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This Company's Cloud Offering Should Put It on Your Radar

By Josh Kohn-Lindquist – Sep 12, 2021 at 6:40AM

Key Points

  • Axon's product lines fit nicely into subscription bundles, giving it a powerful subscription as a service business model.
  • Promising growth optionality remains as the company looks to expand beyond public safety and the United States.

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Axon Cloud is fueling the company's growth machine, providing higher margins and recurring revenue.

Driven by its mission to protect life, Axon Enterprise (AXON 0.09%) has two main product lines: taser, and software and sensors. Originally known for its taser product focus, Axon has done a tremendous job transforming into a quickly growing software-as-a-service (SaaS) business. This transformation has moved the company's cloud offerings to the front of investors' minds as the software portion of the software and sensors segment has grown by 57% annually over the last five years. Now seen as the core of the company's ecosystem, Axon Cloud ultimately enables full utilization of all of the company's devices by aggregating data, evidence, records, etc. for its customers in real-time.

Despite seeing its stock rise over 4,000% in the last decade, Axon Enterprise still has a lot to offer investors with its growing subscription bundles and fascinating growth optionality.

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Image source: Getty Images

Focus on recurring revenue

Despite having many product-based offerings, including tasers, body cameras, and even drones, Axon is quickly becoming a SaaS success story, with 73% of its 2020 revenue coming from recurring bundles. This percentage has grown from 34% as of 2016, which is important since this recurring revenue is incredibly sticky and generates higher gross margins for Axon. In fact, the company's cloud segment provides a massive 77% gross margin, compared to its overall gross margin of 63%. 

Furthermore, Axon's 119% net dollar retention highlights that once its customers buy a product bundle, they are consistently upgrading their subscription to use more of the cloud's features. These features range from basic options such as video storage for body cameras on evidence.com and basic data management, to complex solutions such as live-streaming video or virtual reality training for officers. Generally speaking, net dollar retention compares a SaaS company's churn, or loss of customers, versus its upsell, upgraded or additional products. Naturally, a figure above 100% implies business expansion, so Axon's rate of 119% highlights minimal customer churn and successful service upselling so far. Overall, I believe Axon Cloud's offerings are essential to most customers, as they want full functionality from its products, enabling the company to sign agencies up for mutually beneficial five and 10-year subscription bundles.

In addition to the stability of this recurring revenue, Axon is still in the early innings of its long-term growth potential.

Growth optionality

Offering growth optionality to investors in two majors ways: internationally and through product expansion, Axon looks to continue building upon the 55% year-over-year revenue growth it reported for the second quarter. Internationally, the company saw even higher revenue growth of 60% year over year, however, it was another statistic that might have stolen the show. As CEO Rick Smith explained during the Q2 earnings call, "international bookings, which are our forward-looking indicator, nearly tripled." Currently only accounting for 25% of overall revenue, I am expecting to see a major jump in international revenue over the next few years thanks to this big increase in bookings.

As for product expansion, Axon's optionality seems to be quietly gaining momentum as it continues to build out its public safety ecosystem. Whether it is real-time dispatching operations, data and record-keeping, drone products, or its newly launched augmented and virtual reality training, Axon is testing out a variety of new product ideas with its customers. In addition to this product optionality, the company is committed to diversifying its customer base as it aims to expand into fire and emergency, corrections, and even enterprise with its array of products and services. While it is too early to tell how many of these new growth avenues will work out, it is a welcome sight to see, especially considering Axon's successfully inventive past.

An investor's next move

Thanks to the stability of Axon's recurring revenue growth, it should be able to keep taking some interesting shots at new growth areas, making it an innovative company to continue watching. As we advance, I will be watching the company's net dollar retention rate and companywide gross profit margin. Currently, at 119% and 63%, respectively, I believe these two metrics will highlight whether Axon's ongoing efforts to diversify both its product offerings and its customer base are taking hold or not.

Josh Kohn-Lindquist owns shares of Axon Enterprise. The Motley Fool owns shares of and recommends Axon Enterprise. The Motley Fool has a disclosure policy.

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AXON
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