Axon Enterprise Inc

NASDAQ:AXON

Earnings Call Analysis

Strong Performance and Positive Outlook for 2024

The company ended 2023 with a significant uptick in performance, boasting a 31% YOY revenue growth and a 29% growth in Q4 alone. Profitability also trended upward with a 21% adjusted EBITDA margin for both Q4 and the full year. Looking ahead, the company is projecting a sturdy revenue growth of 20 to 24%, aiming to hit between $1.88 billion and $1.94 billion in 2024. This positive guidance is stemming from the demand for TASER 10 as well as the growth of contracted bookings by 54% YOY, now totaling $7.1 billion. The forecast also includes expected adjusted EBITDA of $410 million to $430 million for 2024, suggesting a margin expansion to approximately 22%.

Solid Performance and Optimistic Guidance

The company closed 2023 with a strong momentum, experiencing a 31% increase in revenue growth year-over-year and a 29% boost in the fourth quarter specifically. Their profitability has also expanded, finishing the year with a 21% adjusted EBITDA margin, representing a notable improvement compared to the previous year. This upswing in margin performance is attributed largely to the company's effectiveness in managing its selling, general, and administrative (SG&A) expenses.

Future Revenue and Earnings Outlook

Looking ahead, the company has set forth an ambitious outlook for 2024, expecting a revenue growth between 20% and 24%, which would amount to about $1.88 billion to $1.94 billion. This projection is underpinned by strong demand for TASER 10 and a solid base of future contracted bookings, now at $7.1 billion after a 54% leap year-over-year. The leadership is also aiming for an adjusted EBITDA in the range of $410 million to $430 million for 2024, reflecting an anticipated margin improvement. The guidance anticipates netting approximately 22% in adjusted EBITDA margin, up from the current performance. They also highlight that this growth pace sets them on the right track to outpace their 2025 revenue target of $2 billion and to align closely with a 25% adjusted EBITDA margin target.

Long-term Financial Goals

The company projects maintaining a 20% annual revenue compound annual growth rate (CAGR) and a steady 25% adjusted EBITDA margin in the long term. These reflect well-considered targets based on current market opportunities and a balance of reinvestment into the business and profitability. Furthermore, the company plans to continue making strategic acquisitions, like Fusus, which contribute towards expanding their total addressable market (TAM). In addition to revenue growth, free cash flow conversion on adjusted EBITDA is expected to stay around 60%, along with an approximate 3% annual dilution from stock compensation expense for 2025 and onward.

Software Segment Drives Stability and Growth

A pivotal part of the company's growth strategy is its software segment, which delivers high visibility and recurring revenue streams, paired with attractive gross margins. By the fourth quarter, the company's annual recurring revenue (ARR) reached $697 million, up 47% from the previous year. The net retention rate for their software remains impressively high at 122%, indicative of strong customer satisfaction and loyalty. These factors contribute significantly to the company's confidence in its guidance.

Margin Influences and Operational Enhancements

Operational challenges, such as a specific manufacturing issue with the TASER 7 that impacted gross margins of TASER products by about 420 basis points in Q4, have been addressed. Moving forward, these margins are expected to recover as the company shifts focus to TASER 10 and benefits from ongoing automation initiatives and cost-reduction efforts. Margin improvements are expected to materialize incrementally across 2024, with the latter part of the year likely showing more pronounced effects due to these operational enhancements.

Strategic Acquisitions for Long-term Growth

The company's acquisition strategy is not solely focused on short-term financial synergies but is driven more by the alignment with its long-term vision, product and team capabilities, and market potential. With the acquisitions of Fusus and Sky-Hero, the company aims to leverage its existing customer base and distribution channels while capitalizing on their unique technological offerings. Fusus's strength in camera integration and Sky-Hero's leading position in tactical drones are both viewed as critical components that will enhance the company's product ecosystem and, over time, are expected to significantly contribute to the growth strategy.

Earnings Call Transcript 2023-Q4

[Erik Lapinski, executive]

All right. Hello, everyone. Thank you for joining Axon's executive team today. I hope you've all had a chance to read our shareholder letter, which was released after the market closed. You can find it at investor.axon.com. Our prepared remarks today are meant to build upon the information and the financial tables in that letter. During this call, we will discuss our business outlook and make forward-looking statements. Any forward-looking statements made today are pursuant to and within the meaning of the safe harbor provision of the Private Securities Litigation Reform Act of 1995. These comments are based on our predictions and expectations as of today and are not guarantees of future performance. All forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. We've discussed these risks in our SEC filings. We will also discuss certain non-GAAP measures, as a description of each non-GAAP measure and a reconciliation of each non-GAAP measure to the most directly comparable GAAP measure can be found in our shareholder letter as well as our -- in the Investor Relations section on our website.

Every quarter we play a video to kick off our call. We love how this helps you get a closer view and feel for our business. To start us off today, we're going to play video we put together and that hits on a bit of what we talked about when we tell you about our moonshot. It's a little under 3minutes. Let's pull up the video.

[Presentation]

[Patrick Smith, executive]

All right. Thank you, Eric, and thank all of you for joining us today. Welcome, everyone, to our fourth quarter 2023 earnings. It's great to come back to you with another incredible year in the books for Axon. We kick off these calls with those videos to help you understand what we do. Some times seeing these kinds of scenes brings out different emotions. But that's what our customers face every day and making those complex situations [ even safer ] for everyone involved is what energizes us in our work. I've talked about my abhorrence for violence many times in the past. [indiscernible]

To come and work here. We envision a world where violence is just a far out thought, but we are constantly trying to find new forms of technology to make this a reality, and we're really proud of the progress we've made over the last year. First, with seemingly small things like adding a warning sound to TASER 10 to help communicate to someone on the other end that something unpleasant is impending, with the hopes that, that person will rethink their decisions and alleviate the need for a use of force action at all. And adding a watch-me button to our body camera so that an officer can proactively request a second set of eyes for them during their most high-risk situations.

