Episode 6: Axon Enterprises

[00:00:01] Welcome to What Matters Most, Sands Capital’s podcast series in which we explore some of the trends in businesses that are propelling the pace of global innovation and changing the way we live and work today and into the future. We’re joined today by Portfolio Manager and Senior Research Analyst Danielle Menichella. Danielle has been a guest on the podcast twice before, first talking about autonomous vehicles with our Aptiv podcast, and then she joined us for a discussion of Keyence, a factory automation leader, which has actually been our most successful podcast to date by far, actually seeing about twice the listenership of any of the other podcasts.

[00:00:36] So if you haven’t had a chance to listen to either of those yet, I highly encourage you to give them a listen. They’re very interesting. Today, Danielle’s back to discuss a business that may seem very different from Aptiv and Keyence but shares some of the same elements of innovation. It’s a business whose mission is to capture truth, protect life, and accelerate justice.

[00:00:58] The company is Axon Enterprises, and it’s a business that may seem fairly niche and one that, at first glance, I bet many of you may not think you’re familiar with. But if you watch enough police dramas, I bet you have heard of it. Axon Enterprise was founded in 1993 by brothers Rick and Tom Smith, who had a vision of creating a device that could stop violent criminals without killing them. They called it the Taser. So I bet you’ve heard of the Taser. And it was actually inspired by a science fiction novel that the two read as kids.

[00:01:31] Over the years, the company expanded into other areas of technology and security, such as digital evidence management, cloud-based software, and artificial intelligence. So today, it operates a full ecosystem of technology to execute the mission providing Tasers, cartridges, body cameras, evidence software, and a multitude of training materials to enhance the current solution of law enforcement. And, more importantly, to improve public safety. It’s a very interesting company indeed, operating in a dynamic and too often controversial arena of law enforcement and public safety. So there are lots of angles that we can approach on this company, and I’m very excited to dig into the details with our expert here. So Danielle, welcome back.

[00:02:13] Danielle Menichella: Thanks, Kevin. It’s great to be here.

[00:02:15] Kevin: Great. Thanks so much for being here. It’s always a pleasure to have you on. As we usually do, we’ll start with the big picture view, and now, opinions and controversy aside, we’ll touch on that later, I’m sure. There are some very real trends we’re seeing that are making this seem like an opportune time to investigate Axon’s suite of products. So take us to the 30,000-foot view to start, and give us an idea of what this company does in a general sense. What does the market that it operates in look like today?

[00:02:45] Danielle Menichella: you know, if I take a step back and look at where the world is right now, I think there are some things that we can all agree on. And one of those is that crime rates, unfortunately, have been on an upswing, and crime is a problem that’s not getting better. I think we can also agree that too many people are dying from guns—and that includes everything from children in schools to everyday citizens to police suspects and even police officers.

[00:03:10] At the same time, we’re looking for more accountability. Law enforcement could benefit from improved community interaction and increased public trust. And all of that’s hard because workloads have increased. Law enforcement numbers are down, and there’s more work to do with fewer resources. And I think that’s really where Axon comes in. The best way to think of Axon, I think, is as a public safety platform of integrated products aimed at reducing fatalities, capturing context, increasing accountability, and achieving faster, more efficient justice. And while Axon has many more solutions than we’ll focus on here today, I think currently there are four key solutions that comprise the platform.

[00:03:56] So first, as you mentioned, and [what] everyone equates it with, is … we have Tasers. Axon started out as a Taser company. And today, it’s the monopoly Taser player. They sell them to over 90 percent of local police departments in the United States. And if anyone is unsure of exactly what a Taser is, it’s a conducted energy device used to incapacitate people temporarily so that they can be restrained safely. And then next, and in my opinion, more importantly, Axon makes body cameras, and Axon is the clear market leader—multiples larger than its closest competitors—and this is a product that is increasingly being regulated and mandated. I should also mention that Axon makes other types of sensors and cameras as well, like those that are used in police fleets.

[00:04:45] So then we have the software and cloud storage of the data that’s coming in from those sensors. And I would refer to this as the connective tissue of the entire company. Axon is a leader in evidence management and record systems, and that’s stuff that is used not only by police departments but also by legal teams, judicial departments, prosecutors, and defenders. And what’s so special about this is all the products work seamlessly together.

[00:05:13] And then finally, I think the fourth thing that’s probably worth mentioning, although it’s newer for Axon, is they have training—both virtual reality, as well as in person—and they do everything from Taser training, so officers are really getting to know how to use that Taser, getting comfortable with it and able to reach for it before they will reach for their gun. They also get training in empathy, sensitivity training, and de-escalation methods. So that’s all work that Axon is doing. And for now, those are the key four areas. But this is an innovative team. There are many other solutions that are waiting in the wings.

