Axon Enterprise Inc (AXON) 2021 Q3 法說會逐字稿

Hello everyone. Welcome to Axon's Third Quarter 2021 Earnings. I'm Angel Ambrosio, Senior Manager of Investor Relations & ESG. And today, we have available with us Axon CEO Rick Smith, President Luke Larson, CFO Jawad Ahsan and Chief Revenue Officer Josh Isnerto.

I hope you 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 remarks today are meant to build upon the information in that robust letter. If for some reason we lose connectivity, we'll endeavor to post a copy of our prepared remarks to investor.axon.com this evening.

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. These risks are discussed in our SEC filings. Before we turn the call over to Rick, we'll play our quarterly update video.

Hey, everyone. As we head into the final stretch of the year and think about our long-term plans, we are providing an update on the Axon growth story. First, pause this video and check out our forward-looking statements disclaimer.

It's been a while since we talked about our $27 billion total addressable market. It's time to revisit it.

$52 billion.

What?

You said $27 billion total addressable market, it's $52 billion now. Our investments in R&D and global expansion have expanded our TAM.

Okay. Our investors will want to understand how we added $25 billion in TAM.

So think of our TAM is what our annual customer payments would be if our hardware and software subscriptions were adopted by all potential users at a price we believe they'd be willing to pay. Our TAM has grown across 3 axes, like a cue, One dimension of growth is geography or region. This means where we sell. This grows as we add sales channel to promote global product adoption.

International has been growing fast. The latest in Q3 was that the Scottish government and the Province of British Columbia through PRIMECorp chose Axon as its nationwide digital evidence management software provider. And we are also seeing further product adoption in major markets such as Brazil and India.

Exactly. Yes, we are now selling into markets you barely heard us talk about even 2 years ago. Our second dimension of growth is through product research and development. This means we are adding to what we sell. And thirdly, we are unlocking new customer segments or markets. This means whom we sell to is growing beyond municipal public safety.

Makes total sense. There are so many types of customers in the early days of Axon product adoption. U.S. federal law enforcement, corrections, fire and EMS, enterprise security and consumers. But wouldn't that mean the cube is still missing some squares? For instance, we sell body cameras to law enforcement in Latin America, but we aren't selling to commercial enterprises there.

Yes. So what you're picking up on, Angel is that we have optionality to grow our TAM as we invest in new markets, unveil new products or expand either of these axes into certain geographies. For instance, our $27 billion TAM considered fleet to be a product sold only into English-speaking markets, but we're actually shipping more broadly now.

Okay. And also Justice is new. We've never told investors about that one before. Should we talk more about that?

Good catch. So justice is a software category that we are bringing out of stealth mode. Axon's CEO and Founder, Rick Smith can explain.

When we say Justice, we mean software to help the court system, such as prosecutors and defense attorneys. We believe we can streamline the discovery process, and we're joining forces with the justice system to make it more effective, fair and efficient. Not only is our goal to save attorneys time, we will also shorten the time that people sit in jail, waiting for a trial. This fits right in with our mission.

Axon's mission is to protect life, capture truth and accelerate justice. To do this, we must optimize discovery. You are probably noticing the line between the virtual world and the physical world continues to blur. As people increasingly live in an online realm, more digital evidence is created. People are even committing crimes in the metaverse, like fraud and theft. Where does Axon come in? More than a decade ago, we entered the digital evidence management category to make body cameras affordable and feasible for all agencies.

Each body camera generates hours of police videos every day. If you think about it, an agency with 10,000 officers can easily generate 40,000 hours of video after just one 24-hour period. We needed to help agencies manage all of that video, developing a cloud-hosted solution was Step 1. Step 2 unfolded as we grew to help agencies manage more techs of digital evidence such as documents, CCTV video and mobile phone footage. We've invested heavily to make Axon Evidence a category leader. Public safety agencies feed all this evidence into the justice system. Step 3 is to help the justice system deal with mountains of digital evidence, which has created mountains of work for attorneys.

A typical case used to be a police report, maybe a few photos and some physical evidence like bullet casings or bloodied clothing. Today, the case will include dozens, if not hundreds of cell phone photos, hours of body camera and in-car footage, all of which must be cataloged and reviewed. Highly trained attorneys are telling us they're spending 1/3 of their day on clerical work. We are enthusiastic to share more about this software category in the coming months. Stay tuned for a product launch and customer announcements.

Loved the product tease, Rick. Okay. So let's go back to TAM for a moment. This bigger TAM with new product categories and new markets all sounds very exciting, but it also sounds like a lot of investment. Rick, how should investors think about leverage?

Financial discipline remains paramount. Let's turn to our Chief Financial Officer, Jawad Ahsan, who's been driving capital allocation discipline since joining Axon in 2017.

Axon has a strong sense of accountability. Our customers are counting on us to deliver life-saving products, and our credibility with shareholders is vitally important. In 2017, we charted a new financial course of strong top line growth combined with margin expansion. We surpassed our own expectations in delivering on that vision, a testament to the stellar execution across all of our teams. Going forward, we're targeting a revenue growth CAGR of 20%-plus, while our underlying business lines deliver adjusted EBITDA margins of 30%.

