Axon Enterprise Inc (AXON) 2015 Q1 法說會逐字稿

(audio in progress) it is a tool that is used in violent and dangerous confrontations in which emotions can be extreme.

While they have been involved in some tragic situations including arrest-related deaths, they have also saved more than 140,000 lives from death or serious injury in more than 2.7 million field uses.

That is the nature of exactly what TASER International is focused on.

Defying conventional wisdom with revolutionary and proven methods to protect life and truth you have to be willing to endure the critics from afar as we try to resolve some of the world's most complicated and dangerous issues of stopping violent people while improving transparency at the same time.

What matters is that we can make a difference that matters in the world and we are determined to tackle these problems.

With that, I would like to turn it over to our CFO, Dan Behrendt, to provide some more color on our financial results and the outlook for 2015.

Thanks, Luke.

As Rick mentioned earlier, revenue in the first quarter was $44.8 million, a growth of 24% compared to the first quarter of 2014, which is stronger than expected.

There are a couple of deals on either end that bolster the results for the first quarter.

We had some deals which were pushed from Q4 into Q1 and we were also able to pull up a couple of Q2 deals earlier but we are certainly very happy with the results.

Research and development expenses of $4.6 million are slightly lower than anticipated again due to the slower hiring than planned.

We did make several critical hires in both project management and engineering roles but have plans to continue to aggressively grow both hardware and software engineering staff levels throughout the remainder of the year.

We anticipate that with the hiring plans as well as incremental consulting spend in the hardware segment, we will grow R&D approximately $1 million quarterly from the first quarter levels into the second quarter.

In order to maintain a leadership position in the market we will make both technology investments in emerging technologies such as wearables, mobile and cloud.

The gross margins in the quarter were epic.

In the TASER Weapon segment, gross margins were 71.1% in the first quarter of 2015 compared to 66.4% in the prior year.

In the AXON segment, gross margins increased to 40.6% compared to 17.5% in the prior year.

As you can see from the supplemental packet online, there were a few one-time reversals that contributed to gross margin strength.

However, as our service revenues continue to increase and the critical mass of licenses is reached, cost of service delivered margins will continue to improve as the fixed costs associated with provision of software as a service.

Due to the one-timers, we think that gross margins on a go-forward basis will be in the 64% to 66% range on a consolidated basis.

The investments we are making are still paying off and proving to be prudent.

In the first quarter, our customer acquisition costs to lifetime value, a standard ratio used to value at the level of investment spend in SaaS companies was 3.5.

As a reminder, the general rule of thumb is investments are well-placed with a ratio greater than 3. With an active user base of approximately 22,000 users this quarter versus approximately 15,000 last quarter, we are seeing continued growth.

With a fourth quarter ratio greater than 4, our incremental investments in sales personnel during 2015 creates a longer return run rate as reps get trained up and deployed into the field so we are certainly very comfortable with the 3.5 ratio for this quarter.

We are realistic in knowing that some of these investments will succeed and some will fail.

We believe that the investments we make in both our successes and failures will be critical to maintaining a learning organization that can evolve and adapt to future technologies and market challenges.

We are diligent about integrating our customers' feedback into our technologies so that we ideally innovate to their direct needs.

Today we are investing heavily in mobile around communication and collaboration features for public safety.

We see the trend from desktop to mobile as something that will certainly come to the public safety market as it has to so many other markets that are intent on being a leader and we are intent on being a leader in this space.

I would like to reiterate our commitment to the long-term and set the expectation this is consistent message you will be hearing from me and our leadership team.

We have assembled a world-class development team which we see as a competitive advantage and which we will continue to supplement with strong hires.

We are playing to win a much larger market over the long run and look forward to generating long-term shareholder value as a result.

You may have also noticed the tax rate for the quarter is 32.5% which is lower than historic rate.

This is due to two things.

The first is we are benefiting from the domestic production activities deduction which we get for producing our goods in the United States.

The second and even more significant is the impact we are having from having our international business structure run out of Amsterdam.

While we set up the Amsterdam office to be close to our customers, we do get some tax benefits under this arrangement.

