Axon Enterprise Inc (AXON) 2019 Q1 法說會逐字稿

Good afternoon. My name is Mike, and I will be your conference operator today. At this time, I would like to welcome everyone to the Axon Reports Q1 2019 Financial Results. (Operator Instructions.] I will now turn the call over to Luke Larson, President of Axon. You may begin your conference.

Thanks, Mike. Good afternoon to everyone. I'm Luke Larson, the President of Axon. Welcome to Axon's first quarter 2019 earnings conference call. Before we get started, Andrea James, our VP of Investor Relations, will read the safe harbor statement.

Hello, everyone. Here in the room in Scottsdale we have Luke Larson, our CFO Jawad Ahsan, and our Chief Revenue Officer Josh Isner, and CEO Rick Smith is joining us from San Francisco. This call is being broadcast online and is available on the Investor Relations section of the Axon Enterprise website. You can find our reported results and our quarterly shareholder letter, which we have posted to investor.axon.com and we've also filed with the SEC.

Today's call will include forward-looking statements, including statements regarding our future expectations, beliefs, intentions or strategies including projections regarding revenue growth, profitability and product development. We intend that all forward-looking statements be subject to the safe harbor provided by the Private Securities Litigation Reform Act of 1995. Axon's forward-looking information is based on current information and expectations. Our estimates and statements speak only as of the date on which they are made, are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. All forward-looking statements that are made on today's call are subject to risks and uncertainties that could cause our actual results to differ materially. These risks are discussed in greater detail in our Forms 10-K and 10-Q under the caption Risk Factors. You may find these filings as well as our other SEC filings at investor.axon.com or at sec.gov by searching under the Axon ticker, AAXN.

All right, go ahead, Rick.

Thanks, Andrea, and thanks for joining us to our investors today. This is a symbolic quarter for Axon because it is the first quarter where we are recognizing high margin software revenue on our TASER program. That revenue will grow as we move TASER 7 through the installed base and drive subscription contracts. And the marginal cost of that revenue is so low that this quarter it rounds to zero, so that feels pretty good. That's why you build software businesses.

Our recurring revenue is now more than $122 million, up 47% from a year ago. Our shareholder letter is pretty robust this quarter because our team accomplished a lot since our February update including significantly retiring product launch risk on Axon Body 3 and moving closer to day zero with a major city agency deploying Axon Records. Our software product launches, Axon Performance and Redaction Assistant, are setting new industry standards for using AI to drive efficiencies managing body camera programs. I am especially excited about our FedRAMP certification. That's a stealth initiative we've been working on for 3 years. Securing FedRAMP opens up the federal market for us. Last month, Luke and I attended an Axon Salute to Federal Law Enforcement on Capitol Hill formally kicking off our entry into the federal market.

Any of these accomplishments we're announcing this quarter could have been impressive on its own and I'm really proud of Axon's teams who continue to push hard and deliver on behalf of our customers. Every product we bring to market is the result of extensive discussions with our customers. In the early days of TASER, we would develop new products in a black box and unveil them when they were finished. That's a model that can result in spectacular successes or failures. We spent millions of dollars developing the TASER X3, a 3-shot taser that I still believe was a great weapon. It's one of my personal favorites. But it was a commercial failure and we barely sold any because it was just too big and complicated. I'm glad that I learned that lesson early on. Today, no product is developed in a vacuum. We spend a lot of time listening to customers and what we're hearing is that the result of this means TASER 7, Axon Body 3 with LTE connectivity, and Axon Records are all gamechangers and customers love them.

While we've been contemplating demand for these products, we are increasingly confident about the timelines we've publicly announced. Q3 for Axon Body 3 and later in the year for Axon Records.

Making a slight pivot, I want to let you know, I want all of you to know that I have a book coming to market later this month. It's called The End of Killing. It's a personal project. I did not seek permission from the board before writing it, because I believe it's a book that needs to be written and I wanted you to hear about it from me. The subject involves my life's work and much of the work at Axon which is using technology to solve one of humanity's older problems, the killing of people.

