Axon President Josh Isner on AI, Drones & the Company's Next Growth Phase

Sure thing. So first of all, thank you for having me today. Ultimately, Axon, we view ourselves as the operating system of public safety. Essentially a network of software, sensors, AI, and people that drive outcomes in the public safety space and beyond that people value and care about, whether you're a police officer or a community member or anyone else. We want to make sure everyone goes home safe at night. And the way we do that is through a variety of tools that we offer our customers. We started off as a Taser business. For the first 15 years of the company, we simply sold Tasers and one thing led to another where there were questions about how Tasers were being used. So we started offering body cameras. Then we realized, wow, there's a lot of content coming off these body cameras. We now host the largest cloud network for public safety in the world. We manage about 50 times as much content as the Netflix library. And from there, different opportunities around additional cameras, whether they're in cars, in the sky with drones, fixed cameras came up. And then now we view ourselves as the company delivering real AI solutions to public safety as well. So a variety of different products in our portfolio. Our main market is state and local law enforcement in the US, but now we've started to sell more and more to the federal government, to international customers, and finally to enterprises that have their own security teams and problems to solve on that end. So, that's a little about our company.

Sure thing. So we had the opportunity to invest in a company called DRA three or four years ago now and we saw this as kind of like a hit-your-forehead simple concept where it's like, hey, if drones are going to become a bigger and bigger part of what happens in really everywhere, whether they're consumers, whether they're military drones, whether unfortunately they're weaponized at times as we're seeing in the Middle East, it's very clear you need an answer to take these out of the sky at times. And so we invested in DRA and we eventually acquired them and now we've grown that business through our channel extensively, whether it's international, federal, or US state and local. And the technology is very simple. You can see if you're an operator, you can see what drones are flying in the sky, what model and make they are, and where the pilot is located. So that's kind of the first level of awareness. So, ultimately a lot of people are just consumers unknowingly flying drones in some protected airspace. You can see where the pilot is and you can go kind of let them know, hey, this isn't the right airspace to be flying in as a consumer. And then you kind of go up from there. The next opportunity is to be able to mitigate those drones, take them out of the sky, and you could use jammers for that. You could use nets for that, both of which we offer. And then the final tier, which you're seeing in war fighting, you mentioned Ukraine and Iran, you're seeing interceptor drones, drones that fly at high speeds, generally cheap drones. The whole point is to collide with a drone and set off the explosion in the air as opposed to on the ground. And so we offer everything up to the interceptor and then we partner with the interceptor companies. We're big on our mission is to protect life. We offer less-lethal tools. Interceptor drones kind of start to infringe a little bit on how we think about our mission and so we've decided to partner there as opposed to make those products ourselves.

Sure. We're in almost every NFL stadium right now with DRA, so when you're attending a football game, an American football game, you'll see our technology deployed there to track drones flying above. And speaking of football, we are protecting all the World Cup venues as well in the United States. And so, every venue that's hosting games, we'll have our counter-drone products there and in action. We're very excited to be able to support that. In addition, we protect high-value infrastructure, whether it's electric companies, installations, whether it's things like a data center or a warehouse or logistics facility that houses a lot of valuable inventory. You'll see DRA kind of everywhere around those installations. And then lastly, you'll start to see it more and more just protecting city infrastructure, although cities still need a waiver to be able to take drones out of the sky. The FAA ultimately gets to decide when drones come down. So there's still a little legislative work to work through on that, but those are some of the environments where you'll start to see DRA popping up.

