Company. Axon: Transforming the Failed TASER Product into a Law Enforcement Platform Titan

(upbeat music) Oh, welcome to the Synopsis A Speedwell Research Podcast. I'm on a new mic. We have a new episode, a new company breakdown. We're excited. Drew had three or four filler interviews before I was able to come back just kidding. They were very good interviews. I listened to all of them, but come on. We've been promising the ax on one for many weeks now. I'll blame myself, but all that matters is we're back. So this is the company that brought you Taser. And when Drew first told me about this company, I really had never thought about tasers in my life let alone that this company would be a $50 billion market cap. My initial response was, wow, I didn't know you could even sell that many tasers. Drew quickly explained that you gotta look a lot more into this company because that is not all they do. They have one of these visionary, very exciting CEOs who's just fun to read, great to listen to. But anyway, without a further ado, Drew give us a little bit of the 10,000 foot overview, what does ax on do and how do they make money? - We obviously gotta keep all the best stuff for an hour and a half, two hours into the podcast. But very high level, you're looking at a company that started with tasers later innovated with the Taser camera, which then parlayed them into the body cam business, which then moved them into cloud services, software, all sorts of other software offerings for law enforcement. And you're talking about a company that now has over two billion in revenues. It probably is one of the best performing stocks of all time if you're looking at when they IPO'd 'cause they IPO'd when they're really tiny. And so you're looking at them for-- - You're saying better than the proverbial monster's ink. - Wait, was it monster's energy drink? - Not monster's ink, but the movie. You know what I'm talking about? - Yeah, that's right, the energy drink, not the Pixar movie. Thank you for that. You know, I get the best host. Anyway, you're talking about a stock that's been able to return over 118,000% over the past 24 years. And even since we just wrote this report, it's up over 100%. And we'll talk about some of the assumptions and all that in the valuation later on and all sorts of potential opportunity for axon. But that's what you're looking at. One of these companies that has not only started in the tasers and that itself is a fascinating story. Rick Smith is one of those people who has really been able to see around the corners, been able to innovate in being a place before the market actually moved there. And I'm really excited to share this one because he is a vastly understudied CEO and entrepreneur. He's had a lot of insights. He's talking about the cloud back in 2008. There's all sorts of things that you can learn from Rick Smith. - Yeah, and we'll get into some of the quotes, but some of the quotes are just absolutely uncanny. And overall, I mean, I just love learning about businesses like this. I mean, taser, it's one of those things you know it exists, but then you really understand how foundational, you know, obviously that weapon is to police force. And then you talk about well, the body came in the ecosystem around it and just how integral that is to law enforcement and kind of reminds me of perimeter, which we spoke about last time, which is the fire retardant that is necessary for firefighters around the world to contain fires. And it's just like all of this kind of infrastructure that you don't think about, but that it is just so mission critical to the day-to-day and then the founders and the people who drive those companies forward are really exciting to learn about. But it wouldn't be a speed well deep dive if we didn't spend a very long time going back to the beginning and really understanding the roots in the history and how did this juggernaut become what it is today and what can we learn from it. So, you know, why don't you give us like first, just what is the taser, I mean, who thought of it? I mean, where did this even come from really? - So we're gonna go back to 1974, which is not, which I'll have to say, the listeners should be pretty excited about that. We've gone back further than 1974, so this isn't too bad. I mean, should we go back to the invention of electricity? - You wouldn't be at a character for us to do that, but that's fine. We'll start in 1974 and if anyone needs us the backfill for further, we can do that. - All right, so great. So 1974, Jack Cover, who was a NASA researcher, he's reading this article about a man who got stuck climbing offense that was electrified. And in this article, it talked about how the man actually survived the electricity flowing through his body, but it totally immobilized him and he wasn't able to move, which gave him an idea what would happen if you created a weapon that could actually shoot electricity into someone's body to incapacitate them. And the impetus for this came about because President Lyndon Johnson, a decade earlier, started saying that there should be other non-lethal means to incapacitate subjects. And so if you think about this at the time, if there's someone who's resisting arrest, the police officer doesn't have good options. I don't even believe Pepper Spray was really broadly used in the '60s, so you really are stuck beating someone into submission, which you can imagine is a pretty grisly thing to witness and to do and for someone to be on the other end of it. So the idea was to create a non-lethal means of being able to incapacitate a subject. And so that is why he was interested in this story when he heard about it. So he created something called the taser. And he named it the taser after this book called Tom Swift in his electric rifle. And the first name was actually TSER after those initials. And then you would get phone calls and people wouldn't be able to say the name, so we added an A. And that is where the name the taser came from. And so these early prototypes were this very kind of bulky box-like gadget that had a light on it and it would shoot out these two pongs with gunpowder and it would unload electricity onto someone. And what ends up happening is when the electricity is flowing through your body, it's going to through your muscles too, it's confusing your muscles. And so you're not able to contract your muscles and you're kind of just stuck there. At least that's the idea. As we'll talk about later, it didn't really work that well in practice at the time. And so in taser is just one of those words, it's kind of like an onomatopoeia. It just sounds like-- it's funny to hear the origin of it because it's just always made sense. Yeah, taser, it electrocutes you. Just kind of like a clean-next or something. It's just so synonymous with the product itself. It was interesting to kind of hear the origin story of that. But listen, you're wasn't going to think I was going to bring out the word onomatopoeia this discussion. But all right, back to you, Drew. Yeah, and we're not going to adjudicate whether or not that's the proper use of that word anyway. Moving on. So he teams up with this private investor. And we're going through all of this kind of backstory because I think also this provides a lot of context for what happened when Rick Smith enters the picture later on because there's this whole history of this product failing basically. And so we're still in the mid '70s. Jack teams up with this private investor. And they found something called taser systems. And the ideas, they're going to manufacture and distribute this product. At first, they're thinking, OK, this could be great for consumers. There's a lot of people that own guns. They would rather own a non-lethal option because who wants to kill someone. And then they're also thinking the back-the-back their head police officers. This would be a very great tool for them to have in their belt. So boom, 1975 comes. The US Consumer Product Safety Commission halts the sales of tasers. And so the consumer market is effectively dead to them. Then they get a second hit from the ATF, which classified tasers as firearms because they relied on gun powder. And they might have survived that designation because people regularly purchase guns. You just need a license except for the fact that it classified it as a title to firearm, which was the same category as rocket launchers and machine guns. And so that effectively destroyed the consumer market between those two things. And so on top of that, making it even worse, though, was that when the ATF declared something a firearm, it has to have a serial number on it, too. And so all of the old inventory they had, which didn't have a serial number on it, had to be destroyed. And so then the State Department, at the same time, came out. They put them on the munitions control act list for fear would be used in torture overseas. And so now they effectively also lost their international market. And so then they were really just stuck with law enforcement. But the efficacy of it was not great enough to really attract law enforcement officers. There was a study at the time that talked to 1,100 field officers in San Diego. And it found it was only effective 56% of the time. And so you can imagine you're a police officer. Someone's coming at you. And you want to subdue them, but you don't want to kill them. You have a choice. Do I beat them? Do I pull out the pepper spray? Do I pull out the gun? Do I pull out the taser? You can imagine you pull out a taser, even if you hit them. And they keep running at you. That is a very bad outcome for them. And so a lot of police did not trust the taser. And so this is now the mid '80s. The original business taser systems went bankrupt. And so now Jack Cover teams up again with someone else. This time it's a lawyer, Barnett Resnick. And together they found a different company called Electronic Medical Research Laboratories, which did business as taser-tron. What a name. And one thing, which is as you're kind of launching through this history, and it's funny. The first time I read through this, I started thinking of your like maximal possible product versus minimally viable product framework. And then it's funny. You obviously later address it. And I was like, well, I guess, you know, I could pretty much write one of these at this point. I can. But I think maybe, in a way, we don't want to linger too long in this, but I think there's such a great example of, you're trying to change consumer behavior. And in this case, it's the police behavior. And you're having a product that's just, it's not quite there yet. Like the idea is good, but it's just in practice, not very viable yet. I mean, I don't know if you want to maybe touch on that point a little bit, but I think it's really, really, really straights it. Yeah, and I'm really glad you brought that up. I was actually kind of saving this for a second part of the memo, but this is where the idea for the framework of when do you do an MVP, a minimum viable product versus a maximum possible product came from. And for those that haven't read the memo, we'll link to it in the show notes. You could also listen to a podcast of that memo. But the idea very simply is that there are times when you're introducing a product to the market, where it has to be so good that you're convincing the users, the consumers, that they actually need this product. And so if you're coming to market with an MVP, that is not going to be good enough to convince them that they need something. that they didn't know they needed otherwise. And so this has been the struggles with the taser early on. It just wasn't a good enough product. And so the reason why I thought of this memo was, because I realized there's these certain category of products, you know, the car is one of them, the iPhone is one of them, Dyson's, AirRap, all these are products that you had to convince people that they wanted it. They needed it. And if you were to ask them beforehand, if this was something they wanted, they wouldn't have even known to conceive of it. And so that's the same thing with the taser. No one was asking really for a taser beforehand, but once they see it, they need to see it work well. And once they see it work well, it's an instantly an aha moment. And this is also why they've had such a long growth way thereafter is because a lot of people are just still getting it. How good of a product this is for police to have compared to alternatives. And so we're still though in 1980, Jack over now, he teams up with another lawyer. They create this new company. They gimmickly, maybe it wasn't at gimmicky in the '80s, but they call it taser-tron. And they're now focusing really just on law enforcement because of all these different acts that were passed that we were talking about. And not a lot of success, however, they did manage to get some big deployments in Southern California. That is where that survey I just mentioned came from. So they're only affected basically half of the time. And so there's a quote at the time where it says they weren't really confident in them. And so that's an issue because if you think about what it's supposed to do, it's supposed to save the life of the person who maybe is aggravated, maybe they're on drugs, but they're about to attack. And so you need to incapacitate them, and you want to do so with the least damage. And not to sound insensitive, but this is a good solution compared to shooting them, which is what often was happening. And so that was the idea is that this is a better alternative of bad alternatives, but it just didn't work well enough that people actually trusted it. And it was actually infamously used against Rodney King. And it also similarly failed in that scenario. And so this was not a very good product, basically. However, it was a good enough idea that it kind of lingered around. Eventually, though, this was not that successful. And so it kind of just lingered. And he and the entrepreneur that ran this company seemed like he had other dealings that became a bigger deal for him. This is where Rick Smith enters the picture. And so this is 1993 now. And Rick Smith is about to go and accept a corporate job. And so he's about to graduate. The Chicago Booth School get his MBA. He's going to accept a corporate job. He really doesn't kind of want to do that. And there was an incident that happened two years ago. It was a real incident. There's two friends of his in high school. They were followed into a hotel parking lot after a road rage incident. And then they were shot dead. The quote he had at the time was he said he was not just shocked by the sheer waste, but the wrongness of it. How in the hell did something like this happen in Scottsdale and of all places in a hotel parking lot? What possessed someone to carry a pistol, shooting metal projectiles at more than 1,000 feet per second to rip in tear flesh, inflicting gruesome injury or death in the name of self-protection, or in this case, road rage. And so he was basically scarred by this a little bit. And he's like, why do people feel like they need this? He understands people want guns for self-defense, but isn't there a better way? And something that could also avoid accidents like this happening. And around the same time, his mom was hearing about all these murders that were happening not far from their home in Arizona. And she wasn't feeling safe. She wanted to buy a gun. And Rick said, don't buy a gun by a taser, because he heard about the taser product. And he found out that she wasn't even actually able to buy a taser. And so instead, she buys a 38 revolver. But this sparked his interest in tazers. And then he learned more about the history, the technicalities of the devices, why they fail, why they don't actually work that well. And so he decided to do some deep research. And he actually ends up writing a report on this for one of his MBA classes before he graduates. And he gets in contact with Jack Cover. And so he drives down. He meets up with him. He gets him to agree to make some changes to the device. One of the biggest and most important changes they make is they get rid of the gunpowder. And so that is really important, because now it's not going to be governed by the ATF and have all the same kind of licensing a gun has. And they're replacing it with compressed nitrogen. And so now he has this new device. He graduates with his brother Tom. They found a company called Icer Corp. I-C-E-R. And that stands for incapacitating electronic restraints. And they very quickly realized that sounds like a very evil name. And so they changed their name to Air Taser. I love the background, the struggle of the company. Rick Smith's kind of founding ethos behind it. It's just an interesting evolution. You hear about, oh, it's classified in the same thing as machine guns and missiles. And his mom can't buy one. I mean, it just-- it sounds so common sense. But then, obviously, it takes someone to kind of notice these things and actually affect those changes. And so Rick Smith is coming in. This is now he's brought it out at bankruptcy. This will be the third go of this Taser business. And so it's 1995. Air Taser is founded. I mean, still there's a lot of issues. I mean, clearly, now they've done-- they've removed some of those consumer restrictions. But you still have some of the reliability issues, delivery issues. You have to really overcome a lot of the negative history that has been surrounded by Taser. So this isn't like a fresh start. I mean, he's got a really-- there's been a lot of damage to the brand in this idea at this point. But clearly, he's still evangelical about it. So wanting to take us through those early days at Air Taser and how did Rick Smith try to turn this around and just get some money in the door? Yeah. So as you mentioned, it is now 1995. They have the Air Taser product. They're working with Jack Over to make those changes. However, and this is, again, this is why we talked about this MVP versus MPP framework. The product is not that good. And we will find out that he actually gets saved by a couple of things that happen. And so let's get into that. And so at first, he's only focusing on the consumer market. He's thinking of his mom. He's thinking of his friends and the road rage incidents and how it would have been better if there was a Taser there. Instead, and so it's very hard, though, to get retailers interested in this device. And believe it or not, they actually are selling through retailers. One of the bigger ones was sharper image at the time. And there's a lot of-- I am a sawshare by a Taser. Natural cross-selling opportunity. And so the newness of the device, the novelty, it meant that most people needed to be taught what it was. And most distributors, they're not really in the business of teaching people or the retailers why they should buy something. They just kind of stalk it. And they don't really care what you buy. And then the retailers themselves aren't that invested in really explaining the product and educating people on it. And so it was a very hard sell for the consumer market. They decide, OK, well, maybe we'll just focus more on law enforcement. The problem with that was kind of twofold. And so the first issue they had was that Taser Tron, that older business, it's still around. It's not that successful, but it's still there. They still sell the police officers. And they claimed that they had exclusive rights to Tasers and all of North America. And they deny this. They say it's not true, but they're a startup company that's a couple years old with no money. They can't fight this in court. And so instead, they reach an agreement that for three years until 1998, they will not sell the any law enforcement. And that gives Taser Tron more time to control and demand that market. And again, kick some back to the consumer market. As we will see, this turns out to possibly be one of the most fortuitous things that could happen to Air Taser early on. Because he is allowed to sell internationally to law enforcement. And so he does this demo in 1995 to the Check National Police Academy in Prague. And this is when they really see the shortcomings of the device. Someone was told to volunteer to come at Rick. And so Rick has his little Air Taser ready to shoot him. He shoots the two prongs. They both go into his body. It delivers the electricity. And the guy keeps running out and puts him in a headlock. And so you can imagine this is a really bad sales pitch. It shows all of the netitudes of the device and how poor of a product could really-- Kind of reminds me of a clip of the Elon Musk Tesla truck when he goes, this window is indestructible. And then someone threw a rock at it and it cracks. And he goes, OK, try this window. Then that window cracks. He goes, OK, moving on. Yeah, not a great look for a product that is supposed to incapacitate someone. And instead it results in the person who's using it being incapacitated. And so they go back to the drawing board after that. They redesign it to change the electricity load, make it more powerful. They do some other things. And they really need this to work now. And so they were very lucky. They were effectively locked out of the North America police departments because had they have demoed that to them at that point, they could have lost all their potential leads because everyone would have been like this devices the joke. And so they're still focusing on the consumer market. The business isn't doing great. And they're coming up with new ideas. And people's cars are getting stolen. And so they're going, all right, we're going to come out with a new product called the AutoTaser. I do recommend you guys look this up on YouTube. And it is basically a big stick that you put across your wheel. And it looks the same as like a steering wheel lock, except it has a lot of electricity, a 50,000 volt charged to anyone who touches it. And so it's a nice vindictive twist on the safety feature. The idea is basically that if someone tries to take your car, they touch it, they get shocked. They're going to go somewhere else. It's not going to be worth it. This product, maybe not that surprisingly, did actually go viral. It was on a lot of different local news, sites and all that. But ultimately, they never really sold that much of it because it is kind of gimmicky. And this kind of reminds me of Airbnb just came out. This is kind of like the macanos and the Obamaos of Airbnb, just trying to find something to gain traction, trying to get money in the door. I mean, clearly, this isn't going to be their main product. But I mean, again, at this point, they're just trying to get traction anywhere because obviously. Obviously the main client base here, which would be law enforcement is off limits, right? So they're trying to get creative, trying to get scrappy. You know, I can imagine myself losing my keys, getting and shocking myself. I could just imagine this product not going well for me, but I'm not shocked that it didn't go viral, but not a bad idea. Yeah. So, you know, it's kind of gimmicky. Something to get money in the door, but yeah, ultimately not going to be what they're going to build off a multi-billion dollar business off of. And so at this point, they're losing $5 million. A lot of it's funded by his dad and family friends and some loans and all that, but they do need to start, you know, getting a real product out the door quickly. And so now it's 1999. They are able to sell to law enforcement. And so that is what they really focus on. Remember, they made all of these changes to the taser. And so now their taser is called the M26. And this is going to be the first taser basically that actually works. And it's going to be nothing compared to the current taser, but still it actually works. And that is a big upgrade compared to the prior devices. And so, you know, once again, they're basically going to these police departments and here's their sales pitch. They're saying, okay, someone is, you know, they're not cooperating, they're running at you. A lot of times, too, there's this issue of something called suicide by cop, which is someone wants to get killed. They don't want to kill themselves for whatever reason, but they do