Next, we thought a bit more outside of the box, introducing individually targeted probes, enabling far more effective range on TASER 10 and making our innovative TASER technology more effective in more situations. And we've reimagined the real-time operations, introducing 2 modern communication capabilities with two-way voice communication to our body cameras to help complex decision trees in real time. As we look ahead, we are solving for higher level of challenges like enabling better decision-making in potentially life-threatening encounters or effectively expanding a police force by reducing the extensive time that they spend on paperwork. And we envision accelerating the speed of the entire justice system. We're innovating in diverse areas for robotic security to generative AI to virtual reality, and there's really so much more that still left for us to do.

When I think back to the video we just showed you, I think about what would happen in those situations if an officer didn't have one of our TASER devices or was not wearing one of our body cameras, so we could all understand what unfolded and why. It excites me that we made huge strides and that our technology is driving better outcomes. I think a lot of what we're working on now has the opportunity to become so pervasive in the future, it will be hard for us to remember life without it. Highly disruptive technology. That's the beauty of it. When you get it right, it quickly becomes difficult to imagine what things were like before it. But we're not always going to get it right by ourselves. We rely heavily on feedback from our customers. There are challenges in the long term rather than what's simply in demand today. While present needs do matter, too, I spend most of my time with our customers on the vision beyond tomorrow, which is what I believe will drive our growth for not just the next 1 to 5 years, but the next decades.

What energizes me in my time with customers is they provide us with the best and most actionable feedback on our road map, the snags and problems we may run into, and help us think through the way to overcome those challenges and the best avenues for us to deliver them what they need. Most critical for us is making sure we have the right people to help us deliver for our customers. When I look at our team, I know we have attracted some of the best and brightest to come and work here. If it's not me meeting with a customer about a new product we have a development, it's somebody from our team. Our team works together, relates feedback and understands our common goal. We don't accomplish what we're doing in silos. We join forces across the company and together with our customers. This goes beyond our current team, extends into key partners like Fusus, who we're thrilled is now part of Axon. Our partnership with Fusus began a few years ago, and we've really been impressed with their people and the product they've built.

I'm traveling with their founder as we speak today. Together, we're taking our real time operations to the next level and opening our ecosystem to an even larger network of sensors and devices which will unlock entirely new solutions for our customers over time.

Before I hand it over, I would like to say that I'm grateful that I've been trusted to lead this company for the past 30 years, and that we've been able to maintain the same drive and energy we had when we started. I might be a little atypical as a CEO as my day-to-day responsibilities align more with my background as a founder that is senior manager. I'm focusing on what's next. What's always important in driving any enterprise from a start up to a $20 billion public company is that we need to encourage people to be the best versions of the themselves. But also to challenge each other, just as our customers will challenge us and to share in a common mission with a culture that encourages us to do our best work.

I'd like to provide one last comment on something near and dear to me. We have talked about our intent to invest in our new headquarters over the past few years. And we mentioned last quarter we were revisiting those plans after we had paused work in September -- or I'm sorry, in the summer of '22. Part of revisiting that has been working to bring our vision of a corporate campus to life. We would like Axon to remain headquartered in Scottsdale where we own a piece of land, and where we have built this business.

I love Scottsdale. However, it's not clear that Scottsdale wants Axon [ as we're seeing ] the political environment become more challenging and frankly, antidevelopment. It's unclear if we will get the approvals we need to execute our product -- our project. So we're exploring several geographies and other options as a result, and it may take some time before we have a definitive decision on our next steps. We will keep you updated in the coming quarters as we resolve our plans and we make progress. Now I know we're not a startup anymore. And that also means we need people focused on execution, making sure that what we do is viable and is executed to world-class standards. And I am beyond fortunate that I have Josh and Brittany and their teams here to help me in our execution.

And with that, I'll turn it over to them now. You're up first, Josh.

[Joshua Isner, executive]

Thanks a lot, Rick, and good afternoon, everybody. I continue to believe there is no better place to be than at Axon. We are building the most talented outcomes-oriented team intact, knowing that that's what it will take to deliver on our moonshot of protecting life and reducing the number of deaths in civilian and police encounters by 50% over a 10-year period. 2023 marked another promising step in that direction. We just recorded our fifth consecutive year of greater than 25% revenue growth and we beat that far by a good amount, coming in at 31% year-over-year. Looking ahead to 2024 and beyond, the opportunity is right there in front of us. We're steeply ramping TASER 10 and Axon Body 4, we are building transformative new products, and we have added Fusus and Sky-Hero, which together grow our estimated TAM by over $13 billion to a total of $63 billion. And I'd just like to say welcome to the Fusus team, it's your first earnings call as part of Axon, and we're thrilled to be on board.

In the past, I've shared my vision on Axon's priorities over the next 3 to 5 years. We are focused on delivering the technology ecosystem of public safety globally. This approach supports our growth in 2 powerful ways: number one, through new product introductions, which expand our ecosystem and deliver new value to our existing customers; and number two, through expansion into our new customer verticals where our existing products empower new users to deliver safer outcomes and drive a clear ROI. This framework has led us to invest in opportunities with federal and international governments, justice, corrections and in the enterprise space. We finished the year with record federal bookings as we continued to see rapid adoption of both hardware and software within the federal civilian market. Likewise, the new Axon Body Workforce camera, or ABW, as we call it, has driven strong pipeline in several segments within enterprise, such as retail and health care.

One shining use case within the health care space is Fairview Health, where they are trialing ABW with nurses as part of their commitment to patient and staff safety. A key to our success is that we continue to lead the market in innovation. It's no surprise when you listen to Rick that we believe our ability to innovate is a competitive advantage for Axon. Jeff's leadership in our product org combined with Rick's visionary thinking and foresight is an unmanaged combination that gives us the luxury of doing two things in parallel, building the next wave of world-class products for public safety and identifying the most synergistic partners in the market, such as Fusus and Sky-Hero. Our standards are high, and yet year in and year out, our product team sets a new bar. Before I turn it over to Brittany to go through our operations and financials in more detail, I'd like to congratulate several of our teams on some substantial recent achievements.