The way Axon invests in future growth while also demonstrating leverage is to target the rule of 40, where the sum of our top line growth percentage plus our adjusted EBITDA margin percentage equals or surpasses 40. This metric is typically used to evaluate pure SaaS companies and has set a high bar for our entire business, which also includes hardware. It's a bar that we continuously beat. The businesses we're building are highly cash flow generative and our underlying software gross margins have never fallen below 80%. Our SaaS business is high growth, high margin, high retention and delivers annual recurring revenue at scale. Investors can expect us to continue to make disciplined investments for growth and unlock more of our ever-expanding TAM.

We'll finish up by showcasing our growth runway. A.J., one thing I've noticed is that our investors frequently ask us about TAM penetration. How should they think about it?

It's totally a fair question, and it's best answered with data. So when you think about our $52 billion TAM, we are less than 2% penetrated globally. This is simple and perfect math. We're approaching $1 billion in annual revenue, and our TAM is more than 50x larger. If we do a deeper analysis, breaking it down by product and by region and consider the potential user base, you can see how we think about the opportunity. Product growth driver #1 is TASER. We believe the rest of the world is 10 to 20 years behind the U.S. in terms of TASER device adoption, and you see that in the penetration rates here.

Okay. But why is TASER penetration under 25% in the U.S.? TASER is an iconic brand. It feels like our devices are everywhere.

Yes. So you are totally right that TASER is highly penetrated among municipal law enforcement in the U.S. But the rest of the domestic market for professional users is largely untapped. For instance, federal law enforcement and corrections are still in the early stages of adoption. And we're also seeing opportunity in enterprise-level private security. Globally, we believe we have room to more than quintuple the professional TASER installed base, and we believe that future devices will kick off new waves of adoption.

Let's hear again from Rick, who founded TASER in his garage in 1993.

In my 2019 book, the end of killing, I laid out our moonshot. Before this decade is out, we will deliver a nonlethal weapon that will outperform a traditional handgun in terms of reliable stopping power. In 2020, we accelerated development of the next TASER device to deliver upon that vision sooner. Every week, I engage with our customers on the front lines of public safety. They tell me that they desperately need better tools. We're proud of how we have made nonlegal TASER technology mainstream, but our customers are still forced to rely on their firearms all too often with tragic consequences. We knew we needed to move faster. And I can tell you, we're making exciting progress.

I believe that our next-generation device makes a giant leap toward our moonshot. And I see a path to TASER devices becoming an officer's primary defensive weapon, especially in international markets, where firearms are not readily available to the general public. Our mission was born of an all too common tragedy after 2 of my friends were shot and killed, their lives permanently ended. And the person who pulled the trigger is now spending his life in prison. Bullets ruin lives, and we aim to obsolete them.

In order to truly obsolete the bullet, we must also offer solutions to private individuals. This is a growing area of investment. When we say TASER is less than 25% penetrated in the U.S., and even lower globally, we mean among professional users. At the same time, one of our largest areas of TAM growth is in consumer. The penetration in consumer is nearly nil today. Historically, our law enforcement in consumer devices have been completely separate. The next-generation devices move to one platform so that the same technology that underpins our next-generation professional devices will also power consumer devices. We also intend to offer personal safety solutions, including mobile applications. Stay tuned for more. We're super excited about our prospects in the consumer market.

That's so exciting. We are all about more effective and reliable personal protection. Let's get back to our runway.

Sensors includes our body cameras, which offer GPS and live streaming. You can see we've been strongest in the U.S. and English-speaking Commonwealth, where there is yet still opportunity to grow, not to mention the rest of the world. As our Chief Revenue Officer puts it, there is more ground to be won than has already been won in body cameras. Our latest fleet in-car camera with live streaming and automatic license plate recognition, which began shipping this year, also drives sensors growth.

That captures our hardware penetration rates. Now investors know that our SaaS business has grown over the past 5 years from nearly nonexistent to now approaching $300 million in annual recurring revenue. You might wonder if there is still room to grow. Let's take a look.

Oh, A.J., wait a second, software penetration seems low given our growing user base.

Yes, it's a good call out, Angel. So before, on hardware, the data percentage showed user penetration, what percentage of potential users have our products. For SaaS software, what we're showing you here is dollar penetration. What percentage of potential dollars we are capturing. This is because new users tend to grow their annual dollar spent with us over time, as we grow the platform and deliver more value. We frequently see our customers double, triple, quadruple and even quintuple their annual software contracts to upgrade to new features. There is room for us to continue moving our customers up the value chain. And the investors can see the effect of this and our strong net revenue retention rates on the SaaS business. You can think of our SaaS software as belonging to 3 categories today, digital events management, productivity and real-time operations. And there's more to come.

Jawad, any final thoughts?

As you can see, we're in the early innings of global scale, which we believe we can capture through disciplined investments. We're introducing new products while unlocking new customer markets and establishing footholds in new geographies. We have a proven track record and are very excited about our trajectory.

Thank you for joining us on our growth journey and investing in our mission to protect life.

Make sure you check out our shareholder letter and tune into our earnings call for more on the quarter and our outlook. See you next year.

Okay.

All right. Great job, Angel and Andrea and our whole IR team, you guys just really did a nice job on that video. I hope our investors enjoyed it.