I've been giving talks around the country to champion this idea and one thing that I ask audiences is to guess under what scenarios police are trained to shoot to kill. It's a bit of a trick question actually, because police are not trained, nor authorized, to shoot to kill. Police are trained to shoot only to stop a threat. It just so happens that up until now, the best tools we've given them to stop a threat are lethal bullets. Killing is a technology problem. We're making a dent in it and Axon is well positioned ultimately to help solve it. We are getting a lot closer to competing with the handgun with TASER 7 and I think we'll get even closer with TASER 8. I've challenged our internal teams to develop a taser weapon that outperforms a handgun as measured by time to incapacitation of a threat within the next decade. And I believe less lethal energy weapons will surpass the performance of kinetic projectiles within this same timeframe. The bullet's days at the top of the force spectrum are numbered.

Speaking of TASER, let me turn the call over to Luke to do a bit of a deep dive on booting up TASER 7.

Thanks, Rick. And thank you to everyone who could make it out to Axon Accelerate last week. We had nearly 2,000 attendees, largely representing the top 1,200 U.S. agencies in law enforcement as well as attendees from police forces around the world. Our Axon Accelerate attendance was very intentional to get the right customers there. We also invited several analysts and investors and it was great that they got to see the excitement as well. One of our key goals for the year is to create a rabid fanbase and I'm here to tell you at the event we sold out our SWAG. T-shirts, hats, stuffed animals of canines. We sold over $30,000 worth of T-shirts and Axon branded SWAG. We will never be complacent with building on our customer relationships, but selling out this stuff really blew me away. Of course, the purpose of the conference is not to sell T-shirts. We also generated more contract pipeline at Accelerate than we generate at IACP, a conference with over 10,000 people. Now IACP is still a very important conference to us, but to me, these numbers are a great leading indicator that we're building the preeminent tech conference in public safety.

In February, I told you that I was laser focused on 3 main execution items this year. Ensuring the success of the TASER 7 launch, bringing Axon Body 3 to market, and launching Axon Records. Let's drill down on the first one. We feel confident that TASER 7 will be a major revenue and gross profit driver for our business over the next several years. In Q1, TASER segment gross margins were pressured by 2 main factors. ASP, the average selling price, and scrap rates. Both will improve over time and we are improving even as we speak.

On the ASP side, we are making the strategic decision to offer trade-in credits to major agencies, many of which were buying new TASER devices from us as early as a year ago. We offer a prorated credit to incentivize customers to adopt TASER 7 sooner and this delivers a greater total customer lifetime value than if we waited for their existing tasers to age beyond their useful life. So we are seeing some near term ASP compression related to these credits, but this was expected and will naturally fade out over time as existing devices in the field age. I actually view this an as extreme positive in that it means we've got a great response to our new weapon where customers want to upgrade early.

Now I want to touch on TASER 7 manufacturing yields and scrap rates which are all tracking to plan. I especially want to shine a light here for the benefit of our software focused analysts and investors. Axon, and specifically our taser unit, has more than 25 years of experience manufacturing taser devices and we've invested heavily in building out this capability. Anytime we introduce a new taser, there is a production ramp that requires us to refine the production process. Because taser devices are used in tactical situations, we perform validation checks on every device before we ship it to the customer. If any part of the weapon does not pass our validation check, we scrap it and improve the manufacturing process. This process is par for the course for historical taser launches. With TASER 7, we are seeing a high demand and so we are ramping production more quickly than previous models. For example, our Q1 unit volume for TASER 7 is on par with the entire first year shipping of the TASER X2 which we introduced in 2011. I feel very confident that we have clear line of site to meeting customer demand while also improving yields with steady state production by the end of 2019.

Regarding the other execution items, Rick already touched on those. We are very excited to talk a more about Axon Records once it is live with our first major city customer. Now turning the call over to Jawad.

Thanks, Luke. And thanks to all of you for joining the call today. April marked my 2-year anniversary with the company and also coincided with the 2-year anniversary of changing our name from TASER to Axon. I'm really pleased with our execution and how we've strengthened the business model over the past 24 months and I believe we're just getting started. As many of you know, we made a commitment to our investors to drive strong growth on the topline while also demonstrating leverage, and a lot of my day to day is spent ensuring we do exactly that. I've done this before, grown a SaaS business while driving leverage, and I'm thrilled that Axon is also proving that it can be done.