[00:05:48] Kevin: So in that description, it strikes me that it’s multiple products but integrated, as you mentioned the word “platform” several times. So it’s an integrated suite of products. Is there any other company, any other competitor in any of those product spaces that has the same sort of integration, or is Axon unique in that sense?

[00:06:10] Danielle Menichella: So I think what makes Axon unique is that they have the Taser. So that Taser is already giving them a customer base that is at least 90 percent of local police departments in the United States, as well as many others. And so they already have this relationship with the law enforcement agencies, and that really is the step in. Then, if you look at the cameras being integrated with some of the software, there are some players. Motorola is probably their next closest competitor that does some of that. But we think that Axon has a superior ecosystem that it’s offering its customers.

[00:06:48] Kevin: OK. That’s interesting. Let’s get this out of the way first: ethical considerations. You know, this is, at the end of the day, a company that makes a—I don’t know if they would call it a weapon, but for all practical purposes, a defensive weapon, to be sure.

[00:07:06] And that’s not something we’ve ever really invested in directly at Sands Capital. So naturally, it raises some ethical concerns with the kind of company that this is. Tell us about how you personally, Danielle, got comfortable with this.

[00:07:21] Danielle Menichella: Sure, so let me address that. You’re right. A Taser is a weapon. It’s a less-lethal weapon, but it’s a weapon nonetheless. And the company would tell you nothing otherwise. So this is a product that the company was founded on back in the 1990s— although the Taser was actually first invented in the 1970s by a man named John Higson Cover Jr.—but that technology wasn’t really developed or geared for law enforcement until Axon, which was previously known as Taser, and that was in the 1990s.

[00:07:55] Kevin: Were those the handheld stun devices that you’d see the little electric arc going between the two?

[00:08:03] Danielle Menichella: Yes, exactly.

[00:08:04] Kevin: OK, got it.

[00:08:05] Danielle Menichella: But the genesis of the company is that the founder, Rick Smith, who’s still the CEO today, had two very close friends who were shot and killed in a road rage incident. And he saw the senselessness in the deaths, and that became his mission: to develop a product that can stop a threat without ending a life. And that mission is every bit as alive today as it was then. And just to give you some examples of that, last year, Axon announced their own internal moonshot, and that is to aim to reduce the number of fatalities between police and the public by 50 percent over the next 10 years. And there are several different ways that this is happening.

[00:08:43] The ways that they’re involved in it are through creating a more effective Taser that can be used to replace the gun with bullets and to create more training for police officers in launching those Tasers. And Axon also launched, this year with the IIR—which is the Institute for Intergovernmental Research—a database for gun fatalities between law enforcement and civilians in the U.S. so that the actual numbers of deaths that are happening can really be known and be shared.

[00:09:12] But despite the pervasiveness of the Taser in U.S. law enforcement today, the Taser is not the majority of the business for Axon, and we expect it to become even smaller over time. So last quarter, for example, the Taser and cartridge sales were less than 35 percent of revenues for Axon, and our internal forecasts have that falling to below 25 percent over the next five years.

[00:09:34] So in my opinion, what makes the company so much more interesting, and what I say makes it more of an impact-type business rather than an ESG [environmental, social, and governance] concern, is the body-worn camera part of it. The cameras are integrated with the Tasers and the Axon cloud and the software offerings to record, store, and share evidence in a way that cannot be manipulated. And then that data is used as evidence to bring justice faster and more effectively. And I think that is so important in today’s world. We need to keep people safe, but we also need to increase accountability in doing that, and that’s what Axon does. And so that’s really where I gained my comfort.

[00:10:13] Then, you know, when we talk about what we actually did as a firm, you know, we normally say that we spend somewhere between a few months and a few years researching a business before we invest in it at Sands Capital. This one was definitely over a year. And after the first few weeks, when the light went off for me that this is the kind of company that we like [was when I realized] it is a hardware company that is transforming into more of a software business with recurring subscription revenues. It has a sticky customer base.