First, the TASER 10 [ leap ] team led by Pat Madden. We are now 4 quarters in, and our order rate is pacing at more than 4x what we saw with TASER 7. And then secondly, with Axon Body 4 product line led by Jason Hartford and David Mesri, we shipped more than 100,000 units in the second half of 2023, only 2 months after announcing the product. While these products started in R&D, they end in the hands of our brave customers. And a lot of collaboration amongst functions or as we call it #joint forces, happens in-between. Our teams deliver outsized societal outcomes together. As you can see, we're not slowing down. We are incredibly humbled by the trust our customers and shareholders continue to place in us, and we remain committed to holding up our end of that bargain. 2023 was a record year, and we are so proud of the team. But we are equally proud that, that same team moved on from 2023, 58 days ago. As we like to say, we're on to the next play. Over to you, Brittany.

[Brittany Bagley, executive]

Thank you, Josh. As Josh mentioned, 2023 was another great year for us with revenue growth of 31% year-over-year and Q4 revenue growth of 29%. We continue to be incredibly pleased with all segments of our business and continue to see enormous opportunities in front of us. In addition to continued strong topline growth, we expanded our profitability with a 21% adjusted EBITDA margin for the fourth quarter and full year. This represents 160 basis points of improvement versus 2022, largely driven by leverage in our SG&A function. As we've talked about before, we continue to focus on expanding gross margins and expect improvement over the course of 2024, as we see the benefits from enhanced efficiencies with TASER 10, from manufacturing automation and cost initiatives as well as continued benefits from software growth. We're also going to continue investing in our R&D to support the opportunities we see in front of us and to make sure we can keep delivering strong growth for years to come.

You've heard today and read in the shareholder letter, the significant growth opportunities we see in federal, international and enterprise as well as for Axon Air, real-time operations and new software capabilities to name just a few. We think we're hitting a nice balance of investing for the future while also increasing profitability and driving towards operational excellence.

While we have leveraged SG&A, we have also continued to invest in expanding our sales and marketing teams to address new markets, improving our internal technology capabilities and bolstering our financial strength, including the fact we've remediated our material weakness this quarter. This positions the business well to continue growing and scaling.

Now as I turn to our guidance, we expect 20% to 24% total revenue growth or $1.88 billion to $1.94 billion for 2024. This is quite strong guidance for us and is the result of increased visibility for 2024. The strong visibility is driven by TASER 10 demand as well as the continued strength in our future contracted bookings which has reached $7.1 billion as of the end of Q4, growing 54% year-over-year.

Our software, which provides us with strong visibility, recurring revenue and attractive gross margins also contributes to the strength of our guide. In Q4, our ARR was $697 million, which grew 47% year-over-year. We continue to have 122% net retention rate and strong customer satisfaction. We expect adjusted EBITDA of $410 million to $430 million, which implies an adjusted EBITDA margin of approximately 22%, up another 100 basis points from this year on moderate gross margin improvement as well as continued SG&A leverage. This guidance includes the impact of Sky-Hero and Fusus, though we aren't going to comment specifically on either of their financials.

Finally, last year, we put out a 2025 targeted model of $2 billion in revenue and 25% adjusted EBITDA margin. As you can see from our 2024 guidance, we're pacing to well exceed our revenue target in 2025 and tracking nicely to our adjusted EBITDA margin target.

As we look to 2025 and beyond, we expect to continue targeting a 20% annual revenue CAGR and a 25% adjusted EBITDA margin. We think this is achievable and represents a very healthy, sustainable and attractive long-term model. We're comfortable in maintaining this long-term growth rate based on the opportunities we've discussed and think this is the right balance of investing back into the business and generating attractive profitability. Also while we have fantastic organic growth opportunities, we're very excited to be able to strategically make acquisitions in markets that will continue to support and grow our TAM like we have just done with Fusus.

Finally, we are also continuing to target 60% free cash flow conversion on adjusted EBITDA and approximately 3% annual dilution from stock compensation expense for 2025 and beyond. As you can tell, we're all incredibly excited about what we can deliver in 2024 to both our customers and our shareholders. We're looking forward to another great year.

And with that, I would like to open it up to questions.

[Erik Lapinski, executive]

Moderators, can you bring everyone into the gallery? Thank you. We're going to take our first question from Trevor Walsh from JMP.

[Trevor Walsh, analyst]

Maybe for either Josh or Rick, excuse me. I appreciated the TAM outlined in the shareholder letter as far as how that's expanding and kind of where Sky-Hero and Fusus are coming in. There wasn't -- unless I missed it, I didn't see any details around the Axon Body for Workforce component contributed to that. Can you maybe just give us generally kind of how you see that opportunity unfolding? And especially curious to see kind of an adoption rate there, given it's a kind of a new vertical or user experience and how -- and does it look like the body camera kind of adoption rate within law enforcement? Or does it kind of feel different from what you're seeing.

[Joshua Isner, executive]

Thanks a lot for the question. I appreciate it. The first thing, just to clarify, is within the enterprise section of our TAM, that's where the Axon Body Workforce would roll up. And we could certainly talk through that more offline. In terms of just interest in the camera, we hads a launch event. We had some customers in town for it and some trial partners in town. I think this year is truly about, hey, how do we make our early customers really successful on this product and then build from there. It's not much different than the playbook that we ran in public safety and so much of it comes down to just having the early maven-type customers that will help us not only build our brand in that space, but also help us build the next iterations of the products. And so that's really what we're focused on. We really do believe the future is in enterprise. We're seeing that early on in the bookings results. We're not quite ready to share anything more on those at this point, but over the coming years we do believe enterprise will become a bigger and bigger part of our business.

