When Axon (AXON 0.95%) reported better-than-expected earnings late last week, most investors likely viewed the great revenue growth and increased earnings as the most bullish signs for the stock. But if long-term investors look a little further into the company's earnings report, they'll find the real growth story.
Those who have followed Axon for a while will know that the company's trying to sign customers up to long-term contracts for hardware and cloud-based subscription services like Evidence.com. The most expensive of those offerings is $199 per month per officer and includes a body camera, taser, holster, cloud storage, records management, and more. And it's the pace at which customers are signing up for those subscriptions that should keep investors bullish on Axon as a growth stock.
Image source: Axon.
The growth in Axon subscriptions
There are two metrics investors can look at to get a feel for Axon's sustainable growth trajectory. The first is annual recurring revenue, which jumped 39% to $141.5 million in 2019's third quarter, an impressive leap.
The other is the number of software seats booked, which increased by 32% from a year ago to 428,600. This gives an idea of how many customers are using Axon's cloud services, which are ultimately what drive its higher-value subscription sales. So, growth in seats booked is an underlying driver of the business long-term, even if it isn't a direct revenue number.
Why booking seats is key
Axon's current business is built on getting more customers to use the company's tasers, body cameras, and cloud services. These are the core offerings that law enforcement agencies sign up for and they're what drives the business.
Locking customers into the ecosystem with software packages is key to inducing them to add to the list of Axon products they use. A law enforcement agency may start by buying tasers, then add body cameras, and eventually upgrade to the $199 do-it-all package. But moving them up the revenue stack starts with bringing them into the system.
There's a good chance Axon will continue to expand the revenue it generates from its average customer. In 2020, it'll be rolling out a records management system that will provide a service critical to agencies' day-to-day activities. Such systems are sticky -- once all their data is stored in one, and officers have been trained in its use, it'll be painful and costly to switch to a rival offering, which will mean Axon will be able to raise prices more easily. The company will be able to expand its offering from there, adding artificial intelligence capabilities to its software and products like Fleet 2 for patrol cars. Whatever new products it brings to the market will already have a set of customers waiting to add them to their packages.
Axon's future is still bright
The pace of growth Axon is demonstrating is impressive, but \we're just starting to see the value of this business model. Over time, more customers will sign up for recurring-revenue contracts that include more services, and lock them into the Axon ecosystem. And that's how this company will grow for many years to come.