want to get killed. And so they will threaten people until they get the cops pulled on them. They'll say, I have a gun. I'm going to start shooting people. I'm going to kill you if you come near me. I'm going to, you know, so they make threats at people. And the cops are stuck because they don't want to kill the person very often and so on. They just went through a tough situation, a divorce, lost a lot of money, whatever it is. And they can't get near them, though, because they are violent. And at the same time, these people will eventually charge it on the north to draw the police officer's fire. And this was not a small incident by any means. This is like one out of every seven police shootings at the time was a suicide by cop. And so that's one of the reasons why Taser was one of the selling points for Taser because in these instances, they can subdue them without actually having to cause permanent harm. There's all sorts of other incidences where someone may be on drugs, someone may be acting out or maybe mentally ill, whatever it is, it would be better to find the best way to incapacitate them without causing injury to the officer as well as the person. And that's what the Taser was designed for. And you know, we may see videos of it and it does look painful to be tased. And I'm sure it is, but that is better than the alternative, which at the time was drawing the actual gun. And so that's what they do. They go to these police office, they go to these police departments. They start getting these winds because their device actually works. And this goes back to kind of the point you're making earlier, which is allowing them to kind of put the R&D dollars really perfect this product. So when they went back to the police officers this time around and started, you know, being able to sell them, they had something that worked that was consistent. That could be fired at a decent range and had some type of efficacy. And that's really what led to kind of this parabolic growth prior to their IPO. Because with the product before this, it just wasn't going to be able to be utilized on a large scale. There's going to be too many issues. So like Drew mentioned, being able to take a couple of years, you know, mess around with their car lock and things like that really allowed them to hone in on the maximal possible product and start changing police behavior and training. But until that was feasible, I mean, this company was not going to really go anywhere. Yeah. And so this is 1998. They renamed themselves to Taser International. Err Taser was a little bit too light of a name for the product they had. And they also started selling in Canada. And then by 2000, they had more than 500 law enforcement agencies using their product. They go public in 2001. Wasn't great timing because it was right as the tech bubble crashed. And they raised about $8 million. So this was a pretty small IPO at the time, half of which was used to fund inventory growth and then also just advertise more. And despite this increase in investment, they're still relying on all these distributors to hold the purchase and sell their product really on their behalf, which is a problem because it is very much a product that you need to inform the user on. And because of that, it's kind of a bit of perverse incentives. It is a little bit of an issue because the distributor doesn't have that much of an invested interest nor understand the product as well as axon. But this is the best they could do for now. I bring this up because we're going to talk about that again later on. And so they talk about their TAM. How many people can actually use a Taser? Well, at the time they say there's about three quarters of a million full-time law enforcement officers, 450,000 correctional officers and 44 million gun owners all in the United States alone. And so that is what they were going after with the Taser market. And so what you see is as they start going after law enforcement, the consumer market used to be 88% of their business. And then all of a sudden it drops to 32%. And sales are growing a lot. It's going 55%. But it's still very minuscule. In 2000, they only had three and a half million in sales. And so this is where they are right now. They had one event happened, which was a sad event, but it really accelerated their business a lot, which was 9/11. And when that happened, a lot of airlines actually bought tasers for protection because they didn't want to have guns on the plane and they felt like tasers would be a good solution to that. United Airlines, they bought 1,300 tasers alone for their air fleet. A lot of law enforcement officers around the same time. They also started buying a lot of tasers too. And 2002 LA Times article noted just how much of trouble the business was in and how it really just started to turn around at this time. So from 1993 to 2001, we had only two months where we had the end of the month payroll covered at the start of the month. I can tell you that it's no way to live. And so they're talking about how for eight years they're basically struggling to get by. Now at the end of 2002, they're in a little better position. Now 2000 law enforcement agencies use their product. 134 police departments made the taser standard equipment for their field officers, which means all of their field officers use the taser. And so that started against some traction for them. And perhaps unexpectedly, the stock starts really kicking off a lot. And yeah, I love that quote from Rick Smith's brother, which is just the dire circumstances they were in. And the fact that this company had already failed multiple times. I mean, the fact that they were able to just keep it together and really wait until they had that product market fit and just gain a lot of traction. I mean, it becoming a standard weapon across some of some of these police forces, not only does that mean that they have this order of sales. That means that as these weapons age out, it's part of the toolkit now. Right? It's part of when new officers when police expansion goes, this is standard issue. Being in that toolkit really solidified it as one of the staples. And one thing which we'll talk about a little bit more is how can that spend shift from a recurring spend, which we'll get into a little bit of the nuances of how police budgeting worked. But currently it was still kind of in that experimental budget where they had to kind of fight for each year. And the company works hard to kind of get that into the more recurring budget base. But anyway, so you're getting traction. That's right. I think your language there was maybe a little strong in terms of their positioning because there's a lot of police departments that still don't use the taser, but you're right. They're starting to gain some adoption, especially by some of these early adopters. And so now it's 2003 though, taser tron is still there kind of lingering on. And so ultimately, you know, you can actually look and you could get some of these figures because they published them in their annual report. In 2003 they noted that taser tron, that competitor that's still kind of lingering around, they had only 200 police departments. And that was down cut in half in two years because they used to have 400 in 2001. And so taser tron is shrinking a lot. And they actually are going to go ahead and end up acquiring them in a little bit just to get rid of any potential litigation and kind of just make that go away. And so they do that. They don't pay a lot of money for it. And at this time though, basically since tasers become very popular, you know, you have the show cops, people are getting tased on it and people are learning about this. It's a small cap stock that's growing a lot very quickly from, you know, 2002 at 10 million in revenues in 2004. It has almost 70 million in revenues. And so the stock was up almost 75x in the matter of a year. And so that is a crazy increase in stock price in a very short amount of time. And so unexpectedly afterwards after, you know, all this strong publicity and all that, the stock takes a big hit at the same time revenue also falls to because the taser now is getting this broad adoption and a lot of lawsuits start piling up. And people are suing for all sorts of different reasons. A lot of them are frivolous lawsuits. What will end up happening is someone would say that they were cooperating with police when they weren't and they got tased and there's no way that they could prove otherwise. That's going to be a hint for something they figure out to do in a little bit. But on top of that, they have other people who maybe have a methamphetamine or some other drug in their system and they do end up dying when they get tased. And in these cases, taser and are not. In these cases, they are actually going to go ahead and defend the police officers. And so this was a really important decision they made was that they technically are only responsible when it's the product that is at fault. But now they're going to defend the officers against or excessive force, basically. And that was a really important decision they made because all these police departments now, they're building a lot of good will with them and they're starting to really like them. Yeah. I just think about this litigation as, you know, I don't know if I call it marketing expense or defense of the longevity of the business and it kind of reminds me of Andy Florence, obviously, we had a co-star being extremely litigious with people scraping the data and using the proprietary information. And he kind of made that known that litigation was going to be part of this ongoing business expense. Ricks. Smith made a similar decision here, which was, hey, we're still an early company. We're not gushing cash by anything in that nature. But again, this is that founder, CEO mentality, that, hey, this is going to be a very long-term business. And we're going to have a very long-term partnership with these police departments. Then we're going to need to come out here and defend the use of this taser wherever that may be. So I thought it was a really great and insightful move. And I think one that a founder truly would make. I'm not sure if they vagabond CEO or someone a transient CEO would make that decision in terms of the long-term hell of the company. Going after the vagabond CEOs, wow, wait a minute, let's make a stand. But it is a good point that they are making these decisions for the long-term. And it costs them a lot in the short-term, which is showing up in terms of earnings. You know, earnings are down 95% in 2005. And part of that is because revenues dropping 30% in that year because all these police departments are deferring their purchases of the taser. But it also is because of all the expenses going up at the same time. Around the same time, too, though, you have a shareholder lawsuit saying that, oh, you said the tasers were totally safe. And these very specific instances with these confounding factors, people did end up dying. And so we need money, basically, too, because you miscommunicated with us. And so they had to settle that lawsuit for 21 million. And so all of this is kind of coming about at the same time. And then Rick Smith, he's basically saying what we're going to do is we're going to defend against all these lawsuits. We're going to make sure that we are always on the side of the police departments because those are our customers and we need to defend them. And he also does something else interesting, which is he starts thinking of ways they can end these lawsuits, basically, forever. And the idea they come out with is the taser camera. And we're going to talk about that in a second. But first I want to talk about this quote from the 4Q 2006 earnings call where the general council Douglas Clant talks. And he says, our customers battle excessive use of force litigation. And the taser device played a very important role in reducing the excessive use of force litigation against law enforcement agencies. Statistics from our customers show a marked decrease in excessive use of force claims when the taser device had been deployed. The courts routinely held that the use of a taser device does not constitute excessive use of force. Our customers place a very high value on the taser device in reducing these claims. And so basically they're saying that we have the stats to prove it. The courts have proved it. We're going to defend, defend, defend, defend. And that is what they end up doing. Now the air starts clearing. People are more comfortable again with taser. And so by 2007, just a couple years later, sales now are reaching a new all time high. $100 million in a single year. Now they're profitable again with a $15 million earnings for the year. And Rick Smith, this is a great quote in 3Q 2008. He talks about how challenging of a time this was for the company. We don't want to understate what a challenging time this was for the company. I think Rick Smith has a really great quote in 3Q08 where he kind of describes that 2005 period. And I'll just read it for you real quick, which is, those of you who have been with us for a long time know that in 2005, this company was really challenged when we saw it's a significant increase in our litigation profile. And that forces to get very good. Frankly, world class at use of force defense litigation because we've had to sit side by side with our partners in law enforcement when these response to resistance or use of force instance get adjudicated. What we've learned through that process is not only that we have again built a world class capability, where now that's built into our business model that we're able to perform that function. But we've come to understand something about our customers. And that is when there is an accident or police responded to physical resistance and there is a use of force. If we think of that incident like a fire, it lasts for a few seconds or minutes. And that's where a taser has typically been focused in giving tools to be able to incapacitate during those certain and fast evolving moments. And we've had a huge impact for our customers. We've saved many lives. We've had major cities go for over a year without shootings for the first time in some of their history with these devices. And so again, just kind of quoting about how being with those partners, giving them the legal defense, setting the precedence in the courts that taser on average is a safer product. And again, he talks about that as being a big deal, right? Like making sure that the courts have litigation precedent and not just settling out of everything and just kind of keeping the dinner bell ringing for these types of sometimes frueless lawsuits. I'm sure some of them weren't frueless, but a lot of them just kind of pay to go away type lawsuits. And so you have to have a lot of credit to Rick Smith there for defending the company. Yeah, absolutely. And he goes on in this is page 19. He goes on and he says, you know, if you think about the incident as a fire, what comes thereafter I'm paraphrasing here is a cloud of smoke. And the smoke is the years of litigation, the post-incident legal reviews. And all of the stuff that just kind of swarms the department thereafter that they have to deal with. And so then he goes on to say that they want to broaden their mission. And so now they're not just looking at the tools police use during the incident, but they're going to become a full solution provider. And they want to not only stand shoulder to shoulder in the courtroom, but they want to take their abilities to create technology to solve all of these problems for the customer. And so what that is going to lead to is axon. And this is now 2008. So they had right before this product that I'm about to talk about, they did temporarily put a camera on the taser. And the way that would work, it was called the taser cam. And every time the taser was pulled from the holster or shot, the camera on the taser would start recording the incident. That was helpful, but they also very quickly found out that you need video beforehand to get the full context of the situation. If you're just getting the few seconds of video after the taser is already shot, you don't know really why it was shot in the first place. So it wasn't that helpful in defense. And so they realized that if there was a way to film the full incident beforehand, it would get rid of any frivolous lawsuits. It would allow for a lot more transparency. And it also would allow for a lot more honesty in policing. And all of that they felt was very important. And so is what led to what they called axon. And so axon originally was the first kind of press release you could see with them wearing it. It's almost, you know, kind of like a robot cop looking thing where it's like a camera that sits right above someone's ear. Yeah, it's interesting, you know, looking at the photos in the report. It's kind of again, the maximally possible product. You know, it's sitting on your ear. I can't imagine it's that comfortable. I could see if you were in some type of run or athletic, you know, requiring some athleticism perhaps it didn't stay on. But again, you know, going back to the impetus for this, I can just imagine that, you know, Rick Smith being privy to the ligation happening where you know, an officer's sitting there describing the events one way and then the plane if he's sitting there describing the events the other way that you know, man, I just wish there was like some security camera footage or something that could just describe what happened. And I'm sure after sitting through like 20 of these, he kind of goes, Oh, you know, that's a pretty obvious thing we could do. And so again, it's nice when you become so embedded with your customers that you can then kind of start creating these products for them and anticipating their needs, which I think is kind of a main competency axon is demonstrated throughout the years. But you know, so let's go with cameras 1.0 though. So they could they roll out. There's some pushback, you know, from the officers, right? As well. Yeah, it's interesting because originally a lot of the pushback came from the police. The police said basically, you know, we don't want big brother watching us all the time. Why don't you trust us? That sort of stuff. And so it never was that successful initially. But the product kind of hung around at the same time, they also introduced it alongside something called evidence.com. This is also going to spawn a new business down the line. So basically at the time, if you have evidence, it's on video, it gets stored in a DVD, it gets put in a warehouse. It requires a physical pickup, chain of custody signatures every time it needs to move. It has to be hand delivered, has to be hand delivered to someone who signs for it. And all of this is a pain in the butt. And on top of that, though, it's very inefficient. It's timely. You're maybe losing a DVD in some instances. Now this is 1Q 2009. And Rick Smith is talking about the importance of this platform and you could really see the way he's thinking and building this business. He says in 1Q 09, evidence.com is to axon as iTunes is to the iPod in the consumer world. We believe that axon and evidence.com will revolutionize the way law enforcement, securely capture, stores, analyzes, collaborates, and manages digital multimedia evidence collected by the officers in the field. And so there's a lot of these kind of other products popping around that are these video cameras. This is not a big market at the time, but there's a lot of these consumer electronic device companies. It's easy enough for them to say, okay, we'll sell the law enforcement too. The problem with a lot of these products is they're kind of hardware first companies where they make a camera. They say it will be really cheap for you to purchase the camera. Just tap it onto your officer, tie it on, and you're good to go. Oh, and by the way, we have some software product or something. And so it's not integrated. The software they're creating is very much an afterthought. And Rick Smith does this entirely differently. He says that the integration is going to be key. The same way Apple is integrated with the software and the hardware. We have to do the same thing. We're going to win on the software and the integration, not on the hardware. And at this time too, he realizes that they need to basically build up their software chops. And so he creates a separate division in Seattle. And you could also see in the stock comp too that they really start giving out a lot to be competitive in this. And this is again in 2009, they're building up all of their software prowess because they know that this is going to be their ultimate differentiation. And this is a really key thing to understand because at this time, this is a non-existing market where they could have clobbered the competition by just having a better hard but instead of doing that, they understood where the competition was gonna eventually go and they addressed that a prior warry. And so that's another reason why it's just very impressive business acumen here. - Yeah, and again, I mean, obviously you do have the kind of the narrative around Apple products about the software hardware integration, but I don't think it was quite as prevalent and obvious. I mean, you know, this is 2008. I don't think it was clear, you know, Apple was gonna be this dominant software, hardware ecosystem that it is today. So if we're gonna have to really hone in on this aspect and say, hey, listen, we're not just going to, you know, have this race to the bottom where we're gonna, you know, try to create the best hardware and then just be differentiated based on our sales price. We're gonna really try to make sure that we have this locking where our hardware works very well with the software and creates some of this tangible administrative relief that we can go in and continue to justify why our products are better. Not just, oh, well, we're gonna be 20% cheaper this year, right? That's not necessarily a place you wanna be and Rick Smith was very obvious about trying to differentiate his products early on with not just price or some type of new fancy gadget or upgrade. - Yeah, and he's really just focusing on customer pain points and he knows that if you have, you know, 12 hours of video from a single officer, what are they gonna do with that? How are they gonna offload that? You're gonna have the officer then go back to their desk, plug it into their laptop, upload it all, rename the files, organize the files, put it onto some centralized server. If it doesn't work, you need IT and all of this is just a pain. And so they, at the time, evidence.com initially, it was like kind of its own private cloud later they in 2011, they moved to AWS, which in and of itself was a very early adoption of hyper cloud scalar. And so even though at the time though, as a police department, a lot of these police has had their own local servers, they're running in their department, they have their own IT department. And what they're start making this argument for and they'll take them many years to make it successfully and for people to understand is they're basically saying, you don't need to have an IT department to manage all of your video. That is kind of a ridiculous thing to do, to individually have each police department, even these small to police departments and Des Moines, Iowa, managing their own local servers and having an IT guy helping figure out video that it's a crazy thing to do. Very inefficient. And so they're gonna do it all. And that's a very early thing. But as you can imagine, a lot of pushback and people at the time were saying, we can't have a private business, have all of this sensitive data. We want all the data in our house. We wanted all within our own servers, on our own department, we want control of it. And this is the same sort of argument businesses had against the cloud early on too. Everyone kind of felt this way. And so they were very early to it and very stubborn in believing that they were correct. And so I've wanted to point all of that out now. - It's kind of a constant, it seems like axon is just constantly pushing their consumer base forward and kind of an