So as you can see from our results, our teams are continuing to execute at the highest level. Perhaps the strongest growth indicator is record bookings of $0.5 billion in a single quarter. As bookings eventually flow through to revenue, we're on pace to become a substantially larger business in the coming years. And the momentum is really strong, with sales contracts booked up 70% year-to-date compared to last year, and we expect another record bookings quarter in Q4.

I'm proud of the results we're delivering in 2021, and even more energized by the opportunity in front of us. We've demonstrated our ability to scale the business and drive leverage in our model. Now we're expanding our growth story. As we continue to introduce new products, selling to new customer market segments and add sales channels across geographies, today, we're addressing an even larger TAM. As you saw in the video, our current estimates point to a total addressable market of $52 billion. With our top line projected to reach at least $1 billion next year, you can see there's enormous white space ahead.

By way of example, in early October, Axon had its largest ever presence at the Association of the United States Army's Annual Conference in Washington, D.C. This provided us with an opportunity to showcase how Axon's transformative solutions for law enforcement position us to disrupt the U.S. defense market, giving us a seat at the table to begin influencing how the military responds to wars of the future. As I watch the helicopters evacuate our embassy in Kabul, it struck me that the United States has effectively not achieved durable strategic success in our last 3 wars. And it's not for lack of sufficient lethality, our military is the greatest fighting machine in the history of the world with the most lethal and precise weapons. Yet the more we killed in Vietnam, the more we lost the hearts and minds of the very people we needed to win over. And the same phenomenon played out in Iraq and Afghanistan. We can no longer kill our way to success in modern conflicts, and I believe the ability to capture bad actors will become ever more strategically valuable, and we intend to lead the way.

As the world moves at a faster pace, Axon is remaining at the forefront of bringing transformative technologies to market. We're innovators at our core. You can see that when you look at our history. We signed the incorporation papers for TASER at my dining room table 28 years ago. And since that time, our mission has remained unchanged. But our organization has significantly evolved. And today, we have a broad ecosystem of public safety products. We have continually found new ways to serve our customers through disruptive technologies and software, even when they met with initial resistance. We've always set extremely high bars for ourselves at Axon, but we found that great challenges make us rise to meet them.

Earlier this month, we held our sixth annual Axon Accelerate conference right here in Phoenix. And it sure felt great to be back in person with all our customers and colleagues. The theme of this year's conference and the topic of my opening keynote was the change is inevitable, and today, technology is moving at an exponential pace. From virtual reality training to our drone program, Axon Air, to automatic license plate reader technology and transcription, we're unlocking the power of technology to reach our north star of obsoleting the bullet and outperforming the 9-millimeter pistol in stopping power by 2030.

And in Accelerate, we introduced our next moonshot. Together with our customers in public safety, within the next 10 years, we aim to cut officer-involved shootings by half. We believe we can accomplish this with new technologies, new training procedures, new policies and even new regulations to guide the way. In fact, I used Accelerate as an opportunity to introduce a regulatory framework, the 3 laws of first responder robotics to begin a critically important discussion of how we use robotics not to kill each other but specifically to avoid harming each other with new ways to capture dangerous subjects. Any decision that impacts the human subjects for robot must be made by an authenticated human operator accepting legal and moral responsibility. That's our first proposed law.

Second, there should be no lethal force. Deescalation should be the primary goal and the minimal use of force to stop a threat. And then the third is that any incident a force deployed by a robotic system should be recorded in full audio video and all user data and reviewed by an independent oversight committee. I will be hosting a Reddit AMA in December to gather public input on these guidelines.

We're proud of our history of introducing mechanisms of control and accountability to ensure that powerful new technologies are used for good. From the data logs in the TASER to the very existence of body cameras and our ethical product framework that we use to guide our ALPR development. And now we're leading the way to set the regulatory framework years ahead of advanced nonlethal robotics technology. We're excited to continue to blaze new trails in our mission to end killing.

We were fortunate to close out 3 days of robust interactive dialogue at Accelerate with a keynote where I got to interview Former President George W. Bush. He delivered an incredibly inspiring talk, expressing gratitude to public safety officers and calling for civility to all citizens, which is squarely aligned with our mission to protect life, capture truth and accelerate justice. And at the end of today's call, we're going to play for you a very powerful moment from Accelerate. So please stay tuned after the Q&A.

And with that, I'm going to hand over to Luke Larson, our President.

Thanks, Rick. Let me start by echoing your sentiment around Accelerate. We believe it all starts with creating a great experience for the customer, which means more than just listening. It's anticipating their needs by mapping technologies to insightful opportunities. The level of customer engagement we saw this year is a testament to the transformative power of the public safety platform we've built. We're obsessed with creating value in a unique way that no one else can by solving real problems with solutions people are willing to use. It was a phenomenal week learning from customers from all over the world, and I could not be more excited for the road ahead. Huge shout out to our marketing, sales, product teams and really all the employees at Axon that made such an impactful experience.

The business continues to grow at a fast pace, which means recruiting and fostering the best and most diverse talent is critical to our success. Our ability to retain top talent not only allows Axon to move increasingly closer to accomplishing our mission, but also allows us to establish new goals along the way. To do this, we need to continue creating an organization that is future-proof, resilient to disruption and at the forefront of innovation. We are currently hiring over 300 roles and we have embraced remote work as an opportunity to expand our talent pool, pooling from the best-in-class resources around the globe.

