating in that market to a larger extent. I think there similar opportunities there between respond and other AI offerings to drive additional value and solve additional problems. So, you know, I think it it really nicely fits together when one solution leads to the next.

Speaker 6

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

Speaker 13

Great. And just maybe, Britney, as a follow-up for you, you guys mentioned international as a particular area of strength, but just any trends between U. S. Federal and enterprise and just kind of relative strength during the quarter? And then I'll hand it off.

Speaker 6

Yes. I mean, I think that, our domestic law enforcement business continues to just put up really incredible numbers and just deliver. And you see that from all of the things that the team has been talking about in terms of the ability to, you know, upgrade, to move on to OSP to continue making those migrations. But we are seeing great traction outside, right? Josh mentioned we had some big corrections wins.

Speaker 6

You know, we're seeing big international wins, especially with TASER 10. Some of our biggest deals have been outside that domestic LE business. And so we really are seeing nice traction in some of the other parts of the markets we've been investing in. Great.

Speaker 5

I might just add there as well. I think, you know, state and local is a little different than federal, international, and enterprise whereas, you know, I think we've talked about this historically where for in state and local, what we really, really need to be good at is building new products and then upselling them into that market. And I think the team draft 1 is a great example of that and the team's doing a very nice job of that. In other markets, it's about taking products that we've already built in selling them in as kind of the first product into those new markets. And I think we're at varying levels of that across international, federal and enterprise, but it's still the same motion.

Speaker 5

And from there, the adoption of one product leads to the next and the next and the next. So I think it's 2 very different motions between state and local and the rest of our business, but the team's doing a really nice job of executing on those in parallel.

Speaker 13

Great. Thanks.

Operator

Thanks, Meta. Up next, David, Keith Housum at Northcoast.

Speaker 14

Good afternoon, everybody, and thanks for the opportunity here. And I'll echo congratulations on the quarter. Guys, you bought a commentary on draft 1, much appreciated. Perhaps can you provide some similar color to FUSUS? Now it's been under your belt here for several months.

Speaker 14

I understand that's successful for you guys, but hoping you can provide some equal color to FUSIS that you guys did for draft 1.

Speaker 4

Let me maybe take that first. You heard some of the commentary there about that we're pivoting our dispatch strategy. And so basically what we've learned, we brought 2 agencies live on dispatch. And what we learned is the core dispatch experience dispatch systems have numerous elements in them. 2 of the big ones to think about are they've got a command line console where they're basically a 911 caller comes in, somebody picks up the phone, and then the call taker types it into a dispatch system.

Speaker 4

Another person is reading those messages, that person's called a dispatcher, and then they relate it to a police officer in the field. Also in that CAD software is mapping software where the map tries to bring together different information. So what we've learned is at agencies, they're frequently opening 3, 5, 6 different maps Because you've got one for your vehicle locator, you might have had Axon respond or where your body cameras are. There's a RapidSLS, which is the guys who locate where the cell phone is, because most people are not calling on a cell phone. So what we learned in the console software, very difficult to drive change.

Speaker 4

Dispatchers are, you know, take 6 months to a year to train them how to do their their job, learning the different dispatch codes. And so what we learned is that that is not an area we could drive much innovation. In fact, each of the first two agencies we launched at said, you know, basically, we don't want anything new there. You've got to rebuild your software to fit our existing training, which, you know, is sometimes it's a hard decision, but Jeff and I sat and we talked about it, he said, This is not going to scale. If we have to rebuild, and it's a fragmented business, there's many different CAD providers, everybody does it a little different.

Speaker 4

But what we've learned from FuSYS, the demand signal there has been extremely strong and FuSYS has been able to take over the map element, the geospatial display. So that's an area where in the time that we brought 2 agencies live on the dispatch console software, We brought, I don't know, dozens or or a 100 live in FuSYS. So we've been actually pivoting our cat our whole CAD strategy is now pivoted to be very FUSYS centric. Like, okay, we think we know based on experience with customers, the existing map interfaces are not very good. Fusus is best in the world at this, and they can bring in the dispatch information into Fusus.

Speaker 4

They can bring in 3rd party cameras from the community, they can bring in ARC cameras. They're really the interstitial connections that bring everything together into one map interface. And so we're really excited. And basically our whole real time communications has shifted to be very FUSUS centric. We've in fact already begun earlier this year shifting away from our own respond map.

Speaker 4

We're bringing it to deprecate that in parts of our ecosystem and just replace it with the FUSIS experience. So Jeff, is there anything else you'd want to add about FUSIS that I might have missed?

