Okay, thanks. Hello everyone. Thank you for joining us, and welcome to our Q2 2022 Earnings Update. I hope you've all had a chance to read our shareholder letter. We posted that to investor.axon.com after the market closed, and the remarks that we make on today's call are meant to build upon the information that is already in that letter. During this call, we will discuss our business outlook and make forward-looking statements. Any forward-looking statements made today are pursuant to, and within the meaning of, the safe harbor provision of the Private Securities Litigation Reform Act of 1995. These comments are based on our predictions and expectations as of today and are not guarantees of future performance. All forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. These risks are discussed in our SEC filings.
Before we go to Rick, we will open with our earnings video.
Hi, everyone. It's great to be here again. We are excited to report excellent momentum. In May, we hosted Axon Accelerate, and you could really get a sense of the excitement throughout our business. This was our seventh annual user conference, and it continues to be the largest technology conference for public safety. It was awesome. We hosted training and hands-on demos of our technology. There were also amazing keynotes, miniature golf, an arcade, robot dogs, and. Well, you know what? Tell you what. It's probably better if we just show you. Naturally, my favorite part was the ice cream parlor. Freeze. Get it? You could almost think of this Accelerate as the unveiling party for the power of the Axon ecosystem. The reality of our partnerships and integrated products was truly on display.
The Axon ecosystem is no longer just an idea. Axon devices and software, alongside partnerships with cutting-edge companies, is already delivering tangible customer value. Our customers are the key drivers of our ecosystem strategy. We partner and integrate with other innovative companies to meet customer needs. Also at Accelerate, we unveiled a new streaming service called the First Responders Network. This brand-new platform showcases real-life stories. It's a unique inside perspective of those who protect and serve. We created this as a testament to Axon's customers who are out there saving lives every day. We know how invaluable they are, and this new service provides a way for others to see and experience their value. I've downloaded the FRN app myself. These stories are incredible. I actually just watched a video about a sergeant who saved an infant's life and then became a godparent to the child.
These are truly everyday heroes among us. Our 2022 RISE Awards recognize officers who have saved a life or shown exemplary performance in the field. Okay, Andrea, this is all a lot of fun, but there's a question we're getting increasingly from investors. They want to get a better sense of our investment priorities. This makes sense, I know, right? Every quarter, we talk about all these exciting new products and categories and how we are investing for growth. Where are we actually investing the most? This calls for a pie chart. As you can see, for 2022, the majority of our R&D investments fall into our core SaaS offerings and our core hardware products. Now we have put incremental R&D toward unlocking the federal and justice sectors.
What's awesome about these new investments is that they build upon the core public safety investments that we have spent years perfecting. With modest modifications, we unlock access to giant new markets. Finally, we have dedicated incremental R&D to the drone and VR categories. Okay, I can see that the core hardware and core software is receiving the majority of our investment. Can you get a little more granular than that? Sure thing, Angel. Our core SaaS investments break roughly equally into three areas, Digital Evidence Management, real-time operations, and productivity software. It is these investments that drive annual recurring revenue and our high net revenue retentions. Our hardware investments split roughly into 65% going toward body cameras and fleet in-car cameras, and 35% into TASER platform engineering. Please note that we are showing directional investment percentages here.
Some R&D investments don't fit neatly into their own category. For example, our investments in core platform infrastructure makes every software product faster, safer, and better. Another key example is artificial intelligence R&D, which is shared across product categories. Our AI team has a big impact, even though these investments represent generally less than 10% of our total R&D budget. To be clear, all of this is a financial view of the business. Our customers simply see best-in-class products where the hardware, software, and AI all work together flawlessly. Check this out.
Hi, I'm Blake Bullock. I'm the Senior Director of Fleet Products here at Axon. I'm Blake Ingoglia, a Senior Graphic Designer here at Axon. We're here today at the Apex Motor Club in Arizona, and we're gonna test the Fleet 3 system with license plate reading technology with some of the fastest cars in the world. Ferrari. Fleet 3 is Axon's latest in-car camera system. It can read license plates across three lanes of traffic at speeds of up to 140 miles an hour. There's no outrunning this thing. Is there? Ferrari's ready. Whoa. Boom, there's the plate. That one was going 120 miles an hour. We see the make, model, and color of the vehicle instantaneously. Holy, a 125 miles an hour. Whoa. Fleet 3 just captured a license plate at 135 miles an hour.
Keep that in mind next time you're driving around town, whether or not you're in a Ferrari.
