🚀A potential compounder: Axon Enterprise (November 2022)

I take a longer-term perspective by looking at their years of financial performance and accompanying financial metrics. There is a lot of information publicly available about these companies, detailed quarter-to-quarter analysis and strategies discussion that I do not want to replicate.

Nothing in this article is intended to be financial advice and should not be taken as such, please do your own research before investing.


Axon’s mission is simple and inspiring: To protect life.

Product offerings: Integrated and reinforcing suite

It is most famous for its Taser device (which the company was started with and previously called), an electroshock weapon used to incapacitate people and “taser” is now commonly used as an English for such device and its purpose. With Taser, there is also recurring revenue from the sales of Taser cartridges.

The Use of Force Continuum is a standard that provides law enforcement officers and civilians with guidelines as to how much force may be used against a resisting subject in a given situation. As the use of force escalates, Taser aims to be more effective and yet inflict fewer injuries in place of other tools (examples: baton, pepper spray); minimising the need to use firearms.

How TASER Energy Weapons Protect Life and Enhance Safety

From Taser, Axon has now expanded to other products around public safety.

The growth of police-worn body cameras has nearly doubled in the past five years and is projected to keep growing. The cameras are a favourite tool of legislators who want to respond to police violence and more transparency. More governments are mandating that police officers wear cameras for greater transparency and accountability. As demand for body cameras grows, demand for digital evidence management grows. Its Tasers and body camera seamlessly send real-time activation and discharge data to the Evidence.com evidence management system. Axon’s suite of products creates a strong integrative and reinforcing network effect.

A video showing its suite of products and how it works together: Axon | Unlock the power of the network

Consistent growth

In the last 10 years, Axon’s revenue and gross profits have been growing at a very consistent compounded annual growth rate of 22.3% with revenue further accelerating in recent years.

  1. As it sells more products, its ARR increases. In Q3 2022, its Annual Recurring Revenue (ARR) grew 40% year over year to $403 million.
  2. Its net retention rate as of Q3 2022 is 120% implying high switching costs.

It has been reinvesting to strengthen and grow. Technology and development costs as a percentage of revenue have been accelerating. Net cash position is strong and has been increasing. Both net cash provided by operating activities and free cash flow is slowly increasing too.

The revenue of its newer products and services has been enjoying faster growth.

Competitors

While Axon is in a strong leading position in its products, there are several competitors.

CompaniesMarket capitalisation as of 10 November 20222021 annual revenue Offerings
Axon Enterprise (NASDAQ: AXON)$12.21b$863.4mTasers, body cameras, software
Motorola Solutions (NYSE: MSI)$43.1b$8.17bBody cameras and software
Digital Ally (NASDAQ: DGLY)$18.83m$21.41mBody cameras and software
Wrap Technologies (NASDAQ: WRAP) $65.73m$7.7bBolawrap (a less-than-lethal suspect restraint system)

Motorola appears to be taking all the pieces it offers and wrapping them in a similar single, cohesive package, by bundling body cameras, digital evidence management, and cloud-based support and making them cheaper for budget-conscious agencies. Because law enforcement is already familiar with Motorola through many of its existing systems, such as its two-way radios, computer-aided dispatch (CAD), cameras, and records management, the two can readily expand their relationship. Because of its leadership role in CAD, law enforcement agencies would likely feel very comfortable adopting Motorola’s other solutions as one.

Hence, Axon and Motorola are competing to enlarge and strengthen their suite of products and ecosystems. Axon is launching its own CAD system, Air program (drones developed with DJI) and Fleet, a connected in-car camera system.

How big Is the threat Axon Enterprise faces from Motorola Solutions?

Market potential and Axon’s growth initiatives

Market potential

Axon believes the total addressable market is worth $52b and the market potential is still huge.

FACT SHEET: President Biden to Sign Historic Executive Order to Advance Effective, Accountable Policing and Strengthen Public Safety

More government agencies are mandating that their police and enforcement officers wear cameras for greater transparency and accountability. Two years after the murder of George Floyd, President Bident, under his Executive Order to Advance Effective, Accountable Policing and Strengthen Public Safety, ordered all Federal law enforcement agencies to adopt and publicly post body-worn camera policies that mandate the activation of cameras during activities like arrests and searches and provide for the expedited public release of footage following incidents involving serious bodily injury or deaths in custody.

Police Body-Worn Camera Legislation Tracker in the United States

More states in the United States are legislating the use of body cameras for law enforcement though they vary in their implementation.

In the United States, consumers’ demand for Tasers has been increasing. The pivot started during Coivid-19 when many worked from home and are concerned about personal safety amidst unrest and violence.

Growth initiatives

Below shows their growth initiatives along two axes. The first is expanding our product suite for existing customers. It aims to improve the suite of products to become a leading operating system for public safety. The second axis is diversifying into new markets in US and international markets by both adding new types of customer profiles or users and by adding to our core customer base.

In its 2022 Q3 earnings call, its CEO emphasised their areas of investment:

  1. Continue to work on their non-lethal tools as they are less than 10% market penetration in terms of global TAM
  2. Virtual reality training which they sell on a subscription to customers
  3. Develop next-generation body cameras
  4. Improve real-time and remote response for better situational awareness, improve decision-making and more effective responsiveness. Invest in Axon Air (their drone solutions) for remote response to limit human exposure to danger
  5. Invest in community impact, engagement and feedback tools for the public and rank-and-file officers to anonymously deliver feedback to police leadership
  6. Invest in more comprehensive and actionable response to resistance reporting

Skin in the game

In February 2018, Axon CEO Rick Smith relinquishes his salary for a ten-year performance plan. This was modelled after the 2018 Tesla CEO compensation plan. The performance award consists of a ten-year grant of stock options that vests in 12 tranches. Each of the 12 tranches vests only if a pair of milestones are both met:

  1. Market cap milestones. For the full vest, Axon’s market cap must increase to $13.5b.
  2. Financial Performance Milestones. Axon must achieve a set of escalating revenue or adjusted EBITDA targets.

As per Form 10-Q filed for the quarterly period ended September 30, 2022, here is the status of the achievement status of the CEO Performance Award:

The first ten market capitalization goals have been achieved as of September 30, 2022. 

In February 2019, its employees were offered to participate in a compensation plan aligned to the same milestones as that of the CEO compensation plan.

Axon’s eXponential Stock Performance Plan (“XSPP”), offered to every eligible employee, is intended to encourage long-term thinking and long-term commitment with an opportunity to earn greater rewards for greater success, albeit with higher risks. It is aimed at retaining and recruiting exceptional talent who have a long-term outlook and motivation to serve and grow the company. The achievement status of the XSPP was also reported in Form 10-Q.

While the CEO and employees’ performance plan has been mostly achieved in less than 5 years, it set a culture of alignment in place. The Board will likely put in place another set of performance plans to motivate the CEO and team further.

Things to look out for

Sustaining its growth and improving profits
The sector is niche. Its larger competitor, Motorola Solutions does not provide information for comparison while the other listed competitors are much smaller. We need to pay attention to:

  1. Revenue growth
  2. Gross profit margin
  3. Net profit margin
  4. Free cash flow

We also need to monitor the CEO and employees’ performance plans to ensure alignment and for the long-term good of Axon and its shareholders.