Sure thing. This is an opportunity that's popped up in the last couple years and now we're working with some of the largest retail companies in the world to not only protect inventory but to also protect their retail workers. I think we've seen two very clear trends: shrink is way up in retail. It's doubled or tripled in the last few years and what that amounts to is billions and billions of dollars of lost inventory or stolen inventory. And at the same time, worker abuse, like violence in the workplace, is also on the rise. We saw Target close a number of locations in the Midwest last year because of both of these factors. And so, we can help with solutions there with our retail body cameras. It's called the Axon Body Mini, and it's a very lightweight, friendly-looking camera that will mount easily on a t-shirt or a collar shirt or really whatever uniform a retail worker would wear. And two things. Number one, retail workers feel 90% safer when they have a body camera on because all of these threats of violence in the workplace go down because there's mutual accountability. Now, it's going to show up on video from the retail worker's perspective. And then couple that with the fact that these cameras, when they catch theft in progress, that's the evidence a prosecutor really needs to prosecute a case. Right now, a lot of theft cases are going unprosecuted because of a lack of evidence. And this gives prosecutors the tools to be able to prosecute. And what that means is you're creating some mitigation for this to be a repeat offense. And that's really ultimately some of the value we can bring to retail. And we're really excited. Our deployments have already gotten into the dozens of thousands of cameras in retail. And we're launching this Axon Body Mini in July, and we think that'll lead to more interest and a spike in retail body camera sales. So very excited about our prospects there as well.

Sure thing. This is front and center for what we think about at work every day. A couple years ago, we launched our responsible innovation framework, which you can see on our website, and we established what we call the EEAC, which is the Ethics and Equity Advisory Coalition. And this is a group of folks that generally would be skeptical of law enforcement and public safety. They're from the activist community, and they come in just like our law enforcement customers do, and they advise us on all of the implications of our products that community members will be thinking about.

Sure. One individual is named Brick Turner. He's a professor at Harvard and he specifically drills into these advocacy issues around video and surveillance and privacy. A number of folks from organizations on the ground around the country that have either had children or friends or loved ones killed in policing incidents. And you can see the whole list of our EEAC on our website, but these individuals have been very helpful thought partners and I think they've seen that Axon takes privacy and information security exceptionally seriously and it's something that's really turned into part of our value proposition is we are the company in public safety who's thought deeply about these issues and about how to protect the civil liberties of Americans while also allowing our law enforcement customers to have the tools they need to catch the bad guys. And that's a delicate balance as I'm sure you're aware and it's one that we take very, very seriously. So I think that's become one of our strong suits as a company is as to how to think about doing this responsibly.

Sure thing. I think there's two elements of the cost. There's our internal cost to use the tools to develop the products and as everybody's reading, that cost continues to go up but the good news is the efficiency and the output continues to get better as well. We're able to innovate and go deeper and deeper into our roadmap faster and faster. And then externally, I'd say the cost is not as big of a consideration because we've found a few use cases already that customers are willing to pay for. One of them is our Draft One product which essentially analyzes the body cam video and writes the first draft of a police report for a police officer. They have to go back and edit it and so forth. But what we've seen is officers go from 50% of their time writing reports to about 20%. And when you can save an officer over a day a week in that amount of time, they're able to go back out into the field and do what they do best, which is fighting crime. And you keep them from kind of devolving into this, you know, data entry type of job. And so when you can unlock use cases like that that save police departments money, real money, like they don't have to hire as many police officers now to do the same job, that translates into a viable business model that offsets a lot of that cost. So we think our AI business is driving a nice quality margin type business but also delivering real solutions, not some of the window dressing like, hey, we involve AI in our software development now. These are real tools that police officers are seeing a lot of benefit in and so we're feeling really good about how all of that is translating into our financials.

Sure thing. So, ultimately I think the easiest way to understand it is we sell a bundle of products called the Officer Safety Plan. And this is your Taser, your body camera, and all the traditional software you would use in public safety. That goes for, depending on which features you want, it could go from $200 to $350 a month just for that offering. Now, we've come out with the AI Era Plan to go on top of that offering. And that's $200 a month. It unlocks an agency to every AI tool we build for police. And so when you put those together, we essentially have the opportunity to take our ARPU up about 50% by delivering these tools to police.

For sure. International, depending on which market you're talking about, is a hard business to break into. I think the Commonwealth countries, Canada, the UK, Australia, very similar policing models to the US, although not exactly the same. We've had a lot of success in those historically. But when you move beyond those, a lot of the police forces are centralized at the government level. So, it's more like selling to the US federal government than it is like selling to cities and towns. A lot more bureaucracy, a lot more connecting the dots, a lot more stakeholders. And so that motion, we've had to get good at that over the last five or seven years. And with some of our new acquisitions combining with that to open up some new doors on the counter-drone side, on the real-time 911 side, and of course our core products, we've seen more and more doors opening into more and more international markets, and thus our business is really exploding there. Last year was our first year of over a billion dollars in bookings internationally and we hope to significantly trump that this year. So, we're excited about what that business looks like into the future and the value that we can add into some of these international markets.