aggressive fashion, like leading them to the taser, leading them to the cloud, leading them to this now future of AI reporting which we haven't gotten to yet. But they're really embodying, and I guess I can really see how you kind of created the maximum possible product out of this idea because it seems like at every turn, they're really embodying the quote that well if I asked my customers what I wanted, they'd say that faster horse, right, that famous quote. And I can see how Rick Smith is going, no, no, no, no, we're not gonna do that. We know where this is going, and we're gonna make sure that we take them there. And they've done that continually successfully, but we don't want to get ahead of ourselves. So it's 2009, and we're, go ahead, 2009. - And we're gonna shift a little bit from the axon camera discussion and talk about again now the taser because this is also really interesting 'cause they roll out a product called the X3, which is in Rick Smith's mind, the kind of taser he would want because it shoots three prongs, which means that you can miss once and still have an extra prong there 'cause you need to in order to get a successful hit and get the electricity through. And so he thought that that'd be really important to people. What he missed though was that when they added that extra prong, it made the device bulkier, it made it heavier, and the police didn't want to carry a bulkier or heavier device around with them. And so he thought this device would be great in a total product killer, and it turned out people were actually very dissatisfied with it, which is also an interesting kind of insight in of itself because originally, you know, with this taser he's thinking from his own perspective and he was right, but now he's realizing that he needs more feedback and continual feedback from the actual users of the product of what they want. And he, I'm gonna read a quote in a second on that, but there was another product they released in 2010 too, which is totally out of left field called the protector. And now they're saying, 'cause smartphones are becoming popular, they're saying we're gonna create an app for the smartphone that is gonna help families monitor what their kid's smartphone activity is. And a little weird of an idea, I could kind of see where they got the idea from though, because they have this cloud-based platform, evidence.com, they're thinking, let's get an app on all these phones, and the kids, if they're in trouble, they can hit an alert or something, they could get sent all the evidence.com, and then it could also be sent to police departments to try to get their help, but this is not a good business. They realized it very quickly, and in 2Q11, just a year after they rolled it out, they said, it was an option on a potentially very large market in terms of cellular and mobile safety products, but it actually turned into a revenue market where there is insufficient demand to justify the focus. And so they very quickly cut that product, but it's interesting that they did that at all. And so what you see is that they have the protector that weirder that have now the X3, which was the wrong taser product for the market, and they had to write it down. And so they start reworking their R&D process, and I think this is a really insightful quote again. - And let me, before you get to that quote, I mean, the protector, 'cause obviously we're speaking highly about how, oh, you know Rick Smith, he's got this entrepreneurial tendencies, he kind of sees what the customer wants, and he goes and builds it. And again, that is a double-edged sword, right? Because people will say, oh, well, they're not focusing on the core business, they're allocating this capital poorly, or something in that nature. But I would say this was kind of the first foray into something that wasn't really, and again, I mean, I'm talking about in this era, which was not directly tied to law enforcement and improving their processes. I mean, this was kind of back to trying to do a large consumer product. And so, you know, we'll kind of monitor that, but I don't think, you know, incorrect me if I'm wrong, Drew, it didn't seem like they really did another big foray or R&D into consumer products. I mean, this seems like they kind of said, okay, let's focus on our niche, which is improving law enforcement systems. - Yeah, that's right. And it was an interesting thing to note. It was good to see how quickly they got out of it, 'cause that pretended well for their future. And, you know, he starts talking about their R&D process after this, and I'm going to paraphrase another quote, and he says, we significantly expanded our engineering team. The process to effectively manage and develop with a much larger engineering team was not yet fully developed, and the informal mechanisms, the gaining customer feedback that worked well for the small entrepreneurial taser of 2003, with those same informal mechanisms, didn't work that well once we got larger. And so, as a result, the taser X3, that first generation of the axon, the head cam, it was driven more by internal and engineering priorities than by customer feedback. And so, over the last two and a half years, we've been very focused on overhauling and refining our entire product development process to better match customer needs. We now have a focused product management team with dedicated PMs, and they've engaged hundreds, or sometimes even thousands of law enforcement officers to design their products. And he goes on to say, we're not making excuses, we've made some mistakes, and as we're saying today, some significant and expensive mistakes, but we learn from those mistakes as an organization, and these have been growing pains, but we have grown from them. So, yeah, again, that quote goes against my entire thing about the Henry Ford quote, because now he's saying, well, I got to listen to my customers, because I haven't been taking their feedback, but. (laughing) - Yeah, it's interesting, 'cause I think it's both, right? When you're coming out with a new product, you have to envision something they themselves haven't envisioned yet, which is kind of what this maximum possible product idea is, and when you're really trying to prove to someone why they need it. And so, the first taser that came out, it couldn't just be a taser that doesn't work, it had to be a really good taser that showed people the possibilities, but then once you get to that point, further iteration should come more from the feedback of what customers want, which is kind of how we see the automotive industry work. So, the first car was something people never envisioned, but cars thereafter, people gave a lot of feedback as to what they actually cared about in a car, and that's how you got all sorts of different cars, different models, different things people cared about, and it's similar with the iPhone. The first iPhone that came out, people wouldn't have really envisioned that that's what they wanted, you know, prior to it, but once it was out, it was pretty easy to say, you know, I want something with a bigger screen. And guess what, that actually did happen in Apple listened. - Yeah, I mean, you're right. I mean, these products go through evolution. So, you're right, the more mature products like the taser, it's now established, you can kind of take some of that feedback, and then as you're kind of opening up these new items, such as reinventing the body camera, reinventing some of those tools to organize evidence, career reports, things like that, that is definitely more of the Henry Ford type. Okay, we need to build it and then take feedback from there. So, you're right, I mean, the company is doing both simultaneously, and I think that's probably, you know, a good medium of both worlds, which is innovating for your customers, but then also on your kind of base layer, providing them, you know, kind of these incremental improvements as they see fit. I mean, they're the ones using it every day, and that's a nice thing about having some type of scale, which is, you know, thousands of officers across the country are, I think you can aggregate some very powerful. positive feedback, which again, is a product of winning this market. I mean, let's talk a little bit. And I get we have a whole competition section, but maybe at this point, we're up to 2011. And I mean, do you know really about any type of are there competitive taser companies at this point, or are they pretty dominant at this point? And I want to save a little bit for the competition section, but just give a little viewpoint of where they are in this point of the company. They're totally dominant in the taser business. Right. And so, yeah, I mean, again, and that's another product of getting further and further away from the competition and being able to aggregate all this feedback. And so, I think we kind of hit a foray into a little bit of their big investment into the software and ecosystem behind these body cameras. And so, I'd love for you to kind of start. This is in 2011. This is really starting to develop. I mean, obviously you spoke about how they restructured R&D, they're putting a lot of money. And again, I mean, it's amazing the amount of money they're spending on software development and things that nature for what could, you know, quote unquote, is a hardware taser company. We're expecting this really working hard for that not to be the end all be all of this company. And you're starting to see some of the fruits of that labor, you know, in the, you know, call it early 2010. So, take us through a little bit of that time. Yeah. So, I'm going to slightly disagree with what you're saying because they, it's really wasn't paying off this bet. And he kept sticking to it. He kept rolling out new versions. They rolled out something called the Axon Flex, which also gave the ability for a body cam. Then in 2013, they rolled out just the Axon body, which is what will prove to be the most popular form function for the video camera. But this is 2013. There's still a lot of resistance. Yeah, officers, they don't want a camera on them. It feels like they'd rather to them on top of that. There's all sorts of pushback from the police department saying we don't want an external party to manage our data. We're fine. Thank you. And by the way, if this is something we do want, we could get a much cheaper. Or a hundred bucks or whatever. We don't need the nice one, the software and all that. They weren't getting it yet in the importance of this whole ecosystem. And instead of caving, he just stood to it. He understood the value prop. He thought it would eventually come. And they continued to invest in it. They continued to roll out new products. And for people who would use it, there were some promising proof points. They talk about, they talk about them one of their press releases in 2013, just the amount of complaints. Just from use of force complaints that go down when they do actually have the body camera on. And so what you're seeing is that just the camera existing and people seeing it visually is actually causing a change in behavior. Both for the people, both for the citizens and also for the officers. And so he believes in this, but it's still a tough product to sell. That all changes in 2014. And so in 2014, and by the way, we're talking about things that can be sensitive that can have a lot of societal ramifications, very polarized topics. This is a business podcast. We're looking at stuff purely from a business analysis perspective. We're not making social commentary. But in 2014, there was the fatal shooting in Ferguson, Missouri. It led to a lot of protest, a lot of riots later on too. A lot of property was damaged. And police officers now weren't fearing so much just their superiors watching them. But now they're fearing that their actions could be taken out of context. And so now they want the video. Now police departments are saying we want the videos. We want people to understand. We want people to view our actions, thinking that should something like this happen to us, it's going to indemnify us, which is what they want. And one of the bigger kind of shifting points is you had the Seattle police union, which took a really strong stance against officer video. And now after Ferguson, they changed their tune. They're saying we want this actually. We think this is going to be important to protect our officers. Whereas before it was seen as a way to kind of overwatch them, now it's seen as a way to actually protect them. And so this was a big shift in the way the police looked at the video cameras. Yeah. And again, I mean, the parabolic kind of revenue growth, you see. It's almost similar to right when they IPO'd, I mean, they're trudging along. They're trying to gain traction in their taser business. All of the sudden, they're getting some police officers. There's kind of the tragic event of 9/11. People realize, wait a minute, we need something to protect ourselves. That's non-lethal, right? You have a big order from United Airlines. And then right, you kind of have this takeoff of a business. I think it's a really similar story here where Rick Smith investing year after year, believing that body cameras are the future. And that ultimately, you're going to need systems to upload, shift through, store, send, all the things that go around with logistically. You can't just collect like, you know, Drew mentioned, you have 11 hours of body footage across thousands of police officers every day. You're going to have so much data to shift through how are you mechanically going to do something useful with it, which Rick Smith was thinking about for a very long time. And so obviously, you have this massive event that really changes the culture around, you know, policing at the time. And so you're just going to see just an absolute parabolic revenue growth. But I'll add Drew, you know, but why don't you do it through some of those numbers? This is crazy. You have to understand this product rolled out basically in 2009, 2009, it rolled out in 2011, they had one million in revenue. Okay, two years after launching it, they had one million in revenue. In 2013, they have five million in revenue. Okay, so this is almost four years after launching. They only have five million in revenue. This is nothing. People inside the company are saying, we need to shutter this product line. This is a disaster. People inside the company are saying, why are we investing in this business line? This is a loser. People don't want this. This is a waste. Rick Smith not only is carrying this business line, he continues to reiterate the product. And we're going to get to a quote that talks about how he basically stood up for this product in front of disagreement with a lot of the company. You got to fast forward to 1Q 2018 to get this quote, but it is talking about this period right now. And this is the president, Luke Larson, giving Rick Smith credit. And he says, we've come a long way since 2010 when Axon Stock was trading at just under $4 per share and we were under a lot of pressure to exit the body camera business. And instead of exiting, we double down on body cameras. And more importantly, the software ecosystem evidence.com. One particular moment I like to call out is at a company meeting about five years ago, so that would have been in 2013 right before Ferguson. He did a survey in 90% of the company wanted to exit the Axon business, 90%. Rick Smith showed a picture of General Patton from World War II with a quote that said, the road home goes through Berlin. And so this is just not only is he disagreeing with what the market is telling him, he's disagreeing with his own employees at the time. And this is not an easy thing to do by any means. And I love that you just read that quote. As soon as I saw that quote on the report, I got this is my favorite quote. I've seen you know, and again, I'm going to go back to I'm going to make this a thing, even though it was a mistake and not the way I was looking for it. Let's go back to the vagabond CEO think again, a vagabond CEO, a transient individual who's there, you know, board put him in, manage the company. They're exiting that Axon business as soon as the pressure comes, they're not holding out for it. They're not investing in it. And this is now as we know that the linchpin of the entire company. And so it's just so important. And I love founders like this that we get to study that Gary Friedman, the Andy Florence is the Rick Smiths because it is really when they have conviction in something, it's cool to see it over and over again, which we like people who really understand their industry and can see where it's going. And then obviously having the investment strength that as an investor say, Hey, I have a lot of faith in this guy. Maybe we don't see where it's going. But hey, Rick Smith's been at this for a while. He's produced some results. Maybe give him a go and the investors who let him do that were rewarded. But people who are saying, you know, on the short term quarterly basis where I'm sure they exit it and they're looking at that 112,000 percent return that drew some, they go, man, I should have let Rick Smith do his thing. Yeah. And no, I think that's a really good point because this is one of the reasons why we like founder led companies is because in moments like this, they feel like they have the independence and power to actually stand up and say, you know, this is what's happening. Whereas in contrast, you could see Intel with Pat Gensler. He comes in, he's trying to run a turnaround. And then the board lets him go two years later. That's not something that happens so commonly when you have that founder CEO and you could really give them credence in the turnaround. You know, Mark Zuckerberg with Metta, the year of efficiency, even Brian Chesky and Airbnb, when we talk about that, you'll see that they went through their own issues where all of a sudden having that sort of founders authority became very important to turning the ship around. And so this is something that is unique that only really a founder can do. And, you know, okay, Vega Bon CEO, I like that term. And when he comes in taking these different CEO executive and ultimately what they're really just about trying to do is not piss people off so much that they get fired. They're collecting a check and all that. Whereas Rick Smith, he literally believes that he can eliminate killing. We didn't talk mention that before, but that is literally his mission. He wrote a book called The End of Killing. Okay, maybe that's too extreme, but he really does believe that with his product and more people's hands, less people will die. And that is what is motivating him. And that is such a different thing than someone who's motivated by keeping their job. Yeah, and 100%. And, you know, we didn't really finish so from 2011, $1 million in revenue by 2016, five years later, that is just to specify this is just the ax on body camera slash evidence.com business, not the taser business. Right. And so, yeah, you get a 59 X in revenue growth from there, you know, run rating $59 million a year in 2016. So again, at that point, you can kind of see that it's on a pretty significant trajectory. But, you know, from there, let's kind of talk about the impetus of what got the body cam kind of going. What other services pricing strategies did they use to kind of solidify their dominance in this? Because this isn't, you know, taser is, you know, we don't like these Lord Monopoly, but the dominant, you know, 99% market share, you know, I don't know what market is, 100% market share in the US, I don't know. We'll call it the predominant player. And then Bonnie Camp footage is obviously not that not the same market. I mean, they've had dash cams in police cars for a long time that axon was not the dominant provider of that. There are other, you know, businesses trying to produce these body cameras. So what differentiates axon here? This is more competitive. This is something they need to really win. So how do they do that? Yeah. So unlike the taser, where to your point, they were pretty dominant right out the outset, because they basically invented the category. That's not the case with the body cam. Once these start taking off, a lot of other people are jumping at it, creating their own products and all that. Motorola, who basically provides walkie-talkies and, you know, other important software, mission control sort of stuff for all these police departments, they're very quick to jump into this game as well. Panasonic is the one who has basically a leading device together with watch guard, these in-car video cameras, which are particularly popular with highway patrol, because you can imagine you're pulling someone over, they want the videotape of it. And so that all existed before and all that. And so they're all kind of saying, okay, we could do a body cam business too. On top of that, all of these lower-end companies that are saying I could get a camera really cheap from China and I could undercut all of you on price. And so all of them are jumping in. And so, you know, you have some cameras being sold for $150 a piece, whereas the axon, body cam at the price point at that time is coming for $800. And the reason why it's so much more money is because he's bundling the hardware with the software. And he's realizing that this price point is very expensive for people and they're not understanding the differences. And so they're comparing $800 to $150 and the camera specs are pretty similar. And so they're going with the cheaper one. And so this he's realizing is a problem. And so they dropped the price on the camera, they debundled the software from it. And instead they start charging monthly package per officer for the software, $10 a month. And then it could reach up to actually $50 a month if you add other features like external sharing, workflow stuff, reduction, which is a really important feature. Basically, anytime you take a video and you're showing it in a court, you can't show other people's faces in it that aren't involved in the incident. Also, particularly minors, you have to blur at their face. And so now they have these tools that can automatically redact videos that saves them a ton of time because before someone had to manually do that. And on top of that, they're also bundling it with hardware upgrades. And so this is going to be the beginning of kind of moving to more of a recurring revenue model. And they haven't fully jumped into it yet. And we're going to talk about that shortly because that's actually a really important transition. And people can learn a lot from that as well for other businesses, how important that is. But that's what's happening right now. And so people are starting to figure out that this is a better solution. The pricing was a little off on that. But now there are police officers that did buy these cheaper cameras. And they are experiencing what it's like to upload 10 hours of video for a day, manually dragging the files. It's literally taking hours a day to do all this. And it's not worth it. And so having a system like Axon, which automatically, when as soon as you put it in the charger, it starts uploading and categorizes, it does all this for you. It's really important. And then of course, you're starting to get all the traditional software lock in, which officers are getting trained on how the Axon body camera works, the processing evidence, all the systems are being able to round it. And it becomes one of those things, which I'll I'll I'll look back to perimeter, which comes to if something is working efficiently, it's reliable for you to want to switch that behavior. It's not enough for you to say, oh, well, I'm going to do all this, you know, work for it to hopefully work as well as what's currently working. You know, you have to then do something above and beyond at a price point that's dramatically lower to kind of break this lock. And obviously, that's going to be very challenging to do, given the amount of money and resources that Rixmith has built. Right? They're all competencies, right? Like building the R&D department, building the attracting the software engineers who want to, you know, be competent and build these very intuitive