[00:10:45] It’s entrenched with its customers. It should behave countercyclically or at least acyclically. And its solutions act as a flywheel to win more business, deepening its moat and ever expanding the space between its market share and its next largest competitor. So after, you know, that light went off for me and I got very interested in this investment case, I then had to spend the next several months working really closely with our portfolio management teams, our other analysts, our stewardship team internally going deep with experts on policing, criminal justice, ethics. And we looked at the safety of the Taser versus other supposedly less-lethal weapons. And we found that there’s first a greater chance that the subject surrenders when faced with the Taser and that even something like a baton carries with it an 80 percent chance of injuring the subject versus about 1 percent from a Taser incident.

[00:11:40] And that number comes from a Department of Justice study by Wake Forest University Medical Center that looked at injuries between the police and the public. We attended the Axon customer sales shows. We watched their CEO and other members of their board get shot with a Taser on stage in the middle of giving a presentation. We watched them go down on the floor, and then about 15 seconds later, they stood up, and went right back to giving their presentation like nothing ever happened. And, you know, I can say that—me personally—I, as well as several other Sands analysts and portfolio managers, have gone through their VR [virtual reality] training. We’ve actually shot both the old model of the Taser, which was the Taser 7, and the recently launched Taser 10. It’s very easy to use effectively.

[00:12:23] We spoke with the company, and we learned about their internal processes, their community outreach, and their ethical advisory boards. And, of course, there were some conflicts that we learned about—and why they existed and how they worked through them. But at the end of the day, you know, this is a company that is focused on changing policing for the better through more accountability. And internally, we took the ESG angles of the business very seriously and came out of them feeling very strongly that this is the right type of business to invest in.

[00:12:53] Danielle Menichella: We think that being thoughtful while we invest in businesses like this that are actually trying to fix existing problems and the status quo, and where we are able to engage with management teams, gets us all to a superior outcome rather than avoiding investments like this. I don’t think avoidance is any way to help in the long term.

[00:13:13] Kevin: Oh, that’s good

[00:13:14] Kevin: I was reading a little about the Taser 10, and maybe the 7 has this also, you mentioned the deterrent factor. I know the 10 is—and maybe the 7 is as well—but they’re equipped with flashing lights and warning signals that I think mean that you probably don’t have to fire it when that goes off. It de-escalates pretty quickly when people think that’s about to happen.

[00:13:39] That’s great. That’s really helpful. You know, I think it clears up or at least helps us wrap our heads around any of the ethical concerns. There certainly is a better way of policing and dealing with public safety than what’s currently available. And, correct me if I’m wrong, but I believe two of their larger customers are both the U.K. Home Office and the Australian Federal Police. And the U.K., in particular, is known for police that don’t carry firearms. So that’s kind of a—I think—a testament to their comfort level with the device. Is that an accurate statement?

[00:14:14] Danielle Menichella: Yes, it’s very interesting. So when people hear about Axon, they automatically assume that this is a very United States-centric business. And, to be fair, 80 percent of revenues today are from the U.S., but 20 percent are international, and that is growing very fast. Their largest single customer, as you pointed out, is the U.K. for Tasers. In the last quarter, the largest contract that they signed was with Scotland, and that, I believe, was in software. But the Commonwealth countries are the next most interested in deploying some of Axon’s solutions. And we think that, over time, there will be more and more demand coming from the international communities.

[00:14:58] Kevin: I was looking also when they talk—and in some of their public comments—they mentioned the total addressable market (TAM), and from kind of the back-of-the-napkin calculation, it looks like they’re estimating somewhere around 35 percent of that addressable market will be outside of law enforcement and will be individual safety. Is that something you’re looking at? Or is that part of the story?

[00:15:20] Danielle Menichella: So in the TAM numbers that the company shares, most of it is actually coming from traditional law enforcement but, more importantly, federal law enforcement, where it’s been relatively underpenetrated, as well as corrections. And then, I think the next-largest opportunity set is more along the lines of private security. And that would not be individual so much, although they do have a very small consumer segment that’s less than 1 percent of revenue and that is not a big driver for us. In our model, we assign very little value to that at all, but there is the opportunity in private security.

[00:16:01] So think that if you have a sports team or you have a stadium, and you want to protect the people who are attending your events, but you also want to make sure that you have legal recourse because someone could accuse your security of saying or doing anything. They will be maybe carrying a Taser for defense, but more likely, they’re going to be wearing a body camera, and that data will be being saved up in the cloud. So I think that’s probably the next greatest opportunity set. And then you have even things like—I know in the U.K., retailers and people who are working in stores are wearing cameras because they’re being assaulted by customers. And so there are more and more use cases along those lines.