How our employees spend their lives matter, which is why we put a great deal of consideration into the culture we are creating and the values we want to embody as we build the future. This means we're doubling down on our JEDI and learning development initiatives. The teams we built are unparalleled, and it's incredible watching the collective hard work and dedication to our mission. We're laser-focused on how do we attract, retain and develop the best talent. You know someone great that wants to make a great impact, send them our way.

As we round out the year, we feel great about our product pipeline. We're finishing 2021 with exceptional bookings, which includes $30 million of TASER 7 revenue that we expected to deliver in Q4, but is now shifting into the first half of 2022. This is the result of an industry-wide chip shortage that impacted our TASER 7 platform. The supply chain conversation is universal right now. And while we are not immune, our teams are definitely navigating the situation. We have incredibly strong relationships and a long history with our supply chain partners who are invested in Axon's mission and are aligned in helping us meet our pipeline.

Teamwork is harder than it seems on the surface and as our company scales globally, it requires a consistent commitment to operate as one team. We're proud of our supply chain teams who have done tremendous job helping us manage through the global supply chain crisis. While we've experienced some delays and the potential for interruption remains, we have line of sight to clearance in the first half of 2022, and continue to be confident in our ability to meet the needs of our customers and deliver on our annual revenue guidance in spite of these challenges. I want to reiterate, we have a line of sight to clearing the backlog in the first half of the year, and we feel great about our pipeline and bookings in what continues to be a dynamic environment.

Now I'll turn the call over to Axon's Chief Financial Officer, Jawad.

Thanks, Luke. I also want to start by echoing the excitement over our Accelerate conference. Meeting with our customers, partners and employees from around the world was super energizing. It reinforced for me that Axon sits squarely at the intersection of social justice and advanced technology, with a mission that galvanizes all of our stakeholders. These stakeholders include you, our investors.

While we aren't able to offer an investor track at Accelerate this year, you've been top of mind for us. In light of feedback we received at our last proxy, we've been conducting a listening campaign to gather more specific feedback from our investors on our approach to governance and ESG. The input we've received has been invaluable, and we look forward to sharing the outcome of these discussions in the coming months.

Now over the past several years, you've seen us invest aggressively in R&D and channel expansion. We've deployed capital through strategic partnerships, putting an early stake in the ground on emerging technologies and trends. These actions have enabled us to unlock transformative new products like VR and Respond, new customer market segments like Federal and Justice and new geographic regions worldwide.

Today, we're excited to share that as a result of our strategic planning and continued investments, we're projecting substantial runway for growth with a new and updated total addressable market, or TAM. Our new TAM is almost double the last one that we shared with you. While our penetration in this new TAM is still relatively low, it's absolutely our intention to serve these markets with the investments we have in play, which will see us bring exciting new products to market over the next 18 to 24 months.

There are 2 areas in particular I want to highlight. First, federal. We hired Richard Coleman to run our Federal business in 2018, and he has since built a stellar team whose performance has exceeded our expectations. We now view the Federal TAM for Axon as a $9 billion opportunity across TASER devices, body-worn cameras, DEMS and other software. We count among our customers today, several of the branches of the federal government, including the Department of Justice, the Department of Homeland Security, Customs and Border Protection and the Drug Enforcement Agency.

We've also been driving adoption of our new multi-jurisdictional sharing feature, which is enabling state and local agencies to seamlessly share evidence with U.S. attorneys. To better serve federal customers who have sensitive law enforcement information, we've made an investment to ensure our software complies with the civilian FedRAMP high and the Defense Impact Level 5 security standards. At these security levels, we anticipate being able to operate a DEMS solution to all 90-plus federal law enforcement organizations across civilian and defense agencies. After a strong third quarter in which we added $35 million in new deals, we are on track to have another record year for federal bookings.

Next, I want to briefly double-click on consumer. Axon has, since its inception, always had a consumer business, but it's historically not been one that we've devoted meaningful R&D to. With the ongoing development of our exciting new TASER device technology, we've committed to releasing a host of new personal safety devices over the next few years that will help advance our mission to truly obsolete the bullet. We also intend to begin offering personal safety solutions through mobile applications over this time frame.

In our shareholder letter, we highlighted that TASER device penetration is less than 25% in the U.S. and even lower globally, but that represents the professional user. The penetration in consumer is virtually 0 in an $11 billion market, which means we have tremendous runway ahead in just this segment alone. To be clear, we're still very early innings in consumer, but we have the alignment, the technology, the strategy, and most importantly, the mission to drive this growth.

Now before we open up the call to questions, I want to highlight 3 themes that we'd like you to take away this quarter. One, we are significantly underpenetrated on our growing global TAM. Two, we're delivering against the rule of 40, investing for growth while achieving leverage. And three, our year-to-date results and outlook for 2022 are a waypoint toward building a much larger company that is synonymous with public safety and protecting lives.

As we look ahead to 2022, we're carrying a ton of momentum into the new year. Our 2022 revenue projection has strengthened to at least $1 billion on top of what we expect will be at least 25% year-over-year growth in 2021. We added a record $28 million in ARR this past quarter to bring our total ARR to $288 million. We have an exciting runway ahead of us and we look forward to sharing updates on our progress in the coming quarters.

And with that, Angel, let's move to questions.