systems. This is all very challenging to recreate now. And you know, Rixmith is kind of running away with this category, but you know, they're still work to do because as we kind of alluded to earlier, there's a bit of a problem with their pricing strategy compared to others as well as where they sit in the budget. And so, Dr. Adam, you want to touch on that, but I think that was a really great point you brought up. Yeah, definitely going to touch on that, but there's just one quote right at the time that I think is really awesome. That's worth pointing out. And he says on a 2Q 2013 call, he says, "The long-term value in this business will not be in the camera hardware. It is in the software and services that handle the title wave of digital information seamlessly and easily. Our goal here is not to have a profitable hardware segment in a portion of the market. Our goal is to build a software platform with evidence.com that creates long-term, defensible and profitable value. This means we need to accelerate the market and focus on how do we get 100% market share. Again, this is another founder CEO talking about domination. We need to win this whole thing. I'm fine having the hardware be a money loser. It's about the software and services. Understand the long-term. And I'm not a vagabond CEO who's not going to be here in a few years to take advantage of that." And so, "Listen, Drew, now abusing my term, but mispronouncing vagabond as vagabond." You know what? I got to get out. Otherwise, the people get kind of mad at me. So, I got to make myself a little attackable. Yeah, you've got your own flair to it, which I respect. No, but you know, it's and I don't I mean, I don't know if it's kind of the height of the software. It is funny, you know, Ricksmith definitely like riding the software. We're a software company, you know? And now they're he's kind of like, we're an AI company. So, there's definitely a little bit of that aspect to you know, which I respect because he, you know, he backs it up. It's true. And that is actually a funny point to point out. But, and that is probably too why the stock always treats the way it does. At least more recently. But in terms of, you know, software, it does end up becoming like they have more data than Netflix does. That ends up being, you know, half of their business, more than half their business. And then, you know, you mentioned the AI stuff is really impressive, actually, tools. Some of the best use cases I've actually seen from AI come from Axon. And so that's getting ahead of ourselves though. Right now, we're talking about a business. No, long story short, he's riding the waves, but he seems to actually be executing on the waves and not just, you know, throwing a dot com at the end of his, you know, plant selling business or something, right? These are actually embodying and utilizing this kind of the new way technology to improve on the product, right? You can be a showman if you actually have a substantial show eventually. And so he does. And so we're now talking about this really big important business model transition. This is really smart the way they do this. And so they roll out something called OSP officer safety plan. Now they're bundling the taser, the body cams, the evidence.com software, and warranty as well as upgrades for $100 per officer per month. And the reason why this was so important, you have to understand how budgeting works at a police department, at a lot of these different government offices is that when there's extra surplus budget, it is only then that they will be able to approve a capital outlay. And so for their whole history, they're going to these police departments. They're saying biotaser, maybe they're saying, oh, sorry, we don't have the budget for this year, maybe next year. And so because of that, every taser sale they get, they have to basically fight for it. It's an individual sale because they're fighting for this like surplus budget capital outlay. And so there's not a lot of that. And it comes maybe every several years. And it maybe doesn't line up with really when they launch a new taser. And so there's some people that have a taser that the lifetime's probably about five years. And they're stretching it to seven, eight, nine years. And they're just waiting for that surplus. And the truly ironic piece of all of this is that if instead they change their business model, instead of saying, we'll call it, you know, a grand for a taser, you're going to only outlay a smaller amount, but a smaller amount every month. They would be willing to do that. And on top of that, not only is it getting them more sales and getting them more approvals, it's getting them into like this regular budget of the police department, which doesn't then get cut every year. Because they don't do the 3G zero base budgeting every year. What they do is they look at last year's budget and they'll add a little bit more, take a little bit away. But once you're getting into that regular budget line item, you're much more likely to be there next year. Whereas if you're fighting for that surplus, you're fighting for it all the time. And so that was a really important change that they made to their business model. Even though the taser, it's, you know, a piece of hardware, you sell a product once what's the recurring nature of that. They made it recurring. And so they bundle all this together. They add service contracts, training, all sorts of stuff. And that really helped also improve the predictability of their business model as well as really helped improve the predictability of their recurring revenue. And so that was really important. They did that. They continued to innovate in 2015. They rolled out something called fleet. This can be an in-car video camera. It's kind of funny if you look this up. It looks just like a body camera with like a stick on it. Because that's kind of like their MVP product. They rolled that one out quickly because they realized that was a blind spot for them. But also when they were going to some of these police departments, they wanted all the video on the same platform. And so by doing that, they were able to add it to evidence.com. Now you could kind of see the software ecosystem aspect similar to how you once you own one Apple device, you're more likely to own two. Once you own two, you're more likely to buy a third. And so that actually helps improve client retention as well as usage. And so that was really important for them. And you're saying too that they're adding these other features. to it, one very important one is called ALRP, which means automatic license plate recognition. This is also now just a byproduct of the fact that technology is much better than in 2015 that some of these legacy providers. And so there are able to basically offer this for $30 to $50 a month, the camera, the ALRP technology for $30 to $50 a month versus prior in competitors who are selling a full system for $20,000. So not only is it now technology improvements, it's that business model improvement we're talking about too. And you can imagine how much more ready a police department is to spend $30 a month, than $20,000. And that is going to be another kind of weapon they use to displace a lot of these legacy competitors, watch guard, Panasonic. And so they're tying it to the ecosystem. They're coming in with cheaper prices. They're bundling everything together. They have more software. And on top of that, we didn't mention this yet, but really important is the fact that prosecutors use Evidence.com too. And that is really important because it kind of builds this network effect where it's a lot easier for a police department to send a prosecutor stuff through Evidence.com, then having to do this physical dischained custody, or even if there is another software out there, they're not familiar with it, they're not logged into it. They have to figure out how that works and all that. So there's just more and more of a benefit now to being on Evidence.com. And then the other great thing about Axon is really the data they're able to produce. I mean, they have tangible evidence about, hey, this is how much reduction, and again, before we get into any of the AI report stuff, just the reduction in terms of, okay, when you have to upload a video, it's already on the software system. The prosecutors already has a login. They can look at the information. It's just the amount of administrative burden they're able to lower. It's just much easier for them to justify. And then by being kind of this more manageable cost by breaking this up on monthly, you just start to see that the flywheel getting in here, right? And then I love the mention of, hey, they slapped the body camera on the dash cam, but it doesn't matter, right? Because at the end of the day, what wins out is putting all of this information somewhere that is easily interacted with and then edited and then everything that flows from there. So it's a really exciting time in Axon's history. And we're starting to see just them out execute every year and just get a little bit more distance from any of their very few competitors in the space. Yeah, well, to clarify, they do have competitors in the body camera space. They're dominant, but there are competitors. A lot of them will talk about them later on, but they're dominant in the taser business. Evidence.com is doing very well by one Q 2016 Axon bookings now surpass the taser segment. So the body cam evidence.com bigger business now than their taser business. So this is their AWS guys. This is now bigger than their original business. And on top of that, but this time they decide we're going to rename the company in 2017 to Axon enterprises to better reflect the broad brand that we have. And I mentioned the distributors that they had to use early on. And that's because I wanted to make this point that in 2011, they had 23 distributors, which was already down from prior numbers by 2016, they cut it to just three. And so now they're taking control over all their distribution. They're directly connecting with all their customers. This is allowing them to get feedback to incorporate into their products and other building things that customers actually want. The direct customer connection is also reducing retention. It's also increasing sales. It's also increasing their ability to sell them other services like warranties, more taser darts, whatever it is. And so all of this is really important piece and aspect of why this business was so successful. And now we're going to go a little bit quicker because now that the business is kind of on solid footing, we're going to jump to 2018. They acquired a body cam competitor called VEVU, VIEVU, and this was their top competitor. However, they weren't that big relative to them because they didn't have that same sort of strong software ecosystem. They did have a couple markets that were very sought after though, like the NYPD. And so they make an acquisition of this company. They do actually end up getting sued by the FTC. Lina Khan would end up carrying that lawsuit until 2023 when it ultimately was dropped by them. It's also worth noting though at the time that this body cam device from the company VEVU, whatever you're pronouncing that, it actually exploded. And so the NYPD wanted to turn off all of them thereafter. And so they probably were going to move to Axon anyway because the only way they were able to salvage that deal was by pushing them to Axon hardware early. And so that is what's happening in that business. It's on strong footing. In 2018, this is crazy guys. In 2018, their stock price for the first time surpassed the level it reached in 2004. So 14 years later, it took to finally hit a new height, which goes to show how this another Cisco example over here, right? I mean, it is for this. More Microsoft, because it's really come back now with the new business. You know, the Axon body cam business is kind of like their as their. Yeah, that is something I really, I did not know that. That's a really shocking fact. I mean, so this is 2004. This was pre litigation where everyone was just like, you know, extra, I mean, this is also post tech bubble, right? I mean, so this is the IPO during the tech bubble. So their valuation was already kind of pretty low. And then once people saw taser, it kind of was just becoming a thing, you know, no one knew what it was before. It's getting shown on all these TV shows, cops, etc. The fun fact, Axon, actually at one point created their own TV show too with video cam footage. I believe had one season, but that was why there's so much hub hub involved in all of that. And so we're back though to 2018. Now the stock price hits a new height. They do a little equity offering 230 million. Rick Smith at this point is noting they want to shift the entire business towards subscriptions. And so that's going to just improve the quality of the business. In 2019, they have a lock on the body cam market. The Motorola still is a camera. There's a bunch of other people, but they are clearly the leader in this. They estimate their tam at 600,000, which is funny because that's actually lower than the tam they had in the early 2000s when they IPO'd just goes to show on those those tam figures. And international though is something that's barely penetrated at all. And it's very interesting too because Europe has they're facing both of the issues they faced before earlier on. On one side, all the data regulations, they don't want, you know, they don't even want cloud none of that. But on top of that, a lot of Europe, it's illegal to even have a firearm, even if you're a police officer. It's pretty rare. And so this is thought to be a really great market for the taser. They don't really take advantage of it until a couple of years later when they roll out the taser 10. This is going to be this incredible taser device that actually can shoot 10 prongs very light. Whereas the device prior to it could only shoot up to 25 feet. This one does 45 feet. And so he's basically set on trying to create a device that is just as good as a gun in terms of range, speed, numbers of shots, all of that. And because he wants to replace the gun ultimately, that's why he wrote this book. It came out in 2019 called the end of killing. And I mentioned it before, but he basically speculates a bunch on how technology can ultimately end killing even in a warfare setting instead of using guns and bullets. You're using, you know, drones with tasers and all sorts of crazy stuff like that. We will not get into in this report, but it's important to point out because he is genuine in this mission and wanting to reduce lethality, especially within the policing segment. And so I just want to touch on a few more things and then we're wrapping up history. Well, listen, nothing like it, nothing like an hour and 20 minutes of history, you know, but we did start in 1970 something. So, you know, we've covered, we've covered 50 years. Pretty good. Pretty good. Pretty, pretty good. And so they now are pushing more into all of these kind of software products. They have records management systems, dispatch, which is basically telling police officers where to go. They're really trying to integrate everything. So now they're not only telling maybe a police officer where to go, they're helping show all of the available video camera footage from the body cams as well as also CCTV cameras are being plugged into this platform. And so it's giving them a really good like mission control center so they could give much better data to the police on the ground, tell them where to go. And then also after the fact it's collecting all this data, which is very important in prosecution. And all of this is coming together. Total revenues at this point they continue to grow. And so in 2020 the George Floyd incident happens. It's kind of similar result is what happened in Ferguson, Missouri, except this time there's all these calls to defund the police. And so, you know, the stock takes a hit initially until people figure out that axon, it's a little bit like copart kind of like no matter what environment it kind of benefits because if there's less money to spend on policing, then you're going to want more efficient policing. And a lot of the stuff they offer allows for more efficient policing, especially when they start layering in AI. And all of this kind of software that pulls all the videos, it makes the police officers job easier. AI later on is going to, this is more recent, but it's going to help write police reports for them on their behalf. But on top of that, they're selling transparency. And so that's going to be very important aspect of kind of this police movement is the fact that the body cams do allow people to after the fact see what was happening and it's allowing for transparency and responsibility on both parties to know exactly what happened. And so body cams again kind of explode from 2020. They go from 680 million in revenue. They double by 2022. And by LTM they're doing about 2 billion in revenues now. You know, and one thing before you finish kind of catch up to date, I mean, you know, talking about the cyclicality of the business, you do have this note here that, you know, in 2010. and there was some sluff off from the great recession. I mean, to me, it seems like police budgets are pretty stagnant, dependent irrelevant of the kind of economic outcome. I mean, what was that dip related to? - Yeah, so if you remember, that was the old business model. So it was a lot more cyclical when you're waiting for surplus budget in order to actually sell a taser. Most of a police department's budget is salaries. And so it's very hard for someone who's like the head of a police department to fire people, who it's like kind of like a fraternity of police, right? They feel like their brothers. And so they will literally cut every expense before they actually fire someone. - Do you, do you? - Fire so much. - Department budgets have some type of variability with tax revenue or something or they fix. - Yeah. - I mean, they get voted on, changed all the time. Generally speaking, big picture, they've been going up over time. But during the police defund movement, they did move money out of policing into other areas. I don't know exactly how this is categorized because you could argue that some of these other areas that they move money to, we're still applicable funds to be spent on stuff like video cameras and software. So I don't know exactly how that itemization works at a local level for every department. But the byproduct of it was that more money was still being spent. - You're telling me you haven't memorized the esoteric nature of police budget allocation in each of their respective counties and districts? - You know, I'm, we're 90 minutes into this. I don't know if people want us to get into it. - Yeah, that'll be part three of this, where Drew just rattles off the different allocation processes across the country. But anyway, let's catch up. So we can get to the other section. - Yeah, and so I also want to point out in 2020, they again raised money 700 million. And so their stock price is pretty strong again. And it kind of, it alludes perhaps to how, you know, Rick Smith is thinking about the valuation of the company at this time. But he also just surpassed a very long period where the stock price really didn't move. Also, if you're looking at his net worth, he's worth like a couple billion now against the market cap of 50 billion. We did trace all of his stock sales. He has sold a good amount of stock over time a lot around 2004 too, when that stock did originally increase a lot. And so that, I don't know how relevant that is, just kind of interesting to point out. They do take, the man was probably suffering for many years as the company couldn't hit payroll. I'm sure he was, sure he was happy to put some money in the bank, you know, like, I think it was a Nick Halle quote, which was, you know, well, I sold some stock because my wife wanted a B-chasse, right? Get off my back. Yeah, yeah. I don't know if it was Nick Halle, but I know I think it was a trans dime exact. You could be right though. And so anyway, they raised some money. They start doing some acquisitions. Some smaller acquisitions. One is called Foundry 45, which is a VR training company. This is also a theme. Like a lot of these kind of things that feel like fads or trends, or maybe not fads, but a little bit like bubbles. They do get into, but they actually very good like reasoning for it. And so they buy this VR company. And they basically do taser training on VR. And that actually is a very important thing to do for people because they need to train to be able to shoot the prongs into someone, two prongs, very well, they're moving at them very quickly. And they don't want someone to actually have to volunteer for that, which they do do sometimes, but that of course does actually cause pain. And so it is a good use case for VR. They roll that into the same sort of monthly service offering in 2023. They buy something called Sky Hero. This is going to be a drone company. Again, really kind of early to this, but this is going to be big because a lot of police departments do not have their own drones. The FAA, it's not legal for them to even fly drones without approval. But more and more now, there are these incidents with drones, unfortunately. And in some cases, there was actually an incident with someone with a drone trying to fly it over a stadium with a bomb in it. And so the police departments are going to need to figure out ways to address this. And they bought this company. They bought another one, too, called D-Drone in 2024. And both of those together, it's all about detecting drones ahead of time, giving police officers info, but then also giving them counter-capability so they could launch their own drones so they could address this. Also, if you're thinking about a police officer going to a place where they, you know, maybe it's dangerous, someone is shooting, it would be great if they could get a drone there first to see where the person is so then they can have that sort of information to tell the police officers instead of going in blind. Oh, man, am I hearing the advent of AI drones with tasers mounted to them? Is that what I'm hearing? So they did actually, they announced it, and they rolled that back, because they got a lot of backlash. I would not be surprised, though, if we see that again in some time soon. Yeah, this is definitely looking, you know, like a Robocop dystopian. We have AI drones flying around, or maybe a safer world. I don't know, depends who's wielding the AI drones with tasers, but, you know. Yeah, this is a business podcast, not socio-political commentary, but if there ever were AI drones with tasers, I believe it will probably be axon that is making them. And that would be good for the stock, and that's where we'll end our discussion. And one more thing before we kind of close this out, they, as I was mentioning, they're getting more into all this software, providing real-time operational info for police. So they buy something called a fuses, I think is how it's pronounced. That's another company. And now, so just kind of wrapping it up, if we think about what's happened. They started as the single-product company of a product that literally didn't even work. And now they have multiple business line items, hardware and software. They're basically a platform that the police rely on. They're becoming enmeshed as the technology provider for police everywhere. And all of these new sorts of things are just gonna be able to plug into this platform very easily, even if they're not the first one to get to drones and get the best AI taser drone. The ability to plug it into the platform is gonna be very important. And so that is where they are now. They're very dominant. But the question is gonna be profitability. Our mature margins and illusion. What about international? Now that this is a big market, competition is still going after them. And so there is so much more that we need to talk about including how do they make money? - Yeah, including how do they make money? And again, we've alluded to it, but let's really dive into the segments. All right, so