Metric loss

Could this metric trigger a major rebound for Axon?

Currently trading with a market capitalization, or company price, of approximately $10 billion, shares of Axon Enterprise ( AXONE -3.10% ) are down more than 30% from their 52-week highs. Seemingly caught up in the market’s massive sell-off of growth stocks over the past few months, Axon’s long-term investment thesis remains stronger than ever, making its upcoming earnings call on Feb. 24 quite interesting. .

Specifically, the company’s Dollar Net Retention Rate (DBNR) will be key for investors. The continued strength of this metric would bolster the longer-term promise of Axon’s operations, potentially paving the way for a rebound in its share price over the next few years.

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Increase sales from existing customers

Operating in two segments, Taser and Software & Sensors, Axon has quietly transitioned into a subscription-based business model, slowly moving away from its historical focus on Tasers. The core of this subscription model is the Axon Cloud unit, which includes the bulk of the Software and Sensors segment.

Through this Axon Cloud, the company offers various software-as-a-service (SaaS) solutions to its customers, including storing data on its cloud, including video footage from its various cameras on evidence.com. However, this is just the start of Axon’s broader cloud ambitions as it seeks to expand its real-time operations (such as dispatch), automated record keeping and training into reality. augmented and virtual for officers.

I highlighted this Software and Sensors segment because it is ultimately the driver of the company’s impressive 119% net dollar net retention (DBNR) rates. In Axon’s case, this DBNR rate includes software, services, and cloud sales while excluding hardware sales, as the company uses the metric to track its overall SaaS growth.

DBNR measures the year-over-year change in sales generated by existing customers, including customers lost through churn. Generally speaking, a number above 100% alludes to the growth of its installed base, which makes Axon’s brand of 119% very promising, especially since it has been at this level for the past five quarters. .

Thanks in part to this solid organic growth from its existing customers, Axon saw its annual revenue increase by 39% year-over-year. Additionally, in addition to driving this revenue growth, DBNR is critical to Axon’s long-term investment thesis as it directly tracks the expansion of the company’s cloud and software solutions, which are the new focus of the company.

Why Dollar-Based Net Retention Is Key to Axon’s Success

As DBNR evolves, so will Axon’s SaaS growth story. Annual recurring SaaS revenue is quickly becoming the engine of Axon’s growth, now accounting for a third of the company’s total sales.

Not only are these SaaS sales incredibly high margin, with Axon Cloud posting gross margins of 75%, they add a level of predictability to its finances, providing valuable recurring payments from customers. While Axon’s original Taser segment boasts strong gross margins of 66%, the shift from 34% of subscription package sales in 2016 to its current mark of 73% highlights this higher revenue model. coherent.

The beauty of this DBNR rate for Axon investors is that it provides direct insight into these SaaS sales each quarter, providing valuable insight into the business model for establishing and expanding the company in its software categories. For example, initially getting its foot in the door with sales of Tasers and body cameras, it is now looking to build longer-term relationships with its customers through its cloud offerings.

Looking ahead to 24 earnings, I will primarily focus on this DBNR rate to ensure it stays at or improves from its 119% mark, signaling the strength of its cloud-focused future. While Axon still trades at nearly 100x free cash flow, its combination of solid sales growth, promising DBNR and developing profitability in its high-margin cloud unit brings it to grow in this seemingly expensive valuation.

In addition to DBNR, it will be critical to watch Axon’s stock-based compensation for the fourth quarter, as these expenses have weighed heavily on its operating margins in recent years. Paying $35 million in stock-based compensation against $232 million in overall revenue during the third quarter, Axon will need to rein in those payouts to increase its long-term profitability.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.