In Q1, we reported strong revenue and you'll notice that we're raising our full year revenue outlook by $5 million while holding adjusted EBITDA guidance in line. This is very much by design. We've told our product teams that the way to earn more R&D budget is through the topline. While we're confident we can deliver $80 million to $85 million in adjusted EBITDA or 34% growth at the midpoint, the adjusted EBITDA margin will vary depending on revenue as we look to accelerate our investments in R&D. With that said, as you can see from our guidance, with Q2 looking like Q1 on both revenue and adjusted EBITDA, we've set ourselves up for a strong back half with much higher margins versus the first half.

Another important area of focus for us is corporate strategy including ways to grow our total addressable market, or TAM. Today we have an $8.4 billion TAM which primarily reflects our 4 strategic areas of investment. Taser, cameras and digital evidence management, Axon Records, and Axon Dispatch. As we look out longer term, we see a great deal of potential to extend Axon's growth outside of our existing scope. Our successful transition to both a technology products and SaaS business leaves us incredibly well positioned to develop new revenue streams. We have a unique opportunity to take the same products and feature set we've developed for law enforcement and find applications for enterprise users who want similar capabilities. Axon has the right balance sheet, the right customer relationships, and the right foundation of law enforcement technology products from which to expand. We're continually thinking about the best way to steward our capital and exploit our market leadership and ensure we do that in a disciplined way to drive shareholder value.

Thank you, everyone, and with that, we'll go to Q&A.

(Operator Instructions) Your first question comes from Jonathan Ho from William Blair.

Hi, good afternoon, and congratulations on the strong results. I just wanted to start out with a question on I guess the TASER 7 impacts from I guess the credits that are being offered. Can you maybe quantify for us a little bit how that works and help us understand maybe how that works through the next couple of quarters as well as maybe over a longer timeframe?

Yeah. So when we launched TASER 7, and this is actually a historical practice that we've used, is we offer trade-in credits for customers that have weapons that are under the 5-year useful life. And we have kind of a prorated calculation where if you were to let's say buy an X2 three years ago or two years ago, and now you want to upgrade to a TASER 7, we'll give you some of the value of that useful life back in the trade-in credit. We usually use this to make sure that we smooth out good customer relationships. And again, I actually view this as an extreme positive in that we're seeing major city customers that want to upgrade to the TASER 7 because it's such a fantastic weapon.

Got it. Then just talking a little bit about Axon Records, you noted that the initial launch customer is getting pretty close at this point towards the back half of the year. But can you maybe highlight what they can do with your system versus what could not be done before? In particular since you're integrating some of the camera capabilities as well.

I'll take that one. First, I would say we just came out of our Axon Accelerate conference and I was talking with the head of Records just a few moments ago and we have a ton of customer interest across the board. And we've been doing some demonstrations with various prospects across the country and getting very positive feedback. So

the way to think about Records is our launch product will have a couple of very unique features. Probably the most unique feature is the ability to integrate your digital evidence seamlessly in with the Records. So we call this video at the heart of the record. So if you think about it, having your video in a totally separate system you have to log into, is just a much clunkier experience. Whereas the way human being communicate now, we don't really send text only messages or documents very much. We tend to communicate using pictures, video, text, even emojis. Even though our current Record system won't have emojis, it will have a very integrated audio/video capability along with the text elements. So that's sort of the way to think of it at the outset. And then we've just really done a nice job, the team has, in hitting all of the basic foundational work, that you're not doing duplicate data entry for 3 different forms, that there's a dynamic input form experience. So you're inputting only the data that's necessary based on the type of report you're filing out. And that can grow if one incident ends up being a stolen vehicle and a felony assault and some other things historically might require several different reports be filled out in sort of duplicate data entry. So that's sort of the foundation. But what really will differentiate us over time is that we are evolving the use of AI to extract video from the audio datacenter. This is where having both hardware and software is unique advantage for us. So Axon Body 3, we spent a lot of time tuning it with a multiple microphone array to be able to optimize how we handle voice data that's coming in so that we can transcribe it more accurately and be able to have AI models that over time will learn when the officer asks, what is your name, the next statement is likely to include the first name and last name and to begin to extract that information and prepopulate the reports. So at our -- I'll just wrap by saying at our conference we talked a bit about how if you think about autonomous driving, we're calling this autonomous report writing, and actually it's not as difficult a problem as autonomous driving is, but it will evolve in several stages. So we're at sort of stage 0 to 1 right now which is all about getting all of the basic data structure right so that we can begin to optimize some of the AI data extraction using our smart sensors when those go live this summer as well. So launch of Axon Body 3 and Records really complement each other in that Axon Body 3 is essentially optimized to begin moving into this AI driven future.