we're an hour and a half in now. We haven't really gotten too much into what exactly the business does. I mean, obviously we've spoken about it a lot, but let's get into a little of the revenue segments. I mean, how are investors getting insight? What kind of granularity do they have? Maybe just give us some kind of high level overview. What's taser? What's cloud? What's the composition of the actual line items here? - Yeah, I think actually this time, listeners have a little bit more of an idea than usually this far into the podcast and how they make money. But okay, so there's two segments, two operating segments, which is taser, and then the other one is gonna be software and sensors. It's a little confusing 'cause they also have two separate revenue segments, which overlap those operating segments. And so that's kind of confusing to look at, but in our report, we have a table. It makes all that clear. So just the taser revenue, which includes, you know, their taser weapons, the cartridges, the warranties, as well as any sort of cloud services that are tied to the taser, 'cause the taser does have its own cloud services tied to it. That is gonna be about 40% of revenues, and then the other 60% of revenues is gonna be the software and sensors revenue segment. And so that's gonna be the body cams, the car cams, which are called fleets. That's gonna be all of the cloud revenue, all of the software revenue, the axon platform, evidence.com, the record management software, their dispatch software, all of that, and we'll get more into that later, but that's kind of all their group together. And so you could kind of see that high level, if you're just looking at these two segments, gross profits from taser is about 60%, and then software, it's also 60%, which is interesting to note, because again, though, both of these segments, they kind of have some products and services bundled together. And so they also separately break out these revenue line items in terms of just products and services. And so if you're looking at just product gross margins, those are gonna be 53%, call it low 50s, and then if you're looking at service gross margin, that's gonna be 74. And then you can also look at that with in each segment, but I feel like this is already getting confusing enough as it is, so go ahead, look at that table on the report, and it will be a lot clearer. But then I really like the level of detail that they're breaking out, right? I mean, you have the taser segment, and then within that taser segment, right, you have all the different line items, what that's bringing in, then you have the software and sensor segment, all the different line items, what that's bringing in, and it kind of allows you to get this better view of how the ecosystem is tying in, and really where a lot of the revenue growth is driving. So I do like, I mean, I have to say, I wanna say Kudos, there's a lot of disclosure here, and I think that that's refreshing, right? I mean, I'm sure they could consolidate a lot of this, obfuscate a lot of what's happening in the business, but that doesn't seem to be what's happening. I mean, how do you think about a level of disclosure from floor into core to, I don't know, we'll say like an apple in terms of what a level of detail they give you about what's going on. Like, where would you say axon rakes? It's pretty good. It's a lot of disclosure, almost at the point of slight confusion looking at it, but it is all helpful and it makes sense. So all of that's great. I don't know, sometimes they talk about bookings, and maybe that's like not the clearest, barometer, but yeah, all the revenue stuff, it makes sense. They even have like gross margins, and R&D by segment, and all of that is kind of interesting to look at. I don't know how much you can really take away from it, but there's solid disclosure. - Yeah, and you're bringing up a great point out the gross profit, and this kind of goes to, if you look at like the taser device level, and obviously they have a little bit of software, 'cause they don't give gross profit by the broken down segments. It's by like, by the overall larger segments, right? Like you can see the-- - So just to clarify, they give gross profit for taser, And then they also give gross profit for software and sensors. But then separately, they give gross profit for products. And then they also give gross profit for services. And so it's confusing because there's products and services that both exist within the Taser segment and other products and services that both exist within the software and sensor segment. Okay, got it. I think that the point is still valid in the sense that you're running a 60% gross margin essentially on that Taser category. Yeah, that includes some software component. But essentially what we're showing here is that they're producing these Taser from a device level standpoint. And they're able to market up quite significantly. And so you can see that this ecosystem is really defending that Taser pricing versus it. You know, if you kind of got this to a race to a bottom and you were just trying to earn kind of like a very like hyper competitive market if there are 20 tasers in there, you can definitely see their their defense of the Taser pricing pretty well on gross margin. Right. Right. You can say that the Taser device itself gross margin is roughly about 60%. Which is pretty pretty strong for a consumer electronic device. And actually it's kind of funny because consumer electronic devices, CED, and they'll use that acronym. But if they use the acronym, CED, what they're really referring to is something called a conductive electricity device, which is what the Taser is. Right. And you know, juice full of fun facts. So thank you for that one. But you know, I had to say reading this, I really enjoyed that level of detail. And so you were kind of doing that gross, gross margin discussion. I mean, obviously the chart is helpful. You know, did you really give it like kind of a size of the revenue segments? Like not in dollars. No. Okay. Yeah. And then maybe just give kind of a size of the revenue segments in dollars. And what's kind of driving a lot of the growth right now? I think that would be kind of an interesting discussion. Yeah. So again, it's like roughly 60% for the software and sensors who called that 1.2 billion roughly and then maybe around 800 million for the tasers rounding. And so that's 40%. And then within that, they do itemize. Actually, it a lot more, which is kind of that disclosure we're talking about. And so you could actually see within the taser segment, there's taser devices. That's only 20% of revenue. Then there's cartridges. That's within the segment, you could see that there's taser devices. That's roughly 40% of the revenue. And then there's cartridges. That's roughly 20% of the revenue and so on and so on. The acts on evidence, extended warranties and others and the training and stuff, the VR training we mentioned earlier, all that exists right within the taser segment and they itemize all that. And so what is the biggest driver of that? Well, it's kind of everything because you buy the taser device. It comes with all of that together. If you look at though what total revenue growth is, you know, most recently in 3Q24, which is the last quarter they reported, you see that the software and sensor segment was growing 36% year-over-year and the taser segment was also growing 36% year-over-year. And so both of them are just absolutely on fire in terms of growth. In the past couple of years, there's actually been a re-exceleration of growth, which was something we could get to later on. But basically in response to a lot of the defund the police stuff and kind of a lot of the defund the police stuff, a lot of the focus on policing transparency. It resulted in people just spending a lot more money on body cams, on a lot of the services they're offering in terms of cloud services, evidence.com, all of that. And on top of that, they're just starting to really penetrate international, which is going to be a big market for them especially because most police officers internationally do not carry guns. And so a taser is a very good alternative if you can't have a weapon. Yeah, and they're just kind of diving into the segments a little bit more, which is, you know, as you're speaking about, I mean, a lot of detail here. You know, within that software and sensor segment, you have, you know, the axon evidence and cloud services, which is roughly $700 million out of that segment. So, you know, the largest kind of line item, you know, one question that kind of popped into mind as we spoke about the bundling. And I'm sure this is deep in the report. And I know you talk a little bit about revenue recognition. But given that this is a bundle, I do wonder how they're attributing, like when they get a new package, you know, and they're saying, oh, you get 100 bucks a month and you get this segment. I don't really know what the split is. Like, how can you say, well, this is for the cam? This is for that. I mean, I'm sure they have something internally. But it is probably hard to actually attribute, you know, that granularly the value that you do get them saying? Yeah. They actually have some slides on the accounting on all of that. And there's kind of an insulinary point to that. That's, you know, worth pointing out here, which is the revenue recognition and the cash flows. And so what ends up happening when you have this big bundle that you're delivering and just to clarify, the bundle could be the taser, the body cam, it could be extra cartridges. And you have a warranty over several years and a lot of times in the bundle two, you're bundling software. And on top of that, you're actually bundling a right to upgrade, which is really important to because basically what that means is they're paying for this upgrade kind of ahead of time. And so instead of all of a sudden, another big capital outlay, you're just getting a free device two years later, three years later, five years later for both the body cams and the tasers. And so that's kind of what the bundle is. And then what ends up happening is that they first deliver the bundle to someone. And so they're recognizing all of the expenses up front, but they're not recognizing the revenue up front. It's recognized over the entire term of the contract. And so that actually means as they're growing and growing quickly, that is weighing on their profit they're showing on their PNL because you have expenses outstripping the revenue. And so the revenue that's going to be earned for say, delivering a taser 10, the cartridges, the warranty, the right to update, it's going to be delivered. It's going to be recognized over, you know, five years or seven years. And there's a slide in the report that we pull that gives you a little bit more detail on that, but that's roughly what's happening. And then there's also the cash flow aspect of that. You have cash outflows immediately because you spent money to create all of this hardware and you gave it to them. And so that's the cash outflow. But the cash inflow is going to basically be recognized over the contract. And so that's also weighing on the cash flows. And so that's why the CFO talks about why the CFO talks about why they're free cash flow lags, they're the revenue so much on terms of cash conversion. But we could talk more about that later too when we get to the ROIC and free cash flow section. But that's an important point to kind of just note up front. And so that does impact the way you're looking at revenues. But the upside to all of that is, you know, 95% or something like that of revenues are these subscription revenues. And so they're not technically, I don't think recurring revenues because it's not necessarily the case that you're going to renew it at the end of a contract, but pretty much it is. And so that has really been a big thing for them. And they've been only pushing more and more into this, you know, most recently on this last call, they talked about how they have something called draft one. And this they introduced, I don't know, maybe a year ago, a little under a year ago. And that's this big cool AI tool that the AI basically grabs all the police videos. And it starts writing a police report for the police. And even though it's not perfect, it rapidly speeds up the process for a police officer to edit the report submitted. And so it's saving a lot of time. And they charge $200 a month for that. And they're throwing that into the bundle too. And so there's really kind of a lot of things within that that are going to continue to grow too as they add more software and services. Yeah. And obviously you mentioned, okay, there's the whole cruel accounting aspect and trying to unpack all that. But I mean, you know, I think the investor, you know, many investors will care about hard cash flow impact. And so clearly when you're providing this hardware upfront and then you're radically kind of recognizing revenue. And I'm not saying that in a cruel standpoint in terms of you're actually getting the subscription cash over a period of time, you know, I mean, that is obviously going to hinder some cash flow dynamics. But you know, you would think that after a while a customer who's been with him consistently, that'll kind of fade away, right? I mean, it's kind of like more experience on that first time growth that they're hitting. Like when you kind of come into a new police department and you outlay all that capital and then you're kind of making it back in that first year or so. I mean, do you get what I'm saying on that dynamic? Not really because it can be lumpy. Because at one point in the contract, they're going to deliver a more body cams. And at another point, they're going to deliver a more tasers. And when that happens, there's going to be another expense recognized with that. But you're not collecting more cash in that period. And so it does cause some distortions. But as these contracts kind of age and everyone's moving to these contracts, it should kind of even out over time. Right. And I guess that's what I mean. So like this is showing up right now more so because as customers, one, they're adding customers, right? That's more cash. That's the big thing. It's the growth. It's the growth is the big thing. Yeah. Right. And so yeah, like you mentioned, once you're kind of on this structure and you're kind of lapping, you know, previously, it kind of washes out in the end. And so long as we're out of the make money, they sell tasers, they sell body cams, they sell software. I mean, they break it down in these very kind of complex and different products that they're delivering. But I think that that's kind of the high level segment overview and what they do to, you know, bring the revenue in. And so, you know, one thing we could touch on is, you know, as we're kind of in this business segment, you know, I would say maybe it's the other bets, not other bets, but kind of other parts in their ecosystem that we've alluded to, but haven't spent too much time on, you know, I'm thinking things like axon air. We kind of left off with the joke about the drones, but that's something that they're investing in. You have kind of the axon training systems with the VR, making sure that police officers are kind of, you know, up to date with all that. I mean, do any kind of other big, you know, other kind of segments that aren't in that core, we spoke about? Yeah. So, like within the software, there's kind of these two categories of software. And we'll talk about this a little bit more in the competition section, but there's something called CAD, which is computer aided dispatch and something else called RMS, which is record management systems. And so those are kind of these two big categories of software or in databases that they play in. And then, yeah, tear point, axon air. This is basically their equipping drones with cameras. And now law enforcement will have kind of eyes on situations they could dispatch a drone somewhere earlier. They didn't know acquisition is something called D-drone. That's all about the-- drone detection. So we want police to know if there's a drone somewhere in the area, so they could see whether or not that's going to be something they have to address. And then ideally, they also have their own drones that could go out and help potentially take that drone down, if they have to. And this is going to be a big thing in the future. And we're seeing it a little bit in these wars that are going on in Ukraine and Russia. How much drones have really changed warfare. And we also, you know, we joked about it on a couple podcasts to go the New Jersey drone thing. But whatever's going on there, clearly it would be helpful for law enforcement if it was some sort of threat for them to actually have a capability to address that. And there was an incident where someone, you know, had a drone and had a bomb on it. And thankfully nothing happened. But there's really nothing that a police agency can do right now to address that because the FAA doesn't allow them to fly drones. And so they need FAA approval. And that's going to be very hard to do on a one off basis. So there's something's going to have to change there. And there's going to eventually be some sort of law enforcement response that's going to be air based. And drones make sense because they're cheap. They're easy to control. You could throw video cameras on them. We joked about whether or not they're going to throw taser on them. They actually did announce that and they pulled it back because of backlash. But I think eventually that's going to happen too. And Rick Smith actually kind of talks about that in his book, The End of Killing. And so all that stuff is a little scary and all that. But you definitely want the good guys to at least have it and have a response. And then the other thing as you mentioned is just the VR. There's not a lot to say on there now. They basically use VR goggles and they have a VR taser kind of a device that doesn't actually shoot and they use that in training. There's some videos of it online. That could also potentially be the longer term, like a more interesting sort of avenue for them to extend training because you can imagine them doing kind of scenarios that aren't just the taser, but all sorts of other training for law enforcement within VR. Again, this is early, but that is something that could be a big kind of growth avenue longer term because imagine, you know, because, you know, when you're trying to pilot, you give them a flight simulator and they get much more training on the flight simulator than they do on a real plane. And that's a very important aspect of their training. And so doing something similar for police could be very important to make sure a lot of these police know how to handle all sorts of a variety of different situations. And so that's not really what it is now now. It's mostly just focused on the taser training, but I think it could go there as well. And so that's also a call option. Yeah, I like how, you know, Drew's bringing up, you know, Buffett famously invested into the flight simulator company. Drew's thing, well, what about taser simulators? Maybe those are similar. But yeah, I will see. I don't think they have the similar economics quite to the, you know, large upfront cost of flight simulator that you use a lot of hours, but you know, who knows? I get where you're going with that. And there you go. You're doubting Rick Smith. I love it. No, no, no, no, last person that doubted, listen, Rick Smith. I'm not a doubtor. I just want to be known about doubting Rick Smith. You know, if he hears me, we're doing, he's got a taser for you. Exactly. Yeah, not the guy. He's going to have a drone taser soon. So, but anyway, let's segway a little bit. There's not too much to say on some of these, you know, ancillary products that they have. I mean, it definitely is supporting the ecosystem. I mean, clearly they've demonstrated, and that's why he spent so much time on history, demonstrating the ability to innovate and their respective field, you know, and continue to kind of push the envelope in terms of delivering to their, you know, police partners, you know, important products. So one thing I want to talk about a little bit, you know, since we're on the business and talking a little bit of the financials here, you know, what are we looking at in terms of operating profit? I mean, you know, we talked about the durability of the ecosystem, the high gross margins. Take us on a little bit like, you know, are we earning a lot of money here? What's going on? Yeah. So in terms of operating profit, they don't have much. And so that is largely a byproduct to two things. One kind of the dynamics I mentioned of expenses being recognized ahead of revenue in a lot of cases, but also they just spend a lot on R&D. They really do continue to invest a lot. They invest a lot in marketing and all that. And so you haven't really seen these mature margins come through. And, you know, 2023, 2024, you're looking at a low double digit 10% roughly operating margin. Interestingly enough, so they do say that mature margins are going to be about 30% adjusted EBITDA. That's a made up number though that I don't like. They did for whatever reason in 2014. And we're going to talk about this more in the evaluation section actually, but he did say that mature margins could be 24% and that was in 2014, I believe. And so where that 24% comes from, I can not exactly say, but it does drive with a 30% adjusted EBITDA margin because you're layering in a couple points of DNA, a few points of SBC. They do have a lot of SBC. And that roughly gets you there. And so that's our framework for thinking about that. We'll talk more about the mature margins later, but just in terms of actual operating profits, not a lot right now. Wow, look at Drew. You know, back to his roots throwing out adjusted EBITDA. We lost him for a second in perimeter where he was throwing that term around left and right, but, you know, I'm glad he's back. You know, I guess the way they get me is that they don't give me any alternative. And I have to say something, but yeah, there you go. I mean, yeah, they had to win you over. That's all you had to go with. So, but no, no, obviously very, you know, a company that's experiencing a lot of growth, investing heavily. So, you know, yeah, I mean, we haven't really, I mean, in their history, we haven't really seen them put up, you know, like 25% operating margins. Have we? I mean, they've always been kind of in this investment story. I mean, has there been any time where they've posted pretty positive operating margins? So, not really since actually they launched the Axon Bodycam business have margins really kind of recovered from that. If you're looking at like 2007, that's probably where around where margins peaked. That was, you know, a higher 20% margin, but very different business now. And so you can imagine with all of the improvements in the business, a lot more software, a lot more recurring revenue, you should be able to see a much higher margin now than you would have been able to see back then. But yeah, for the past many years, really since almost Ferguson, and they started investing a lot more, more aggressively and growth was a lot more aggressive. And that was kind of that same dynamic of the expenses running ahead of the revenue recognition. Margin's really continued to compress a lot. Right. And so, you know, that's one of those things where obviously management saying I'm a term margin, you know, you haven't really seen them ever execute at that level. So, you know, it's tough to say. And then, you know, I mean, you got to break down, which part of this spend is going to growth, which part is made. And so it's difficult to see. But I mean, again, we'll get into this valuation section. But given, you know, the software tendency to this business, it doesn't seem like an out of, you know, outlandish number. No, it seems very, very achievable 25% mature margins. And so, you know, we'll get into that when we talk ROIC and valuation. But, you know, one thing about this company is obviously this is a growth story, you know, anyone who's followed this