Axon's R&D investments fuel our flywheel. We build products and bundles that give our customers superpowers to ensure everyone gets home safe. This creates more users, AKA people, and nodes, AKA devices, on the Axon network that creates more data, allowing us to unlock more value through machine learning and AI. We use that to create even more great products and bundles. Okay, our update wouldn't be complete without sharing some exciting customer news. In Canada, they found that simply presenting a TASER device deescalates a situation between 70% to 90% of the time without having to deploy a cartridge. We are seeing exciting TASER 7 device adoption across Canada. Our products just made major news in the UK, where the West Midlands Police officers and staff became the first entire agency in the country to live stream their body cameras back to central command.
The West Midlands is the second most populous county in England after Greater London. That's a wrap for this quarter. Drill down into our financials and our shareholder letter at investor.axon.com. We'll see you in November.
Awesome. All right, well, I will launch in. Andrea and Angel, great job as always on the quarterly video. That's fantastic. Great way to share all the exciting stuff with our shareholders. Okay, everyone. We're executing on what is shaping up to be a really excellent year. Our confidence in our growth extends well beyond 2022. We emerged from the pandemic and civil unrest of 2020 in our strongest position ever, and now we're fortunate to be able to leverage that position of strength while many parts of the economy are experiencing uncertainty. We're seeing broad-based strength across our product lines, and we're really energized by the growing number of agencies that are buying nearly everything we offer and signing up for 10-year contracts, sometimes even 12 years. It's exciting to see an agency go all in with Axon.
You know, we set a vision several years ago that an agency wouldn't just say, "Well, we have a TASER device, or maybe we have body cameras and Evidence.com," but would instead simply describe Axon as their technology partner, period. That's starting to happen now when agencies sign up for all of our software solutions, plus our body camera, dash camera, the TASER 7, the VR training, our drone solution, and so on. Customers are increasingly demonstrating their confidence that we are the right technology partner for them for the next decade. We made it easy for our customers to bet on us because our team delivers. Now on to some other items. We expect profitability to improve in the back half of this year. We expect to drive increased leverage coming out of Q2 when we had some expenses that won't repeat.
More on that coming from Jim in a moment. Also, we recently launched an internal campaign called Spend It Like It's Yours to clamp down on some low-hanging fruits such as travel expenses and swag. In fact, we created a new position appointing a swag czar who must approve all purchases. Being scrappy is not new to Axon. We're just taking it to another level of rigor. I was recently quoted in The Wall Street Journal as last week saying, it's, you know, it's good to go on a swag detox. Not every event needs a T-shirt, and we need to balance the need to travel against what we can do over Zoom, such as maybe sending one or two key representatives to be in the room and having others join online. We're continuing, though, to hire and invest in this environment, and we're disciplined about it.
Our bar for talent continues to move higher. Where we have seen other technology companies slow down their hiring, that presents us with opportunity, and you'll see some of that in our increased headcount spending in the second quarter. Thinking back to 2008, in that downturn, we invested in creating the cloud and body camera business while our competitors were pulling back. The results of that decision are measured in billions of market cap. Ice ages favor the adaptable, and we see times like these when the war for talent cools as an opportunity to advance our mission, so we'll come out of it far stronger and more competitive. Our commitment to generating strong cash flow and operational discipline is shared among the entire leadership team.
You'll see in our shareholder letter that we've revised our expected capital expenditures this year to reflect slower pacing on our new campus investments. We're adjusting our pacing to reflect a world that is still in flux as we determine the best and highest use of the campus, optimizing for the new world of hybrid work, as well as the best and highest uses for our capital. It's more important that we get it right than we get it fast, and we are preserving optionality. Finally, I feel great about the trajectory of our C-suite. Since our last call, Josh Isner was appointed COO and Isaiah Fields, an 11-year veteran of Axon, was promoted to our Chief Legal Officer. Also, we've made a lot of progress with our CFO search, which Josh will highlight in a little bit more detail.
In the meantime, Interim CFO Jim Zito hasn't missed a beat. Before turning over the call to Josh, let me take a moment to share my thoughts about Josh's leadership skills. First, Josh's promotion to COO was really a natural progression for him and for Axon. Josh has been a rock star since the day he got here, and he exudes sheer confidence. He built a revenue stream and embodies our core value to own it. For the past seven years, Josh has owned quarterly revenue delivery, where he's helped us establish an excellent track record. Josh is highly focused on delivering results and executing and exhibits excellent discernment. I'm thrilled with our partnership and our working dynamic. We have a rigorous and healthy back and forth, and I'm very confident in his leadership during the next phase of rapid growth.
With that, now let me turn it over to Josh Isner.
Thanks a lot, Rick. I appreciate that and it's good to see everybody. In my new role, I'm humbled by the trust our team, our customers, and our shareholders have placed in me. We are working hard every day to deliver on our mission and drive exciting growth in tandem with margin expansion. Here's what that looks like in terms of where I'm investing my time and focus. First, I'm working on building a world-class team from top to bottom. As opposed to focusing on simply filling the needs of today, I'm working with our leadership team to build the team we need for the next 5 to 10 years. We will focus on a next play mindset, versatility, mental toughness, and the capability to deliver outsized outcomes as the core characteristics of our team. That starts with the search for our new CFO.
