What if police officers had the power to instantly scan and process license plate information from every car on the road -- including yours? No need to wonder now that a new product from Axon Enterprise (NASDAQ:AXON) makes it possible.

Axon recently announced its Fleet 3 in-car video system, which includes a technology called automated license plate recognition. Police cars equipped with artificial intelligence cameras will automatically "look" at numerous license plates and find the ones needing attention. An officer won't be unnecessarily distracted by manually looking up the information. This announcement comes a full year before the Fleet 3 system is rolled out, allowing time to address potential privacy and ethical concerns.

A long line of cars stuck in traffic.

Image source: Getty Images.

What's the problem?

Axon in-car video is already capable of making license plates visible at a distance of 30 feet with its Fleet 2 product. The difference with Fleet 3 will be the added capability of AI sifting out law-abiding plates and only flagging plates of interest. Police departments can set up alerts for license plates suspected of being connected with vehicle theft, human trafficking, and other offenses. And because AI is doing the work, officers can stay focused on the job.

So AI will locate more offenders and police officers will be more focused. What's not to like? Well, this tech does present a new set of ethical dilemmas, and it still isn't government regulated. Consider that, in theory, Axon will have data on thousands of vehicles, including where they go and when they go. Do you think there might be companies out there who would love to pay Axon for that kind of data? That is just one specific concern of several raised by the Policing Project in regard to automated license plate recognition.

But before you vow to protect your privacy by never driving again, remember that Axon recognizes this technology can be abused. That's why it's taking this next year to lay down guidelines for how the system will work. No one is forcing the company to do this; this delay is self-imposed. And further, Axon already has a history of listening to recommendations. Earlier this year, Axon elected to keep facial recognition technology off of its police body cameras for fear that it would disproportionately target minorities. So while concerns about collecting license plate data are valid, Axon's proactive ethics is a reason for optimism.

Axon's bigger picture

Axon doesn't want to be just a hardware company generating revenue one product sale at a time. It wants its financial results to be driven by recurring subscription revenue -- and that starts with its software products. In that way, you can think of its Taser and Axon camera hardware as a way to steer customers to software solutions like Evidence.com. It makes sense. Of Axon's identified $8.4 billion total addressable market, the lion's share ($5.8 billion) comes from cloud-based software solutions.

Going back to license plates, AI license plate technology is a way to entice law enforcement offices to purchase the Fleet 3 system. And since Fleet 3 in-car video uploads data automatically to the cloud, it drives sales growth to Axon's software and sensor segment of the business. This segment comprised only 39.6% of total revenue in 2018 but grew 52.8% year over year. This compares to only 7.9% growth in the company's Taser segment. Nearly all this revenue is recurring.

In Axon's second-quarter earnings call, CFO Jawad Ahsan pointed out that the company's focus on recurring revenue is working. In 2016, only 34% of the company's total revenue was recurring. This past year, recurring revenue was up to 55%. For 2019, this percentage is tracking even higher, as almost half of Taser segment revenue is now recurring.

What's next

It's important for companies to consider the ramifications of the products they offer. I think most of us are for safer communities resulting from more effective law enforcement but also against the invasion of privacy of law-abiding citizens and discrimination against a person based on race or social status. For Axon to be most successful, it will need to address both sides of the debate simultaneously.

Axon is scheduled to report earnings on Thursday, Nov. 7. The company has a habit of meeting and beating expectations, but it missed both revenue and earnings expectations last quarter due to a supplier issue. It'll look to get back on track by meeting its third-quarter revenue guidance of $120 million to $125 million. If met, that translates to between 14% and 19% revenue growth year over year.

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