[00:16:43] Kevin: Great. OK. Well, let’s dig more into the specifics on the investment case then. You talked about their dominance in terms of market share and the integration of the product line. Maybe talk a little bit more about the business plan generally, you know, what’s the growth path for the company going forward? And, I’m very interested in hearing more about the subscription-based business and how they can lock in more of these customers over longer periods of time.

[00:17:08] Danielle Menichella: Sure, sure. So let’s start with the Taser. It’s interesting, but it’s not the major part of the investment case. It’s actually a very minor part. And there’s more growth there. But there’s a lot more growth to come from the cameras and from software. But we see Taser growth coming from the introduction of two new models, at least over the next decade. Those models, we hope, will get us to a place where a police officer or law enforcement will reach first for the Taser rather than that gun.

[00:17:38] So the Taser becomes more effective and more of a substitute for the gun with bullets, and the penetration there is already quite high, like we said, in the U. S. local municipalities. But, as I mentioned, corrections departments, the federal and state groups can also see greater penetration, as well as international. So then we think about body cameras. In the U. S., those are being increasingly regulated and mandated, but the penetration is about 14%, which is according to Axon’s most recent earnings report. So we see that increasing significantly over time. We talked about the use cases in private security, retail, and international.

[00:18:21] Then we have all these new products, whether it be the VR training, the fleet cameras, dispatch systems, ALPR [automated license plate recognition] systems, robotics, drones—the further opportunities for growth. But to me, the biggest near-term driver for growth comes from the more functional software, which is driving upgrades to higher software bundles from existing customers.

[00:18:42] And to think about it in number terms, the total addressable market in the U.S. for digital evidence management software and other real-time operations, productivity, and record software is about $22 billion, based on what Axon publishes in its presentations. But the Axon cloud penetration is only about 4 percent of that $22 billion on a value basis, which leaves a lot of room for upgrades. And if you think about that in terms of customers of Axon’s existing customers, less than 20 percent currently subscribe to the highest software bundles, leaving plenty of room for upgrades over time, and those value-added software bundles will deploy more and more AI [artificial intelligence] features, which will allow current officers to spend less time sitting behind a desk, filling out paperwork, and more time walking the streets, getting to know their communities. And this means that fewer officers will have to be hired and fewer will have to be trained, and that’s really good for police budgets. So Axon comprises about 1 percent of police budgets currently versus the majority of the budget, which goes for officer compensation. So we see that as having the ability to grow multiples higher as long as the payback and the ROI [return on investment] is there.

[00:19:56] Kevin: Can we dig in a little bit more on the AI component? What, how does that work? Is it basically just a way to go through massive amounts of video data and pull out relevant clips, or how does that work?

[00:20:09] Danielle Menichella: So right now Axon currently offers AI-powered transcription and redaction, which takes body camera video evidence and automatically transcribes video footage into text. And that allows for more efficient search by legal teams. With redaction, Axon software is able to automatically blur faces and personal information in video footage so that the evidence can be more quickly and efficiently gone through. It could be searched; it could be shared in the court system, in the legal system.

[00:20:38] They have a lot more in the hopper in terms of AI, but I think those are two of their current use cases. I also think it’s important to mention that we believe Axon is the most advantaged, in terms of potential AI down the road and generative AI, because within the public safety space, they have access to the largest data set given their market leadership in the body-worn cameras and their cloud storage.

[00:21:05] Kevin: Because you’ve mentioned it, we should probably touch on this here as well. What about any privacy concerns? I mean, you mentioned they can blur faces and things like that, but is that an issue with these always-on cameras that they have to deal with?

[00:21:18] Danielle Menichella: You know, that’s an issue that they’ve been working through over the past decade or so, convincing police departments and police officers that they’re comfortable having their camera on all the time. And a lot of it depends on specific laws in the local municipalities, whether or not officers have to have it on all the time. What we’re finding is that police officers more and more want to have that video footage, at least good police officers do, because it protects them, and it keeps them safe in the event that something goes wrong and they’re being questioned and their actions are being questioned. So from the police officer’s perspective, that is something that is decided by each municipality, whether it has to be on, has to be on all the time. More and more, though, you’re seeing police officers choosing to have it on.

[00:22:09] In areas where it has to be on, Axon takes privacy very seriously. The data that they get is anonymized to get learnings from it. We have the redaction tools. There’s blurring of faces, blurring of personal information, all of that is of the utmost importance to the company.

[00:22:28] Kevin: Sure. Yes. So there are a number of less-lethal options than firearms, and there are quite a few numbers of camera makers out there. So what is it that makes Axon special?