We have made a lot of progress in this area, and we are very excited about the candidates that we have attracted. We hope to have someone to announce shortly that I am personally thrilled about. As Rick said, I couldn't be happier about the partnership we've had with Jim. His steady leadership has allowed us to take our time with the search for a permanent CFO. He has been the consummate teammate and done whatever the team has asked. I sincerely appreciate Jim's leadership. Second, I'll be driving discipline and prioritization across the business. The one thing each of us truly controls is where we focus our attention.
We have a lot of exciting opportunities to go after, and as you all know, we will unlock maximal value by focusing our efforts only in the areas where we can have the most impact and deliver the most value for our customers. That is the optimal path for shareholder value creation as well. For every opportunity we say yes to, we will say no to dozens. When we do say yes, we will win. From there, our job is to block out the noise and execute. Third, I will be ensuring that we are aggressively pursuing our total addressable market opportunity. We value that at $52 billion, and it continues to grow as Axon unveils new products and unlocks new markets.
We view our channel as one of Axon's core differentiators, and we will continue to invest into new geographies and customer segments, such as commercial enterprises, federal, and adjacent markets. We will also be scaling our VR, drones, records, and dispatch businesses. For every single one of our product lines, our best days are ahead. That includes the TASER business, which is changing the world for the better and is just getting started internationally. I think you're going to be very pleased with what you see unfold here over the next couple of years. Finally, the entire management team is looking forward to turning on the free cash flow spigot over the next several quarters, which opens up a lot of options for us as a company. This is totally within our control, and we are implementing a plan to optimize the level of execution in this area.
We can do a lot better here. With that, I'll hand the call over to Jim.
Thanks, Rick and Josh. Hello, everyone. It's great to see you again. We had an excellent quarter, as you can see in our shareholder letter. Let me put some context around the results and how we are thinking about our outlook. Top line momentum continued with growth of over 30% and gross margin improved sequentially. We delivered second quarter adjusted EBITDA of $50 million, a margin of about 17.5%, largely reflecting some expenses that were unique to this quarter. Let me unpack that for you. During the second quarter, we spent about $1 million on Axon Accelerate, our annual user conference, which has become strategically important to our sales pipeline, technology leadership, and ecosystem expansion.
Additionally, we committed more than $3 million in incremental mid-year bonuses to employees at the senior director level and below. This was an intentional decision given the team over-delivering on results in an environment where inflation was impacting their lives. We did so precisely because we had line of sight to stronger than expected revenue, both in the quarter and in the back half of the year, which is reflected in our updated outlook. We are especially pleased that we could issue this bonus without affecting our projected adjusted EBITDA margin percentage for the year. The fundamental strength of our business allowed us to demonstrate our commitment both to our shareholders and to the team members who work so hard for our customers. With that context on the quarter, we are already focusing on moderating expense growth going forward to help drive adjusted EBITDA margin expansion.
Our working capital needs were $23 million in the quarter, and we have already started to see some of that reverse in July, which is driving us to maintain our full year adjusted free cash flow outlook. Finally, I'd really like to highlight our commentary in the shareholder letter about our technology partner ecosystem, which was exciting to see in action this past May at Accelerate. In June, we renewed our strategic technology partnership with Microsoft Azure, who will continue to be the primary host of our software platform and cloud. This is a great partnership for us in many ways. Microsoft is a global leader in cloud technology. Of course, they need no introduction. Our customers trust Microsoft and thereby feel secure putting their data into our cloud.
As part of the renewal, we extended our contract term for another six years, which gives us long-term pricing certainty and cost visibility for our Axon Cloud business. The renewal supports our software gross margin target of more than 80% and also paves the way for faster international cloud expansion without diluting this target. What's also excellent about this partnership is the ability it affords us to offer pricing predictability to our own customers. It's just a winning deal all around. We also highlighted several of our ecosystem partners in strategic investments during our Accelerate conference and in today's letter. The investments we make are driven by our long-term product strategy, which is set under the leadership of Rick, Chief Product Officer Jeff Kunins, and Josh.
Our corporate development team, led by Andrea, has been a key thought partner in enabling Axon to grow into its role as the definitive technology hub for public safety. We take pride in our approach to identifying emerging market leaders in the high-value sectors that we know well, integrating their solutions with ours, and combining them with the power of our direct sales channel and deep customer relationships. Importantly, the structures our corporate development team has negotiated on behalf of Axon provide us with significant flexibility and optionality on the investments we make. The ability to obtain customer feedback, experiment with product integrations, and see how our teams work together allows us to preserve optionality for our business, delight our customers, and expand our technology ecosystem in a highly efficient way. With that, Andrea, let's take questions.