[Brittany Bagley, executive]

Yes. And just to jump on a little bit. So we gave enterprise a $15 billion TAM in our update. So that's where we see that playing in. And a lot of the body workforce camera really came because we were getting feedback from our customers as we were trialing it, largely in retail and in health care about sort of the size and the weight and how they wanted to wear it and how they wanted to use it. And so we really took that feedback and we reflected it in the updated product, and that's what you see. We announced Fairview Health as an early customer there, but we're really looking to be able to provide this solution into the retail and the nursing part of the market, where they're facing a lot of challenges today around associates and nurses feeling safe in their work environment.

[Trevor Walsh, analyst]

Great. Congrats on a solid finish to the year.

[Erik Lapinski, executive]

Thanks, Trevor. We will take our next question from Joe Cardoso at JPMorgan.

[Joseph Cardoso, analyst]

I'll also echo my congratulations on the results. So it's great to hear that TASER 10 momentum is tracking where you left off last quarter. But curious if you could just touch on how you're thinking about the margins tracking for the product. If I take a look at TASER gross margins, it looked like you had some stability over the past 2 quarters. Just curious if we should interpret this as a floor for the segment? And then how should we think about the trajectory for the remainder or as we rather progress through '24, particularly in the backdrop of you guys -- you've been talking about it for a couple of quarters now, bringing on automation, the cost efficiencies. So just curious how you're thinking about the margin trajectory there.

[Brittany Bagley, executive]

Yes. Great question. Thank you. We had a onetime event in TASER in Q4, where we had a bit of a manufacturing issue largely related to a batch in March of last year. And so that is impacting our gross margins in this quarter in TASER by about 420 basis points. So absent that onetime impact, they would still be down slightly on mix, but they would look much more stable sort of quarter-to-quarter. And so as we go into next year, that onetime impact comes out, and that's where you start to get the commentary about how the TASER gross margins, overall, we expect them to improve, and they really are improving around our efforts for TASER 10. As TASER 10 mixes in, that's an impact, but then we're offsetting that by the fact that we're getting benefits from automating the line and doing cost-down initiatives as we go through the year.

[Patrick Smith, executive]

Yes. And just to jump in and reiterate there, the issue was on TASER 7, not TASER 10 that led to this warranty reserve. And one thing I would point out is TASER 7 was developed prior to the current regime under Hans Moritz that's leading our whole hardware engineering group, and we've seen substantially more rigorous free market validation and as a result with AB4 and the Fleet 3. And so far, with TASER 10, we've actually seen more robust field reliability, lower return rates. So I just want to make sure we didn't conflate that warranty issue was T7, previous design, not the current T10s.

[Joseph Cardoso, analyst]

No. Got it. Totally it makes sense. And then maybe just a quick clarification on that front just in terms of the TASER 10 improvement. Not to harp on it, but maybe just in terms of the improvement you're expecting through the year, is the expectation that it happens more linearly? Or is it more back-end loaded? Just curious just in terms of like as you bring on this automation equipment, is that more subject to being in the back half? Or is it more first half? Just curious how we should think about linearity through the year.

[Brittany Bagley, executive]

Yes. I think there's a number of initiatives going on, including the automation and then cost-down initiatives. And so I would expect you see that starting to roll in as we go through the year. So it won't be all back half weighted, but obviously, you'll see the cumulative impact of that more in the back half as we get all of those executed.

[Erik Lapinski, executive]

Thanks, Joe. We're going to go to Jonathan Ho at William Blair next.

[Jonathan Ho, analyst]

Maybe just starting out with the high-level question. How should we think about the impacts from the Fusus and Sky-Hero acquisitions? I know you're not giving financials, but in terms of your ability to either sort of approach your longer-term vision or to cross-sell their products, just wanted to get a sense of the synergies that you see here with these acquisitions.

[Brittany Bagley, executive]

Yes, I can start, and I'm sure that the team will want to jump in. I would say that these are acquisitions that we're really doing for product and the team and the opportunity far more than we're doing specifically for synergies. So I really want to focus everybody on sort of the long-term market opportunity and customer opportunity that they bring in. All that said, I think there are some real benefits as we bring in these products and these teams to having access to our customers and our channels and all of the experience that we've had, scaling up these types of businesses as well as giving them access to some of our infrastructure and support on the G&A side. And so in a lot of ways we're hoping that, that really allows them to run faster and accelerate what they're doing.

[Patrick Smith, executive]

Starting to respond there. I had muted myself. The other thing I would say is on each of them, they are highly strategic. So Fusus, what they really bring is, I described them at a high level like the Switzerland of cameras. They've integrated with every imaginable sensor in CCTV camera, and we met them, we were introduced by customers who really loved what they were doing and said, hey, we want you to integrate Axon cameras onto the Fusus map because we don't want to have to open a different map and a different interface for every different vendor of cameras that we're using. And that's a lot of work to build something and Fusus has stayed away from building first-party cameras, and we really do want to keep that solution very open, so that it can be broadly compatible with virtually any type of sensor, any type of camera in the market. And we think that's critical to expanding the utility of our ecosystem to our customers.

And then on the Sky-Hero side, long term, this is probably not going to be big revenue in the short term, but they are one of the, if not the leading tactical drone maker in the world used by special forces, by SWAT teams. And we think if we want to eradicate violence from society, we've got to get out of this mindset that the way you stop a person with a gun is sending more people with more guns and have a gun fight. And we think drones and robotics have a huge role to play there. I'd say that's probably a little longer term. It's not going to be a 2024 or maybe even 2025 revenue impact. But 10 years out, we think it could have an enormous both societal and revenue impact, especially in the space around private security, where there's millions of people worldwide whose job it is to sort of observe, report and secure facilities.

That's a highly monotonous job and one where drones and robotics, we think can do a much better job at those monotonous jobs. And when those jobs become dangerous, they could do a much better job than putting a human in danger when a threat does emerge.

[Erik Lapinski, executive]

Thanks, Jonathan. We'll take our next question from Will Power at Baird.

[William Power, analyst]

Okay. Great. I'm in a vehicle, so I'm going to stay off of video for a moment. But maybe if I could come back to software. I know you expect that to be one of the key drivers in '24 along with T10 and other products. Any way to kind of help unpack what the expectations for growth there are across the different components, evidence versus records, dispatch, et cetera, just to get a sense for the breadth of that growth?