[00:22:40] Danielle Menichella: So that’s true. But first, I think it’s important to acknowledge that a less-lethal weapon can also be less effective at stopping a threat. If someone truly feels that they’re being threatened in a life-or-death situation, they’re only going to reach for what they feel gives them the best chance of survival. So there’s a saying that you can’t bring a knife to a gunfight, and the Taser comes closest to a bullet substitute, but even that still needs to improve to fully get there and inspire full confidence for self-defense.

[00:23:11] And I think we will get there. And we’ve seen a big step in the effectiveness of the latest Taser versus earlier models, and we expect that to continue in a meaningful way over the next decade. So then, in terms of cameras, you are right. This is a fragmented space, and there’s a lot of competition there, but it’s a space that Axon has dominated, and that’s based on the top—the largest—50 municipalities in the United States where their market share is close to 80%.

[00:23:38] And we believe that Axon has dominated the market because of their ability to build the best solutions for their customers. And what that means is that the Taser, the camera, and the software work seamlessly together, ensuring that the video data is uploaded to the cloud in the time before weapons are drawn. So you touch your Taser, the camera records until the incident is over, the data goes to the cloud where it cannot be manipulated, And then that data goes into records and evidence and is shared amongst police departments as well as law teams and the judicial system. It’s very difficult to deploy a scaled body camera program due to the thousands and thousands of hours of video footage that are piling up rapidly, and they have to be kept—depending on the state—it could be a couple of years, or it could be indefinitely, depending on the crime. And so Axon’s winning that market by building tools that help customers best and more efficiently manage the high and growing number of digital evidence hours that they’re generating.

[00:24:42] And once all of that data is stored via Axon’s cloud, it makes it difficult to move it somewhere else. So that’s why customers tend to be extremely sticky. You already have all of your thousands of hours of data stored on the Axon cloud. You’re not going to look to move it someplace else. And then Axon makes it easy to sell these solutions via increasingly value-added bundles with, on average, five-year contracts. Some are even longer.

[00:25:06] Kevin: So that reminded me of something else I read about the company and, you know, apologies for, for pulling this kind of random thoughts out of the air here, but what you’re describing, I think, in terms of the hardware/software platform is Axon Evidence. I think that’s the business line, right?

[00:25:23] Danielle Menichella: Evidence.com.

[00:25:24] Kevin: Evidence.com. And then there’s Axon Respond, which I think is really quite interesting. And that’s integrating more wireless connectivity into the cameras so that command centers can actually monitor in real time what these officers are doing.

[00:25:38] Danielle Menichella: So this is a relatively new solution. I think that this is a great opportunity for them. It’s not really competing with Motorola and their radios, but it’s a camera where you can speak into it and you can hear from it. And what makes this … I think it’s going to be very useful for Axon and its customers [because], you know, a lot of times when a 911 call is dispatched, they’ll have ambulances go, the first responders include fire, you’ll have police officers, and then the police officers will get there and ascertain what’s happening.

[00:26:13], And sometimes it’s a situation that the police officer, despite their training and their increasing amount of training that that Axon is helping them with through virtual reality, but they might not be an expert. They might need a mental health expert, or they might need someone who speaks a different language or someone who knows how to interact with someone who’s deaf or mute. And so they have the ability with their camera to speak to dispatch, who can then put them directly in touch with someone who can handle this particular situation. And so this really, I think, will help improve community interaction. It will help reduce some of the issues that officers happen to come across when they enter a scene and they’re not familiar with what’s happening there. So this is a great opportunity going forward.

[00:27:02] Kevin: Yes, it’s Mission Impossible level stuff, which I think is really interesting. Just to visualize how that would all work out. And, actually, to think the technology’s been there for a while, and it’s finally coming to, you know, the real world, which is nice. Related then, maybe talk about some of the new products in development. I say related because I think one of those is a fully automated kind of robotic camera and Taser delivery system. Maybe I’m getting that completely wrong, but something along those lines that I know is fairly controversial.

[00:27:35] Danielle Menichella: So this is a controversial product. It’s something that has come out from the idea of all of these school shootings. And we need a way to get someone or something into the school that can stop the threat without the risk of getting more people killed. I think it’s an interesting one to think about because it does highlight some of the interactions they’ve had with their own ethical advisory boards with community interaction groups and some of the things that they’ve chosen to do as a result of that. And they do have several investments in drone companies and several relationships with robotics companies, and they talk about putting cameras and deploying these things with Tasers.

[00:28:15] So I think two important things have come out of the discussions. Right now, it’s very important to say that we are still in the research period. They’re still learning about people’s objections to these things and different community tolerance for these things. This is something that will be researched for many years before anything comes out of it.