Okay. Thanks, Jawad and team. And as Rick noted, as we move into Q&A, I would encourage you all to stay tuned. If you have the time, we have a special surprise that you -- for you at the end of today's call. Moderators, can you bring everyone up into gallery view?

Okay. Great. All right. Our first question comes from Josh Reilly at Needham.

All right. Thanks, guys. Nice job on the quarter here. Maybe we'll just start with the $30 million shift in Q4 TASER revenue. Would you expect all of that to hit here in Q1? Or will it be more evenly spread out through the first half? And then what are the puts and takes on the timing of that revenue hitting?

Yes. Thanks a lot for the question, Josh. I think at this point, we do see it hitting in both Q1 and Q2. And certainly, it's a challenging supply chain environment across the world right now, and the team is doing a great job navigating through that. And so of course, we're hoping we can fulfill as much of that in Q1 as we can. But realistically, it will be across Q1 and Q2.

Okay. Great. And then maybe just a follow-up on Fleet 3. As that's launching here, is there going to be any impact to that production ramp given the semiconductor supply chain challenges? And then is there going to be any initial impact to gross margin as a result of this ramp due to the Fleet 3 mix coming in as well?

So I'll let Jawad answer the second part of that question. But on Fleet 3, the demand has been very, very high, higher than we've ever seen for our in-car video products before. And so we are shipping a record numbers of Fleet 3 as compared to Fleet 1 and Fleet 2, and we expect that to continue throughout next year. We are oversubscribed for the product right now, and I think that speaks more towards the demand than anything else. But we do expect to ship large quantities relative to previous versions in Q1 and moving forward -- I'm sorry, Q4 of this year and moving forward into Q1.

And then, Josh, your question on gross margins, we are not expecting at this point any impact from Fleet on gross margins.

Okay. Next question comes from analyst, Jonathan Ho of William Blair.

Congratulations on another quarter of strong results. If we look at your revised TAM estimates, can you talk about maybe why the decision now to sort of update the TAM? And maybe what underpins some of these assumptions since it seems like the markets appear to be a lot larger than you previously thought?

Yes, I'll start with that one, Jonathan, thanks for the question. So we've been, as we've talked about for the past few years investing for growth beyond the TASER devices and body cameras. And we've given you flavors here and there of the markets that we're aiming towards the new products and segments. And what we wanted to do is reflect accurately how the business is oriented today. Our TAM has been expanding in the past few years, but that's also because the lens that we're looking at our business though has been widening as well. And things like VR, a bigger presence in federal, more of a focus on consumer. These investments are in flight now. As I have mentioned, they're still very, very early innings. But the TAM really speaks more to our ambition. We wanted to align how we're thinking about our TAM opportunity with how we're investing for growth today, and we wanted to make sure that you guys are thinking about the same way that we are.

Got it. Got it. And then when we look at sort of this revised TAM opportunity, what are the investments that you need to make to get sort of unlock these additional markets. What are the most impactful ones, if you can just highlight that for us?

Yes. The great thing about it is it's not a lot of incremental investment. The beauty of Axon's business today is that the technology we have for TASER, for example, right, we've been investing in TASER for quite some time. We've talked a lot about the next-generation TASER technology, we're very excited about. And that technology is going to be able to serve our domestic and international law enforcement markets. It's going to be able to serve our federal markets, corrections, enterprise security. It's going to, in a large way, be able to translate to consumer as well.

And so what we're really looking to do is gain leverage on investments that we're already making. The same thing holds true with body camera and DEMS. You look at the body camera and DEMS product, it's really an enterprise solution that happens to be oriented towards law enforcement today and is geared towards law enforcement. We think that there are other use cases for that technology. And there are new areas like VR training that we are making a new incremental investment in that content. There, the demand is extremely strong. And in drones, here, we're looking to partner a little bit more and find the right partners to help us get into those markets. But what you should read into this is that we're not looking to really expand or to get too far ahead of our skis as far as investments into new technologies. It's really driving leverage from the ones that we have.

Okay. Next question comes from analyst, Brian Gesuale at Raymond James. Go ahead, James.

We also have Astrid on the call. So Astrid, if you would prefer to ask the question, you can go ahead and do it as well.

All right. Maybe we'll give you both a second, and we will go to Paul Chung from JPMorgan.

So just on your annual software contracts, what do customers kind of want more of? How are you thinking about the dynamic between the new seats and increase in wallet share? And where are some of the upcoming features we should expect to kind of further drive that launch there?

So Paul, thanks for the question. I think the good news here is that the product team has done a fantastic job delivering several value-added feature sets over the last couple of years. And we're now seeing the market really start to value those. One of those is performance, which measures how officers are complying with their agency policy. There's updated redaction tools. There's a product called Standards, which is kind of our first module of our Records product. And ultimately, as we bundle these solutions together in our Officer Safety Plan offerings, we're seeing more and more customers buy those offerings. In fact, we see about double the number of licenses purchased this year so far in that plan as last year. We're only Q3 here -- or through 3 quarters, I'd say.

So there's a lot of runway ahead for customers to continue to adopt a lot of these feature sets that have been released, and our focus is really through customer success as well as sales, making sure that we do a really good job showing and portraying the value that these new features have. So that will be kind of our biggest focal point for our software sales team over the next year is moving more and more customers into those offerings, and we're certainly confident in our ability to do so.