Speaker 8

I think that's spot on. I think we're just hugely, customers are as bullish on Fusus as we are, and I think they're just voting with their feet. And across the board, it is the fulcrum for the journey you've heard me talk about for a long time. Like, ultimately, the real time operations journey is 2 things, win more sockets and win more moments. More sockets, meaning more sensors, more cameras on our panes of glass and more moments, meaning more conversations, more collaboration, more minutes of that intense real time incident management stuff happening one way or another between our cameras, our sensors and our pane of glass now at Fusus, and they are the fulcrum of us being able to accelerate that journey.

Speaker 5

And one thing I might add there is just also that while we're super excited about the adoption and momentum within public safety, Fusus just represents this awesome opportunity in enterprise as well. And I think that in terms of having a product that right now is so relevant for a lot of our enterprise customers and could be the first product they buy for Maxon and then, like, the motion we were talking about before of, you know, that opening the door to dams and body cams and, you know, additional solutions down the road, Fusus very much is proving to be that and and we're super excited about the kind of path that it's creating for us in the enterprise space as well.

Speaker 4

Hey, let me actually double down on that one. Sorry to keep going, Keith, but you wanted some more detail. So FUSIS, I initially thought of it as, oh, this helps a police department connect to 3rd party cameras like a school or a business. Yes. It does that.

Speaker 4

What we've been really interested to learn is there's many large enterprises. Some are private businesses. Some are big federal government agencies that have 100 or 1000 of their own facilities. And over the last decades, they've installed a bunch of different systems at all those different facilities, and they can't even manage their own cameras. But with Fuzeys they don't have to come in and reinstall it all.

Speaker 4

They can basically use this same sort of network appliance. They can plug it in. And so you could have a large agency, whether it's public or private, suddenly they don't have to go replace all their cameras. With Fetusys, they can aggregate those feeds themselves and be able to share it to public safety partners. So that's where I think the magic is coming in.

Speaker 4

We're having enterprises that are looking at Fusus for their own internal use in addition to being able to partner with agencies. And I think, Brittney, I don't know if you wanted to add anything in terms of the numbers on this.

Speaker 6

I was going to throw some numbers in, but I think the enthusiasm covers it well. Keith, for us, FuSYS is in our real time operations group, as you heard the team talk about. And we did share that, that grew over 100% in the quarter. So it's continuing to perform really well and be one of the segments that's contributing to the growth in software outside of that evidence.com piece.

Speaker 14

Alright. I've got tons more from us. I'm actually passing off because I know I'm not following this.

Speaker 6

I don't know. We could we could spend the whole rest of the call on this as you can tell.

Speaker 14

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

Operator

it. I appreciate it. So that I can try to manage our time. We've got Jeremy Hamblin up next.

Speaker 15

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

Speaker 4

Yes. Let me start strategically, then maybe let some other folks give a little more detail. So when you think about D Drone, for our core business of law enforcement, their interest has been, I would say, sort of mediocre on the pure drone detection. It's like, yeah, that's interesting. It's not part of our day to day jobs today.

Speaker 4

But the DFR component, being able to fly drone as a first responder, there's a ton of interest there. They see that as the natural extension of a drone program. And DFR last we ran the numbers it was growing literally like a 10x rate that in a 12 month period, we'd seen 10 times more agencies come on DFR. Now what we also think that counter drone defense is going to become a bigger deal. I mean, there's stories emerging now about the role of a drone in the assassination attempt on Trump.

Speaker 4

We think we're going to see, unfortunately, you know, drones consumer level drones can be weaponized pretty easily, especially based on the rapid innovation we're seeing in the Middle East and Ukraine. So we also think there's going to be a big opportunity in law enforcement for counter drone, but it's not, no pun intended, on their radar so much yet. So DFR was the big play there. But then where D drone is also interesting for military customers, you know, they've got a large number of systems deployed in Ukraine right now, and I think every country and every military is now getting very interested in how you deal with the threat of small FPV and consumer grade drones. So D Drone kind of gives us a new way to enter into the military markets, critical infrastructure from protecting all the NFL stadiums to nuclear power plants, etcetera.

Speaker 4

So D Drone gives us existing product lines to go into new markets and then hopefully pull the rest of our ecosystem along with it. Jeff, anything you'd add?

Speaker 8

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

Speaker 5

Sure. Like as Rick said, hey, this is going to take some time, even though the numbers are kind of exponentially growing in terms of adoption. There is this is going to take some time

Speaker 1

to be adopted in such a

Speaker 5

way that it has a business and fleet business and so forth, it's about establishing relationships with the agencies. It's about getting the first kind of 1 or 2 drones in there and then landing and expanding over time. So I would position this as strategically very important to win some market share early on, but more of a long term effort before it really starts to have a major

Speaker 1

impact on the P and L.

Speaker 15

And where do you guys assess the TAM in 4 or 5 years?

Speaker 5

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

Speaker 15

Thanks, guys.

Speaker 5

Thanks a lot, Jeremy. Appreciate it.