[00:28:34] However, so far, they feel very strongly that they will not put any facial recognition on these cameras. And the other thing that they are holding firm to right now is that regardless of how much AI-generated automation there can be, the ultimate decision on whether or not force is applied must be driven by a human not a machine. And so I think that those are valid ethical concerns that have been raised.

[00:29:02] Again, this is all work in progress. This is not a product or solution that’s going to be in the next two, three, or five years. This is something long term that the company cares about because they want to reduce the deaths, and they want to make people safer. But they also want to engage with all of the important groups who have a say. And, you know, privacy and protection of individual rights, when it comes to surveillance and when it comes to making force decisions, are very important.

[00:29:39] Kevin: That’s excellent. And you know, we spent a lot of time talking about this specific technology, the devices, the ecosystem around the products that they develop. Maybe spend a little time talking about some of the tailwinds from a macro [big picture] perspective that will drive more adoption of these tools within police forces and within public safety.

[00:29:52] Danielle Menichella: I think the main thing is demand, right? There’s a lot of crime. Crime isn’t getting better, unfortunately, and we need to do something to make our citizens feel safe. So we want to look at ways to make our streets safer and to make people have trust in that system. The second part of that is supply, right? So we have a police department where it’s hard to get people who want to join. We’re not able to—either from interest or from the ability to pay—hire a lot more police officers. So they have to do a lot more with a lot less.

[00:30:30] And Axon has solutions that help that. I think the most important thing and the most important driver of Axon solutions is the need to increase accountability between public safety and law enforcement and communities. And we’ve seen a lot of that fall apart over the last several years. And we’re meeting cries for more accountability for better interactions for a safer, more cohesive, and inclusive community.

[00:30:59] And I think that Axon is really a solution to this problem because it provides not only the cameras that collect the data of what’s happening on the streets, and it collects data, you know, 24/7 very often or, at the very least, 30 seconds or more before an incident starts, before any sort of weapon is even touched, and then it continues to record through the completion of that incident.

[00:31:24] And then that data goes to the cloud and is in a safe place, where it could be shared amongst groups. You know, a lot of times if you’re watching video footage of something that happened, whether it was something bad that happened between police and a suspect or something that proves that the police officer was in the right, and you’re watching a video, whether it’s on YouTube or on the news, you’ll look in the upper right-hand corner and there’ll be the little Axon motif. And so you’re seeing Axon video more and more, and that’s really helping improve perceptions of what’s going on between the community and police.

[00:31:58] Kevin: That’s great. OK. And I guess that leads us to a part of the podcast here where we talk about the bear case on the company. Do you see a growth wall or any kind of obstacles to continued growth? I’m thinking, in particular, of, you know, the kind of ebb and flow of police budgets, at least at the local level, and probably, you know, even now at the federal level. Would that have an impact on growth for the company?

[00:32:27] Danielle Menichella: Certainly, police budgets are something that we have to think about. Historically, police budgets have always gone up. Generally, when the macro of a country is not doing well, unfortunately, crime increases. And so you have the government looking to spend more money to support the economy. And then you also have the government trying to protect its citizens and put more money into policing. So that’s why I said earlier that this is a business that seems to be acyclical or or countercyclical even. Then, in terms of police budgets, we do expect those to continue to grow over time.

[00:33:06] But more importantly for Axon is that the solutions that it provides are value added, and they should have a high return on investment. They should allow for police officers to—instead of spending three hours of their day sitting behind a desk, filling out paperwork—a lot of the software will do this automatically so they can get on the streets.

[00:33:29] They can do more of their on-the-ground work, and reduce the number of officers that are needed to be walking the streets because you have much more automated workflows. And so I think that we talked about currently the police budget that goes towards Axon products is somewhere between like 1 and 3 percent depending on the group, but that could be higher as Axon is able to prove more and more automation and efficiency gains for their customers.

[00:33:58] Kevin: OK, and you touched on this a little, but is there a physical growth wall for the product itself? I mean, at some point, could they reach maximum market share capacity and not sell another Taser?

[00:34:14] Danielle Menichella: Sure. I mean, there’s a growth wall conceivably for everything. I think that this growth wall is over a decade out. And I say that because I do believe that the Taser will have additional iterations that will make it more effective and more useful. I think that there’s plenty of growth left in terms of camera penetration, in terms of use cases for cameras and the data that is captured by them, and then, most importantly, that software piece of it.