Your next question comes from Mark Strouse from JP Morgan.

Good afternoon, thanks for taking our questions. So it sounds like you can't divulge too much information yet about the major city that's adopting Axon Records, but are you able to say, was that a competitive displacement? And then are they adopting your entire solution as it stands today or are they kind of cherry picking certain modules?

I'll take that one. So this was a customer that's been a development partner. They did look at the available options in the records space. But there we've been primarily focused heavily on developing the records system with them. So you can think of them as a standalone that is not part of a bigger economic package. This is really focused on developing a records system.

Okay. Then congrats on getting the Redaction Assistant out the door. I guess can you just kind of talk about, based on the trials that you've run so far, kind of the efficiency gains that your customers are seeing? I think you guys have thrown out the stat of multiple hours in the past for certain minutes of video. Is that process now down to minutes of redaction? Maybe you can compare that to kind of your prior redaction tool and some of the other competitors that are out there.

Great question. We just launched. One of the launch partners was a city prosecutor that was meticulously tracking the time they were spending on redaction. And before the Redaction Assistant compared to afterwards, once they deployed Redaction Assistant, the city attorney reported they were spending 80% less time per video on redaction and that that actually was going to lead to a change in how they budgeted. They wouldn't need to budget for more people to be able to do the redactions. So that's the one that comes to mind. We're a little early in the game in terms of having a bunch of agencies, but that first feedback of 80% was pretty enlightening. Our target was to reduce redaction times by at least 50%. It looks like we're outperforming that.

Got it. Then just one more quick one if I can for Jawad or Josh. Can you just remind us when the TASER 7 upgrade credits end? And I guess kind of secondary to that, do they kind of dwindle down over time each quarter?

Hi, Mark. Yes, absolutely they do go down over time. They will start to -- so we had an offering in Q4 of last year, it went down as of Q1, it has stayed flat Q1 and Q2 and then it is declining every quarter after that. So essentially that's done to be fair to customers but also to drive some urgency around upgrade cycles. So you'll see a lower trading credit as of July 1 compared to what we're offering this quarter.

Are you able to say does that completely end though by the end of 2019 or does it drag on into 2020?

We are planning to assess that decision at the end of the year. So I think we can't really give an answer there other than they will continue to decline through the end of this year and we'll assess it in December.

Your next question comes from James Faucette from Morgan Stanley.

Thank you very much. I wanted to ask, maybe for Jawad, can you just walk us through a little bit, one thing that I look at is, when you see the magnitude of upside versus your guide for the full year, I don't think it's a big deal, but I just want to make sure I understand the puts and takes of why maybe the guide for the full year isn't at least as much as what the upside was in the first quarter.

What we're actively doing, we're making a conscious decision to reinvest the upside from revenue into the business. When we came into 2019, as we put together our budget process we were oversubscribed. There were more things that folks wanted to do than we had the budget for. And so what we said was that as we progressed throughout the year, as we beat on revenue, we're going to fiscally take that and reinvest it into the business. And so that's what we're doing. We've raised our guidance for the year on revenue, but we've held it on EBITDA.

Got it. Okay, that's clear. And then I guess I'll open it up to whomever, but as we're rolling out, just thinking about long term, as we're rolling out the different software products and its applicability beyond just police forces, etc., how do we think about the opportunity beyond that? And what needs to happen to even start to expand it further into whether it's court systems, prosecutors' offices, or even more broadly within the emergency response field? Thank you.

Oftentimes, these first responder units will use the same technology platforms. And we've actually seen some very interesting inbound demand from these adjacent markets. We are being pretty tightlipped for competitive reasons on our exact approach. I would say we're definitely looking at the adjacent public safety spaces, in addition making a strong push into the federal space as well as international markets as well.

