Axon Enterprise - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 delivered record revenue of $604.0M (+31% y/y), Non-GAAP EPS of $1.41 and Adjusted EBITDA margin of 25.7%; both revenue and EPS exceeded Wall Street consensus and the company raised full-year revenue and EBITDA guidance.
• Software & Services revenue grew 39% y/y to $263.0M with ARR up 34% y/y to $1.104B and net revenue retention at 123%, underscoring durable subscription momentum.
• Management launched Axon Vehicle Intelligence (Outpost/Lightpost fixed ALPR), unveiled Axon Assistant, and announced partnerships with Ring and Citizen to deepen public-private safety networks, positioning new product cycles as catalysts.
• Guidance raised: FY25 revenue to $2.60–$2.70B (from $2.55–$2.65B) and Adjusted EBITDA to $650–$675M (from $640–$670M); margin target ~25% includes ~50 bps tariff impact, with no price increases planned this year.
• Governance/watch item: Company disclosed additional ICFR material weakness and restatement related to classification of 2027 convertible notes; no P&L/cash flow impact, but presentation change adds near-term control remediation focus.

What Went Well and What Went Wrong

What Went Well

• Software & Services strength: Revenue grew 39% y/y to $262.7M; ARR reached $1.104B (+34% y/y) with NRR at 123%, driven by premium plan adoption and new users.
• Product cycle momentum: Connected Devices revenue rose 26% y/y to $340.9M; TASER revenue of $195.5M (+19% y/y) on strong TASER 10 adoption; Personal Sensors $88.4M (+30% y/y) on Axon Body 4; Platform Solutions $57.0M (+51% y/y) including counter-drone and VR.
• Strategic expansion: Launch of Axon Vehicle Intelligence (Outpost/Lightpost) and Axon Assistant; partnerships with Ring and Citizen to expand real-time visibility and community collaboration underscore ecosystem moat. “These aren’t just product and capability launches—it’s a blueprint for the future of public safety.” — Rick Smith.

What Went Wrong

• ICFR/material weakness: Audit Committee determined previously issued FY24/quarters should not be relied upon due to an error in classifying 2027 convertible notes as long-term instead of current; to be restated (presentation only) and an additional ICFR weakness identified.
• GAAP dilution and SBC headwind: Operating loss of $8.8M driven by $140.2M stock-based compensation expense; GAAP diluted EPS $1.08 vs Non-GAAP $1.41, reflecting sizable non-GAAP adjustments including SBC and marketable security gains/losses.
• Free cash flow muted: Operating cash flow $25.8M supported free cash flow of $0.9M amid working capital headwinds; management continues investing in capacity and R&D with FY25 CapEx guided to $160–$180M.

Transcript

Erik Lapinski (VP of Investor Relations)

Axon's executive team today. I hope you've all had a chance to read our shareholder letter released after the market closed, which you can find at investor.axon.com. Our prepared remarks today are meant to build upon the information 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. We discuss these risks in our SEC filings. We will also discuss certain non-GAAP financial measures.

A description of each non-GAAP measure and a reconciliation of each non-GAAP measure to the most directly comparable GAAP measure can be found in our shareholder letter as well as on our investor relations website. Now, turning to our quarterly update. First, we're going to show you a quick video recapping some of our recent announcements from Exxon Week in April.

The mission is really simple. Design like it matters because it does. This is not just another ALPR camera. It is two cameras in one. It does not just capture plates. It recognizes vehicle make, color, visible damage, and even bumper stickers or roof racks.

We're turning ordinary streetlights into extraordinary tools for public safety.

Our goal here is to build an ecosystem with many partners bringing together millions of cameras from any provider to solve crimes. This is one of the most ambitious things we have ever done at Axon because of the massive scale. With that, I am excited to announce the Axon Assistant. It is an AI-powered companion that just sits right on your chest with a camera you already own. The Axon Assistant launches with a groundbreaking capability, real-time translation.

Boker tov. Ani nirgash lehatzig lachem et hayecholot shel Axon Assistant.

Good morning. I am excited to present to you the capabilities of Axon Assistant.

The Axon Assistant and all the new AI features I just shared are part of what we call the AI Era Plan, which gives you predictable pricing and guaranteed access to all these new AI solutions. Maybe you're catching a theme here. Public safety is an ecosystem, and that ecosystem is stronger when we come together with industry leaders. Please welcome the inventor of the doorbell camera and the founder of Ring, CEO of Aura, of Citizen, SafariLand.

I'm proud to announce that Ring will be integrating with Axon's community request service, the first of hopefully many partners to do so.

The retail crime hub becomes your go-to for engaging with retailers.

Announcing Citizen's partnership with Axon. Instant access to millions of public cameras.

Technology is what we build, but relationships are why we build it.

Today, I want to thank you for our relationship.

Rick Smith (Founder & CEO)

All right. Thanks, Erik. I always enjoy watching those highlight reels. Welcome, everyone, to our First Quarter 2025 Earnings Call. We kicked off another exciting year at Axon just a couple of weeks ago as we hosted our annual user conference, which is one of my favorite events of the year, as we dedicate a full week to spending time with our customers. As you can see from that video, we got to show them the many exciting things we've been working on. I believe our work is about far more than technology or results. It's about our mission to protect life. It's about giving those who stand on the front lines of our communities the tools, the tech they need to be safer, faster, smarter, and better connected. We envision a society where violence and crime rarely occur because it is simply so unappealing and so well-deterred.

