AXON Earnings 5/6/24

Investment Analysis Clubs Saul’s Investing Discussions
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AXON exceeded expectations after hours, but the stock was down, probably due to announcement to by DeDrone. I thought they already had drones in their portfolio, but DeDrone sounds like it can also take out the bad drones as noted in this quote by the CEO…

"Together, we will accelerate our efforts in creating a more advanced end-to-end drone solution that enables the good drones to fly and helps ensure the bad ones don’t," CEO Rick Smith said in a statement.

If they can easily disable bad drones, that is good for the police. Note that drones were used in some of the protest clashes to make sure cops were not going to be ambushed. Not sure if those were AXON, but all the body cam footage wash.

I have always loved the Evidence.com component, which is a subscription service to properly store footage so it holds up in court.

They announce a generative AI component to Evidence.com that should really add to earnings going forward (you know it ain’t free).

Axon already cleared an early entry last week on momentum from its April 21-25 Axon Week event, highlighted by the unveiling of Draft One. The generative AI takes audio input that has been uploaded to the cloud from officers’ body cameras to create a first draft of field reports “in literally just seconds,” William Blair analyst Jonathan Ho wrote in an April 24 report.

“Axon believes it can save an average of an hour per day in report writing per officer,” Ho wrote. He added that Draft One may incorporate video from body cameras to augment reports in the future.

JMP securities is bullish on Axon VR training to grow the adoption of the Taser 10 product.

Estimates: Analysts expected Axon earnings per share to rise 8% to 95 cents, according to the FactSet consensus. Revenue was seen rising 29% to $441.6 million.

Results: Axon earnings grew 31% to $1.15 a share, 20 cents ahead of forecasts. Revenue jumped 34% to $460.7 million.

Outlook: For the full year, Axon raised its revenue outlook to a range of $1.94 billion to $1.99 billion from a prior range of $1.88 billion to $1.94 billion.

Axon bumped up its capital spending plan to a range of $80 million to $95 million from $60 million to $75 million as it accelerates its capacity expansion to meet higher demand for its newest Taser.

Pete

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Adding some more details from their conference call and targets vs actuals,

Full year 2024 revenue previous guide of 1.88B - 1.94B → 1.94B - 1.99B
Full year 2024 adj EBITDA 410-430M → 430M-445M
Full year 2024 EBITDA margin 22% → 22% (no change)
Full year 2024 CapEx 60-75M → 80-95M
2025 target of 25% adj EBITDA margin → reported 23.6% this Q
Future contracted bookings last Q of 7.1B total → 7B total this Q
Q4 ARR 697M → Q1 ARR of 825M
122% NRR Q4 → same 122% Q1

Robinhood consenus analyst expections EPS of 0.94 → actual 1.15

There was an acquisition of Dedrone this quarter for an undisclosed amount. Axon led their series C funding round for 30.5M in December of 2021. This company counters other drones with the main use cases being stadiums and battle field combat. Last quarter management had mentioned about this company that “Ukraine is buying a ton of these drones for obvious reasons”.

Two other previous acquisitions are mentioned on the call,

  • FUSUS, real time crime center, live video feeds, undisclosed amount
  • SkyHero, Brussels based company, UAVs and UGVs (ground) for active shooter situations. Mentioned last quarter this product was not meeting FAA standards for keeping the drone in line of site of the operator. Acquired for undisclosed amount

Summary of the conference call,

CEO - Patrick Smith

  • Drone as first responder (DFR) is massive opportunity
  • DFR limitations exist with regulations, FAA requirements to have visual observer of drone
  • Acquisition of Dedrone solves these limitations
  • Dedrone use cases in stadiums, aerospace security, and military critical infrastructure
  • AI has applications across everything we do
  • Draft One uses AI to produce police reports from body camera, audio, and video
  • Officers typically spend 15 hours per week on data entry
  • Introduced real time operation solutions
  • Raised bar for field support with live streaming, and two way video and voice communications
  • VR portfolio, training officers

Joshua Isner - COO

  • “I feel really good about our momentum to start 2024”
  • Strongest bookings quarter in company history
  • Pipeline is the strongest and is the healthiest it has ever been across all major customer segments
  • TASER 10 being linked to VR training within TASER platform
  • Revolutionizing RMS (Record Management System) category
  • Seeing our “emerging markets” become more meaningful contributors to results
  • Dedrone has strong international presence, which could accelerate international channel
  • “We have spent the last 2 years fortifying and rebuilding our leadership team, and we are ready to move faster than ever”
  • Strongest adj EBITDA margins in more than three years since Covid

Brittany Bagley - CFO

  • 34% revenue growth
  • Cloud and services revenue +51.5% yoy
  • Sensors and “other revenue” grew 14% yoy (Axon Body 4, and “fleet revenue”)
  • Over 25% of revenue came from outside of law enforcement (other categories are international, federal, justice, and enterprise)
  • Using adjusted gross margin because of increased stock based compensation
  • Adjusted gross margin for Q was 63.2% vs 61.5% in Q4
  • Expect some pressures on gross margins for the rest of the year because of ramping T10 capacity
  • Dedrone will increase TAM by 14B with total TAM of 77B
  • Expect incremental costs from acquisition of Dedrone to have slight impact on adj EBITDA margin
  • Dedrone is small, will be immediately incorporated into Software and Sensors revenue segment
  • Future contracted revenue was down slightly qoq to 7B in Q1 (Q1 is slowest Q)
  • Have “strong pipeline” basing forecast on
  • Increasing CapEx spend to 80-95M from 60-75M is because of ramping T10 production for strong demand