This is Rick, let me add one more detail. One thing that I think will really help make body cameras more appealing in additional markets is once they are real time connected and can livestream, I think that just opens up a whole bunch of additional use cases from the traditional where we've been so far which is record the event and then some hours later you dock the camera and that information becomes available. Being able to livestream that information opens up, as you can imagine, just a whole host of different types of services that I don't think we even understand yet. Once the camera is out there, we believe this is one of those things that will evolve and we'll iterate together with our customers. But I think that both in law enforcement and for these other markets, like for emergency medical services, being able to livestream video from a scene using a system that meets law enforcement, public safety and HIPAA types of regulations can be extremely valuable for emergency room physicians or others to be able to see what's happening out in the field. So that's just one example of where that live connectivity we think really could open up the available markets that will be interested.

Your next question comes from Scott Berg from Needham.

Hi, everyone, congrats on a good quarter and thanks for taking my questions. I guess we'll start with, on the FedRAMP side, Rick or maybe Luke wants to take the question, how should we think of what products are going to be sold into that area? Is it going to be tasers, cameras, drones, software? Help us understand what that opportunity looks like.

Yes. Basically, all of the above are options. Now we have been selling tasers historically through the federal markets, but they've not been using our cloud services. So FedRAMP now opens up the entire platform up to FedRAMP Moderate which covers most of the use cases for all of the above, for fleet in-car systems, for body cameras, for federal agencies to start using Evidence.com for managing their taser weapons, and certainly we think drones could be an interesting space there as well.

Got it, helpful. And then, I guess, Jawad, on the future contract value, it's up nicely, a little bit less than 50% year-over-year. But your new bookings in software and sensors is down. How should we think about that metric? My guess is there's some camera movement in there given the expectation that some of those sales are being pushed off to the second half when AB3 is ready?

Yes. The first thing I'd say, so Josh is here with us today, so I'd love for him to weigh in, but one of the first things to note is that in Q1 last year we had a large, a very large international booking, about $30 million. So if you strip that out, we were actually up year-over-year. And then, Josh, would you like to add some color?

Yeah, I'd say the Q1 results in video bookings are purely at this point seasonality. I think Q1 is kind of our softest quarter of the year. Sometimes there's a large one-timer like was the case last year in Q1. But I certainly have a lot of confidence that this is not a sign of anything to worry about. I actually think we're going to have a very strong rebound in the next few quarters in terms of Axon bookings. So Q1, people get new regions, people have new quotas, we have the sales meeting, first week of the year is kind of a dead week, so it's just naturally kind of our slowest quarter of the year. And again, I think there's a lot of reason to be optimistic that that number bounces back.

And I would just add, I think your comment on AB3 was correct. We announced AB3 to great fanfare at IACP in October and then reemphasized some of the, all of the capabilities that Rick addressed with the wear and livestreaming. And so we expect that to start shipping at the end of Q2, and we think that will -- end of Q2, beginning of Q3, we think that will drive to high demand.

Before we move to the next question, I'd like to remind people to please limit to one question and a follow-up. Thank you. Your next question comes from Will Power from Baird.

Great, thanks for taking the questions. First one, maybe a bit of a follow-up perhaps for Rick or Luke, but just qualitatively, I'd love to get your perspective or color on conversations at Accelerate around AB3 and how you're thinking about the pipeline and what customers are perhaps most excited about with that product. I guess as part of that, should we expect something similar with AB3 to what we're seeing in TASER 7 with respect to potential trade-ins and credits? How do we think about that and what that might mean for gross margins in the back half of the year?

Got it. So yeah, one of the really nicest surprises I would say at Accelerate this year was just how much interest there was in the live connected services. When we first really started talking about live services with our customers, there was a lot of questions about whether that was something that they would actually use. And we decided to go all-in. Our customers, almost all of our customers are on a hardware upgrade program and we could have chosen to do an AB2+ where we could have done a next generation body camera and focused on cost optimization on the hardware and met our financial obligations. But we felt the right thing to do was to extend ourselves and actually make this a really powerful camera upgrade. So while our customers are effectively on the iPod upgrade program, we're giving them an iPhone. And we believe that was the right thing to do because it basically enables a whole host of new services that we could begin to sell once the hardware can support real time connectivity. I would say a year ago that was a little bit dicey. It was not a super easy decision to make in that as we were calibrating with customers, it was not universally clear that they would basically value those connected services enough to want to pay for them. And I think we put that concern largely to rest this year. I think our team has done a really good job of understanding what the customer use cases are. I'll give you one example. So one of the downsides you worry about sometimes with police union management relationships, is if it's seen as a micromanaging tool where the chief is going to be logging onto his cell phone remotely and trying to micromanage the scene, that is the sort of thing that customers would absolutely not react well to. But when we help them understand, hey, if you're going into a situation where you're just uncomfortable, that you as an officer could activate the livestream and ask your fellows to watch your back and know that other people are going to be able to see what's happening and begin to rally support if they start to see it go downhill. Because sometimes before an officer calls, their intuition is starting, you know, calls for help, they're starting to see things that make them uneasy. And for us to give them the ability to share that with the rest of their team actually gives them a real sense of comfort going into the unknown. I think as a result, some of the positioning and a lot of the great work the product has done in the product design, every customer I talked to this year was very interested in the connected real time services. And maybe every customer might be an overstatement, maybe some other people on the team might have found some customers that were less interested. But I would say it was a real homerun making the move to include LTE on Axon Body 3.