Sure thing. The acquisitions you mentioned, that's been a lot of work for us. And there's been one more called Fūsus, which is all of our real-time video products that we integrate into the command center. And that was a big one as well. So, we've had really four of those in two years. This year is about hunkering down and making sure that we get all of the value we anticipated out of these acquisitions. So, I said on our earnings call the sum of two of our acquisitions, Dedrone and Fūsus, we've owned those companies for a combined less than two years, and we've already booked about 150% more dollars than we paid for the combined value of those two companies. So, we got to keep that motion going and make sure we see these opportunities come into maximum fruition. But the valuations, yeah, they're diverging from public markets in a lot of ways. When you look at how these private companies are valued. And I think we're seeing that just in tech in general. And so really our goal is to identify these companies early and you get a couple benefits from that. You pay less for them and you can integrate the teams and products more organically into the business. The bigger they get, the harder that stuff is and the less native that feels to the end user. So, our strategy has always been find the early movers with super talented teams and we can help them grow, but ultimately we want this to be an organic experience for our customers. And so, that's kind of our bar for how we think about acquisitions.

Yeah, I think we've just narrowed the range a little bit on capex, but the name of the game there is for us it's investing in a lot of automation for our hardware and that's the biggest use of our capex and it's something that leads to higher gross margins later and our volumes can continue to go up in terms of our output. So ultimately, look, one of the things that I take a lot of pride in at Axon is we treat every single dollar seriously. I look at all of our open roles. I approve our net new headcount. I approve our budget and go through it line by line and we want to run a business where we can do a lot of stuff in R&D but to be able to do that we have to have extreme discipline in SG&A and in capex and so the capex projects that we greenlight, those are things we really believe have a significant ROI for our investors and same with our opex. We are going to run a lean and mighty team to be able to maximize the amount of funding we can put into R&D because ultimately that's what pays dividends for our customers and that's what keeps our 30% plus revenue growth stream durable for the years ahead. And so, we're really big on investing heavily in R&D, but offsetting that with a pretty fine-tooth comb everywhere else in the business.

Sure thing. So, ultimately at Axon, you got to have a little bit of an iron stomach. Our stock tends to be a little volatile. I always say last year we hit the 400s twice. We also topped out in August at 900. And so as a growth company, ultimately I think we're viewed as a growth company and the bar gets higher and higher for that trend to continue. And when you have environments like now between the SaaS apocalypse and all the liquidity going into AI, you see multiples compress and that hits the growth companies a little harder. But ultimately, look, we've been growing by 30 plus percent for three straight years. We've been growing by 25% for seven years now. Our profit margins are expanding. We put our heads down and we just do the right thing for the long term of the business every day. And some of this just gets cleared up along the way. We don't really react to the macro stuff going on. We know we are running a rock-solid business that's going to be here for a long, long time. And so some of this, you kind of just roll with the punches. And we saw it in Q1. Our institutional investors, I think on average, upped their stake by about 50% in our stock as it was selling off. So, you see a lot of the folks that have been with us for a while that understand our business. They're doubling down on the company and using this as an opportunity to do so, but I couldn't be more confident in our future. So, this is just a moment in time and we're going to keep doing what we do and everything in the markets will take care of itself.

Absolutely, without a doubt. We've partnered with Skydio, which is the number one American drone company in the world. It's the number one drone company in public safety, and we are their channel partner. So, we sell in their products and we make a nice commission on each of those sales as a sales agent. And ultimately, we don't take some of the, as they grow, they have to invest heavily in R&D and so forth to keep this product line growing and growing. We kind of are a little immune from all of that investment and we get the benefit of being the channel into public safety. So this funding that is unlocked is certainly a big tailwind for Axon and our prospects in distributing Skydio throughout the market.

I would love to. Thank you very much for having me and have a great rest of the week.