It is worth noting because we will have income in the United States as well as various foreign jurisdictions outside the United States, our effective tax rate could fluctuate due to changes in the mix of earnings and potential losses in countries with differing statutory tax rates.

We look at this each quarter and update our effective tax rate as appropriate.

As a reminder, the annual shareholder meeting will be held in a couple of weeks on May 18 in Seattle.

It will be held at 1800 Yale Avenue at the Springhill Suites Seattle downtown at 9 AM Pacific Standard time.

After the formal voting procedures, presentations will be made by Luke Larson, Rick Smith and Marcus Womack.

There will also be an informal roundtable discussion with the Company's product managers on both the video and weapon side of the business where you can ask questions about the product offerings and the development process.

We also have some videos and mementos from the IOCP conference so investors will be able to experience a bit of what our customers went through at that conference in the fourth quarter.

While not required, we would appreciate RSVPs to be sent to IR@TASER so we can plan for the appropriate number of attendees.

You may have also noticed we changed up our earnings release, earnings process this quarter.

We heard feedback from last quarter they were perhaps a little bit too verbose during the call and did not leave enough time for questions.

This call is meant to update you, our investors, on our quarterly progress so we tweaked the process to hopefully make this more useful for you.

We not only added AXON segment statistics into the release as well as a few more business highlights from the quarter but for the first time we have uploaded supplemental packets to the investor website which goes through each of the line items -- line item drivers to provide investors a little bit more color about what happened in the financial statements.

As a result we will be skipping most of the financial highlights of the call and going right to Q&A.

At the end of the call we will be tweeting out a survey link.

Please let us know what you think about this new format and ways that we can continue to improve this process going forward.

With that we will go to the Q&A portion and take questions from the audience.

(Operator Instructions).

Paul Coster, JPMorgan.

Good morning.

This is Mark Strouse on for Paul.

Thank you for taking our questions.

So, Rick, thanks a lot for going through your travel plans I guess for the next six to nine months.

I guess are some of those countries and cities you're going to be visiting, are they cities that have already expressed an interest in on-officer video or does it go more to set up the sales force and build more of a sustainable long-term business?

Another way of saying it is should we think about those international opportunities that is kind of pilots maybe in 2015 and then more full deployment orders in 2016 or could there be some meaningful orders in 2015?

Certainly I think the UK is getting to a point of maturity where we could start to see meaningful orders this year.

France, we've got to just frankly get a little more engaged there with the customer, they have 8000 weapons that are I think eight or nine years old.

So we see a real need for them to upgrade those.

I would like to hope we can make some progress on that in the relatively short term.

Italy is a brand-new market for us but there we've got the largest police force in Europe so I would say that one is more of a long-term.

So the general idea here is really more to start momentum.

I don't think I'm going to be closing orders per se but what we are finding is these international agencies are really large compared to the US.

Like the city of London is considered a small agency in the UK.

It's got 1000 officers.

Here in the US we would call that a pretty good size agency.

But for example as a result of some of the work I was doing in the UK, I was invited into the London Met to do a session on leadership during transformation of an organization.

So this had nothing to do with sales per se but the London Met is going through their own transformational project right now and I think that is not something that typically they would invite a sales rep in to do something like that and that gave me access to something like the top 150 leaders.

Now of course I'm very careful in those things not to turn that into a sales pitch but really to try to be a helpful thought partner but I think that really resonates with these agencies more so than the product per se because most police agencies around the world I think are struggling with the same problems, they are very far behind technologically.

Just this past quarter, the NYPD had put in I guess a $1 million line item to replace their typewriters and that resulted in the City Council of New York actually banning typewriters from the NYPD or putting in a motion to do so.

So that is not a uniquely American problem.

So I know this a little bit of a long-winded answer, I'm not going over there to sign contracts and celebrate big orders that are already baked.

This is setting the foundation for the long-term and also we are using this as sort of a forcing function like we did in the UK, this kind of helps focus the team on getting new hires in place so we have a team in place to continue to follow up as we start each market.

That makes sense.

Thanks, Rick.