Great. And just any color from I guess anyone on the team on how to think about gross margins for just really the broader sensor segment the second half of the year as AB3 rolls out?

Yeah, so what we expect is that -- we're not going to, like we talked about, we're not going to really see any -- there is no trade-in credit on the body camera. And those margins, we're managing that segment to about a 25% margin and we expect that that will continue in the second half.

Your next question comes from Steve Dyer from Craig-Hallum Capital.

Hey, guys, it's Ryan Sigdahl on for Steve Dyer. Quick question as it relates to guidance. In the press release, you expect significantly higher growth rates in the second half of 2019. But based on Q1 actual, Q2 growth of 16% to 17%, it implies something like 16% to 20% in the second half of the year. So that basically brackets Q2 expectations. What am I missing there?

I don't think you're missing anything. We expect that Q2 is going to look very similar to Q1 and we're really ramping up for a strong second half.

So the significantly higher growth rates in the second half of the year, just maybe some color there on that comment?

Sure, we'll be in full production on TASER 7 and shipping AB3 and going into Q4 with shipping our Records product as well.

All right, it sounds like a little bit of conservatism then in that 2019 guidance based on that. Secondly, just on the TASER 7, what, of the orders in the quarter, what percentage were upgrades versus new users? And then what percentage of those TASER 7 orders received trade-in credits? Thanks.

Just if I understand the question correctly, it's what percentage -- we kind of view every customer as being a previous TASER customer. The question is what percentage are using the trade-in credit at this point? I think the majority of the deals would have some trade-in credit.

Yeah, by definition, the only ones that wouldn't are ones that never have deployed tasers before.

So just to clarify that, so it's anyone that has a taser gets a credit, not just ones that are under the 5-year useful life warranty?

Correct, but it's scaled to how old the weapon is. So by far, the least valuable trade-ins are the ones that are older than 5 years. And the most valuable ones are the ones that are within one year old and it just scales throughout the lifecycle of the weapon.

Your next question comes from George Godfrey from CL King.

Thank you. Two questions. Jawad, is the 300 to 400 basis point margin improvement on an annual basis now off the table?

Yes, George, we -- at the beginning of the year, we changed our guidance. We're still over the 3-year period managing to drive leverage in the business. And what we said specifically for 2019 is that we're going to deliver $80 million to $85 million in adjusted EBITDA. Now, the margin rate, the reason we don't want to guide to that specifically if that's going to vary depending on where revenue comes in. And given that we committed to reinvesting any additional revenue into the business, the margin rate is going to be really difficult for us to guide to. So rather than guide to that, we're guiding to the $80 million to $85 million in EBITDA.

Okay, so just so I'm clear, we could have that type of improvement in any given year, but are you saying the 3-year cumulative will average out to that range, so that's still on the table? Or no? I just want to make sure I understand that.

When we put together our budgeting for 2019 for 2020, our expectation was that we are very much going to be driving leverage. And again, if it turns out that it's 300 to 400 basis points, what we really are looking at, when we set our budget for example for the $80 million to $85 million, we wanted to stay within that range. When we put together our budget for 2020, it will likely be in the same range because we want to consistently year-over-year continue to drive our EBITDA margin up. But again, what we're really more focused on is not so much -- what we want to do is invest in the business and make the right investments in R&D to capture this opportunity ahead of us while at the same time driving leverage. But it's both of those. We're not prioritizing a specific margin target.

Okay, and then looking at the balance sheet, DSOs this quarter, 117 days. Q1 two years ago, that was 51 days. Is that the new level we should expect going forward?