[Joshua Isner, executive]

Sure thing. And I think the answer will -- it really depends on the market segment. I think for state and local, that's where we're really, really focused on selling the officer safety plan and this bundled set of enterprise software, from digital evidence management to reporting software to all of the key software add-ons all in one place. And so that's one of the true measures of success in the channel domestically. Internationally, it's really about, hey, how do we get folks on the cloud for the first time. And for some of these governments, it's literally the first time they're on the cloud in their professional lives. And so that's -- we're starting from a place of just arriving at that moment and then building from there over the next several years. And of course, in enterprise and federal, it's somewhere in-between where we might not exactly sell some version in the OSP that we sell to domestic, but it might be some more tailor-made software offerings that are the right fit for those customers. And so for us, I think we always end in the same place, which is highly valuable, highly useful, high-ROI software being deployed to customers that remain -- and happy with it. It's just a question of the path that it takes to get there and in each segment, it might be slightly different. And so that's a bit of a summary for you.

[Brittany Bagley, executive]

Yes. And Will, just on the commentary, I would say I was highlighting T10 and software, particularly as drivers for improving gross margins. They obviously both will be great contributors to our revenue next year. But really, all of our segments are performing incredibly well, and they'll all contribute really nicely next year.

[Erik Lapinski, executive]

Thank you, Will. We're going to take our next question from Alyssa Shreves at Barclays. I think she's dialed in.

[Alyssa Shreves, analyst]

Can you hear me?

[Erik Lapinski, executive]

We can.

[Alyssa Shreves, analyst]

Can you hear me? Great. Just a kind of quick question on the T10 demand. Is it -- are you seeing existing customers looking to upgrade? Is it penetration into new markets? And how much is this VR training kind of moving the needle in terms of T10 adoption?

[Joshua Isner, executive]

Yes. It's a fantastic question. Thank you very much. The first answer is kind of yes to both. I think our existing customer base is very predictably upgrading not only at the end of their useful life of their previous generation will have been -- but for the first time, we're seeing customers expressing interest in an early upgrade to TASER 10. So we're really encouraged by that. Additionally, this is -- we do believe this will open new customer markets for us internationally and some private security, federal use cases as well. And so across the board, very bullish on T10 adoption and the rate at which that adoption is occurring. So that's a little bit about the market kind of response to T10. Could you just remind me what the second portion of that question was?

[Alyssa Shreves, analyst]

Yes. How much of the VR training is kind of driving customer interest? Is it more a nice to have? Or are customers kind of viewing this now as a need to have once they trial it?

[Joshua Isner, executive]

I'd say we're probably squarely in the middle of those two at the moment, and this was a big year for our VR program because now that the sensors work very well and very reliably, it's about how much content we can build to deliver to these end users to simulate different training scenarios. So it's a move from, hey, how are you performing with T10 at a range setting or some basic interactions -- and we'll build on that to these more complicated decision making type of scenarios. So we think this is going to go hand in hand, not only, of course, the training experience, if it's very strong, will help adoption of the product. But it will also drive far safer outcomes in the field.

If we're able to simulate the type of stress that you can feel in VR relative to shooting at people in costume or with Velcro suits on or at stationary targets at a range, these are the things that can really make the difference in the field. And so very excited about that. We're rolling it out to international as well. We're rolling it out to federal. We're tailoring scenarios for those markets. So we think these 2 products, VR and TASER 10 are kind of linked moving forward. And it's represented by the way we go to market as well, where you pay one rate for both of those offerings and you get both throughout the term of the contract.

[Erik Lapinski, executive]

Thank you, Alyssa. We'll take our next question from Mike Ng at Goldman Sachs.

[Michael Ng, analyst]

I just have 2. First, there was a big step-up in future contracted revenue, I think that $1.3 billion sequential increase is the biggest on record. Is there anything to call out as it relates to outside deals or customer wins that contributed to that? Or would you guys just consider that normal momentum? And then I have a quick follow-up.

[Joshua Isner, executive]

For sure. I don't think there was anything abnormal about Q4 other than it was a record quarter for us. And you know there is some seasonality in our business. It was our first quarter of billion-plus dollars booked across the business in 5-year bookings, so we're really excited about that. We don't necessarily share much more than that on our total bookings, but that was a pretty big milestone for our team. So of course, that will represent itself in future contracted revenue, and we're excited about that trend and certainly aiming to outperform that record this year.

[Michael Ng, analyst]

Great. And then just a follow-up for Brittany. Just on that future contracted revenue, I know you guys have talked about 15% to 25% of that being recognized in the next 12 months. But I guess, has the duration of that future contracted revenue extended it at all? Have there been longer-term deals? Naturally, the reason why I ask is it seems like 25% of $7.1 billion, you have full visibility into the 2024 revenue guidance. I'm not sure if that's the right way to think about it.

[Brittany Bagley, executive]

Yes, of course, it's a great question. It hasn't changed such that, that 15% to 25% guidance of what converts for the next year has been pretty consistent over at least the last few quarters. I think in general, we have seen a trend towards some longer contracts. So again, Josh -- Josh will correct me, but I think historically, there were more 5-year contracts and now we're seeing more 10-year contracts and some that are even longer than 10 years. So that's certainly a factor in there. But nothing has massively changed in terms of how that future contracted revenue converts in for the next year. I do think it helps in terms of us having visibility and giving a strong guide for next year. And so I think that's where you see some of that come through.

[Erik Lapinski, executive]

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

[Joshua Reilly, analyst]

I got one and a quick follow-up here. If you look at the Fusus acquisition, is this the product that is going to require a little bit of incremental investment on your part to kind of drive broad customer adoption across the customer base? Or is this ready to go day one for your entire customer base?