Dan.

just on the evidence.com, the $26.80 monthly revenue per seat figure that you guys have, is there any way to -- and I know that is an average number -- but is there any way to kind of frame what the range of those ARPUs are, maybe not by customer obviously but maybe by customers that are doing the bare minimum with you versus those that are doing the total package and what kind of range is there in that monthly ARPU number?

It is a fairly wide range.

It is some of the new offerings are actually pushing up at least the top end of that.

So it is -- our basic service starts at $15 plus storage so sort of assume at the low end of the market you may be a $20 or $22, probably closer to $20 before discounting and then our highest tier for the highest tier service with unlimited storage and integrations would be $65 per month before any discounting.

So there is a fairly wide range there but obviously hopefully you can drive people into programs like the unlimited storage program with the AXON Ultimate with unlimited storage or the Officer Safety program are both some of the higher tier programs and as we get traction on those higher tiered programs, hopefully that can start moving the needle.

The other thing that we are cognizant of is that as that installed base gets bigger and bigger, it is going to be harder to sort of move it dramatically in one quarter.

It is going to be more of a trend over time just because you've got that large installed base.

The one thing I would add as well, Dan, is that number is just the software and storage services so traditionally people that go on these new higher inlicense tiers are also signing up for some pretty significant monthly sort of deferred revenue related to hardware and warrantee services.

That is correct.

Okay, that is helpful.

Thank you very much, guys.

Glenn Mattson, Ladenburg Thalmann.

Good afternoon, gentlemen.

Questions about the gross margin especially in the video hardware segment.

Maybe, Dan, can you walk us through why that was so strong.

It has fluctuated widely over the past four or five quarters, maybe a little more on that.

So on the software side, we are really encouraged to see that 65% margin for the quarter and that is mostly driven by the fact that we sort of finally got to sort of that critical mass where we are starting to see the benefit of our variable cost of one more user in the system versus variable cost of delivering that.

And that is why that improved so much this quarter as we sort of finally crossed the point where we are really seeing that benefit.

On the hardware side, we did benefit a little bit this quarter, as you know we took a large reserve last quarter for some access and obsolete inventory.

We were able to reverse a little bit of that this quarter, about $200,000 which improved the margins so those margins on a normalized basis would have been closer to 25% this quarter.

Okay.

And then could you say what you think going forward, the video, the service, the software margins -- if you look out two or three years, kind of what the potential is on that side?

I think again, I think it is partly based on ARPU.

As we move that ARPU up I think that has got the ability to expand margins.

Along with these advanced features that will drive people to those higher pricing tiers, there is not a lot of variable costs to delivering it.

There is a lot of R&D cost but our cost to service a customer on the ultimate plan is not that different from customers in some of the lower tiers.

So as we move that ARPU up, I think that 65% can improve over time.

Certainly if you look at other sort of SaaS companies, we certainly have the ability to move that up.

I would say that probably somewhat unique to TASER is the fact that we also have storage which is going to be a little bit of a lower margin product over time just because of the efficiencies of what customers would expect to pay for storage but overall we are very happy the 65% and hopefully we can improve that over time as we see that ARPU go up.

Great.

Last for me, the Weapons number was quite strong this quarter.

You mentioned that you may have pulled an order or two forward from Q2.

Can you talk about the magnitude of that and do you expect Q2 to be -- last quarter Q1 to Q2 was basically flat -- do you see it may be sequentially down or still growing here?

What do you think?

That is a good question.

As you know, we are sort of a book and ship business so it is a little bit harder.

I can tell you that we did have a couple of million dollars worth of orders that we expected in Q4 that just basically just missed and we were able to close those deals early in Q1.

So there was a couple million of stuff that sort of trickled in from the fourth quarter that was pushed to the first.

We pulled in probably another $1 million plus of Q2 orders as well so we certainly benefited from that.

As far as sort of the seasonality, it is always hard.

You know, you get some of those positive lumpiness in a quarter it sort of mutes some of that normal seasonal trends just because Q1 is typically one of our weaker quarters from a seasonality perspective and we exceeded even our own expectations for the quarter with these results.

Okay, great.

Thanks.

Congratulations.

Steve Dyer, Craig-Hallum.

Nice quarter.

Dan, I just want to clarify something you said on gross margins.

