Axon Enterprise Inc – December 29, 2022

Close to one thousand people are shot and killed by law enforcement in the United States every year. Amongst a myriad of social and political factors, Axon Enterprise is on a mission to protect life by developing hardware and software products that aim to solve some of society’s most challenging problems, including not least, making the bullet obsolete.

Axon provides a range of public safety and security solutions, including software and hardware products and services, to law enforcement, military, and private security customers. Known for its TASER brand of electronic control devices, which are used by organizations around the world as a less-lethal means of controlling and subduing individuals. The company also offers a range of other products and services for public safety and security, including body-worn cameras, digital evidence management systems, and cloud-based data storage, analysis and automation tools. In addition, it provides training and support to its customers to help them effectively use its products and services.

A relentless focus on innovation has Axon continuing to invest in its suite of products, further improving the reliability of cameras, compliance safeguards, and final fail-safes, that ensure agencies “never miss a moment”. Ultimately providing an end-to-end solution for every piece of an agency’s digital evidence from capture to the courtroom.

Delivering more than a decade of consistent top-line growth, Axon continues to diversify into new markets by adding new types of customer profiles and users, and by adding to its core customer base. In particular, through ongoing growth acceleration with U.S. federal customers as they seek less-lethal technology.

In 1969, NASA researcher Jack Cover began to develop a non-lethal electric weapon to help police officers control suspects, as an alternative to firearms. By 1974, Cover had completed the device, which he eventually named TASER, referencing a 1911 novel called Tom Swift and his Electric Rifle. Initial versions which used gunpowder as a propellant led to the device remaining commercially unsuccessful and Cover’s company, Taser Systems, collapsed.

In 1993, after two of his friends were shot and killed, Rick Smith formed AIR TASER with his brother Tom, and Cover, designing a version of the device that would use compressed nitrogen instead of gunpowder as a propellant. After nearly going bankrupt marketing other products such as an electroshock-based anti-theft system for cars, the company, later renamed TASER International, introduced its TASER M26 weapon in 1999.

Operating with a multi-million dollar deficit, TASER took steps to improve sales by offering to pay police officers to train others on how to use their products. Along with a lifeline from an IPO on the Nasdaq in 2001, the marketing technique vastly helped improve the company’s market share, as sales reached almost $70 million in 2004. Soon after, it began to expand its offerings beyond taser products including the TASER Cam, which added a grip-mounted camera that is activated after the safety is disengaged. As well as the company’s first body camera, which was designed to be head-mounted, and could upload footage for storage on a web-based service.

In 2015, TASER announced the formation of a new division known as Axon, which would encompass the company’s technology businesses, including body cameras, digital evidence management, and analytics. While the TASER brand was still used for its weapons products, the company soon rebranded as Axon to reflect its expanded business. The TASER product line still contributes to a significant portion of Axon revenue; however, the company’s technologies business has helped produce major gains, with Axon cameras achieving a market share of 85% among police departments in the U.S.’ major cities.

Founder Rick Smith is still with Axon serving as chief executive officer. Under his leadership, Axon pioneered TASER energy weapons, made the body camera industry what it is today, and built the world’s leading digital evidence management platform. Holding a B.S. Cum Laude in Neuroscience from Harvard University, a Master’s in International Finance from the University of Leuven in Belgium, and an MBA from the University of Chicago, Rick has dedicated his life to helping public safety and providing visionary leadership to challenge Axon and society on how to address deeply entrenched social problems.

Chief operating officer, Josh Isner is responsible for Axon’s day-to-day operations, execution, marketing, policies, and employees. Having joined the company in 2009, Isner has served in several key executive roles after leading the company’s domestic body camera and cloud software team through record growth. While managing Axon’s global product, software engineering and security teams, chief product officer, Jeff Kunis, drives the company’s efforts in research and development, which is renowned for delivering best-in-class platforms and devices.

Axon develops and manufactures several products and solutions for a range of public safety agencies and military organizations around the world. These include everything from state and local law enforcement, U.S. federal civilian and defense agencies, justice and court systems, corrections, fire departments, emergency medical services, and other private security firms.

Axon delivers solutions across three broad product categories including TASER, Sensors, and Software. The TASER business develops smart devices, tools, and services that support public safety officers in de-escalating situations, avoiding or minimizing the use of force, and aiding consumers in personal protection. The Sensors business develops devices such as body cameras and in-car systems that facilitate transparency, real-time situational awareness, and the capturing of evidence accurately. While the Software business produces a suite of cloud-based, software-as-a-service solutions that integrate with sensors and TASER devices, covering digital evidence management, productivity, and real-time operational needs.