All right. Thanks. Here we all are in gallery view. We'll take our first question from Will Power at Baird. Go ahead, Will. You're up.
All right. Great. Thanks, Andrea. Yeah, I'd propose, though, too, that maybe the next analyst day could be at the racetrack, and we can help you test ALPR. I'd like a couple of quick questions. You know, the cloud growth continues to be, you know, strong. You know, obviously Evidence.com is a key component of that, but I'd love to hear you know, unpack any of the other kind of key drivers there. What are you seeing with, you know, record management, any of the other kind of key pieces of the software portfolio? What does the traction and trends look like?
Yeah. Thanks for the question, Will, and nice to see you again. I'd say, for us, you know, we've talked about this a lot in the video. I've mentioned our flywheel. For us, the biggest thing we can be doing quarter to quarter is driving the number of officer safety plan subscriptions up. That bundles essentially all our products outside of dispatch that we sell. Sorry, dispatch and fleet. You know, it provides optionality for customers to opt into records, but it, you know, provides a nice base for ARR between the license, all the software add-ons, the TASER, the virtual reality.
For us, that's really the major focus in our state and local business, is to drive as many renewals and purchases of that plan as we can. In addition to that, I think we are seeing exciting growth in some of our newer segments, one of which is federal, another is international. And then even in newer ones like justice and corrections, we're seeing an uptick. I'd say all of those are combining to just provide a lot of wind in our back as we go on here. We certainly still feel like our best days are in front of us.
That's great. Josh, maybe just one more for you. As you look at the international opportunity in front of you know, any perspective on how the macroclimate is or isn't impacting sales cycles, demand trends, et cetera? That's kind of the broader question. Number two, tied to international, in your prepared remarks, it sounds like you're, you know, feeling better and better about, you know, the TASER opportunity. Maybe just any other color or perspective, you know, what's driving that optimism?
Yeah, absolutely. Internationally in general, to answer your first question, I don't think we're seeing any kind of macro impacts at this point in terms of, you know, adoption interest, buying cycles and so forth. I think we've strongly performed in the TASER segment. We are seeing national police forces buy larger order quantities of TASERs than we've seen in the past, which is really exciting because, you know, when we're talking about a national police force five, six, seven times the size of NYPD, and they're starting their purchases in the, you know, thousands, the high four digits, you know, into five-digit thousands of units of orders. Like, it's very exciting because we know that we're very good at kind of the land and expand type of playbook.
We look at these as really good indicators for the future of our TASER business. We do. You know, we are working with more and more national police forces across the world. I'd say on top of that, our execution in our tier one markets, the U.K., Canada, and Australia, has been really strong, where we continue to see more adoption of Evidence.com and bodycams, but also kind of our newer features on Evidence.com, like real-time streaming and transcription. The next step for us internationally is gonna be to repeat that same level of execution in tier two and tier three markets.
There, you know, we've got to do a really good job of evangelizing the cloud and helping customers understand why the cloud is far, far better as a mechanism for storing and sharing digital evidence. We're working through that process. We'll continue to build there, but, you know, we're really excited about all the work our international team is doing, and they're really focused right now on driving the results upward.
Thank you.
Thank you. Analysts, if you're on this call, we assume you're in queue, so you don't have to keep your hands up. You can, but we gotcha. We'll take our next question from Erik Suppiger from JMP. Go ahead, Erik.
Yeah, thanks for taking the question. Good quarter here. One, like I don't know if you said this, but can we assume that backlog grew from the end of Q1 to the end of Q2? Or how should we think about some of the backlog that you carried in from Q4 into Q1 and did that roll into Q2? Secondly, any comments about supply constraints? Did that improve? Or where are we from a supply constraint, supply chain constraint perspective?
I can...
I can take the first half of that. I guess, yeah, we disclose future contracted revenue, Erik, in the letter, so that grew to $3.3 billion. So it was up versus a little bit less than $3 billion as of the end of Q2. Then yeah, there's really nothing, you know, in Q4 we had some unfulfilled demand that rolled into the first half of the year, but we're sort of back to more normalized levels of sort of quarter to quarter order inflow. I guess, Josh, you wanna take the supply chain, please.
Sure thing, I'd just add to that, you know, just traditionally, in the back half revenue, you know, performed stronger than the first half. We see plenty of demand still and certainly are going to execute against that demand. In terms of supply chain in general, our supply chain team has been one of our top performing teams at Axon. As you can see in other businesses, you know, companies are getting hit hard by supply chain constraints. Our team has just done a masterful job navigating through some of those challenges. Frankly, this is one of the reasons we do keep some inventory on the shelves to get through periods like we've had over the last few quarters.