Okay. Great. And then on the international front, you saw very strong growth there, particularly in Europe. Where are you seeing pockets of strength there in Europe? And where are you seeing the most momentum? And then how has the traction been in Asia? You called out that contract there in India. Any comments there?

Yes, absolutely. Thanks for the question. So those who have been with us a while will recall, for a long time, we're really disciplined about proving our international strategy in what we call our Tier 1 markets, the U.K., Canada and Australia. And we feel like we've earned the right to expand it beyond those markets now, and we've hired out really talented teams in several markets around the world.

In EMEA, specifically, we're seeing exciting growth in the Netherlands, in Italy, in Spain, in Germany and in France, in addition to India, where we're -- we look at this first contract with Gujarat as kind of the first indicator that our strategy there is working and we're going to build out a team there across one of the largest policing markets in the world.

Another place we're really seeing a lot of success is Brazil, which 3 or 4 years ago, we were barred from selling into, and now they are again buying both CEWs and our video devices. And so we've gotten to the point now where both our sales team has localized into some of these markets and our product team is doing a fantastic job supporting our customers in those markets to kind of round out the edges and achieve that last mile of product market fit, and it's really coming together nicely for our international business.

Okay. We're going to go back to Brian Gesuale from Raymond James.

You've had several really large wins here over the course of the year and some big deployments coming up with body cams as well as a lot of investments to make to continue to support that TAM opportunity out there. Can you maybe talk about how we might see the margins ebb and flow over the next couple of quarters as you start to bring those customers live and continue to invest in the business?

Yes. Brian, thanks for the question. I'll take that. So over the long term, I want to reiterate that we're driving the business towards 30% adjusted EBITDA margin, 70% gross margins. Over the next couple of quarters, I guess the best way to think about it, when we start off a year, we have a comprehensive list of investments that we want to make in product, in channel, operational excellence, et cetera. And we set our revenue targets and then determine which of these investments that we're going to fund, as you might imagine, not everything gets above the line, not everything gets a green light.

As we over deliver on revenue throughout the year, we unlock funding for those items that were below the line because we do believe that we want to reinvest back in the business. We've got a tremendous opportunity to get after these new product segments and channels and so forth. Had we not had $30 million of revenue pushed into 2022, our adjusted EBITDA margins in Q4 would have stayed roughly flat to where they were at the end of Q3. But because we've been unlocking funding throughout the year for these new initiatives, we're now expecting to finish the year at the EBITDA levels we've guided to, which translates to roughly a 20% adjusted EBITDA margin for the full year.

And then for next year, we're going to reset. Now 2 things to note here. The first one is that the new initiatives that we're funding, things like VR training and federal, next-generation TASER, body camera, records and dispatch, fleet, we're super excited about. For all these areas, demand is very strong. And just like you saw in 2021, you're going to see any over-delivery fall right to the bottom line. You'll see our margin tend to tick up.

And the second thing to note is that we're in the budget process right now. We're going to treat 2022 just like we've been treating prior years, which is we're going to make sure that there are going to be things that are below the line. So the Q4 margin rate, even though it's going to be slightly lower, we're going to do that as an anomaly.

Great. I appreciate that. And then the ARR that you booked in the quarter, I think sequentially, it's about as strong as I can remember. Any specific shout-outs to particular lines of software? I know the VR/AR stuff has been -- had a lot of momentum over the course of the last couple of quarters. How might we think about some of that strength and what it might look like as we carry that momentum into '22?

Yes. Let me take that one, at least to begin with. So we're seeing improving attach rates on our premium services like Respond, which is the live streaming of body cameras. On our last call, we talked about how Charlottesville used that capability as they were taking down the controversial statues to be able to see where all the officers were and be able to tap into live video streams. There's also ALPR, of course, Fleet, and Respond is part of our new OSP 7 Plus premium, which is a plan that includes VR and transcription. So I think we're also seeing an improvement in the attach rates in our highest premium plan in addition to those individual elements.

Yes, it's right. It actually is, Brian, just to formalize, it is a record for us. It's the largest single quarter increase we've ever seen in ARR.

I thought so. Congratulations.

Okay. Our next question comes from Keith Housum with Northcoast.

Congratulations on the quarter once again. I appreciate all the color on the TAM and the penetration. As we look at your TASER weapons, they had a phenomenal quarter this quarter. Can you provide a little bit of color or context in terms of the percentage of weapons that are being sold as replacement or refresh versus really into new users?

Yes. Thanks a lot for the question, Keith. Nice to see you again. Ultimately, for us, I think there's 3 or 4 markets right now that are adopting TASER. And the answer to your question is really dependent on the market. For U.S., state and local, ultimately, our motion there is more of an upgrade motion where folks are -- the majority of the market is upgrading from a legacy TASER to the new TASER 7. Now because we sell cameras and TASERs in the same bundles now, we are seeing an uptick in that market in terms of first-time standard issue users, which is promising, and we hope to continue to see that being well into the future.

And then in other markets like international and federal and enterprise security, we're seeing more and more first-time TASER users. So in international, for example, we have a TASER First strategy, where we really want to bet on ourselves to deliver a really fantastic customer experience to a customer we never worked with before, and they'll adopt our TASERs and then a year or 2 later, once we've put some equity in the bank there with those customers and go back and sell them additional products from our portfolio, and I think federal is a little bit of that as well and then same with our private security channel. So a little bit of a mixed bag depending on the market, but definitely seeing high demand across all of those markets.