Q&A

  • Reports on Draft One are that the reports generated are typically better than officers make
  • Draft One seeing early orders, pipeline is building, revenue starting in second half of year especially towards end of year
  • Draft One will be a high margin product
  • Cautious on EBITDA, factoring in absorbing acquisitions and integration costs
  • Analyst, “If you look at the full year guide, while raised, it does imply some deceleration”
  • “We like to see more of the year materializing before we get out over our skis on total revenue for the year”
  • “We don’t have any kind of pessimism out there or any reason not to think we’re going to have another great year”
  • CFO notes that they are lapping a “very, very strong year”
  • Better demand than we’ve expected for T10
  • Devices came in “a little bit lighter” and software was pretty strong (Sounds like they are supply blocked on T10?)
  • Analyst asked about the sequential bookings decline from Q4 to Q1, response that Q1 is slowest sales cycle typically
  • COO says “I see no red flags in bookings for the remainder of the year”
  • COO, “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” (They consider this a so-so quarter? I’m wondering why the sales team needs extra motivation)
  • Federal bookings are phased into multiple years, revenue recognized when product deployed/shipped
  • Federal in bucket of mention of “really, really healthy pipeline”
  • Some body camera issue with the New York Department of Corrections and a competitor solution (I can’t tell from the transcript if they won or lost this contract? Looking up the competitor it is Utility Associates, a private company)
  • Analyst asked questions about how to ensure body cameras don’t catch on fire (There were 2018 and 2021 incidents with Miami police officers)
  • Analyst asks about Australia and the previous contract (Nine Austrailian airports ordered T7 in 2019)
  • Mention that T10 has “double” the demand that T7 had
  • T10 is a meaningful step in outperforming a firearm
  • Modern warfare turns out these small consumer level drones are a real game changer, but also presenting threats to all different types of live events
  • Dedrone about monitoring drones in airspace
  • Draft One competes in very competitive market
  • Customers can decide how their data is used in relation to AI solutions
  • Will lean into counter UAV “pretty hard” (Dedrone opportunity)
  • Dedrone has a customer set that is new and can bring more opportunities into Axon econsystem
  • Did captial raise in fall of 2022 knowing they would be looking to be active doing M&A
  • Importance of robotic security, SkyHero and Dedrone fit this vision
  • Analyst notes this is a slower booking quarter but pipeline is growing
  • CFO says best pipeline coming out of a Q1 ever, notes that had slightly softer future contracted revenue in Q1
  • Analyst, Axon and Cloud services 12M qoq (possibly lower than expected? CFO replies revenue recongition is lumpy)
  • Analyst question about RCMP, police department in Alberta and wins in “Cornelius”, North Carolina and Puerto Rico. Says “I know some of these were from a large competitor” (Looks like the competitor is Motorola Solutions)

Overall this seems like a decent report, but would have liked to see guidance raised a bit more. They are doing a lot of acquitions which may delay bottom profitability some.

P.S. AeroVironment (AVAV) was up 7% today and is near at all time high. They are a drone maker with a 5B market cap. Probably too big for an acquisition target, but who knows.

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@wpr101 Thanks for a really good write up on Axon.

Separately, you mentioned AVAV at the tail end of your write up. It has prompted me to report a tiny, speculative position I have established in Red Cat (RCAT). Here’s a summary from SA:

Red Cat Holdings, Inc. engages in the provision of various products, services, and solutions to the drone industry. The company operates through two segments: Enterprise and Consumer. It built infrastructure to manages drone fleets and fly, and provide services remotely, navigate confined industrial interior spaces and dangerous military environment. Red Cat Holdings, Inc. is based in San Juan, Puerto Rico.

Though HQ is in Puerto Rico, they have a 25,000 foot manufacturing facility in Salt Lake, UT. Their enterprise value is a touch over $82M. I bought some shares because they have a really interesting drone called Teal and the partnerships they have established. One of the main features of Teal is that has extremely high resistance to communication jamming. Jamming has been the primary problem plaguing Ukrainian drone operators. More info at redcat.red.

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Teal Drones is using Comms technology from Doodle Labs (non-exclusively). They do not have any of this technology in house.

The Doodle Labs Mesh technology is interesting and the Russians have not adapted to it at this point.

Red Cat has a total market cap of $88M. How many of these microcaps are being promoted on this board? Pretty sure Saul would not have allowed it.

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I’m aware of the Doodle Labs association. I’m not promoting Red Cat or any other microcap. As I noted, my position is both tiny (less than 0.15%) and speculative. I posted it as I thought others might be interested in tracking it, nothing more.

I did pause before posting as I felt it possible some folks might misinterpret my post as a recommendation or “promotion” or what-have-you. If you read my post again, you will see I posted the enterprise value of $82M.

Most certainly, if a board monitor thinks it should be removed, I have no quarrel with that.

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Potential competitor? Company called Truleo

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