[00:34:44] Axon has a very large software engineering team. These are people who are working with their customers to think about the solutions that are needed to find things that will make their lives easier and make the product work better, so that’s a constant development phase that they’re in. And, you know, every time a new feature is added, it drives demand for additional software purchasing. And then finally, we have all of these new products—these new solutions—that are, currently being researched and being worked on, and then you have the expansion from mainly a U.S. business to the whole, you know, international potential.

[00:35:21] Kevin: That’s excellent. So a lot of room to grow. I do want to ask you one question because I think this is interesting, and I know, you know, the growth isn’t necessarily in the device itself; it’s in the ecosystem broadly. But I think it’s fascinating—the upgrade from the Taser 7 to the 10 and the increase in efficacy of the device. Can you talk about that a little? Like what does the 7 do and have, and why is the 10 so much better?

[00:35:46] Danielle Menichella: Yes, so, I think the main thing was that, and I’ve shot both, so I’m speaking from experience.

[00:35:52] Kevin: Well, and let me ask you this before you even jump into that. Have you been shot by one? Everybody’s going to want to know. Have you been tased?

[00:36:00] Danielle Menichella: I haven’t. I have not.

[00:36:01] Kevin: OK, good, good.

[00:36:02] Danielle Menichella: I have said that, eventually, we should be tased. I have not done it. I felt like watching the CEO be tased —and other members of the management team—was good enough. But, you know, I haven’t done it.

[00:36:12] Kevin: And I understand it’s a rite of passage at the company, you know, maybe not one that employees are excited about, but there is some news floating around that you’re required to be tased if you work there.

[00:36:22] Danielle Menichella: You’re not required. It’s offered. I think a lot of people who work there want to be tased because they … what’s so interesting about this company is when you meet the management team, and you talk to the people who work there, and you visit their facilities, and you go to their sales events, these are people who truly believe in the mission. Look at some of their top management people, and they came from, you know, Silicon Valley companies. They came from very high-profile businesses and jobs. And when you talk to them, they will tell you it is because, you know, they were sitting there and there was a school shooting, and someone said to them, what are you doing about things like this?

[00:37:02] And when the prospect of working for a company like Axon that did have a mission to really change the world and make the world a better place in terms of safety, when that was brought to them, it was something that they believed in, and they couldn’t say no to. So I think there is a lot of buy-in from the people who work there. And so, because of that, a lot of them choose to be tasered and to feel what that’s like. And they believe that they can, you know, they can sell the product and the ecosystem better if they’ve experienced it themselves because when they tell you that this product is safe, they believe it because they’ve seen it and they’ve felt it.

[00:37:36] Kevin: OK. I got you off track there.

[00:37:37] Danielle Menichella: Sorry.

[00:37:38] Kevin: So back to, you’ve shot. No, that was my fault. You shot, you’ve shot both the Taser 7 and the 10.

[00:37:43] Danielle Menichella Yes.

[00:37:44] Kevin: Tell us what the differences are.

[00:37:45] Danielle Menichella: So to me, the main difference was the 7 was a little bit harder to get the suspect to go down because it has two cartridges in it. And each one had two shots, and you had to make a connection between the two shots, whereas the 10 gives you 10 opportunities to connect two of the probes, and it’s much easier to shoot those. They go farther. It just is an easier thing, whereas you only have the four shots in the Taser 7.

[00:38:11] Kevin: And am I correct that the 7 requires the positive and negative to be in the same set?

[00:38:16] Danielle Menichella: Yes, exactly.

[00:38:17] Kevin: Whereas with the 10, the positive and negative can be any one of the 10 shots.

[00:38:20] Danielle Menichella: Right. In the 7, you have the four shots, but it’s two and two, and you have to get the two that are together to match up.

[00:38:27] Kevin: Yes.

[00:38:28] Danielle Menichella: Whereas the 10, it could be any of the ten.

[00:38:31] Kevin: So it seems a lot more effective.

[00:38:32] Danielle Menichella: Much.

[00:38:33] Kevin: Yes.

[00:38:34] Danielle Menichella: Much easier.

[00:38:34] Kevin: But it has the deterrent technology as well. So hopefully, you don’t have to even shoot the thing.

[00:38:39] Danielle Menichella: Right, it has warnings., it can be used in all weather. The 7, for the most part, could be used in different types of weather, but the 10 works much better in a lot of rain and a lot of water. It’s a more effective Taser. And I think, in addition to having those 10 shots versus the two shots at two, I think the other big benefit of the 10 is that it shoots much farther. So you don’t have to get up close to the suspect, where it becomes much more dangerous for both of you.