So you had to aggregate all the numbers. Would it be 70% is going to be refreshed, 30% new or will be vice versa? Can you kind of ballpark that for me?

I don't have it off the top of my head, Keith, I would probably want to avoid any estimate until I've got the data in front of me. So we can come back to you with something like that in a future quarter.

Fair enough. I appreciate that. Just as a follow-up on the supply chain. Any chance that supply chain issues will expand beyond just the TASER weapons this quarter into body-worn cameras?

So I'll take that one, Keith. We feel really good about our pipeline. We've been working closely with all of our suppliers. We've got signed contracts and committed deliverables into Q1 and Q2. And so at this time, in the first half of the year, we feel really confident we're going to get rid of the backlog on TASERs and keep the momentum going with our full product portfolio. Now I would add the caveat, we are in the middle of a global supply chain crisis. Our team has done a phenomenal job navigating that. And I think our supply chain strategy has proven that out over the last 2 years, and we feel really good about it.

Okay. Our next question comes from Jeremy Hamblin at Craig-Hallum.

I'll add my congratulations. I wanted to first start with a question, I think, probably for Rick and the product development team. So with this ambitious target to make the bullet obsolete by 2030, right, it's been a few years now since TASER 7. How many iterations of the TASER product do you expect to roll out between now and then in that 8-year period in getting you to that capability where stopping power can match or exceed traditional handgun?

So I would say 2 or 3 product revs between now and 2030 would get us -- I don't know if we would -- just to be really specific, I think by 2030, our goal is to outperform the 9-millimeter, and I think that's 2 or 3 product gens out.

Okay. And in terms of the investment in your R&D team that needs to be made to achieve a goal like that, is that something that you feel is going to accelerate from what it has been growing at over the last, let's say, 4 or 5 years?

No, not necessarily. The TASER developments are continuing to move along. And that business as it grows is funding the R&D. I did also, at Accelerate, start to talk about robotics. And part of this as well is being able to remove operators from harm's way in some of the most high-risk scenarios and to be able to incapacitate the target. So in addition to the handheld TASER devices, we know our customers. Also like if you have a guy in a barricade situation who's armed, or I was just talking with a major police chief earlier about incidents like somebody with a gun standing on his porch, you don't want to get within 25 feet of him.

And so in those cases, being able to deploy a long-range system, and ultimately, I've come to believe that doing that through some sort of robotic is better than trying to develop some long-range rifle, will be part of the net solution that it will take for us to cut police shootings in half. We think part of that is better weapons that the human can operate themselves, TASER 8, 9, 10, and then also new capabilities where they might be able to engage, particularly dangerous subjects from further distances or even outside of the building.

That's actually a good segue into my follow-up question, which is personnel costs are typically the highest expense for most police departments. This has been an incredibly dynamic 2-year period in law enforcement. Vaccine mandates, civil unrest that we've been going through. I just wanted to get a sense for the insight that you're hearing from police chiefs as to, one, staffing with new patrol officers, whether they're getting the personnel that they need? And two, the evolution with Axon as a partner in how to potentially stretch the police force that's deployed in public domains a little bit better or more efficiently so that they can maintain their budgets. What is -- can you just enlighten us a little bit more about what you're hearing from police chiefs?

Yes. Well, I think one of the things we can do to best help them stretch their budget is to free officers from having these fairly expensive professionals spending a lot of time on data entry tasks. And a lot of the work that we're doing in, for example, in records may not read us directly on obsoleting the bullet. But it can read very directly on helping agencies leverage their staff. I mean effectively, we could double their productivity if officers didn't have to spend half their day sitting in a laptop typing up records.

And so we're doing a lot of work there on the back office to connect all these sensors we have in the field all the way through, not just into the reporting system in an agency, but now moving over into the justice system, where we started to talk about how we're finding there's new efficiency needs for prosecutors and courts that are receiving the sort of deluge of digital evidence that we're producing, that our customers are now producing and handing off, and that's creating new and other interesting areas where we can solve a lot of these efficiency problems that translate very directly into budgetary gains.

Are they getting adequate staffing or are they having to rely on you even more as a partner because in some cases, it does sound like staffing has been a challenge to get? I think there's a lot of people who feel like they've been attacked maybe is an appropriate word, publicly, and they're not looking to sign up for the job anymore. But maybe an opportunity for Axon to again, stretch those resources.

And we certainly are hearing that recruiting is particularly challenging in this environment. I mean I do think we're also seeing a shift in public sentiment. I mean, in Minneapolis, the bill to replace the police department did not pass. I think we're starting to see a shift in our customers are starting to feel it as well where people are just realizing that law enforcement is really a critical function, and we need to have real solutions, and that requires thoughtful investment, not defunding. But ultimately, as it is more challenging for them to hire, then productivity tools do become even more important.

Okay. Our next question comes from Erik Lapinski at Morgan Stanley.

Maybe if we could go back to the adoption you're seeing with Records and Respond. I guess just curious, are customers generally upgrading to those solutions as they're moving to higher value bundles? With body camera contracts, do you see that some customers actually have room in the budget to do that ahead of their existing contracts? Just anything on kind of the cadence of adoption. I understand it's still early for most customers.