No, that's an anomaly. And what we are seeing is that as we expected when we did our follow-on offering, there's a greater shift to subscription, many of these invoices are paid annually in advance, it's a different model. And as we're making this transition, we're working with our customers to make sure that we're working with them and doing what's right for them and helping them transition to these longer-term, or sorry, these recurring contracts. And so that's something that in that transition, we're experiencing a bit of an anomaly, but we don't expect that to continue.

Can you give an estimate for CapEx? That's my final question. Thank you very much for answering.

We're anticipating in the range of $12 million to $15 million for the year.

Our next question comes from Jeremy Hamblin from Dougherty & Company.

Thanks, guys, congrats on the good results. Wanted to come back to the weapon segment for a second. You've had some nice traction thus far on the 7, but in terms of thinking about the kind of units and how they're going to play out the remainder of 2019, the growth that you might see in that segment from the 7, how do we expect that in terms of taking over the total units that you sell in 2019 given the trade-in credits and so forth versus what we saw in the first quarter where you had about 25,000 of the legacy units and about 9,000 of the 7?

Yeah, I'd say the expectation is TASER 7 becomes a larger percentage of total handles sold in each quarter. I think as we rolled out T and E units and so forth, it's going to take time for TASER 7 to scale to that point. And there is some international orders and it was Q4 in the UK, our Q1, so X2 is the only legal weapon there. So some of those dynamics led to selling more of the smart weapons than T7, but over time, our expectation and what we're driving toward is making sure that T7 becomes the most commonly sold handle as we go throughout the year.

To be more specific, as we get into let's say Q3/Q4, would you expect T7 to be at least 50% of the total units sold?

I'm not sure I can give a specific number. Because again, it does rely on like if there's large international deals in process with other units, or if there is a big one-time order of X26P or X2, it could kind of temporarily skew the numbers. But we certainly expect the trend to be that T7 becomes a larger and larger percentage of total handles sold throughout the year.

Yeah, and I think we have a very illustrative chart from our roadshow that shows how we've been very effective at transitioning to the new technology from the original X26 to the X26P and the X2. And we would expect our execution to be the same as we transition to TASER 7.

Okay, then one other question on Axon cloud service revenue. You saw your gross margins fall about 90 basis points sequentially and down almost 500 basis points from where you were a year ago. Can you give me a sense just in terms of that change, what's driving that and how we would expect that to play out the remainder of 2019?

Sequentially we're not really seeing much of an impact. There's always some cyclicality, but our pure, the pure software component of that is so flat, it's a very high margin. It could be driven by a mix of lower margin professional services, so that's something that tends to weigh in on it. But again, that's part of the cyclicality.

(Operator Instructions) The next question comes from Keith Housum from Northcoast Research. Keith Housum, your line is open.

Sorry, can you hear me now? Sorry about that, I had you on mute. Can you guys provide a little bit more color on the FedRAMP opportunity? First off, is that included in the $8.4 billion TAM? And perhaps some numbers around how many [overriding audio feedback] out there?

Today, our TAM is largely focused on municipals and small forces. As we look to grow that over time, we see federal being a very real opportunity to get future penetration into the federal police forces. But also, our ultimate goal would be to have the actual like big army and more penetration into the larger operating units.

But right now, that number is not including the FedRAMP? Your $8.4 billion opportunity?

No, it's not.

Okay, got you. And then as a follow-up question, can you just provide a little bit of color on the international efforts during the quarter and how there were comparing to last year and how I guess some of the RFPs are looking for the rest of the year?

Sorry, you were looking for an update on international weapons?

International overall, weapons and the body sensors.

Certainly, that's been where most of my attention is focused along with the T7 upgrades. I think we're seeing a lot of good indicators. Our Q1, or sorry, our Tier 1 markets are performing well. Upgrading weapons, consolidation of video contracts and so forth, I think we're starting to see some really good signs, even back into last year in Tier 2 markets, and I expect to see that momentum continue in some of our Tier 2 markets this year. So certainly, the expectation and what we're working toward is [inaudible - feedback on line].

And there are no further questions at this time. I will turn the call back over to the presenters.

Great. Well, thank you everyone for a good Q1, and we will talk to you on the next earnings call. Thank you.

This concludes today's conference call, you may now disconnect.