[Jeffrey Kunins, executive]

The good news is it's a combination of the two. So right now, out of the gate, one of the reasons why we were so excited about Fusus as a partner and then moving to the acquisition is that their product turnkey out of the box today is ready to go very broadly across state and local in the U.S. and then beginning internationally as well. It's absolutely a groundbreaking change for the ability for agencies with their real-time crime centers and command staff and even right in the dispatch center, to get unparalleled situational awareness by partnering with [ CCTv ] cameras from private enterprise and the like. So right out of the box, it is selling and growing like gangbusters. And it's a fundamental part as we go forward of our overall real-time operations vision you've heard us talk about for a long time, where our real strategy is to provide the best full stack and open ecosystem we can to help agencies with the entire life cycle of an incident. And it's ultimately about our play to earn the right to win more sockets, meaning win more sensors and win that pane of glass where they review the information from those sensors, and to win more and more communications moments as both first responders and the businesses that -- where things happen, work together to resolve as quickly as possible things when they occur.

[Joshua Reilly, analyst]

Got it. And then just a quick follow-up on the TASER 10 automation. Is that going to also benefit unit growth in addition to benefiting margins?

[Brittany Bagley, executive]

I would say it does, yes. The more automation we have, the more it helps our capacity. I would say that's pretty much factored in as we think about next year, though. So I wouldn't necessarily expect any surprises coming from that.

[Erik Lapinski, executive]

Thanks, Josh. Keith Housum at Northcoast.

[Keith Housum, analyst]

Could you guys just unpack international a little bit more? Perhaps I missed this in the release. Perhaps talk about, if you don't mind, some trends that you're seeing in international. Obviously, I know it was a very strong bookings quarter for you last quarter. But how did it look this quarter growth in bookings? Or are we starting to see some of that revenue that you booked last year come to fruition?

[Patrick Smith, executive]

Yes. Thanks a lot, Keith, and great question. So we're super excited about the quarter we had in terms of bookings last quarter, I believe it was a record -- a new record in terms of bookings. So the team is executing in terms of writing orders and driving a lot of the momentum in market. But there's just some noise around when the revenue recognition will occur. And I'd expect that to fluctuate a little bit more than it does in the U.S. because you've got things like country-by-country approval of TASER 10. So even if a customer wants that, in some cases, has purchased it, they need to wait until all the testing completes until they can take delivery of it. In the video business, there's longer lead times on implementations because you're deploying a country, a national government, not the city in a lot of cases.

So the amount of sites and amount of work and clearances you'll need to do that work is considerable. And so all to say the revenue will continue to be lumpy quarter-to-quarter based on shipment times and based on implementations. But from where we sit, as long as the bookings number continues to drive that revenue will fall -- it will start to add up and fall to the bottom line in terms of EBITDA dollars as well. So we're certainly excited about it. The team has got the wind at their back after a couple of years of really trying to build more of an apparatus in Continental Europe, and we're starting to see the fruits of that labor pay off. So future is bright for international. Nothing has really changed in terms of our outlook or perspective on that, but there will be some peaks and valleys in terms of the rev rec over the course of the year.

[Keith Housum, analyst]

And then, Josh, maybe this one is for you as well. But in terms of the corrections market -- obviously, you guys spent a lot of time on that and again in the release today. But are you seeing new products? And what's the strategy in terms of growing corrections and how are you guys achieving the success you're having?

[Joshua Isner, executive]

Yes. Yes. Certainly, Keith. We think the foundation of it, not different from any of our other segments, as tasers and body cams, but things like -- Fusus, things like drones, both indoor and outdoor, those are VR training in corrections. Those are investments we're currently making, and we really believe are a great fit for corrections. And up until now, we've really talked about corrections as a domestic and state and local function. There's a large corrections opportunity in federal. There's a large corrections opportunity in international. And I think all of those potential products fitting in is not unique to domestic. So certainly, we're excited about that. And we believe, especially after the feedback we've been getting on some of our early meetings on some of these new products with corrections that there is a lot of interest and those will fuel some growth in that segment.

[Erik Lapinski, executive]

Thanks, Keith. We're going to take our next question from Meta Marshall at Morgan Stanley.

[Meta Marshall, analyst]

Great. Maybe -- you talked initially just about kind of the drone business maybe not contributing necessarily this year. I just wanted to kind of get an update on -- you had quotes in terms of feedback that you had gotten from certain customers. But just what are some of the hurdles to kind of greater drone adoption? And just kind of an update on what was going on with the integration of Sky-Hero or just kind of early traction there. And then maybe just a second question just to kind of give them all at once. Just on -- it sounds like there's a little bit going on with headquarters decisions. Just is there a kind of drop dead deadline when you're hoping to kind of make a decision on what city to do the expansion in?

[Patrick Smith, executive]

Let me take that, and I'll start with the drones. I think drones is an area where, again, we see tremendous long-term opportunity. Near term, there's a couple of different issues that have slowed that are sort of, I think, were pre-inflection point shall we say. So on the outdoor drones, there's a growing interest in Drone as First Responder, namely -- today, the way they deploy drones is the police drive up in their patrol car, then they open the trunk, they take out the drone and they fly the drone around. That doesn't give nearly as much benefit, right, because you've already got to get on scene to use the drone and then frankly, from an officer safety perspective, it's not necessarily great to be standing around staring at a drone controller.

I think where the market wants to go is this idea of Drone as First Responder where the drone is deployed from a fixed facility, flies to the scene and gets there before officers can. That started in Chula Vista, California. Shout out to chief Roxana Kennedy there who really started this. We're seeing that. It is in the early stages of an exponential doubling [ batter ]. And every year, we're seeing about double the agencies doing Drone as First Responder. It went from single digits to now in the tens of agencies doing it. In order for that to really take off, we need a little more clarity from the FAA on agencies being able to fly beyond visual line of sight to be able to fly the drones safely.

Today, if you want to fly a drone as a first responder, most of the time, you have to have a police officer standing on the roof under an umbrella, watching the drone fly into the distance. We have, through one of our other partnerships with Dedrone, that is the world leader in drone tracking and counter drone. We've invested and we've partnered with them. Dedrone gives you the ability -- the NFL stadiums use it to track all the drones around NFL stadiums. And Ukraine is buying a ton of these to track drones for obvious reasons. We have some pilots we're doing where Dedrone is coupled with Drone as First Responder. So instead of a human being watching into the distance, they can't see a drone beyond a couple of hundred meters, we can actually track those drones in the air space with this integrated solution.

