Axon
Law enforcement multiplier
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Axon is a technology company that specializes in providing products and services for public safety agencies around the world. Founded in 1993, the company has grown significantly over the past two decades and now operates in more than 100 countries.
The founding story is quite unique. Rick Smith was at Harvard when two of his friends from high school were shot dead. While grieving, he wondered if there was a non-lethal weapon that could fix gun violence. He kept thinking about the idea and eventually connected with inventor of the Taser, Jack Cover. Mr. Cover was a NASA engineer who had been working on his invention for nearly 20 years by the time Rick Smith reached out. But the story goes back even further. Some of Cover’s inspiration was a children’s book written in 1911. The book was called Tom Swift’s Electric Rifle (TSER – Mr. Cover later added an “A” to the name). Rick Smith and his brother set out, with the help of Jack Cover, to improve the Taser in 1993. The original Taser actually used gunpowder so it was officially labeled a firearm which really depressed sales. So the Smith’s decided to use compressed nitrogen and things took off. One early marketing stunt the company did was to pay cops to teach citizens how to use Taser’s and thereby sell more devices. Now, Taser’s account for 40% of the company’s $2 billion in revenue. For 24 years, the company was named Taser International but it rebranded in 2017 to Axon. Over the past decade, Axon has diversified its business and now the overarching mission is to protect life. In fact, Rick Smith’s moonshot goal is to decrease the number of police related deaths by 50% over the next decade.
Here is how they plan to do it. On top of the non-lethal Tasers, one of the main products that Axon offers is body-worn cameras for law enforcement officers. These cameras are designed to record video and audio of interactions between officers and the public, which can be used for evidence in criminal cases and to improve officer training and accountability. In addition to body-worn cameras, Axon also offers a range of other products and services for public safety agencies, including in-car video systems, a portal for citizens to upload police-related videos, evidence management software, and training and consulting services.
One of the key features of Axon's body-worn camera system is its cloud-based storage and management platform, Evidence.com. This platform allows agencies to securely store and manage their video and audio evidence. Evidence.com also includes a range of tools and features for analyzing and organizing evidence, including redaction tools and automatic tagging of important events. Apparently, the library of footage in Evidence.com is more than 30x the size of Netflix’s entire catalog.
Axon has also done a few interesting acquisitions over the past couple of years. The company bought Dedrone, a provider of military-grade drones and Fusus, a real-time crime control center company. Rick Smith — the visionary he is — thinks that every police car will have an associated drone that will be another helpful set of eyes to survey crime scenes before the squad car arrive to the scene. As part of this vision, Axon is actively trying to improve its dispatch product, which is where Fusus comes into play. Fusus has an open network of security camera footage that can be stitched together to improve mapping. Imagine every business and outdoor camera giving Fusus access, which would result in an open surveillance network. This might sound Big Brother-esque — drones and surveillance networks — and maybe it is but Axon’s mission is to cut down on police-related violence. Having better perspectives is a part of this so officers can be better equipped to handle difficult situations. Axon’s latest body cam, AB4, also has two-way video feeds which allow dispatch officers back at HQ to see everything that’s happening.
Because of all this innovation, Axon has several competitive advantages that create a moat around its business. One of these is its strong brand and reputation, which has been built up over the years through its commitment to providing high-quality products and services to public safety agencies. The company has a stronghold with police stations, as roughly 85% of all stations are active buyers of some sort of Axon product.
You can think of these stations like an installed base where Axon can continue to sell new models of Taser, more storage for Evidence.com and more sensors and cameras for officers. It’s not a perfect example, but Axon’s business model is similar to Apple’s with hardware upgrades and an incredibly captive audience because of sticky software. The company’s cloud revenue, which mainly consists of Evidence.com, has grown at an astounding rate over the past 5-10 years and it is still growing at almost 40% annually.
Some of Axon's main competitors include Motorola Solutions, Digital Ally, and WatchGuard Video. These companies offer similar products and services but Axon is certainly the dominant player. One potential company to watch out for is Warp, founded by Tom Smith, Rick Smith’s brother and original business partner. The device is non-lethal and supposedly not painful as it shoots out a spider-web like kevlar rope to apprehend people. It’s currently a start-up that is burning cash but something to keep an eye on.
While the company faces risks like any other company, Axon is an exceptionally high-quality business. Almost 50% of the business is from recurring sources these days, the Taser and body cams have strong upgrade cycles, and there is quite a bit of optionality considering a visionary founder at the helm. One of the biggest question marks surrounding the business has been a limited TAM as police stations don’t have unlimited budgets but the business has found a way to continually add value. Rick Smith has mentioned Axon spend usually accounts for 1% of customer budgets and can be up to 3% for those who have adopted the full suite of products. When downturns inevitably do happen, even if headcount is cut, stations tend to invest in technology to do more with fewer people. As an example of Axon’s innovation, the company’s latest product is called DraftOne, an AI-powered report generation system. The testimonies of beta tests have been incredible, with some people saying it has literally given them back two hours per day, instead of spending so much time on paperwork and writing reports. DraftOne automatically ingests body cam footage and location data to create a report rough draft that officers can then edit and upload. This is a perfect AI use case and the early traction has been amazing. Products like this are why Axon’s TAM doesn’t worry me as much as it did when I first started researching the business years ago. Some management teams just prove that there is far more optionality that meets the eye.
Overall, Axon is a well-managed company with a strong presence in the public safety market. The company's competitive advantages and diverse product portfolio help to mitigate the risk of limited budgets and position it for long-term success. While the stock is almost always very expensive, the company’s $9 billion in revenue backlog reveals plenty of future sales. Axon is a prime example on winners continuing to win.
Disclosure: Infuse Partners LP owns Axon Enterprise Inc.
If you made it this far, check out our latest letter over at Infuse. Axon is still a top 5 position but we have been trimming recently because of the valuation.