We think at this point, things look better and better each quarter. Like we do feel that we're through the worst of it and that, you know, we'll continue to be able to build the supply orders, but also start to build a little buffer there as well on our TASER and core body camera lines.
Would you care to guess as to timing when supply chain might be relatively normalized? Any thoughts where we'll be as we enter 2023?
Well, at this point, I don't think we're guessing. We're just executing against our plan. I think, you know, by the end of this year, we'll certainly see some buffer in the TASER 7 and AB3 or Axon Body 3 product lines. From there, you know, I think it'll just be about optimizing the level of inventory we keep on the shelves. From an investor or results perspective, I wouldn't plan on seeing any kind of abnormal activity in either product shift or, you know, inventory backlogs.
Great. Thank you.
All right. Thank you. Next question, Sami Badri from Credit Suisse. Go ahead, Sami.
Hi. Thank you. You know, you made a reference earlier, maybe it was Rick, regarding profitability being better in the second half of 2022. I think you just made a reference that second half revenue growth is, or at least second half revenue production is usually better than the first half. Is there a specific segment or a product that's seeing very good profitable dynamics in the second half that's kind of giving you guys that operating leverage? That's the first question. The second question is the free cash flow guidance was reiterated and unchanged for the fiscal year 2022, but it looks like there were some changes in CapEx. Could you kind of give us the puts and takes on that?
Sure thing. I'll talk briefly about the free cash flow element there. Remind me of your first question, Sami.
Our products that are enabling better profitability in the second half of 2022.
Yep. I'll take those two, and then I'll kick it over to Rick on the campus piece as well. In general, I think we see stronger bookings in the back half of each year and that's really across all products. This is the end of Q3, the end of the fiscal year for several major markets in the U.S. It's also the federal government's end of their fiscal year, so a combination of budgets ending and having some money to spend, and then the new budget starting. If there's a line item for our products, it tends to be a pretty active part of the year.
I'd say, you know, the big driver of profitability is the TASER business and we expect exciting results there. Really across the board, we do see a lot of upside in the back half of the year. In terms of free cash flow, I'd just say we've reiterated our guidance because we feel like, you know, frankly, coming from sales, this, to me, is not all that different than inside sales. We've got to get in touch with customers, have a process we follow, have well-trained people on the phone, get commitments, follow up on those commitments, and then just get to the point of real predictability there. I think Jim and I are partnering together there, and we've just brought in a new AR leader.
I'm personally investing time with our accounts receivable team to build a playbook here where we can really measure efficiency and productivity. You know, this again, this one is really within our control. When we couple that, like you mentioned, Sami, with, you know, a better EBITDA both dollars and margins in the back half of the year, you know, there's a lot of opportunity to improve free cash flow in the back half, and we're really focused on it, and that's what we're gonna do. I'll kick it over to Rick to talk about the new campus.
Yeah. Thanks, Josh. So earlier this year, you know, we had projected an accelerating spend on the new campus. We've now we're basically telling you we're gonna slow that down. We're pacing it out a bit. There've been a number of things. I'd say one of them is just the inflationary environment. What we've seen, you know, as we're getting ready to really move forward with more of the significant build-out on the campus. Construction costs are just up pretty dramatically. When we couple that with we've also seen COVID resurging, you know, I think even more than people had expected. We looked at the whole return to work dynamic. We've come to accept that the future is going to be hybrid work.
We also saw an opportunity to really look at what is the best use of the overall land, really optimizing for collaborative events, customer-centric events. Of course, the land that we need and the space we need for manufacturing and warehousing and all that. But maybe shifting the balance away from the idea of people coming into the office so much and really more the hybrid work environment. In this environment as well, like, there's a lot going on, and we just wanted to preserve some optionality of our cash. You know, so we basically said, "Let's slow down a little bit.
Let's really kind of recalibrate and see what the post-COVID world looks like, and let's let the building costs cool off a little bit, and that'll give us a little time to just keep tuning and refining." The world is in a pretty constant state of flux, and we'd rather, you know, take our time and make sure we get it right.
Got it. Thank you.
All right. Next up, Keith Housum at Northcoast Research. Go ahead, Keith.
Hey, Keith, it looks like you're on mute.
Sorry. You think I've learned. Thanks, guys. Appreciate it. Looking at the TASER gross margins and your commentary regarding improvement in the second half of the year, I mean, previously I think the manufacturing automation was gonna happen when you then build the campus, but sounds like things are changing. Perhaps touch on what your plans are for a second half of the year of improving the automation and the manufacturing process.
Yeah. I would say that's not fully dependent on the campus headquarters. We're already starting to sort of build out that automation. I think part of what we're seeing in the first half was really pressure in terms of growing into our expanded manufacturing footprint. We've been investing to sort of build out the footprint and capacity to build. I think as we grow into those build plans, I think we'll see better overhead absorption in there, and I think that's not contingent upon the new building.
