Axon Enterprise, Inc.

Good afternoon. My name is Robert, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Axon Q2 2019 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session, at which time instructions will follow. I will now turn the call over to Andrea James, VP of Investor Relations and Corporate Strategy. You may begin your conference.

Thank you, Robert. Hello, everyone. I'm Andrea James. Welcome to Axon's second quarter 2019 earnings conference call. Here in the room in our Seattle R&D office, we have Axon CEO Rick Smith, President Luke Larson, and CFO Jawad Ahsan. Our Chief Revenue Officer, Josh Isner, is also joining us remotely. This call is being broadcast online and is available on the investor relations section of the Axon Enterprise website. You can find our reported results in our quarterly shareholder letter, which we have posted to investor.axon.com, and we have also filed with the SEC. Today's call will include forward-looking statements, including statements regarding our future expectations, beliefs, intentions, or strategies, including projections regarding revenue growth, profitability, and product development. We intend that all forward-looking statements be subject to the safe harbor provided by the Private Securities Litigation Reform Act of 1995. Axon's forward-looking information is based on current information and expectations. Our estimates and statements speak only as of the date on which they are made, are not guarantees of future performance, and involve certain risks, uncertainties, and assumptions that are difficult to predict. All forward-looking statements that are made on today's call are subject to risks and uncertainties that could cause our actual results to differ materially. These risks are discussed in greater detail in our Forms 10-K and 10-Q under the caption Risk Factors. You may find these filings, as well as our other SEC filings, at investor.axon.com or at sec.gov by searching under the A-A-X-N ticker. I hope you've all had a chance to read our shareholder letter. which you can find at investor.axon.com. And management's remarks today are meant to build upon the information in that letter. Please go ahead, Rick.

Thanks, Andrea. And thank you, everybody, for joining us today. We're proud of the progress we're making in driving strength in our software business, and we had a strong bookings quarter as our sales team really went out and sold the Officer Safety Plan 7 this quarter. There's a lot of positive momentum and underlying strength in the business, That said, the quarter did not meet our expectations, so I want to ensure everyone understands the puts and takes that affected our results. As you all know, we've been working hard on ramping TASER 7 and all of the subassemblies associated with the program. We experienced a disruption in our supply chain when our battery component supplier on the TASER 7 was unable to meet our stringent quality standards as it scaled. We have since worked closely with the supplier to help them scale, and it is now producing at production volumes. Unfortunately, as a result, about $3 million worth of forecasted TASER 7 sales shifted from Q2 into Q3 2019. From a TASER gross margin standpoint, we also saw some pressure related to a write-off of some obsolete inventory that we were not able to utilize due to a design change. While the short-term pain of this write-off was disappointing, we estimate the results of the associated design refinements will reduce our cost of goods for the TASER 7 cartridges by around 33% around the end of this year. Given that cartridges can represent more than 65% of the hardware costs in some TASER 7 programs, these cost savings will have a material impact in improving margins in the TASER segment. Taking a step back on product launches, one of the reasons we brought in Hans Moritz, who comes from Intel, to lead hardware engineering, was I saw opportunities to improve our new product introduction processes. Hans has brought in several senior members on his team, and I'm excited by the energy and rigor that they are bringing to our new product introduction process. Of course, that team has been here just a few months, but I've been working with them very closely and can say I have a high degree of confidence in the improvements that they are implementing. For example, we now have teams that are spending more time at suppliers earlier in the process. And the overall level of coordination between engineering and our suppliers and our in-house manufacturing teams is evolving to a whole new level. Looking to the future, I feel great about our ability to reaccelerate and sustain growth. OSP 7 Plus is generating a lot of interest, and it's exceeding our expectations. As we mentioned in our shareholder letter, major agency adoption of the OSP 7 Plus plan already includes Atlanta, Baltimore, and Minneapolis. The major agency customer reception to the TASER 7 has been strong, and we expect that revenue will continue to build. You don't see it right now in the P&L because of the low upfront hardware ASP due to bundling, but all the amortized revenue on the TASER 7 program will add up on cartridges, software, and warranty. Turning to Axon Body 3, we went to a healthy level of detail in our shareholder letter about some of the achievements we've solved in bringing that product to market and what remains today. namely completion of the carrier certification. Pretty much every customer I've spoken to this year seems energized about Axon Body 3. We've done demos and tests with some of the largest police departments in the world, and it's clearly a game changer. This is a really powerful camera, and most customers will receive it automatically as an upgrade. Then we can enable a whole new host of services once the hardware supports real-time connectivity. We're going from a body camera that gives you a historical look at what happened to a real-time connected device, and that has the potential to become an assistant on your chest. We're looking forward to putting Axon Body 3 into the hands of customers this quarter, and we're planning for meaningful shipments in Q4. With that, I'll turn the call over to Luke Larson.