Operator

We've got 2 left. We're going to go to Mike Ng at Goldman Sachs.

Speaker 16

Hey. Good afternoon. Thanks for the question. I just have 2. First on Axon Cloud Services, you know, up really strong in the quarter, dollars 19,000,000 sequentially, which I think is the highest on record.

Speaker 16

Is that a good way to think about sequential growth from here? And when you think about cloud services and cloud revenue, like, do you think about it as a function of number of seats and revenue per seat? Or do you have a different framework in terms of teasing out the longer term opportunity there?

Speaker 6

Yeah. I mean, great question. I'll start. It was a big step. You can probably see as you go back our steps jump around a bit for, you know, any number of reasons.

Speaker 6

And this happened to be a really nice quarter from a step standpoint. You also again, we talked a lot about fuses, but you've got fuses starting to come into those numbers and some good additions. So I don't have particular go forward guidance, you know, and given this was the largest step, maybe take that into account as you think going forward. But really, really healthy growth and we were happy to see it. And, you know, I'll let Jeff jump in on this one too probably as the owner of this segment.

Speaker 6

But yes, we do. We think about revenue per seat, number of seats, and then a lot of the, you know, how many features and functions are each of these customers buying in terms of our add on as

Speaker 1

we've used that Amazon Prime analogy for

Speaker 8

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

Speaker 16

Great. That's fantastic. And it's a good segue to the follow-up, which was, you know, just really trying to think about how much that, like, revenue per seat could actually grow. Like, I I don't know if there's a good way to think about, you know, when you think about some of your highest value customers, like, what's the revenue per seat for them versus some of the newer customers? You know, how much more penetration in some of these, you know, newer software products like real time operations and AI and productivity, You know, can there be into the existing installed base?

Speaker 16

I was struck by, you know, about half the growth, you know, coming from these newer software products. Thank you.

Speaker 6

Yeah. No. It's it's a great question. I think probably the best we can give is, you know, we we give periodic updates on how we're doing on our OSP penetration to give a sense for how much more room do we have to go. And we actually luckily shared an update, you know, this quarter that our OSP penetration, you know, went above the 20% mark.

Speaker 6

And so basically, that's of all OSP, not just premium, but it means that just over 20% of our potential customers are on our OSP plans. You can imagine with that, there's lots of room to go. You know, that talks more to getting any customer at all onto our OSP plan. But then as you think about revenue per customer, that can be the most basic plan, and we move them up to our OSP premium plans over time. So, my punch line is lots of room to go on that one.

Speaker 16

Great. Thank you, Britney. Thank you, Jeff.

Operator

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

Speaker 17

All right. Great. Thank you. I guess I'll echo the congratulations, broad based, great to see. I guess I have two questions.

Speaker 17

Maybe first one for Josh. So I was intrigued on TASER 10, your 4 largest deals outside the local law enforcement, if I heard it right. Just it would be great to kind of understand, the local law enforcement, if I heard it right, just it'd be great to kind of understand what's happening there, what's kind of driving that. And I guess within that, I'm also interested in kind of understanding how much is TASER 10 opening up new TASER customers altogether? Are you starting to see people that just didn't have TASER 7 or earlier versions you know, go to TASER 10 because of the new capabilities?

Speaker 5

Yeah, absolutely. Thanks, Will. Good to see You know, it is exciting to see so much adoption and growth outside of state and local. I'd say, you know, there's the biggest dynamic in play there is, you know, in in corrections even, but then more so in federal and in international, you just end up with these customers that are 2, 3, 4 times the size of NYPD. And so when the pension for large volume orders is so much larger outside of the state and local customer base.

Speaker 5

And that's what we're starting to see. We saw a large correctional facility purchase. We've also seen a lot of international governments for the first time really ordering our devices in larger volumes and same for the federal government and the civilian space. So I think it's a function of just the work we've put in over the last 5 years to expand beyond state and local law enforcement. And now a lot of those, you know, a lot a lot of that effort is starting to pay off and I think it'll pay off for years to come because there's still going to be plenty of upside in selling more and more TASER devices in.

Speaker 5

But like we said before, that's going to kind of open up the opportunity to sell body cameras in, to sell fleet in, to sell drones, VR, etcetera. And so, I think this is promising

Speaker 3

in a lot

Speaker 5

of different ways to see TASER 10 so well adopted outside of the state and local customer base.

Speaker 17

Okay. That's helpful. And I wanted to ask Rick one. As you know, there are fresh concerns on the macro economy, we're potentially going to go into some sort of recession. You all have a great slide in the investor deck that I think in some respects addresses this, right, looks at this consistency and public safety spend over a long period of time.