Gotcha. The professional services part that hurt the software and sensors gross margins, was that in advance of the CAD and some of the systems you're putting in, or where was that spending being done?
I think it covers, you know, CAD, RMS are sort of the software pieces, but then there's a heavy fleet portion as well. You know, fleet, there's a big uptick in terms of fleet installs. All those things together lead to sort of that PSO revenue becoming a slightly bigger portion of the cloud revenue. That's sort of enabling sort of that high margin software cloud revenue growth as well. It sort of set the groundwork for future growth. I think, you know, PSO is an important part of us, you know, controlling that customer experience and really getting sticky customers.
Okay. All right. Thanks, Jim. Appreciate it.
All right. Awesome. Thank you so much. Next question from Jonathan Ho at William Blair. Go ahead, Jonathan.
Hi. Good afternoon. I just wanted to understand, first of all, you know, with your headcount increases, can you talk a little bit about where you're making, you know, sort of those incremental hires? And, you know, what sort of changed for you to want to make those hires now? I think you referenced a better hiring environment, but just, you know, I'm curious in terms of your thinking.
Yeah, absolutely. I think, look, the last couple years we've hired very, very aggressively across all segments of the business. Now, we're starting in a lot of places to grow into that size and not need to hire as aggressively. The one major exception to that is in product. I think from our perspective, you know, we have a lot of great ideas, and we limit those, you know, what we do based on where, you know, where we think we have the most upside and also, you know, the size of our team and what our team can take on.
For us, you know, as long as there's talented engineers, product managers on the market that can help us deliver product faster and build, you know, products that we feel can really change outcomes in public safety, we're gonna keep investing there. I think going into next year, you know, the mindset's gonna be get a little leaner in terms of our hiring plans and SG&A and continue to be aggressive where we can in R&D.
Got it. Then, you know, just as a follow-up, you know, when we think about, you know, some of the cost savings initiatives that you referenced either on the T&A side or other areas, you know, can you talk a little bit about, you know, maybe philosophically, you know, where you're seeing that opportunity, you know, the, you know, spend it as if it's your own, you know, I know I'm not saying that right, but that campaign. You know, I just wanna understand like you feel like there was maybe, you know, lack of oversight there in the past or, you know, is this a situation where you're just trying to, you know, tighten the belt a little bit? Thank you.
I think it's. I'm not sure it's a lack of oversight. I think certainly we've got very good controls and process in place to measure expenses. I think at times we've gotten just a little bit bloated in how we think about things from the number of people that attend meetings, you know, with customers like Rick mentioned, or swag is another obvious one where we have and maybe the absence of being in the office, we've used swag as a way to kind of connect with our employees. I think there's just opportunities to get a little more efficient in those places. It's not necessarily an indictment of anyone or anything we've done in the past. It's just more like the landscape's changed a little bit.
We see all this exciting revenue growth well into the future, and it's just a matter of, you know, getting leverage out of that growth where we can without impacting, you know, our employee sentiment at Axon. I think we can thread that needle very effectively.
Yeah, let me jump in and add it as well. Like, you know, a business like any community can't sort of have all messages resonate at the same time. You go through cycles. Several years ago, we had a be scrappy year where that was an opportunity for us to lean and say, "Okay, this is the year we want people to really." Like, it's very similar to what we're doing. We Spend it like it's yours.
Like, 'be scrappy' was, "Hey, we wanna focus in on finding ways to more efficiently get things done and reward people who are being scrappy and not, you know, throwing a body at every problem." We've had a fair number of new employees come in, and certainly, you know, we have our standard expense controls and training, but we felt with what's happening, look, the overall market's down, inflation's up. You know, other companies are, I'd say, more aggressively cutting back their investment plans. We saw this as an opportunity to communicate with our employees like, "Hey, Spend it like it's yours." Right. Like, this is a moment. Let's take what's going outside. Everyone has things in your control where you can cut back spending, and by doing that, we'll all be rewarded.
You know, the market is rewarding companies that have more financial rigor, and we can also reward you by investing and not having to pull back on our investment plans and the exciting things we wanna go build. We can't just be toned down and, you know, continue as if the macro environment hasn't shifted. I think this was a balanced way for us to connect with maybe even some of the angst our employees are feeling about the macro environment. Like, "Hey, here's something you can do. Really buckle down on expenses so we can continue to invest over here," 'cause we know these are the times those investments really pay off. You know, our hiring has accelerated, and I think a big part of that is it's the macro environment. We don't have as many competitors.
We're having more success recruiting because we're just not competing with as many other tech companies that are as aggressive right now. These are the times we wanna lean in and accelerate our growth. Hope that gives a little bit of context as to how we felt we could position this with the company employees to really get them all rowing in the same direction.
Yes. Very helpful.