company, I mean, they're, they have a lot riding on their ability to execute long into the future and really grow into the valuation. And so I think it's very important to kind of understand the industry. I mean, who are they selling to? How much money could is even available to be spent on items like this? And is, you know, again, as we do that reverse DCF, we're going to kind of model out. Okay, well, this is what revenues going to be in X year. I mean, is that even a feasible number or is it going to come to something like, well, there's going to be no police officers and axons the entire budget, right? I mean, so these are good things to understand. So, why don't you take us through the industry? Who are they actually end customers other than police officers, you know, global domestic? And then what are they kind of saying that Tam is, I mean, it's funny. We already saw from the 2001 IPO. I think you said there were less police officers now in their Tam estimates than there were. So, you know, yeah, the drop that so I guess there's less police officers now 24 years later. But you know how Tam goes. I mean, it's definitely, it's anybody's guess so you can't fault anybody, but you just want to make sure that directionally it makes sense. But without that preamble, all right, Drew, tell us a little bit who are the end customers in this? Yeah. So, I'll start by saying that end customers, they kind of group them into four categories. They have US state and local government officials. They have US federal government, then they have international governments, and then they have commercial enterprises. They don't even list consumer most recently when they showed in a 4-Hue 2022 earnings presentation, their main segments. Although they do break out consumer in the Tam, they update this Tam a lot. In, you know, a report we kind of just showed all the times they updated the Tam. Just because every time you see a Tam update, you have a little less faith in it. So, that's kind of why we put out all the differences. Especially as the stock is going up, it's kind of like, well, just kidding, that was, we need a, we have a much bigger Tam, you know. Yeah, find me another 10 billion of revenue. So, again, for reference right now, they're doing around 2 billion in revenues. If you looked at August 2020, they would have said their Tam was 27 billion. If you, when the biggest jumps comes in November 2021, when all of a sudden the Tam is now jumping to 52 billion. And so they added this whole consumer safety category, which they estimated at 18 billion. So, that was a big jump. And then in 4-Hue 2022, a couple of years later, it gets rounded back down to 50 billion. And then in 1-Hue 24, two years later, it goes back up and now it's 77 billion because they added acts on air and VR. And so it's all of the 50% increase right there, you know. Yeah, you know, it's always good. But on a EV to Tam basis, anyway, 2021 again, I don't know what's going on. Yeah. That's just kind of big picture. There's obviously a lot of money just within public safety. There's, you know, correctional facilities, kind of just pulling out some of the bigger what we'll consider kind of like the more realistic Tam's you have, you know, digital evidence management. That's 10 billion. So they say, you have real-time operations productivity. That's 11 billion. A camera hardware 10 acts on air in ARVR. They say seven. They have professional tasers, five, and then personal protection is five. And this is global, right? Yeah, this is global. Yeah. - Yeah, they say the US is about 70% roughly of that though. They have all these different categories and they're changing them and it's kind of confusing to look at, but big picture, two billion revenue, there's a lot of money that is spent on just, you know, law enforcement and correction facilities just in the US. That's a $215 billion budget. And so there is a lot of money and that budget basically increases every year, even with the defund the police movement. It barely stagnated. The budget's moved around a little bit in some local levels and then they're made up like more so a year or two later when crime went up because that's what happens when you're not police. Sorry, no political commentary. Well, you know, I think that's factual if you have no one policing that let you know. Anyway, no, no, so I mean, generally let's break this down a little bit. So one, you have these moving tam figures. I mean, they're trying to add VR, I mean, all these things. I mean, what's your just take on the tam? I mean, is this something that concerns you? I mean, do you see other companies messing with it a lot? I mean, is this them just trying to say like, "Hey, our valuation's gone up so much for investors to be interested?" I mean, they got it. I mean, what do you think is the motivation there? I don't know, honestly. It made sense that they talked about the tam of Axon Air and VR when those were like new segments they're talking about. They continue to readjust the segments, though. They rename them. They round the numbers up. They round them down. I don't know if it's just like a different person doing this presentation every time. Sorry, no disrespect. I are, but it moves around a lot. And every time it moves around, it's kind of like how much faith do you really happen these numbers? Yeah, I mean, one thing about the tam that I think I took away from this is kind of two things, which is one, obviously, that general trend of, you know, and again, I mean, I guess you can't say this for a fact that the population is increasing in the US. But we'll say that in general, US public safety is on a trend upwards in terms of spend. And then the other thing is is clearly, right, IT is becoming a larger portion of that spend. And so, you know, I could see a world in which the incremental dollar, right? Like obviously you talk about how salaries are such a large portion of the budget. I think you mentioned 80% or something. 80 to 95, yeah. 80 to 95%. And then you also mention, you know, listen, the software isn't going to yell at you or you're not going to feel bad about it. You weren't at a barbecue with your software. You're going to feel much worse about layoffs. So clearly, you know, you made a very real judgment call, which is, hey, things that are usually the first to go or not people. But what I could see happening, and this would make me be a credence to Axon is the fact that as incremental dollars kind of get added to budgets, leveraging the individuals you have to be able to do more work, right? And then obviously, if your axon's increasing subscription costs or adding more layers on, that cost is still going to be a lot less than a full time employee. And so I could see them getting a larger share of that, you know, incremental spend. Yeah, thank you for bringing that up too, because what ended up happening with the defund the police movement is that it really tarnished the desirability of someone wanting to become a police officer. And so they had a really hard time recruiting people. And a lot of these police departments remained understaffed. And as a result, they kind of had to lean on, you know, different solutions to free up officers time. And so by using, you know, stuff like draft one, which writes the police reports, it allowed an officer to save many hours a week that they would have spent writing a police report to now have more time they could actually be out on the field. And so these kind of AI tools are making a police officer more efficient. It's giving them more time, which is also saving a money, too. And so even though it is a capital outlay, if you got rid of this stuff, it would be much more inefficient. Like imagine you got rid of evidence.com, and now you're going back to hiring a career to hand deliver a physical disk. Like there's no world in which that is saving you. And so to kind of push back on something you said, oh, you never take your software to a barbecue. So it's easier to fire. That's not really the case anymore. Like this stuff is very sticky. They're not going to get rid of it. It's very unlikely they even replace it with a competitor's product for things we're going to get to later on. Really what that is more relevant to is increasing spend. And then also when they were on this old model of like these cat-backs base kind of budgets that they are fighting for, this kind of surplus budget went before they moved to a recurring budget line item. And so that dynamic has definitely kind of changed. And it's not as likely that they're going to ever really cut the spend on axon because it's a bundle. It's used every day. It's used by all these police officers. There's all these efficiency and productivity benefits, et cetera. Yeah. And one thing-- and I guess you could talk about this a little earlier-- but this might be a good point to bring up-- how can axon deliver price increases? I mean, given that the budgets fixed in each budget, I don't know if they just add 2% to it each year, or how much pricing power do they really have? I mean, because clearly that's the beauty of a software lock-in. You can kind of extract some of the good will you created eventually and increased margins that way. So not sure if you have any color there. Yeah. Historically, they've never really talked about raising prices on something that's already existed. It's mostly they create new things, throw it in the bundle, and upcharge for it. All of these new AI features are the most recent example of this. Now they're charging $200 a month for a one draft, which writes the police reports. And it's worth it because imagine how many hours it takes to write all of the police reports for a month. And versus $200 an AI is going to help you do that all. You're easily saving. I forget the exact figures. I think they put out some figures. It was like 10 hours a week. And so you could do that math per hour. It's less money paying for that AI feature than hiring an extra police officer. And so that's really been their strategy is they've just been bundling more things. They'll come out with a new taser. It's a better taser. They'll charge more for that. And so it's really about kind of improving their value and charging more for the things that they're doing. They could say we have a monopoly-- sorry, we don't use that word-- on taser. And we're going to start charging more for it. That really hasn't been what they've been doing, though. It's really been more about the bundle and continue to add more things and cross-selling. Right. And again, it's funny. You have that great memo about consumer surplus and kind of thought experiment of private equity bought out Costco. Well, it would be one of the first things they did, which, as you mentioned, is a price hike. And so I think it's smart, Rick Smith, is leaving, like we mentioned, a lot of consumer surplus there and making sure that when prices go up or something in that nature, it's a value-added service. And I think that's a good way to continue to build a relationship. Yeah, but the other thing, also, to keep in mind is who is paying for this. And so it's ultimately taxpayers. And there's someone in charge of a budget. And so they have to make sure there's money for it. But at the end of the day, they don't really care that much. As long as there's money for it, if you're raising prices, it's not like it's coming out of anyone's pocket. There's no shareholders that are going to yell and taxpayers, you know, maybe Doge is a little bit of a difference in terms of this, but by and large people. That would be the state. A lot of it would be the local Doge, I guess, for some of them. Which I don't know if there's local Doge is yet. So, well, they do a federal contract too, as well. But that is a much smaller aspect. But yeah, so it is a little bit different of a dynamic, because where does the good will lie? Okay, cops love them. Do taxpayers necessarily love the taser? Well, it's better than alternatives. But it's kind of hard to say there's like good will there. They probably appreciate the body cams, at least a good portion do. And so it's a little tricky to say that. But again, as long as there's budget there, they can kind of continue to soak up some of that. But that also does make that pricing conversation harder, because you can imagine them, you know, some local police department saying, like, we don't have budget for that. And it's not a matter of like, we'll find it somewhere else. It's like, that's it. You know, we're not going to cut police officer salaries. So that's, it is what it is. Yeah, it's a good point. Yeah, who the good will is with? And you know, you're right. It's an interesting discussion. But I would have to imagine that if there's, you know, mission, like we mentioned, if the mission critical, the police officers like them, I think that, you know, some things are moved around to find the budget versus other things, right? And so it's a good point though. But let's get into a little bit of what we've been kind of dancing around, which is the competition section. And so I love the way you break this down. You know, it kind of reminds me of the perimeter competition section. Super long for the fire retardant section. And similarly here, the non-lethal device alternative, IE the taser device competition section is not very long. But Rick Smith's brother does have a lasso device that I had a YouTube because after reading this, I go, I cannot imagine that that is effective or works at all. I saw some videos. I wasn't convinced. I'll have to say, I'll have to say there was one video I saw, which was like a live action of it. And there was a, you know, a suspect and he wasn't cooperating. So they hit him with the lasso and it didn't incapacitate at all at all. But he was so confused by what happened. He just kind of like, he's stupided to being arrested. I don't know if you saw that video. Yeah, yeah, yeah. The top comment was like, this thing just confused him so bad. He'll just let it go. I was like, I guess that's just right. Yeah. But anyway, enough of that. Get into the non-lethal device alternative. And you can talk to him seriously about the lasso. You know, definitely I'm making fun of it. But I mean, maybe people made fun of the taser earlier. Maybe it's something to be, you know, it's thanks seriously about. So it's a one of you enlighten us. Yeah. So competition, we bucket it into three groups. There's non-lethal device alternatives. So that's going to be the taser competition. There's officer video. That's going to be the body cam basically competition, as well as in car video. And then three is going to be cloud and software solutions. That's going to be all these different software providers. A lot of legacy software providers are separately offering police software for many decades, even before the body cams kind of came to the scene. And so all of that's the competition. Let's start with the taser competition. This is the most fun. So the taser, as I mentioned, they do conductive electricity devices. In terms of like a device that actually works like a taser, there are number one. No one else does that. What are the alternatives? OK, well, you have batons. So you can-- this is grizzly, I know. But this is how-- policing worked before the taser was people would be beat into submission basically if they didn't cooperate and so they have batons, they have fists they could use, pepper spray is another thing but pepper spray isn't great because it doesn't actually stop someone from moving it just blinds them and so they could still charge at you and similarly it also very often inflicts friendly fire on the person shooting the pepper spray you could get some in your eye too and burn. There's rubber bullets those also could just end up pissing someone off they also could be much more dangerous than their stun guns which are similar to a taser except they don't actually shoot out the prongs so there's no range so it's much more dangerous so it has all of the disadvantages of a taser and none of the advantages so not a great solution either just real quick on why a taser is actually like a good solution is if someone is you know mentally ill angry they could be on drugs they could be wild and they're saying they're gonna attack you or they're running at you you basically want to stop them in their tracks without trying it without hurting them or causing permanent damage and so the way the taser works is that it puts these two prongs it shoots the electricity it puts enough electricity through the muscles that they actually can't contract on their own volition anymore and so it stops the ability to move basically and they're gonna usually fall to the ground and the fall to the ground hurts but that's much better than these alternatives and another alternative by the way is pulling out the gun and shooting someone which is obviously not what anyone wants and so while we really should have explained the mechanics of a taser much earlier than hour two but that's fine this way they they're constantly getting new information and they feel like they're they got to stay involved and so you know maybe later on we'll explain what the stock ticker is and so that's basically why the taser is stress such a strong alternative these are all bad things to happen but it's the best of the bad and okay so the rick smith's brother Tom basically they had a falling out this is back in 2012 he left taser international as it's called at the time before they renamed to axon and he comes out with something several years later called the bolo wrap and this is that lasso thing what this basically does is it shoots a rope with these two kind of like weights on both sides that then wrap around someone and so the idea at its best is that you're shooting this rope and their arms are together and it closes their arms to their body and so they can't move their body or they do it on their legs and so they can't run or they can't charge and this looks a lot better optically like you're getting wrapped up in a rope it doesn't look that grizzly is being tased it probably doesn't have the same sort of very tail risk events where if someone does have a pre-existing cardiovascular condition or is on certain drugs being tased could lead to a cardiovascular event and in some cases death and so that probably doesn't have that issue with the bolo wrap on the other side of it the this bolo wrap it does have these spikes at the ends that do go into people people are still gonna fall but most importantly it doesn't work so I watch all these videos I do recommend looking at the videos because at first you're gonna be like this thing is really cool and then you're gonna think about how it actually works and you're gonna realize instantly the issues with it and so first of all you need an eight foot range and so you can imagine like if someone is standing near a pole or something like that or in a doorway like all of a sudden it doesn't work like a doorway is its weakness that's a problem and on on top of that if you have your arm up one arm up two arms up and you hit the hit it with the body all it does is wrap a rope around your body and it doesn't actually stop you on top of that you only get one shot so you got to make it good and if they're moving it's very hard to actually get this right and it is kind of funny though I read a report where someone used a bolo wrap on someone in a hotel who's like jumping up and down with the knife and they didn't have a taser and so like they're gonna try this bolo wrap and they shoot it and wraps around this person's body it only gets one arm so one arm is on the body and the other arm is still free and the person just stops because they're so confused what just happened like they just give up but massive confusion yeah you can't get a big advantage right now yeah I don't know what to do maybe this is so lame maybe there are some correspondence you know who saw the taser and his early days who were laughing about it oh this thing it you know it's like a little it's like you shocked yourself on the carpet or something I mean so who knows maybe the bolo wraps got legs eventually yeah I think of all of the other alternatives it's like the best but the tazers like much better especially if you're looking at a taser now so the taser 10 has 10 shots so now you only need two shots on someone to tase them and so that means you basically have nine tries and it also means though that you can do multiple assailants at once if necessary or pretty rapidly and so there's that aspect to it the cartridges are reloaded pretty quickly there's 45 feet of range so that's a lot of range and you don't need all this wide space in order to use it and it actually incapacitates them and there's not this risk that oh you know one arm is up and whoops that was the arm with the gun and so you get shot and that is not what you really want to risk with the bolo wrap the bolo wrap has not created their maximally possible product yet I think that they're still far away from it but maybe one day it'll be like wonder woman's lasso and you just you can't even you can't even move but not the case so anyway I think taser I mean long story short very similar to perimeter's fire retardant business they're pretty dominant and not a lot on the horizon to disrupt them so let's get into kind of the more interesting second not interesting but more more competitive segments I mean so let's talk officer video I mean they were as we mentioned I mean dash cams were the first type of video to be captured regularly you know Rick Smith was early to officer video he had kind of a head camera for a while and then ultimately as we mentioned invested heavily into the axon body camera system who else is in this space I mean what what are the decision making factors here I mean what are the vectors they're competing on you know you cut me off when I was having so much fun talking about the bolo wrap anyway I'm sure you had another bolo wrap story but you know I really did I really did but that's okay we'll move on to officer video make sure we keep this podcast education dense and so if you're looking at officer video axon list 12 competitors in this area there's a bunch of other competitors there too it's very tricky though because as we mentioned axon integrated their hardware and software very early on and so all of these hardware providers if they don't have a good software solution they're not really competitive anymore and so they a lot of them do have their own software or they use a third party software provider gentech that will talk about in a moment and they're all kind of on their platform they white label a lot of this stuff but that aside it's still not a very good solution it's kind of clunky it's a little zoom like if you get the windows reference and so digital ally is one they rolled out you know their own taser like device as well wasn't very successful didn't work anywhere near as well as the current generation axon tasers the struggle to stay competitive then they sued axon they claimed that some features on the body cam like it automatically turning on when it's being triggered by sirens was patented they lost the case and then and you know their last annual report there said they're pursuing channels outside of law enforcement so it's kind of almost like they're seeding that market to axon and so that that was like one of the smaller competitors one of the bigger ones is motorola so motorola basically is you know the number one radio provider for not only law enforcement but all sorts of first aid and they have their own kind of software too that they got involved in with dispatch and all that so they're pretty integrated they're in a pretty strong position but in terms of their video solution it's just not a very good camera which is kind of surprising that it actually loses on not being a great video camera and so there's something called the national urban security technology laboratory and this is an organization that's actually housed within the department of homeland security and they put out a test in 2022 and not looking at these different body cams and you can actually look at the the stalfotos it's on page 53 in our report and it shows the motorola camera footage when someone is moving here and