Yes, absolutely, Erik. Thanks for the question. And ultimately, we believe our products work best together, right? And we believe that digital evidence will be at the heart of every police Records, certainly we've already seen that trend, and we expect that to only continue grow over the next 5 to 10 years.

And so right now, most of our customers are buying Records in the same offering, the OSP or the Officer Safety Plan offering. And that strategy is serving us well. Right now, we're doing our best to balance more and more customers signing up for the Records product with nailing the experience for our first adopters. And we're hearing more and more positive sentiment from our early customers in Records to attribute to the hard work our product team is doing to deliver that experience. And we really believe that stacking one customer onto the next and just doing that enough time to have a really positive early experience in Records is what's going to lead to that significant adoption across the market later. And so that's kind of the motion we're focused on for them.

And then as we think about consumer and just as you're building out prospects for channels there, do you expect most of that to be kind of in a direct model? Are there opportunities to expand into storefronts, I guess, just in how we think of the differences of sales model as kind of the consumer opportunity really starts to ramp?

Yes. Thanks, Erik. I'll take that and maybe turn it over to Rick for some additional color. So today, it's both. Today, we sell through distributors and direct to consumers. And we certainly plan in the near term to leverage both of those models going forward. We do think there's an opportunity for us to increase direct-to-consumer with some of the products that we're developing. It's not only next-generation TASER, but we're also in the process of developing mobile applications for personal safety. And those, we're going to be going direct.

I'll just kind of leave it at that. I don't want to telegraph too much what we're doing that we haven't announced in terms of products yet, but we're excited about what's coming.

Very excited.

All right. Our next question comes from Will Power at Baird.

Okay. Great. Yes, I echo congratulations on the strong results. I want to come back, probably to you, Rick, or whoever wants to take it, I know you made a comment on the record bookings, up 70%. I just wanted to get a little more color on the key drivers or components of that strength? Is it dominated by any particular product, geography, you think about between sensors, TASER, international. It feels like it's pretty broad-based, but any further backdrop on the drivers would be great.

Yes. Let me hand over to Josh. He's just a little closer to the customers in terms of the actual order flow. I'm feeling broad, general support from the customers. And one thing we're hearing is the fact all this stuff works very well together, they see as really being quite valuable. Historically, police tech systems are sort of infamous for not playing well with other systems. But with that, Josh, how would you answer that question?

Yes. Ultimately, our bookings are a combination of several factors. I think in our core segments, the more and more Officer Safety Plan adoption that we see drives bookings up because it is -- those are our highest ASP offerings.

Now in addition to that, we're seeing international grow very quickly, and we're really, really excited about that. We had -- we're on track for a record year at international by mid-double-digit percentages, and we're -- that's very encouraging to see. We're also seeing that same growth in some of our newer segments, such as the Justice segment had a record quarter. Our Enterprise segment had a record quarter. Private security sales growing. And then, of course, new products are also contributing, both on Axon Air, which is our drone offering, and VR. VR is our fastest adopted product ever, including the TASER X26. And so we're seeing just across -- it's the first quarter we've ever had where every single one of our sales teams exceeded their goal in Q3, and we're expecting that type of momentum that contribute -- or to continue across all segments and all products. So very encouraging stuff. And I think as Rick said in his comments, to start, we expect to even post better result next quarter in terms of total bookings.

Yes. Okay. That's great. And then maybe just a question for Jawad, I know you all provided the revenue guidance or a target for next year. Maybe I missed this, but any framework for EBITDA margins for next year, I know you have a longer term 30% target. I think this year, you largely outperformed where you intended to be. You've got investments planned. I mean you learned some of the puts and takes we should think about as we kind of put our models together for next year being the right ZIP code.

Yes. I appreciate the question, Will. You've certainly nailed the party line. We are driving towards 30% margins long term. And we're going to remain opportunistic about where to invest. We are in the process of setting our budget for 2022. We have not formally guided to EBITDA dollars or margin for next year. The way that we're thinking about it is, as I had mentioned, we have a host of investments that we'd like to fund. Not everything is going to get funded. And as we go throughout the year and hopefully surpass our revenue targets, we're going to unlock more funding.

And the reason we're doing that is there's just -- there's so much opportunity in front of us, and it's across a variety of categories. It's across multiple products, multiple channels, multiple geographies. And I want to make sure that we're keeping our top line growing, and the way we do that is by investing, right, and not focusing on EBITDA.

So what you can count on from us is we're going to stay disciplined. That's something that Rick and I and the rest of the executive team are very much aligned on, that we want to drive leverage in the business over time, but we also are going to prioritize investing in getting after this TAM that we shared with you today.

Okay. And I think that's everybody, unless there are any follow-up questions? No? All right. Rick, over to you to close us out.

Awesome. Okay. Well, again, thanks, everybody, for joining us. We look forward to updating you as we bring the year to a close next quarter. And I do want to close out by sharing a powerful moment that we shared with our customers at Accelerate, where we missed having our investors this year. We celebrated their sacrifice these past 2 years through the pandemic and widespread social challenges.

So with that, let's share the moment. And please stay on. Life is short, folks. Don't run to your next call. Take a moment and share this with us. Your investments make this possible.

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