Speaker 17

But you've obviously been through a lot of cycles of the company. It would just be great to kind of hear your perspective as to what type of impacts maybe you've seen in the past. And as you look forward, what we might expect in part because the portfolio has also changed quite a bit even if the customer base is somewhat similar.

Speaker 4

Are you calling me old, Will?

Speaker 17

Well, I'm sorry. You just got great perspective.

Speaker 4

I'm teasing, of course. I'm having a fun with you. Always good to see you. Thanks for the question. I think the same dynamic we've seen in the past, we're in this kind of a bubble in some ways.

Speaker 4

And I mean not like a frothy bubble. I mean, just it's different. It's we haven't seen the economic swings really impact us one way or the other. When things are really great, it doesn't really lift us because of that. And when things are rough, we don't get hit downward with that.

Speaker 4

And I think it's because in our customer base, the whatever they're spending on tech, it's still a fraction of their overall spend. Almost all their money goes into personnel, vehicles and gas. And then tech is relatively small. So when times are really good, the agencies are typically hiring more people and expanding if the tax revenues are allowing it. In the tough times, I think in 2008 we had a quarter or 2 where they were really trying to like tighten their belts, but when it became clear, oh, yeah, we're going to have to, like, actually make personnel cuts, we then found them investing more in productivity.

Speaker 4

And now back then, we were still primarily the TASER company and body cameras were super new. I think what's different this time, most of our revenues on these long term contracts were an essential service. So we don't see agencies, better knock on wood when I say this, I can't fathom them like cutting back contracts. And in fact, things like draft 1, many agencies are still struggling to fill their approved budgeted seats. The post George Floyd sort of impact, the difficulties around recruiting and kind of the negative energy around policing is improving.

Speaker 4

The pendulum is swinging, but many of them are still 15% to 20% below their targeted force numbers. And so that's where we're hearing this sort of magical feedback where they're like, man, with draft 1, if it's freeing up 20%, 25% of my officers a day from writing reports, that's almost like a 20% bump in my force power overnight. So, you know, I certainly hope we're not in the beginning of a big economic swoon. And I'm not going to tell you we're immune. I think anybody's immune.

Speaker 4

But historically, it just seems to be that we just we're in this different universe over here where those economics just don't seem to matter as much for good or for bad.

Speaker 5

And I'd just add to that, Rick, that one of the really nice things that makes us feel really good at Axon is our products save lives and they also save money. And so for customers to move away from our products, it very literally is costing them money to do so and and and will make, you know, their economic situation worse, not better. And I think our customers understand and appreciate that. And certainly, you know, we work really hard to make sure that our products deliver that type of value, for our customers.

Speaker 17

Great. Thank you.

Operator

Thanks, everyone. Thanks, Bill. Toss it to Rick to close us out.

Speaker 4

All right. You know, you got to knock on wood when you have results like this. And, Josh, Jeff, and Brittany and the team, just so many people worked so hard and have delivered so consistently quarter in, quarter out. You know, I was waiting for Eric to throw up the screen with the forward looking statements when Josh was expressing his effusive enthusiasm for the back half of the year. You know, but it's been just a phenomenal run with the team.

Speaker 4

But it really does feel like with Draft 1 and some of the other things we're doing, we're in the early innings in a lot of really exciting new stuff and new markets that are now really taking off as well. As Josh likes to tell me, there are so many different pathways to be able to make our numbers work. And just it's a really exciting time to be in the business. So we're delighted to have been able to deliver these results. A little inside baseball, Britney has sort of joked that we didn't prove out to be very good at forecasting again this quarter because the sales team over performed where we thought we were going to be again.

Speaker 4

I tend to like those problems. Britney would like to see CSP a little more accurate. But you know, you got it.

Speaker 1

But if

Speaker 6

we're not, this is the way to go.

Speaker 4

So, of course, I challenged Josh, the sales, hey, let's keep over delivering. Of course, we want to do that. So anyway, sorry for all the enthusiasm. We were having a good time. You got to enjoy the good quarters, and obviously we're feeling good about the certainly the near term.

Speaker 4

And I'm super excited about the long term with all the stuff that's frankly unproven yet. That to me is the exciting stuff. We got a lot of good stuff that's draft 1's off to a phenomenal start. And with that, I'm going to stop talking. Hey, Eric, are we doing a thing at IACP with analysts this year?

Speaker 4

I should have asked that before I bring it up in front of everybody.

Operator

We'll have something.

Speaker 4

Okay. So for those who can't stay tuned, IACP is gonna be great. It's in Boston this year. Check-in with Eric on that. And, you know, we're just grateful to have you all supporting us as our shareholders.

Speaker 4

So thanks, and we'll see you all in a couple of quarters oh, no, I'm sorry, in a couple of months for the next quarterly results.

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Earnings Conference Call
Axsome Therapeutics Q2 2024
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