And we think that is going to be foundational to really letting drones really grow. Actually, let me pause for a second. Jeff may have had a technical correction for me on the growth rate. I guess we're going to be conservative. It was more than a doubling this year, but it was off a small base. So again, we're seeing really early exponential growth in DFR. Now when we think about indoor drones, Sky-Hero, when we acquired them -- so one of the downsides of being a big company is we have lots of lawyers to make sure that we're very compliant and that's obviously a good thing most of the time, but for example, we discovered that Sky-Hero had some challenges in that -- the bands of energy they were using for RF transmission to get through the walls, to be able to fly indoor effectively, were outside of the acceptable bands under the FCC here in the United States.

So we've had to actually pause selling on a temporary basis while we are working to get approval from the FCC and an exemption on being able to sell those to state and local in the U.S. But again, we didn't buy Sky-Hero for the near-term revenue. It's really about the relationships they have with the world's leading SWAT teams and tactical users, and we believe that's the foundation on which we can build transformative new capabilities. So part of it is just kind of getting with Sky-Hero now they're part of a bigger organization. The good news is we've got full teams focused on international legal compliance. So we're kind of upping their game from a compliance and legality end standpoint.

Meanwhile, they're bringing their, I would say young, scrappy innovation. I mean these guys built a profitable drone business with a very small team. Not many people have done that. And I'd say the magic is happening. They're working with our design team, and I would say, over the next couple of years, I'd say, maybe a 2- to 5-year horizon, you'll start to see some pretty mind blowing stuff coming out of our indoor tactical drones as well as our outdoor DFR. I think those are the 2 biggest segments, being able to fly outdoor drones without humans on-site and then being able to go into buildings and use drones in the most dangerous situations.

[Jeffrey Kunins, executive]

That's right. And there's also a really exciting hybrid between the sort of drone in a trunk thing Rick talked about and full DFR as the whole industry tries to sort of find their way forward as fast as they can. And this is a thing that actually Adam Bry, the CEO of one of our other partners, Skydio, and he and I talk together about it. They're keynote of their launch a few months ago of their newest drone, where you combine the physical drone being with a patrol officer who can go to a scene, but then the instant that they need it, you have that remote pilot who's able to manage it on scene in a DFR style. And so what you're seeing is innovation and experimentation to try to move as fast as possible while navigating around these various short-term constraints. And so it's just a -- keep watching this space.

[Patrick Smith, executive]

The last thing actually, I do want to add one more thing to all this complexity, the shifting sands between the United States and China is also creating another -- just a change in the marketplace. So DJI was by far the dominant hardware provider, and we have chosen to partner with many different hardware providers. Initially, we were partnering with DJI. That's no longer very viable because the U.S. government federally will not buy any DJI hardware and states are now passing similar laws. So we see up and coming folks like Skydio, that have really just recently gotten to what I would say is a competitive hardware platform to DJI for the outdoor drone use case. We partnered with a company out of Switzerland called Fotokite that does tethered drones. So each of these things have created some short-term shifts in the marketplace. But we think the foundation is going to be firming up over the next couple of years to see this go from really awesome concepts to significant businesses.

[Joshua Isner, executive]

And then, Rick, did you want to answer the second question as well on the new headquarters timing?

[Patrick Smith, executive]

Yes. We hope to have a decision by sometime this summer. To make the call. This has kind of drug on for a while. So we're -- we'd like to get moving on it.

[Erik Lapinski, executive]

Thanks, Meta. We'll take our next question from Mike Latimore at Northland.

[Mike Latimore, analyst]

So within the cloud category, you have the Digital Evidence Management, real-time operations, productivity software. Would there relative contributions to growth in '24 be noticeably different than what you saw in '23.

[Joshua Isner, executive]

So the question, just so I'm clear on it, Mike, is what type of growth are we looking at for 2024 relative to '23 in our software offerings?

[Mike Latimore, analyst]

Yes, among those 3, does one get more pronounced in '24?

[Joshua Isner, executive]

Yes. And Jeff, feel free to follow on with your thoughts, but my instinct is DEMS is essentially built out, and we're on the right track there, and we'll continue -- to continue to build out that ecosystem into new markets and so forth. But productivity is really the one that stands out to me as the huge opportunity for the year. I think we've beared all the pain of coming to market with enterprise software, especially historically custom enterprise software over the last couple of years. And now we really believe we found market -- product market fit. When we deploy this product to customers, we're getting fewer calls in the weeks following that are, hey, this didn't quite work the way we thought it would or a new feature request or whatever the case may be. Customers are very, very happy with their early experiences with the product.

And now we feel like, hey, we can start to dump a little more gasoline on the fire and deploy faster across more customers in a year. And then the one aid to that, I'd say, is our Respond product, which is live streaming product, and that's part of our real-time operations pillar. And there, that's all the live streaming from the body camera. That's where Fusus slots in as well. There's interesting things we can do between Fusus and in our DEMS -- I'm sorry, our real-time products. So yes, very excited about each of those. But in the short term, I think the biggest growth relative to 2023 year-over-year will come from productivity.

[Jeffrey Kunins, executive]

Yes, that's right. Thanks, Josh. All of those are incredibly exciting. I think the reason why we call it productivity is it is not only -- while it also includes our straight up product for full or classic RMS replacement, it's really -- the vision there is all of the things that relate to helping, as Rick talked about in his intro, saving time and giving hours and minutes and moments back for officers to be out in the field helping communities be better as opposed to doing paperwork or other things. And so there's an exciting story on multiple fronts there.