Axon’s key specific products include:
– TASER conducted energy devices (CEDs): are used by law enforcement agencies to subdue individuals who are resistant to arrest or pose a threat to the safety of themselves or others.
– Body-worn cameras: provide for police officers and other public safety personnel to wear on their uniforms. These cameras record audio and video footage of interactions with the public, providing a record of events for later review and analysis.
– In-car video systems: record audio and video from inside patrol vehicles. These systems can help improve transparency and accountability in law enforcement interactions with the public.
– Evidence management software: a suite of software tools that help law enforcement agencies manage, organize, and analyze digital evidence, including video footage, audio recordings, and other data.
– Training and consulting services: to help law enforcement agencies implement and use their technology effectively.

The majority of Axon’s revenues are generated via direct sales, including its online store, while distribution partners and third-party resellers are also leveraged. The company’s primary customer market is U.S. law enforcement for which it serves around 17,000 of the approximately 18,000 agencies across the country.

In recent years, Axon has been benefiting from a growing social focus and scrutiny on law enforcement behavior. This has been further cemented by the White House issuing its Executive Order on Advancing Effective, Accountable Policing and Criminal Justice Practices to Enhance Public Trust and Public Safety, in May 2022. The order contained a key provision outlining a requirement for federal agencies to adopt body-worn camera policies.

Taking advantage of these considerable tailwinds, Axon continues to take steps to expand its total addressable market to over $50 billion by introducing new products, selling into new customer market segments, and adding sales channels to new geographic regions.

Axon has been investing in sales personnel to capture new markets, including the U.S. federal government and military, departments of corrections, fire and emergency medical services markets, along with commercial enterprises and jurisdictions. Axon also sees a further opportunity to create more effective and reliable personal protection for private individuals, with market penetration among consumers currently negligible.

Underpinning key product developments to help agencies and communities ensure that critical moments are always captured and stored, Axon introduced the Never Miss a Moment framework. The framework centers on improving the reliability of the company’s suite of cameras ensuring that events can be captured from multiple sources including on-person, vehicles, and drones. As well as ensuring cameras are recording when they are supposed to thanks to comprehensive activation, compliance support, and safeguard protocols managed by Axon software. While final failsafe capabilities allow agencies to enable specialized sets of authorized users to forensically retrieve “missed” video.

Axon’s highly recurring, stable business model has provided it with an impressive record of consistent year-over-year growth. Building on its 2021 record revenue of $863.4 million, and having already delivered $853.8 million in revenue for the first nine months of 2022, Axon upgraded its full-year expectations at the end of the third quarter to a range of $1.15 billion to $1.16 billion, reflecting approximately 34% year-over-year growth at the midpoint. The strong results were driven by broad demand across the company’s product suite and notable strength in the Software & Sensors business.

Robust gross margins of 62% in the quarter allowed Axon to achieve good operating leverage to deliver adjusted EBITDA of $68 million. This was driven by the strength of the Axon Cloud solution and a new long-term contract with Microsoft Azure.

Looking ahead, Axon’s revenue outlook of $1.16 billion is in line with consensus expectations. While earnings per share are expected to retreat modestly by 15% to $2.00 for 2022, due to a $0.91 surprise spike in the third quarter of FY21, EPS are expected to bounce back by 32% in 2023.

Across Axon’s business units, the company faces challenges from a wide range of competitors.

In the TASER business, CEDs compete with an extensive list of less-lethal alternatives to firearms, including rubber bullets, pepper spray, mace, stun guns, acoustic devices, and batons among other things. However, Axon’s devices offer advanced technology, portability, accuracy, built-in accountability systems, low injury rates, and training options. Furthermore, they also offer connectivity to a cloud network, which allows agencies to more effectively manage their less-lethal programs and automate use-of-force reporting.

For the Sensors and Solutions business, the body-worn camera and in-car video market are highly competitive, with major players including giants like Motorola, Panasonic, and many more. While software solutions to improve public safety agency workflows are both highly fragmented and highly competitive, with alternatives also available from IBM, and Oracle, among many others.

Axon has proven itself to be an incredibly robust business that continues to execute and deliver growth for shareholders. Furthermore, with plenty of growth opportunities across new markets and jurisdictions, it appears to have little in the way for continued momentum.