Yeah. The only fact I don't think I probably add to is just the fact, you know, overall travel costs as like everybody's seeing also went up sort of at the same time as we sort of dealt with that sort of pent-up, you know, post-pandemic demand. I think as Rick says, we adjust to sort of the best way to operate in the most efficient ways from a travel and hybrid perspective going forward. I think we'll thread the needle a little bit better in terms of meeting that, and I think everybody's plans are focused on that.
Thanks.
All right. Awesome. Josh Reilly at Needham, you're up next.
All right. Thanks, Andrea, for the questions. So TASER revenues obviously were very strong in the quarter, quite a bit above what we were modeling. You touched on this a bit, but how much of the back orders you expected at the end of last year to be complete? I think you'd mentioned previously by the first half are now through. I think you mentioned it was like $30 million. Then can you remind us if there's any seasonality to TASER shipments and if that could affect Q3 or Q4 TASER revenue, just so we have an idea sequentially?
Yeah, absolutely, Josh. Thanks for the question. I'd say it's fair to say we're caught up on the TASER shipments from Q4 last year, and we've shipped those over Q1 and Q2. Because sequentially, TASER shipments go up in the back half of the year, that, you know, we still feel like Q3 and Q4 will be, you know, the highlights of the year revenue-wise. I think that's kind of the story. Q4 tends to be a little more, a little higher than Q3, but, you know, over the years we've seen the inverse of that as well. As a back half, we certainly have a lot of confidence that, we'll outpace the first half of this year in revenue.
Got it. That's super helpful. On the Axon Fleet, units, those increased nicely as well quarter-over-quarter. Should we assume that all of those are Fleet 3 at this point, or are you still shipping any Fleet 2? How should we think about the level of supply constraint versus demand for that product?
Yeah. In terms of the mix of Fleet, there's still a little bit of Fleet 2, but mainly Fleet 3, and of course, a lot of, you know, body camera shipments going out. Supply chain constraints, I'd say. We have plenty of supply to deliver on our guidance in the back half of the year. You know, product by product, when we get outside of the core TASER and body camera products, there's a little bit of flux month to month there. You know, in a macro sense, we are feeling great about where we stand from an inventory perspective.
Awesome. Thanks, guys.
All right, Jeremy Hamblin from Craig-Hallum. Go ahead, Jeremy.
Thanks for taking the questions. Congrats on the strong momentum in the business. So federal contracts clearly a pretty key segment right now, really a big driver of the business, ton of momentum there. I wanted to get a sense for, you know, whereas we've seen executive order mandating, you know, federal agencies to use body cams. Wanted to get a sense for what you're seeing internationally in terms of that type of mandate, that type of adoption. You know, typically there's been a decent lag period between instituting that type of policy.
You know, there have been significant incidents both in English-speaking world as well as other places with surprising incidents. You know, Japan comes to mind, where we wanted to get a sense for, you know, what the pulse is of other government agencies around the globe.
Yeah. I think it's a good question, Jeremy, and as you'd expect, it varies a little bit. I'd say just like the United States, Canada, Australia, and the UK were relatively early adopters of body cams. You know, even if a mandate were to come down at this point, I think I don't know that it would change the buying behavior all that much in those three markets. I think the market has decidedly already shifted to body cameras there. In other markets, we're starting to see. I position it like, you know, international governments are starting to dip their toe a little bit into the body camera world and start to understand kind of what's gonna work for them and what's not.
I think we do have a lot of opportunity there, first with kind of small and mid-size orders and then growth over time. That's really where we see kind of international going in terms of body cameras. Like I mentioned, we are seeing international governments start to deploy TASERs with a lot more conviction around the globe, and we should expect to see that continue for the years to come.
As a follow-up question, you know, domestically, federal contracts, in terms of the value that you're getting in those deals, right? You're talking about a huge buyer, a buyer that's been mindful to look at getting best pricing, et cetera. Wanted to understand in terms of, you know, length of contracts there and kind of the value you're getting, the ASPs, on how that compares, obviously, without getting into exact specifics. Just understanding that a little bit in terms of that buyer.
Is that for international specifically?
No, domestically.
Oh, domestically. Okay.
I think.
What was that, Rick?
I think the question was about our federal buyers.
Oh, Federal.
Correct.
You know, our federal government is generally mirroring what our state and local customers are doing pricing-wise. Certainly we do have some commitments to, you know, make sure that we are recognizing the federal government and the most favored nations clauses in some of those contracts. Ultimately, we do feel pretty good that those license types and sizing is similar to what we see and far ahead of when our state and local customers started to buy in large volumes. Like, the federal government has kind of skipped that phase of basic licenses and TAP, and they're buying a lot more frequently at higher license types, which is exciting.