Did you say excluding kind of one-time items you expect 64% to 66% gross margins going forward?

I did on a consolidated basis, that is right.

Okay.

And then real quickly, another quick question.

Luke, I think you had indicated you anticipated OpEx going up by $1 million.

Is that kind of per quarter or is that the next quarter will be $1 million higher than the last quarter?

That is for next quarter.

We see the businesses happening now, I'm sure you saw on the news we had a presidential candidate, Hillary Clinton, call for body cams that the events that are occurring in Baltimore.

We feel now is the time to build out the sales teams and capitalize on that momentum.

Okay, great.

As it relates to the video business, ARPU obviously didn't go up kind of at the same sequential trajectory that it did last quarter.

Is that a function of -- it has just kind of been since real recently that you guys have started signing kind the all you can eat or bigger data plans or is it a function of you still have some early guys on the network that may be got the first year free or something like that or any color there would be great.

Steve, this is Dan.

I think it is a little bit of both.

Certainly these newer pricing tiers are new and there is kind of a long sales cycle for really both products but certainly the video product as a new capability, there is a long sales cycle that goes with it.

I can tell you that the new pricing tiers have been well received by customers that we have presented them to.

And over the next several quarters, hopefully we will see where deals close at those pricing tiers as those sales cycles come to a close and we start getting orders for those higher tiers.

Got it.

Okay.

And then as it relates to the bookings, I know it is variable and a lot of it is swung by big deals.

But generally directionally, how do you see the trajectory progressing throughout the year given we keep getting these public incidents?

And looking at your sales book would you expect Q1 to be a low watermark or too tough to call?

It is tough to make an exact prediction.

We certainly feel very comfortable that we are going to see strong year-over-year growth on a total year to total year.

As you know, it is very deal dependent so each quarter we don't want to put too much weight on an individual quarter for that reason but we feel that the macro trends are great for us.

As Luke said earlier, we see this market forming this year so we think that certainly as we look at the market and our pipeline we are very happy with where we sit right now.

Okay, great.

Last question for me and then I will hop back in the queue.

And I know there is not a perfect answer to this just given that you don't know but if you had to guess at kind of what percentage of your Weapons orders this quarter or sort of in general right now are replacements or upgrade versus new, how would you make that split?

That is a tough question.

I would say that the international is probably still the bulk of those are still net new deployments just because you've got so much white space internationally.

The OPP is kind of a good example where they've legalized the carry of TASER Weapons for patrol officers now.

So some of those are replacements for supervisor weapons but the fact that you have now sort of opened up the market certainly makes that a net new capability for a lot of officers out there.

I would say in the US, I think our telesales has done a really nice job.

There is probably some whitespace that those guys are capturing as well just being in front of customers and providing great service.

We think that has enabled some of these agencies that are a say sub 100 go from maybe -- same kind of thing where they are going for supervisors to water deployment just because I think we are just more top of mind.

So there is definitely a mix in the US as you know there are still a fair amount of white space.

We still have some large cities that are underrepresented with tasers, hopefully some of the indications from like LA last year as they started fielding more of the TASER Weapons and their desire to put a taser in a camera and every officer will see that trend continue with some of the other big cities where a lot of white spaces.

I would add in as well, we are really trying to shift the focus and the conversation with our customers sort of away from the idea of upgrading what you have to expanding tasers for everybody that come on guys, it is 2015, every cop that goes out there with a gun should have a taser and probably a camera now.

So that is why we shifted toward this standard issue grant program where we are giving -- basically from an investor perspective, think of that as a replacement for our old trade-in programs.

Where now the incentives are if you want to get the $100 to $400 per officer you basically have to step up and make tasers standard issue so that every officer that comes out of a (inaudible) gets one and that they can show to us some sort of a plan that they are giving every officer on patrol a taser, a camera or both.

So as we have shifted that focus and then also frankly the logistics costs of having people send stuff in just so we can destroy it here, so I would say our visibility on what is upgrades and what are not is kind of dropping and so we are not really necessary focusing on that a whole lot as we shift to this focus of every officer getting a taser.

Okay, thanks.

Thanks, Steve.

