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Axon: Bringing AI To Law Enforcement Through Innovation
AXONAxon(AXON) Seeking Alpha·2024-02-01 19:44

Axon's Business Overview - Axon Enterprise Inc has grown into an 18Benterprisevaluebusinessbyverticallyintegratinghardwareandsoftwareproductsforlawenforcementagencies,creatinga"WalledGarden"ecosystemthatoffersasuperiorcustomerexperience[1][3]−Thecompany′sverticalintegrationstrategyissimilartoMicrosoft′sapproachinsoftware,allowingittodominateitsindustryandcapturesignificantmarketshare[3][5]−Axon′sproductportfolioincludesTASERdevices,bodycameras,officerproductivitysoftware,backofficesoftware,andtrainingproducts,allofwhicharenowofferedasaseamless,verticallyintegratedplatform[3][5]GrowthDrivers−Axon′sTAMexpansionisdrivenbyenteringnewindustryverticalssuchasmilitarypoliceandcommercialsecurity,aswellasinternationalmarketsliketheEU,APAC,andLatinAmerica[8][9]−Thecompany′sfederalbusinesshasgrownfromessentiallyzeroafewyearsagotonowaccountingforfiveofitstop10dealsinQ32023,withaTAMestimatedat18B enterprise value business by vertically integrating hardware and software products for law enforcement agencies, creating a "Walled Garden" ecosystem that offers a superior customer experience [1][3] - The company's vertical integration strategy is similar to Microsoft's approach in software, allowing it to dominate its industry and capture significant market share [3][5] - Axon's product portfolio includes TASER devices, body cameras, officer productivity software, back office software, and training products, all of which are now offered as a seamless, vertically integrated platform [3][5] Growth Drivers - Axon's TAM expansion is driven by entering new industry verticals such as military police and commercial security, as well as international markets like the EU, APAC, and Latin America [8][9] - The company's federal business has grown from essentially zero a few years ago to now accounting for five of its top 10 deals in Q3 2023, with a TAM estimated at 10B [9] - International revenue grew 52% in Q3 2023, with management believing the international business could eventually be five times larger than the current US business [9] Product Innovation - Axon has a culture of product innovation, launching new successful product lines that drive compounding sales and free cash flow growth [6] - The company's TASER 10 product has seen orders surpass the first six quarters of TASER 7 orders, with orders pacing at over 4 times the rate of TASER 7 [7] - Axon stays close to customers through frequent technology summits, ride-alongs, and annual user conferences to calibrate R&D decisions and drive innovation [6][7] Software Business - Axon's software business reached 619MinARRinQ32023,growingat54619M in ARR in Q3 2023, growing at 54% YoY and accounting for 36% of total revenue [10][11] - The company's net revenue retention rate is an excellent 122%, driven by new customer signings, feature add-ons, and existing customers expanding their needs [10] - Axon's software business alone could justify the company's current 18B enterprise value, as it continues to sustain 50%+ growth while the rest of the software industry decelerates [12] Valuation - Axon is currently reinvesting aggressively to build out its international organization and expand into new verticals, which is pushing down near-term free cash flow margins [13] - The company has provided an intermediate free cash flow margin target of 17 5% to 20%, with its software business expected to generate 30-40% free cash flow margins long-term [13][14] - Using reasonable assumptions, Axon offers about 15% annualized returns, with the market pricing the stock fairly efficiently relative to its growth prospects [17][18]