Yeah. I would add, Josh, as well that, you know, we're starting to now invest in dedicated federal R&D. You know, in many cases, we're seeing the Fed customers interested in premium sort of, you know, features that might even require a little more investment in certain terms of, you know, hardening of different devices or software to meet certain federal requirements that in some cases can even lead to premium pricing.
Great. Thanks for the call. Our best wishes.
Thanks.
All right, we have one more analyst, and then if any of you guys have a follow-up, we'd love to take your follow-up 'cause it looks like we will have time. We'll take our last question from Erik Lapinski at Morgan Stanley. Go ahead, Erik.
Thank you. I just maybe wanted to follow up on the federal market and some of the comments you guys just made there. I'm curious in terms of just the unbundling that you're seeing in the federal market. You know, are you seeing similar uptake of OSP 7 +? I know that, you know, a number of agencies already have TASERs, so are they looking at body camera contracts kind of separately or unbundling when you see those deals? I'd be curious on kind of what it looks like.
Yeah, great question, Erik. I'd say we're seeing kind of, department by department, a little bit of everything. I think the agencies you mentioned already have TASERs. A lot of those are up for upgrade, so it's a great time to buy our body cameras and software and bundle those, that upgraded version of the TASER in with that contract. Other customers are buying software only, you know, our investigative package for certain customers in the federal government and then some standalone activity as well. There's a lot of really encouraging things here, but one of them that stands out is customers are also buying across our suite of products. They're seeing use cases for live streaming. They're seeing use cases for records.
They're seeing Fleet 3 interest. Really across the board, we're seeing a lot of interest in a lot of different products from the federal government, and it's really a credit to the work Richard Coleman, our head of federal, and his team have done. It's really kind of transformed over the last few years from kind of a steady state market into an exponentially growing one.
Thank you. That's helpful. If I could sneak in another one. I know the corrections market is kind of another expansion area for you guys that we didn't talk that much about this quarter. I'd be curious if just any, you know, whether it's from funding initiatives you're tracking or kind of just what the states are looking at, in terms of the corrections market, you know, if you're seeing more of an uptake there, if it's kind of. I know there have been a couple early prisons the, over the past couple of quarters, but just in terms of kind of building on top of that.
Yeah, the team is definitely growing. For us, I think it's more of a, it's less about the federal government giving grants or funding or any kind of overall market effects there. I think it's more just historically, we haven't really had a team focused on corrections as its own market. We really did a lot of corrections sales through the sheriff's office while they were buying products for the rest of their deputies. Now just having a really focused team, we're starting to unlock a lot of that market on a much more predictable basis. I think the growth there is just attributable to our team's focus as opposed to any external factors.
Thank you.
Great. Looks like we have a follow-up from Jonathan Ho at William Blair. Thanks, Jonathan.
Yeah, just a couple from me. I wanted to maybe dig a little bit into your Microsoft opportunity. Can you talk a little bit about, you know, the level of benefit or cost savings that you could maybe see from that deal, just as a starting point?
Yeah, I'd start by saying the exact terms of the deal are, you know, not something we can, you know, go public with. I don't know, Jim, what would you-
Yeah. I'd say at high level, it enables us, it supports our target long term of having 80%+ software gross margins, and I think the duration of that contract is really helpful for us for having that confidence and visibility to our pricing, when we set our contracts with customers. I think it helps us, you know, over time, sort of maintain or expand our Axon Cloud gross margins. But I think the best thing that it does is gives us predictability.
Got it. You know, just in terms of the commercial market, can you talk a little bit about your progress there and, you know, maybe some of the go-to-market opportunities that you see, you know, specific to commercial? Thanks.
Yeah. We're thrilled with the opportunity there. Mike Shore and his team have just done a great job on building something. You know, we don't get those same advantages we sometimes have in the public sector where the referral network and stuff, we have to build those from scratch. Mike and his team have done a great job of that. You know, the team continues to be on a cadence of kind of doubling every year, and that's happened in terms of their results for the last three years now. We're still probably about 90% of the way there on product market fit, where we've got some really evangelical early adopters that are excited about how things are going.
Now it's just kind of closing that last 10% of some of the product market fit items and really expanding each year. I think we're really well positioned to do that, and you'll start to see some names that you're very familiar with, you know, adopting our products for more commercial purposes.
That's it for me. Thank you.
All right. Do we have any other follow-ups? We'll give you a second. I can see you guys thinking. Okay. All right. Let's have Rick close us out.
All right. Well, obviously another great quarter. I'm really proud of what the team was able to deliver. You know, there's a lot going on in the world, and our team just really digs in, and Josh just does a great job of keeping people focused, right? Block out the noise. There's a lot happening in the world that we can't affect, but there's things within our control, and the more we focus, the better the results always end up being. Appreciate everybody joining us today, and we look forward to updating you on the back half. Have a great day.