quickly it's very blurry whereas the axon camera is very clean and that's actually even an older generation axon camera and so that just kind of goes to show that motorola isn't that competitive in on-office or video they do win to an extent though because they have the radio business so they have that connection they already have a lot of software in a lot of police department so that's something they can leverage there's another competitor called utility and then on top of that there's someone else called watch guard they were the undisputed leader in in-car video motorola purchased them and so so that's been good for motorola in a way to kind of get a position into that but it was kind of too late axon was really taking over this market all the integration all the software and I'm going to read a quote from 4q 2018 which is kind of the only time they really talk about this and this is right after they launch fleet which again in-car video and so rick smith says sales tell us there's been quarters where we've been the market leader on a dollar booking basis and we continue to feel the momentum is headed in our direction so we feel really good about within a year or two of launch we've been able to be a contender for the number one spot and we think we only get stronger with time and so that's him talking about the in-car video you know motorola just came out with the watch guard acquisition so that they still have a good spot in in-car video it's hard to get market share numbers on all this but you know that's not the quote I thought you were going to read by rick smith I thought you're going to read this absolute zinger he has after the motorola acquisition of watch guard which I'm going to read because that's the fun quote so this is rick smith ceo you know 2q 19 responding to the acquisition watch guard he goes I mean not to be critical of our competitors but we were really taking a bite out of watch guards market share with our integrated all offering. And so I don't know that adding two subpar solutions makes a better one. And I was like, all right, Rick, you know, I respect that. He's just calling it out as it is. He goes, we don't talk about competitors, but when we do, we annihilate them. Yeah. All right. So still my thunder. That's fine. Anyway, we're talking about axon's integrated hardware offering and our host who's not Matt Russell just took my thunder. And we're talking about this, you got to save something thunder. All right. You can't just, you can't just hoard it. All right. All right. All right. Moving on, Panasonic is another in-car device. That's also was pretty popular. They're like these legacy providers, though, they really didn't keep up with a lot of the advance in technology. They're still selling these really expensive devices on this, you know, one time basis. So they're fighting for that surplus budget. That issue we talked about axon solved years earlier. They're still in. And so, you know, it's tens of thousand dollars to install one of these units, 20,000 sometimes. And axon's coming in and saying, we're going to bundle it. It's going to be a monthly price, just, you know, maybe another hundred bucks a month, something like that. And it's so much easier to win business that way, especially when it's integrated with everything else. It's going to be integrated with the officer's body camera. It's going to be integrated with their taser. It's going to be integrated with evidence.com. It's going to be integrated with, you know, our dispatch system, our record management system, all of that. And so, they're really just winning a lot. I do want to point out one thing, though. So Panasonic, basically they first started losing to watch guard. Then they spun off their camera division. They renamed it I pro. And so they had all of these other cameras, their own digital evidence platform, didn't really hear about any police department ones there. So it seemed like it was, it was pretty late. And then there's also these other competitors kind of roughly in this space. We don't really hear a lot about them, but you go to their sites. They offer all this stuff. It's a little hard to see what exactly is the difference or why their products suck, but they seem to suck because no one really uses them. And that's get tech technologies, utility, which I mentioned earlier, Reval Media. They all have these hardware solutions, a little bit of software, you know, some digital evidence, but not really all these like new features, the AI driven stuff that Axon has like one draft. A lot of the other features, though, they at least list. But, you know, they're missing the axon network, which is so important. And we talked about this a little bit before, but basically a prosecutor needs all of the evidence. It needs to come to them easily. It needs to fall to chain a cost. But also, and this is really important, they cannot omit any evidence. And so if you have these police departments on all these different networks, there's a bigger chance that they miss evidence from even, you know, police body cam, it may not even be the most important of evidence because you have six other police officers near the area. And you got all their evidence, but you miss that one. The case can still be thrown out because all of the evidence, because all the evidence wasn't actually submitted to the defense. And so making sure all of the evidence is in the same place, it helps improve the likelihood that a trial isn't going to be dismissed on some sort of technicality like that. And so that's a really important aspect. You know, and one thing, and, you know, Drew just hyped me up because I weave in all his other memos, but I mean, it's nice to see how they kind of relate to this business analysis. And so, you know, one thing I'm thinking of here is the Pete Network, which is Rick Smith kind of created the entire, I mean, we heard about him since 2011 saying, Hey, we're going to have a software ecosystem that is integrated with our hardware. And it is going to be kind of this all-encompassing infrastructure. And I can see from, you know, reading about these companies, you know, looking at the report, how these, they're kind of device companies that then said, Oh, we got to do some software, by the way, but it really wasn't the entire ethos of the company. And so I feel like that's probably why a lot of these integrations are not ideal. They're probably afterthoughts. They haven't really been invested. They haven't thought through. They haven't been, you know, trialed by fire, things like that. I'm not sure if you have any credence to that or not. Yeah, I mean, I'll read this Josh Eisner quote the COO in 2022. He says, "The ecosystem or network, where everything between hardware and software just works seamlessly together." And you can really only achieve that by building products from the ground up. Like an alternative method, would be to acquire some big companies and try to cobble them together. And that just doesn't work in the eyes of the user. Like the user experience is never as tight or as fully integrated as it should be. And so we've really built this system from the ground up in terms of this network between hardware and software. So I think that's differentiating factor one. Everything just works really nicely together. And so that's the Apple analogy. Yeah, and I mean, obviously he said it well, but I mean, I do think that that's definitely and we'll get into the differentiating factors. But I mean, we continue to hit on that, which is just the overall ecosystem fully integrated. And one thing I want to bring up about Motorola, I mean, obviously is this $73 billion market cap company. I mean, clearly they could throw a lot of resources behind the segment if they wanted to. I mean, do we have any information? Is this material to them? Is this a big focus on them? Are they talk about it? You know, like, what does this mean to them? Yeah, I mean, it's definitely, well, it could be material. It's definitely an important area for them, but they basically lost the body cam business. Axon was there first. And so if you don't have a good body cam, then it's very hard to be the leading software provider for all of the video management tools that they have. And so then, you know, in Axon's case, that also leads to a lot of other businesses. They still are already present in a lot of police departments again, because their radios are number one. And so the radio business is really what they've been focusing on. You know, they have some 10 billion in revenues. So it's not like they don't have money to spend on this area if they didn't want to, but they're really focusing more on the things that are working for them, which is the radio business. And they do also, when we get into the next section with software, they do have a pretty strong position, particularly with CAD, computer-aided dispatch software, because a lot of that ties into the first responders. And so they do have a position there. It's just the body cam business. There's not a lot of figures, though, on that that we could really point to. Right. Yeah, fair enough. You know, it's just interesting seeing, hey, this is a subsidiary of some, you know, large, obviously large company, which Axon is grinding on this every day, and it's their main focus. So, yeah, I mean, that's just a factor to keep in mind, but it doesn't mean that they can't execute if we don't keep an eye on them. So one thing we can, I don't know if you have any kind of closing thoughts on the body cam industry. I think we were going to move segue here into some of the, like, comprehensive software offerings and, you know, see, I'll just say real quick, very hard to get a market share number or rough estimate, though, is that Axon has about a 70% market share within the body cam business. And so that's probably only going to go up over time, especially as people, you know, some people bought solutions several years ago. They're not ready to upgrade, but I feel like Axon is going to eventually be able to get them. And then separately, and maybe we should have touched on this in the Tam discussion, there is kind of a little bit of a push for body cams in retail now, because there's issues, especially in California with theft and a lot of people stealing stuff, and then sometimes there's a lot of issues, especially kind of more recently with people fighting and stealing with in retail stores, and there's liability involved. And so having a body cam is kind of just a way in case something does happen. They can look at what actually happened and see what the real deal was, and also just the fact that there is a camera, people tend to behave differently. And so that is not something when I originally was looking at this report, wrote this report several months ago, thought much about, but it does seem like you're seeing it a little bit more common, but maybe that's only in California. I mean, I think it's a great anecdote. I mean, I was in New York recently, and I was noticing, I mean, some of those CVS, some of the Walgreens, you know, kind of the legitimate security guards, not like, you know, I mean, they're like body suit, you know, pull, it proves best, not all that. I mean, I did notice that they were having body cams on. So I could see as, I mean, you know, why would you not want that? I mean, you know, if you have to get into an altercation with someone who's being rowdy in the store or something, I mean, it's good to have have the audio and a perspective kind of on that cam. So I mean, it's a great point to bring up. But let's segue into the software segment now. And the one you kind of open up with here is Tyler Technologies, which a Mark Lennard of constellation software has spoken to, and it's kind of, you know, tipped his cap off to before. So I mean, nothing to sneeze at. I mean, obviously a lot of respect for Mark Lennard, and he thinks there's a company executing at a high level. A chance to start, they probably are. So take us through kind of what this segment, I guess the cloud software solutions, how did you kind of bucket these competitors? What are they doing? And then we can specifically get into Tyler Technologies. Yeah. So there's evidence management software, very fragmented, although axon is pretty much taking a lead there. There's record management software, which is all sorts of records involved in an investigation where police officers collecting info, collecting, you know, photos after something happens, they're taking interviews with people and so all that is feeding in. There's computer to aided dispatch. That is going to be, oh, we need a police officer to go to this area. We have some sort of software that helps coordinate all of that. And so there's over 50 competitors that offer a variety of different software to law enforcement. They list 13 by name and kind of the bigger ones are going to be Motorola solutions, Tyler Technologies, Central Square Technologies, Northrop, Grumman, Hexagon, and Mark 43 of those. We're just going to talk about the first kind of four, because those are the bigger ones. And you mentioned Tyler Technologies, quick background. You're looking at roughly, you know, 25 plus billion dollar market cap company. It's a pre old software company, started in 66. A lot of their clients are still on on-prem software. And so it's this old legacy, you know, this old legacy software company, a lot of the stuff that's true of these small VMS companies is true of a lot of their clients, which if you recall from the constellation software discussion is that these clients are, you know, on these on-prem solutions. It's very hard for them to leave. It's very sticky, but it also means that it's very hard to update the software because you need to bring someone physically there to do it. It means they need to have their own in-house IT department. means that they need to buy their own servers and have their own upkeep for that and they don't have really the ability to expand with compute and bandwidth is needed. So eventually that's probably gonna go to cloud solutions. It could take a long time 'cause a lot of their clients are these police departments, government departments and they're pretty slow with this stuff. But they actually had a figure up, thought was pretty interesting. That says over two thirds of the systems are over 20 years old and with legacy vendors. And so a lot of kind of the worst you can imagine in slow to change, bureaucratic software, that's what they deal with. And there are beneficiaries of that 'cause they're happy to raise prices on them until they leave. And so yeah, they talked about how only 15% of their clients move from on-prem to public cloud. They kind of are framing this as this is a big opportunity for us. I'm not so sure. I think probably if someone's gonna go through the pain of doing this, there's probably also gonna open up the opportunity to look at other vendors. And so I think that could be a potential headwind for them. We haven't done a big end up looking to Tyler Technologies, but it's not too hard to happen. That was the funniest thing about looking at this slide. I thought they were bragging about how many of their customers are locked into on-prem and how kind of like, wow, they're never gonna leave. We got them, aha, but they were kind of trying to phrase it as like, oh, we can't wait for them to move to the cloud. I go, I don't know if that makes sense or this is them trying to kind of positively spin this situation. But yeah, I mean, once you're moving, it's obviously, you know, you're gonna bid this out to everybody and choose the best software, right? Which may or may not be good for them, right? I mean, we, you know, well, this is a great segue now into the next competitor, Central Square Technologies. And they were formed via merger of four software companies and they kind of all came together. And now they offer all this different software to the public sector. Tyler Technologies too, by the way, has a lot of different acquisitions they did over the years. And so it is kind of this clobbered together software. And so Central Technologies though, and I'm bringing this up, they put out a press release in 2021 that said, they basically stole a client from Tyler Technologies. And so that transition to cloud is this opportunity for people to pick them off because they're going, you know, why don't you look at other people? You've been with this guy for so long. He hasn't been so good to you and it's someone who's saying, well, we've done on prem for so long, we could also do cloud. Why don't you want to go to the person that was cloud first? That was cloud native. And so I think that's what's happening more with you're dealing with these pain points you do. You go ahead and move to someone who's the best. And so Central Square, they give us some stats. They say they have 375,000 officers using their solution every day, 8,000 customers. Remember those software is not mutually exclusive and it's not so clear exactly which software they're talking about. But nevertheless, this is one of their bigger competitors. They have their own computer, aided dispatch, record management. They have a 911 call center solution. They have analytics. They have this public safety suite package. So they have all of that. And that's another one of their bigger competitors there. And they also integrate with all these other third party solution. But it's also worth noting that they don't have this hardware kind of integration. And so integration isn't so good. And especially if they're forced to integrate with Axon. Of course, someone is on Axon. They're going to want the Axon software. And so then it's like do pick Central Square and then also go to the not as good Motorola body cams and then clopper together a bunch of stuff. Some people are no doubt going to do that. But that's just kind of big picture there. And then I also want to note that one thing that-- and we're going to get to this next competitor that's called GenTech, which was founded in 1997-- they have their own digital evidence management software. It's actually the same software, though, that Central Square uses. And so GenTech, it seems like they have this kind of white label solution that they sell to these other providers to help them kind of bundle everything together. And so Ipro, which was Panasonic's kind of division that spun off. They also use GenTech. And so GenTech, kind of similar deal, a bunch of SaaS security management software, they've an on-prem security platform access control hardware, which is like physical locks that you can open and control and monitor a lot of other public safety software. And so yeah, this is the digital evidence management platform that a lot of these other providers are using. Again, it's not integrated, though. And by virtue of the fact that anyone can get it, it kind of became very commoditized. And so it's no longer really like a special thing to have everyone kind of just expects it, whereas the integration is kind of a selling point. And so they offering it to all these other software providers so they don't have to make their own. It really almost just like commoditizes the offering. And so then when an offering becomes commoditized, these other sort of competitive factors become more important. And so that's kind of these other players there. And I want to just hit on Motorola again real quick. They're also very entrenched in a lot of police departments, because they're radios. They're a computer-aided dispatch. And they did this acquisition in 2000 of a company called Printek. And that's when they started getting into dispatch software. So they've been in there for a long time. They have their own video manager, and digital evidence management platform. It's called command central evidence. And so if you go to their site, it seems like they have all of these different applications, all these different features. It's kind of hard to see what they don't have. But again, it really just comes back to kind of the way it acts on as attacking this with the integration, with the ease of use. With the fact that we're going to go first with the body cams and the tasers and all of that. And then we're going to get them onto this evidence.com platform. And then we're going to cross sell from there. Don't want to be on the same platform. And so it is a little bit like a kind of a backwards way of getting some of these software providers' business. Because you could kind of think about Apple coming in with their hardware first. And if the Safari browser wasn't preloaded onto their phone, then maybe people really wouldn't have used that as much. And they wouldn't have been able to get that revenue share from Google. And so it's kind of like a backwards way of getting into the software business. And to a lesser extent, you could also think of their iCloud too. You wouldn't go out and buy iCloud unless you had the iPhone. But you want the iPhone. And so now you're all buying iCloud too. And so that's kind of what they're doing with their hardware offerings. And it's working well because then it creates its own network within itself. And one thing I'm noticing a lot about these kind of software competitors-- obviously, I mean, the main vector that they're competing on is this evidence platform, similar features that Axon would be doing. Again, I'm sure they integrate to some degree with different body cameras. I mean, it's not really clear what those integrations are. But one thing is they seem to be really on the dispatch. I mean, what is Axon doing? Are they concerned about if they don't own the dispatch area, then they might be losing out on that? Or that's kind of just like a different feature in the police department? And what do you thoughts there? It's a business that they're trying to win. But it's not something that's necessarily critical for them. But they are going after it. They made an acquisition, fuses, I believe it's called, maybe I'm mispronouncing that. They do want to win it, though. It is an important area for them, too, as they leverage the fact that they have all these video cameras everywhere. It's very easy for someone to see live what's going on. They also, when they rolled out this last body cam, they put LTE in it. And so they could use the network to talk to people. So it does have kind of a little bit of a feature, like a two-way radio. And so that's also kind of eating a little bit into Motorola's traditional radio business. That would be more interesting to see longer term at the body of camera, fully replaces the use of a radio. Radios are so reliable, though, and they use different radio waves. And it doesn't tend to have the same sort of issues with the connectivity that we have with the network. So I don't know how likely that is or not. But it could over time take a little bit of that. And what's happening is that someone is watching sometimes this body cam footage, and they're directing the officers to what's happening. Where they're watching live and moving resources around in order to coordinate all that. And so that is why having the dispatch is also helpful. And that integration is helpful. Because it's kind of like you can imagine a military operation where there's all sorts of different cameras on people's combat helmets, on their weapons, and you're looking at the helicopter footage and all that. Wouldn't it be helpful if all of that was in the same place? And it was coordinated, and there wasn't integration issues, of course it would. And so that's kind of the value prop there. Yeah, and I mean, of the software segment, I don't know if we have any market share data. I mean, it's long story short, how concerned are you about any of these people or anything of that nature? I mean, is there anyone to be looking out for and kind of monitoring? To be honest, it's really tricky. Because it's such a large area, quote unquote, software. There's so many different offerings, very spotting market data. It's very hard to even compare the different offerings. But what I will say is that they basically have been winning business year after year after year. And so that does suggest that their offering is by far the strongest, and they've been introducing new modules. And when they introduce something, it's