First, you've heard us talk for a long time about transcription. And transcription has been steadily and steadily and steadily been being adopted even for the straight up use of looking at a single body camera video at a time, and being able to scrub through the video and see and search through the transcript of that. Just that one video. And now as that gets adopted more and more, we can build incredible new functionality on top of that using AI and other things. And so stay tuned for future announcements in that regard, but that keeps mixing up in customer delight in customer adoption. On pure records, as Josh said, now we've got more than 100 agencies who are live with at least one module of Axon Records, including a rapidly still growing of those who have done their full RMS replacement. As well as a bunch that are using that Axon Standards product, which is the use of force module, which is the easiest thing for them to get started with alongside, even before they've made the full replacement of their RMS. So we're just incredibly excited about the trajectory and the momentum and the acceleration there.

[Mike Latimore, analyst]

Great. Then just on the future contracted revenue, 15% to 25% is next 12 months. Can you just talk a little bit about the variables that would move that to 15% versus 25%?

[Brittany Bagley, executive]

And it's really about sort of average contract length inside of that future contracted revenue. That's sort of the variable between the 15% versus the 25%.

[Joshua Isner, executive]

And Brittany, would you also say it's the number of TAP upgrades of hardware that would ship in the current year? So our upgrade cycle is 2.5 years. So if we have an outsized number of contracts that year where these customers hit 2.5, you'll see more revenue because we're shipping all that upgraded hardware. And if it's a year where it's more software and the upgrade is next year, then that will be closer to 15% versus the 25%.

[Erik Lapinski, executive]

Thanks, Mike. We've got 1 minute left. We'll go to Jeremy Hamblin for our last question at Craig-Hallum. I believe he's dialed in on a phone. Jeremy, can you hear us?

[Jeremy Hamblin, analyst]

Yes. Thanks. Hopefully, you can hear me. Congrats on the strong results. Just in terms of -- I wanted to just -- sorry, if I missed the explanation on this already. But in terms of TASER automation impact, and thinking about what that can do for gross margin on that product line, both in the second half of '24. But also then as we get beyond into '25. Can you just provide me with a little bit of color on that?

[Brittany Bagley, executive]

Yes, of course. So I think the TASER automation as well as initiatives that we're doing around cost improvements are a lot of what gives us comfort talking about how we think we'll have moderate gross margin improvement for 2024. And then we don't have any long-term margin guidance out beyond that. Our long-term guidance beyond '24 is really focused on the 20% revenue CAGR and the '25 adjusted EBITDA margins.

[Jeremy Hamblin, analyst]

But just following up, is specific to that product line and not necessarily thinking about it in terms of total company, what are the -- if you undertake the project like that, what is the kind of the goal of the range of outcomes in doing that?

[Brittany Bagley, executive]

I think the goal in the range is to really improve the TASER 10 margin, so that you see sort of stable TASER gross margins over time rather than some of the fluctuations that you've seen. But again, we don't have a long-term target out there specifically for TASER gross margins.

[Jeremy Hamblin, analyst]

Got it. And then last one quick here. In terms of your kind of TAM penetration and opportunities and as we think about, I think, with Slide 15, as you look at adoption rates in rest of Europe versus your commonwealth. I don't know exactly the timing, but in terms of thinking about the success that you've had in commonwealth versus what you're seeing in rest of Europe. Can you give us a sense for how that time line is playing out versus when you kind of had some breakthrough contracts that you won maybe at this point 7, 8, 9 years ago? Just trying to get a sense for how that might play out.

[Joshua Isner, executive]

Yes. Thank you, Jeremy, and it's nice to hear from you. I would say it's really a tale of 2 product lines there. On the TASER side, we're actually seeing Continental Europe already start to outpace the commonwealth countries, in pockets. And so we're really excited about that. We had some large orders last quarter on the TASER side and we see the path here where the nice thing is in these commonwealth countries, they're set up much more like the United States where they either have states or territories or whatever the case may be. Some of these larger markets in Europe, they buy from the federal level. And so the order volumes are just much higher and you can really build with one customer with a much bigger kind of white space in front of you.

And so we do believe you'll start to see Continental Europe really rival or outperform the commonwealth markets as soon as this year or in the coming years.

On the cloud side, that's where the commonwealth were very early adopters really across the board U.K., Australia and Canada. In Europe, I don't think it's a secret, it's been slow and maybe slower than we would have expected upfront. I'd say that's fair to say -- but at the same time, we've really zeroed in on 3 markets in Continental Europe, where we really are starting to break through on the cloud. We've got trials going on or paid pilots even. And there, I think our thesis is, there's plenty of work to do and plenty of upside just amongst those few markets, but having a few really breakthrough in the next year or 2 will be the kind of tailwind we need to start to steepen that adoption curve in other markets as well. So still some work to do on the cloud side, although we're seeing some really encouraging signs there. And on the TASER side, I think things are happening as we speak, which were -- which is encouraging.

Thank you, Jeremy. We'll see you in a few months at your conference.

[Erik Lapinski, executive]

Thanks, Jeremy. All right. We're going to take it over to Rick.

[Patrick Smith, executive]

All right. Thank you to our investors for joining. Thank you to our incredible employees that I'm so fortunate to work with. Thank you to our new team members from Fusus and Sky-Hero. And actually, today, we had one of our employees who had joined through an acquisition of iNPUT-ACE a few years ago. And I was just delighted to hear one of the things that is really important to me is that those new team members and employees find a new and exciting home where they want to stay. We don't buy companies because we're going to go in and slash and burn to cut costs and make money through the traditional synergies.

We buy these companies because they are critical to our mission. Their people are doing great work. They're innovating in ways that we're excited. We'll continue to inject that sort of late-stage startup energy back into our own bloodstream and keep us going. So I couldn't be more excited and grateful for the team of investors employees we've got. I was out with Chris today, showing Fusus to some customers and maybe some things Jeff was hinting at I might need our redaction tool to cut out all the positive expletives I got today on some of our new capabilities. So there's never been a brighter time to be at Axon, and I can't wait for the rest of the year to unfold. Can't wait to be -- it accelerate here in about a month, and I look forward to talking to you all again in May. So thanks, and have a great night.