Greg McKinley, Dougherty & Company.

We have a $71 million backlog.

Can you help us break that between hardware and software?

We haven't really disclosed exactly where that is coming out of.

Certainly as you see more of these ultimate deals that some of that backlog is going to be hardware for future cameras.

Anybody on the ultimate plan is going to get a camera at the 2.5 and five-year mark so that is definitely included in that number.

So it will certainly be a mix on a go-forward basis.

The deals that are not on those ultimate plans, it is going to be all software under those deals so there is going to be a mix.

I would say if that is something that is interesting we can take a look at that but it is not something that we are ready to talk specifically to today.

Okay.

I think as your bookings continue to build that will be something that I think investors increasingly have an interest in understanding how that revenue and margin mix unfolds.

Within that backlog maybe again, I am sure you have higher ARPU in that backlog than what you reported this quarter.

Can you talk at all about how you expect that to behave as backlog amortizes through the income statement over the next 12 months or so?

Yes, I would say probably the way that we would maybe encourage investors to look at that is look at the sort of user count and we've got the 80% or so attachment rate and sort of look at how that approximately 22,000 user count at the end of Q1, how that grows over time.

And just the fact that we are seeing about a 65% margin on the service side today, I think that makes for a pretty good case just as that user count grows throughout this year and into next year.

So we see that the AXON business gross margin should continue to improve.

So you will see improvement in mix, you will see a greater percentage of their total sales coming from the licenses versus the hardware which should improve the overall profitability at least on a gross margin line for that business.

Okay.

Going back to Weapons, can you -- I mean you had really strong Weapons units during the quarter although international didn't necessarily stand out as being the source of that.

So should we interpret that your focus through the telesales group on medium to small size agencies was the big driver there?

And I wonder if you can tell us your thoughts on that and then as you look at the next nine months of the year with Rick spending a lot of time traveling internationally, is that where some big opportunities lie from a Weapons standpoint or is it more domestically?

So on the first question, our tele team has just done a phenomenal job servicing what I would call the long tail of the market.

As you know, we have got 10,000 agencies in the US that are very small and so our tele team has been servicing these agencies that are 1 to 25 officers that have historically not been actively serviced from a sales perspective and so we have certainly benefited from pulling some of that revenue in.

On the international front, certainly there are some really big opportunities internationally.

Historically, we have not seen them -- I've not been happy, we have been able to pull those opportunities into the boat and certainly that is part of the reason for the renewed focus there.

I would say the other thing is in the US, I have been doing thought leadership type stuff, speaking at chiefs conferences, etc.

It is getting less and less that I'm really involved in individual sales calls.

Frankly I would say the caliber of our sales team is dramatically higher than it was just a few years ago.

The team here is really hitting on all cylinders across the board.

So certainly as Luke talked about, tele is doing great.

We have also added what we sort of call Junior reps in each region to focus on the middle tier and then our senior regional reps are focusing on the largest agencies and as we increase that level of focus I think we are seeing improvements across the board.

Okay.

Okay, thank you.

And then maybe if I could just ask you to repeat, I think you commented on the degree to which the accrual reversal impacted margins in the quarter.

Could you remind me of that please?

So on the video segment, we had about a $200,000 pick up on the hardware revenues or hardware gross margins so on a normalized basis the hardware margin for video would have been closer to 25%.

All right.

Thank you.

I'm showing no further questions in the queue at this time.

I would like to turn the conference back over to management for any closing remarks.

Obviously we love having calls like today.

I would like to congratulate the whole TASER team and our new AXON group out of Seattle, just a great quarter.

We look forward to seeing you all at our shareholder meeting in Seattle.

You will get a sneak peek at our new facility up there.

It won't be quite ready for move in until June but those of you have been at our headquarters in Scottsdale know that we take great pride in putting together a unique and compelling work environment.

We are doing some similar work in Seattle.

Come on up, check it out and meet some of these new people that we have been hiring.

Everybody have a great day and we will see you in a few weeks in Seattle.

Ladies and gentlemen, thank you for participating in today's conference.

This concludes the program.

You may now disconnect.

Everyone have a wonderful day.