their business to go out and win. It's not their business to lose. And so if I was a legacy provider on an on-prem solution, I would be much more worried than Axon coming out with something just two years ago saying that we're going to go after this business. So I'm not saying they're necessarily going to have success in all of these areas, although we have been observing them having success, it seems less likely though that their offering is going to be something that is not going to be competitive against a legacy provider. Having said that, there's many reasons people don't switch. And so that is part of the issue. Right. And I think this gets into a great section, which I mean, again, we've kind of just been hammering this point the whole time. But essentially, why Axon wins? And of course, they have this great flywheel diagram. And let me tell you, if you don't have a flywheel diagram as a business, you're pretty much just not even in the running of being a successful business. You better have some type of way to articulate a flywheel or no one's even going to look at you. So tell us about Axon's flywheel. Why do they win? We've been handing on it a lot. So maybe we don't need to spend too much time here. But just take us through like 30 seconds. Hey, well, I summarize all the things we've been talking about here for a little bit about the Axon's platform. What do I get? One breath? Now. - No, no, you can take multiple breaths. We're not there yet. (laughs) - Oh really? - Yeah. - Oh, we gotta do this twice? - No, no, yeah, do it in one breath. Go. - Give us the one breath take. I mean, what is the axon winning strategy here? - I got one breath, that's the right one. If you're up for a challenge. - So axon's right to win. Ultimately, really just starts with the integration and ends with the integration and all of the other aspects that really tie into that. And so within that is really the ability for everything to just work. Just be seamless. And this is the same sort of advantage that Steve Jobs talks about with Apple. And from that, they're able to position all sorts of other new products and services within their offering. The most important of which, and the most important aspects I have kind of blood out from that is this network effect where now all sorts of police officers are on. And so once they're on this network, though, it's very hard to get off because now you have all sorts of data, very sensitive evidence that is stuck on the prosecutor's side in the police departments. And so if you move off, you have to move the evidence, but there's also this risk that the evidence kind of gets stuck in the middle somewhere and that it disrupts a trial process. And so there's very unlikely that you're gonna actually wanna switch off of this. On top of that, you have the prosecutors actually know how to use the software. They have accounts within it. And why disrupt something that's working when disruption could potentially mean letting someone who is guilty not be prosecuted to the full extent of the law. On top of that, though, they have these different hardware devices, most specifically the taser, which is not only the best way to non-lethally incapacitate someone, it also is the best replacement to a gun. And so if you are putting a police officer out there into the field, you need something that they can trust and that can actually defend them against someone will also actually not causing damage to them and incapacitating them. And the taser's really the only device out there that can do that. And so they are able to use that taser to build good will with police departments and to wedge their way into a relationship, which will then also add into the body cams, the body cam hardware itself is the best in class hardware video camera. And it's not just the hardware so good, it's again this integration, the way that a lot of these other providers, they're actually costing these police officers more time because of all the time involved in cataloging footage, uploading footage. All of this is just done automatically. And so whereas Axon saves people time, competitor products, cost people time, all of this together though then gets bundled. And once it becomes a bundle, now you are no longer fighting for just these individual aspects. You now have to fight against all of these preferences that are being fulfilled and being fulfilled simultaneously and add a lower cost than an Alacart product. On top of that, once you get all these products together, the Axon body cams, the fleets, the tasers, now you also have drones, you have the VR. And all of this together is now being put on a unified platform. And once it gets put on that unified platform, it's much easier for them to add other software modules on top of that, which is exactly what they've been doing as they've been continuing to encroach on more software providers. And on top of all of this, you have the Salesforce, the relationships, you have several hundred patents that have protected them. And then you also have the reputation, the fact that they've stood up for police for decades at a time. And on top of all that, you have all these new AI tools that are benefiting from the fact that they have all of this data. They have more video data than Netflix has of videos. And all of that is important in order to properly catalog and categorize different items as well as now that the writing police reports, the police themselves are now editing those reports, which is further giving them more data and will only allow their AI products to get continually better making it much harder for a competitor to catch them. I gotta say that was more than one breath, but we'll take it pretty impressive and I think a good summation of, you know, kind of the flywheel diagram here. And again, I mean, love the words flywheel, network effect. Those are what's gonna make a company successful. But I mean, again, not just saying those, but actually embodying them, which I think acts on this great job of. And so let's get into a little bit of the, like ROIC and framework discussion. I mean, this is one of the few, I think the only report that I've seen a revenue multiple attached to in your evaluation. So I mean, you can kind of indicate that this company is not cheap. But before we get into there, why don't we get into a little bit of the ROIC? And so you did a mature margin ROIC analysis here because if you look at their ROIC currently, I mean, it's hard to calculate net operating profit after taxes and divided by invested capital if there is no net operating profit, which there isn't much to report here. And so take us through kind of the mature margin ROIC. I mean, high level, some people may find the mature margin analysis, you know, and have some flaws in it in the fact that hey, they haven't achieved it. You're giving them credit for it. But what are your thoughts over on the ROIC analysis that you did? Yeah, I mean, I don't have a problem with the mature margin analysis framework provided that you have confidence in what you believe the mature margins to be because again, the point is basically you have expenses that are growth expenses and at some point, you're able to cut those. And I do believe they could cut down R&D. They could cut down Asinem if they wanted to and then you would see those margins show up. But they've just been investing a lot. And then on top of that, there's also that factor again. We talked about earlier expenses tend to run ahead of revenue recognition. And so both of those things are involved. I can see them talking quicker. I think that's because of that segment we did right before. So you don't have to do one at a time speed when Drew's talking, you know? (laughing) Yeah, I don't know why making sure people can't listen to me. I want to have time speed as important. But it's not. So slowing down here, their invested capital base, if you're going back to 2016, it was very low, you know, 44 million. So for a long period of time, you were looking at a very strong ROIC 2016, even on all these deflated profit figures. It was still over 50%. As they raised money a couple of times, we mentioned them in the history, that further went into the invested capital base. And so it started to fall, but then also they started to invest more. So profits also started to shrink. And so that's been all weighing on, you know, the ROIC. If you're looking at it from the mature margin basis, though, it's pretty strong. It's, you know, at its lowest 14% in 2021, but, you know, 50% in 2023. And so it's a pretty strong ROIC. And you basically want them to continue to invest in all of these growth expenses. And so that's all we really are going to say on the ROIC front. I will jump down to free cash flow, though, because they don't have any. And if you're looking at operating cash, that also is not a very high number. There's a little bit of cap-axe, not a ton, but when you're backing out a stock-based comp, which of course we're going to do, to treat it as a cash expense, their cash flows in, you know, most of the years since 2017 were negative. And so this is, again, another point with the revenue recognition stuff, and when the cash is coming in, versus when it's going out, they're growing a lot. And so that is part of the factor here. And, you know, CFO, Brittany Bagel, talked about how they're really only targeting a 60% free cash flow conversion right now, which is going to be, you know, net income turned into cash, while they're growing so quickly, which is a very, very tiny amount. And so not really a lot to love about that, in that fact, but having said that, it, again, is just the byproduct of how much they're investing. This is an old company, and they're still growing 35%, you know, last quarter. That is a huge amount of growth for a company that is this old, this large in this many segments, and still growing a lot. And so I've no doubt that if they were to ever taper growth, slow it down, that it's a software company, they're going to know how to produce cash. And so that is kind of what I'll say in the free cash flow. - And, you know, kind of a part of that cash flow, I think free cash flow analysis really can segue well into the stock based compensation conversation. I mean, obviously, SBC is a huge portion of how they incentivize employees. I think it's also part of Rick Smith's ethos. And when you're trying to attract top engineers, I mean, stock based comp is kind of a very regular compensation structure for people in startups and tech companies. And so I think he's trying to kind of carry that similar aspect to axon. One thing is, is, you know, in 2021, SBC jumped to about 35% of revenue. And that was clearly, you know, Rick Smith had a kind of, you know, Elon Musk pay package types of things, not of that size, but in terms of a similar heavy lofty goals, you hit these lofty goals, you're going to get a massive options package. And so take us through a little bit about one, excluding kind of Rick Smith's, you know, packages. I mean, as a SBC is a percent of revenue on just kind of a normalized basis. I mean, is there anything really that meaningful here? I mean, it's kind of in line with other software companies or you feel like you're a little aggressive. - It's high. I mean, look, you're the past few years are looking at eight to nine percent. And that's definitely on the higher end. They, when Rick Smith rolled out his own, as you mentioned, you know, large CEO performance plan, then he also gave another stock plan to a lot of the employees. And so that also increased it. If you go to like 2013, before they tilted into becoming a software company, stock-based comp was like 3%, then it jumps up to like five. And now in the past couple of years, it's eight. It's 9%. You're gonna wanna see that figure come down. That you can't be running 9% stock-based comp. That's just way too high. And so again, some of that is because of this, what they call the exponential stock plan for employees. So, you know, as that hopefully burns down, that's not gonna be a regular expense and you're gonna see it come back down. But even 5% is on the higher end. And so all of that is, I'm not gonna sugarcoat it, not what you wanna see. And so if you are though looking at the actual targets that Rick Smith laid out in his own CEO package, he actually rolled out one people complained. He rolled out a second one. I'll just talk about the second one, but both of them are in the report. Basically, he doesn't get the last tranche until the stock hits, you know, a $900 stock price plus. Which now, you know, it's within range, but at the time it was a $200 stock price. So that's a huge jump that they were expecting there. And then they also have to hit these different revenue or adjusted EBITDA targets. And so the highest revenue target, is $7 billion, the highest adjusted EBITDA targets, 1.75 billion. And so you do have a lot of room to go from there. I'm not gonna talk too much more in detail. This isn't the report though. If you wanna see more about it. And so, you know, it always is like, okay, he owned 5% of the company already. He would have owned much more if he didn't sell down his equity stake. And there's always the question, do really need to give them all this extra equity to really perform our money. aren't they already adequately incentivized? And I think that's fair on the other end. If you're going to do it, I do appreciate that it is lofty goals. I would probably prefer to not see it stock price-based and just purely financial metrics-based. But then there could be a downside to that too. If they hit the financial metrics and the stock price goes lower, then you get a lot of dilution. And so it is what it is. Yeah, obviously, you have Gary Friedman receiving large option packages. I mean, you see a lot of the CEOs who, and again, I get it. I mean, they're the ones driving. And especially, I feel like if you're going to do it, like you mentioned, it better be, hey, these are some hurt-y-ly in tasks that he has to do. I mean, these aren't like, oh, if it goes up 10%, 10% or increased revenue, I get this. I mean, these are, if he executes on these, I mean, it's definitely a lofty performance goal. One thing getting into a little bit of the valuation here, and obviously, this is kind of the part, we don't get too in detail. The whole analysis here in Excel is available for Speedwell Research Members Plus subscribers. But a long story short, this company is very expensive. I mean, by any metric, like I said, this is the only valuation section where I saw Drew quote a revenue multiple. He's trying everything he can. He's looking at a multiple of mature no-pad. I mean, you know, because he doesn't want to say 300 times earnings or whatever the number is. So he's trying to come up with something better. But anything you want to say high level about valuation, kind of the things you're flexing on in terms of what to look out for. - You're really making me look like a shill on that one. Okay, so it is 25 times sales, or 80 times mature margins. I don't even know what that is on real earnings or on cash flow. It's high, it's very high. We actually, we wrote this report when the stock was at a 30 billion market cap, and that's when we last ran the reverse DCF. Now it's at a 50 billion market cap. So you're gonna want to update that number in your Excel, and we're gonna republish the reverse DCF at the end of the next quarter for members to take a look at. But we basically just sensitized across different revenue figures all the way up to 25% revenue growth was our most ambitious 'cause that's 25% for the next five years. That's gonna be a lot of revenue growth. That assumes they get to, you know, five and a half billion at the end of that time period, which, you know, it's definitely possible. But, you know, then thereafter, it just gets tougher and tougher to grow so high. We talked a little bit already about mature margins. We did a sensitivity analysis between 20 and 30. I noted before Rick Smith pointed to 20% operating margins before leverages basically coming from GNA and R&D. I think probably less so from SNM. They, you know, do expect gross margin expansion as well. They think it can reach up to 70% gross margins, you know, 900 basis points higher than currently. And so that is a lot of expansion there. And on the SNM side, I'm a little bit more conservative there because they're gonna still have a big distribution network, a lot of people that have to help people use the product, sell the product. It's also support for all the software and all that. You could definitely see some leverage there, though, too. It's a little less clear to me, though. And then you get the results that you see in the reverse DCF, which were, you know, pretty interesting at the time. I'm gonna save them for Speedwell members. Check out page 72. You could become a Speedwell member if you are not at SpeedwellResearch.com/subscribe. And then you get MyLove forever and our unnamed host love as well. And on top of that, though, it's worth pointing out that we never explicitly modeled all these other call options, which could potentially be big. You not only have Axon Air, which is the drones, the VR training, all this AI software is really increasing the ARPU of all these different customers, officers, and that could continue to increase. They could continue to roll out more software modules. That's kind of more embedded, though, in the software growth rate. But then you also have the fact that maybe, you know, retail and commercial do end up putting body cams on a lot of their people and you see a big margin expansion. International, it could be a big margin expansion. Who knows, you could have pet body cams. You could have, you know, what, you could put a body cam on anything. You never know. (laughing) All right, we're back to 2021. Anyway, exiting that discussion. Let us talk about risks and what can go wrong. Yeah, no, no, it is funny, but, you know, some of these things like, you know how it goes. I mean, at certain point, there's gotta be a lot of growth and you gotta be confident it can come from. But again, this one, we're second winning the big business risk section. This is kind of when investor risk and business risk, I mean, clearly the biggest risk here is high valuation. Company continues to execute. But I mean, we had a great point in 2001. It took them, what, 17 years to hit where they were in 2001 or something. It was from 2004, 2018 or something. Yeah, 2000. So again, I mean, company executed, they did a great job, but the investor, you know, was left hanging for 14 years. So something to be cognizant of here. But so we're not gonna really comment on that. But why don't you get into something like existential business risks and most of the companies we cover, it's kind of like, I don't know, they're hard to come up with because they're great companies, they're in good positions. But what did you come up with, true? Yeah, and again, this is why the reverse DCF is really important because you could see those implied expectations and if the implied expectations look lofty, you would at least are aware of them and can take an appropriate decision there. And that is as diplomatic as I'll say it. And moving on to the risks, you're already transitioned me to. The first one I had is it's just very hard to meet expectations as they continue to go up and up. But this is a business risk too because there's so much stock base comp going to a lot of their employees that if they miss expectations, the stock price plummets, a lot of these employees may be feel demotivated, they're detached, maybe they also then have to offer even more stock base comp in response. And so that could have demoralizing quality to the business itself. And we did see that to an extent in some of these tech companies, although they did ultimately pull through, it's just something worth mentioning. The other thing is a cyber attack. I think that's probably the biggest one. If all of a sudden it's not seem as very safe, then maybe people are switching to other providers. Although it does not seem that likely because a lot of these even security firms have survived security attacks. A large national incident involving a taser, maybe people all of a sudden sour in the taser, whether it's rational or not, becomes harder to sell. Anti-trust action is possible, doesn't seem so likely, no move towards it right now. Any sort of privacy movements that say you can't videotape people without their permission, maybe that just leads to the dumbling, although their face is maybe it means you can't record it all. Who knows? That's a pretty far out one. Another national backlash against policing that could result in more cutting the budgets, not so likely. And as we mentioned before, they kind of are a little bit copart like the way they've been pretty resilient in the face of all these things that you would have thought were pretty bad. This is maybe a bigger one, a video camera device explodes, then they can be seen as dangerous, maybe they get pulled, they go to another provider. Again, a lot of laptops have exploded too before. I love when you're reaching here. Well, you know, if a taser backfires and shoots someone, but yeah, that's a risk. I guess, enough, but it's good, it's explicit. Yeah, it's very hard to come up with a lot of risks for this company. I think the biggest one maybe, and this says maybe a little bit more friend and center now is you get a company that is like really good with robotics and AI, and they just start replacing a lot of this stuff. And that maybe is an existential risk that's super unlikely, but you get robots with AI, and now they're going to be the police, and they don't need a body cam because the body cams in the robot, and then it's a different software. Watch Robocop for reference if you need a vision about what that looks like that risk. Yeah, and then you know, it could get tied into drones. Maybe, you know, they're different kind of AI-driven drones, and they're offering isn't as good, and it's like this whole other system that is totally separate from what exists currently, and so you don't even have to worry about how sticky it is with police departments. It kind of is coming totally out of left field, and so there's all that, and then you know, the classic key man risk. And yeah, I mean, it's a good articulation of the risks, and you know, Drew always has to get creative with some of the companies we cover because man, they seem to be in pretty good positions. I think obviously, front and center is, you know, the valuation risk, but obviously great companies, you know, do tend to surprise to the upside, right? So that's always something to be cognizant of. But we always are the ship that allows the investor to make their own decisions as Drew likes to say. So, you know, downloadable risks. And that's almost what I say. That was a little confusing. Well, you know, insert the speed well propaganda, but you know, download the Excel, and you know, make your own decision about what's feasible and what's not. Thanks for, if you've made it this far, and thanks for joining us on our three hour discussion of axon, we have our next report, will we covering will be Airbnb, walker down lock, some point or done lock instead. They will take a poll. We'll take a poll. I don't think anyone's going to want a walker done lock, but we'll do it eventually. They won't want it if you tell them they don't want it. They don't know what true that that's true. We'll do a poll. We'll see, we'll see, they might want a premier real estate refinancing firm. Yeah, I mean, when you put it like that, I mean, I'm ready to talk about it now. And last things just before we cut off, there are some other axon resources available that are free if you're not ready to become a paying speed well research member, which will get you access to not only or axon research report, but all the other reports as well, the updates, all of that. You could go to speedwellmemos.com. You'll see axon business history there. We put made a lot of it free for you guys. There's also lessons you could learn from Rick Smith. That's a separate memo. We'll link to all of that in the show notes. And until next time. And until next time. (upbeat music)