[00:39:08] Kevin: Yes, let me ask you about that because that was interesting. We kind of glanced right over it. Describe VR training. You’ve done it. What does that entail? Are you wearing like an Oculus headset? Walk us through the whole thing.

[00:39:19] Danielle Menichella: Yes, so I’ve done it twice. And I did it, I would say, about nine months apart. And I will tell you that the leaps and bounds between those nine months [resulted in] an extremely different and better product. And so you do wear the headset, and I’ve done it in several different ways. I’ve done it in terms of sensitivity training and de-escalation training.

[00:39:41] So I’m acting as a police officer, and I got to interact with someone who was deaf or who had difficulty understanding what I was saying. And then the other situation that I interacted with was more for police officers, spotting depression and mental illness in their other police officers.

[00:40:01] And so I learned the signs to look for, for a police officer who was on the edge of wanting to commit suicide because they had been going through something so difficult. And then, I’ve also gone through VR training for Taser shooting. And that is, I think, a really great opportunity because right now, the number of hours spent in training on how to shoot a Taser is relatively limited.

[00:40:27] It only happens at certain times. You usually have to go someplace and learn how to do it. And with the VR sets, the police departments are able to have people train like, you know, 10 minutes right before each of their shifts, or they can do it on a weekly basis or a monthly basis in small increments, but it’s a constant practicing of that.

[00:40:47] And you don’t have to waste cartridges because it’s a virtual shooting, although you are holding a virtual Taser. I mean, it’s a physical Taser—and it weighs the same, and it feels the same—but it’s not actually shooting anything. So you get really comfortable with how the Taser itself feels. You see how you’re shooting, how well you’re shooting, good practice. And it really allows for the amount of training to increase without expenses. You don’t have to take people out of their everyday jobs. You don’t have to travel somewhere. Like right now, a lot of times you have to travel to go to learn how to shoot these things or to practice to have your upkeep [training], so now you can do it in the police station, during off times of your normal shift.

[00:41:28] Kevin: That’s fascinating. And, it’s probably not the right word for it, but it sounds like a lot of fun as well.

[00:41:32] Danielle Menichella: Well, yes, and they even have created video games that their officers are capable of playing VR that involve basically shooting a Taser. So you’re practicing shooting—I think it’s zombies or something, but I could be wrong. And it’s something you can do in your spare time, but you’re actually getting better and better at deploying that Taser quickly and effectively.

[00:41:55] Kevin: Excellent. Well, we’ve talked a lot about the company and the products. Did we miss anything? I mean, is there anything maybe outside of that particular suite of products that they’re thinking about or working on?

[00:42:06] Danielle Menichella: No, I think that’s … I think we’ve touched on all the major parts of what makes Axon special. I really would say that this is a company that is really forward-thinking and is OK with thinking about how to rock the boat to make the world a better place. They’re not afraid of taking risks head-on to change the world, and they’re really focused on these innovative products. But the most important part of the business is this connective tissue that the software really connects everything together and really provides value added and a high return on investment for their customers.

[00:42:43] Kevin: That’s excellent. Well, great. Well, thanks again for joining us on this call. It’s always interesting. You cover some of the most fascinating companies here at the firm, I think, and we’ll certainly have you back. And, you know, I’ll also keep you posted on the success rate of this particular podcast. I think you’ve got a …

[00:43:01] Danielle Menichella: I feel a lot of pressure here.

[00:43:02] Kevin: You have a high hurdle with Keyence so … But I think that this is a fascinating topic, and I’m sure people will be really interested to hear more about it. So thanks for taking the time.

[00:43:11] Danielle Menichella: Great. Thank you, Kevin.

The views expressed are the opinion of Sands Capital and are not intended as a forecast, a guarantee of future results, investment recommendations, or an offer to buy or sell any securities. The views expressed are current as the episode date and are subject to change. This material may contain forward-looking statements, which are subject to uncertainties outside of Sands Capital’s control. The securities identified do not represent all of the securities purchased or recommended for advisory clients. There is no assurance that any securities discussed will remain in the portfolio. You should not assume that any investment is or will be profitable. A company’s fundamentals or earnings growth is no guarantee that its share price will increase. For more information, including a full list of portfolio holdings, please visit our website at www.sandscapital.com.

As of December 29^th, 2023, Axon was held in the Global Growth, Global Leaders, and Global Shariah strategies. YouTube is owned by Google, which is held in the Global Growth, Global Shariah, and Technology Innovators strategy. Motorola was not held in any Sands Capital strategies.