I'm so proud of the products we've developed and brought to market over the past few years because I think we are creating the power of that deterrence to create a safer society. Each quarter, we're putting TASER 10 in the hands of more people, helping them safely de-escalate conflict without escalating to lethal force. We're giving them better training tools alongside while investing to improve efficacy in more and more situations. At the same time, our camera and sensor systems are becoming increasingly connected and exponentially more intelligent with the power of AI. Draft One is helping officers cut back on administrative workloads so they can focus their attention in the field where it matters. In the field, Axon Assistant ensures they're no longer alone. They have an always available voice-driven AI assistant delivering critical information exactly when and where it's needed through hardware that they already have.

With Fusus, they also have the support of hundreds of thousands of public and private cameras to provide them another layer of real-time visibility. Now, with Axon Vehicle Intelligence and Light Post and Outpost, our tools are delivering actionable insights through license plate recognition and real-time alerts available through innovative, flexible form factors. Through our newly launched integrations with Ring and Citizen, we're also helping public safety and the community work together to help keep their neighborhoods safe, building a critical bridge, all while protecting privacy and the right to choose whether or not you want to participate. As you know, I spend my time thinking about where Axon is going, and part of that is thinking about how we grow.

Our new headquarters project is a focus of mine, and I'm excited to share that we recently cleared another hurdle with the passing of Arizona Senate Bill 1543, recently signed by the governor. This gets us one step closer to moving forward and one step closer to keeping Axon in Arizona. Our efforts around this new legislation are another example of what our unstoppable team can do. I could not be more proud. Challenging, divisive political opposition and obstacles have stood in front of our project for nearly five years, but our team found a way, and the leadership of Arizona found a way to step up and help us stay here. We don't have everything finalized yet.

There are still a few other hurdles to clear, but I wanted to thank our team for everything they've done for this effort, including hundreds of employees who showed up at the Arizona State Capitol building and personally met with and wrote letters to our elected officials to help them see just why we want to lay the foundation for decades of future growth at Axon right here where we started. We will come back to you with more details when we have them and look forward to updating you on our continued progress. With that, I'd like to hand over to our President, Josh, to share more about what the team accomplished in the first quarter. Over to you, Josh. Thanks a lot, Rick, and good afternoon, everybody. As I'm sure you can gather from Rick's comments, we're really proud of everything going on here at Axon.

We're ramping our investments to deliver on our vision, and our team's ability to execute quarter after quarter has allowed us to do so at an incredible rate for our customers. The start of the year is a great opportunity for our sales and product teams to do just that, to plan and work through customer priorities and see where we can help. I'm proud to say our partnership has never been stronger. This was especially evident coming out of Axon Week, our user conference in April, and continues to be evident as we look ahead. Q1 bookings are a great indicator of our momentum. Although seasonally, the most modest bookings quarter of the year, we're off to a fantastic start. A year ago, at the end of Q1, I felt like we could have come out of the gate faster, and we talked a lot about that throughout 2024.

I'm thrilled to say our sales team responded to that message, emulating the sense of urgency and mission orientation that our customers deserve. As a result, we emerged from Q1 with a far stronger outcome and an even more exciting pipeline for the remainder of 2025. We expect another record for annual bookings with a growth rate in the range of what we saw last year. I'm proud of our mentally tough sales team who embraces the fact that pressure is a privilege. More specifically, our pipeline is strong across customer segments, especially with U.S., state, and local who are upgrading to our OSP 10 premium plans and beginning to deploy Draft One. In fact, five of our top 10 Q1 domestic deals included OSP 10 premium, and two included Draft One.

Along the same lines, through the first two years, TASER 10 orders continue to pace at 2X the rate of adoption of TASER 7. This is our fastest new TASER adoption by a wide margin. Through one year, Draft One remains our fastest adopted software product with nearly 30,000 active users across Draft One and our AI Era Plan to date. More than 2X any other product we've launched one year in. Turning to our other customer verticals, international bookings are off to a strong start. We're seeing demand in Australia, Latin America, Canada, Asia, the U.K., and Europe, all of which contributed to our top 10 international deals in the quarter. The team delivered a record Q1 booking results, and we have more and more conviction in the growing global pipeline. Additionally, we're seeing strong demand across our emerging verticals, including triple-digit growth in corrections and in justice.

In enterprise, we're coming off a record deal in Q4 and building a strong pipeline in several key industries. US federal, as we mentioned in Q4, represents a strong long-term opportunity. While there's a lot of uncertainty within the federal agencies, our solutions are mission-critical and the value we deliver is clear. While Congress discusses reconciliation and a final budget for next year, we will continue to focus on converting the existing large deals in our federal pipeline. Finally, I'll conclude with a quick note about the current tariff situation, which Brittany can expand upon in more detail. A couple of years ago, our team flagged tariffs and the uncertainty in the South China Sea as reasons to diversify our supply chain and make large but low-risk investments in inventory.

I'm proud of Brittany, Josh Goldman, and Eric Kurtz and our entire operations team for seeing around corners and ensuring we are ready for a climate like this. This, of course, puts us in a better position to serve our amazing customers. That's always the priority, and we're confident in our ability to do that given the quality of our team. With that, we're on to the next play. We'll kick it over to Brittany.

Brittany Bagley (COO and CFO)

Thank you, Josh. As Josh and Rick mentioned, we're extremely proud of our results and performance as we deliver for our customers and invest in the future. First quarter revenue of $604 million increased 31% year over year, our 13th consecutive quarter over 25%, and we delivered a 25.7% adjusted EBITDA margin with $1.1 billion in ARR. Before I go into the details, you'll notice we updated our segments from Taser and software and sensors to connected devices and software and services. As we mentioned last quarter, we made this change to better align our segment reporting given our increasing product diversification. Some previously disclosed margin information will no longer be included in the shareholder letter as a result, but we'll continue to give periodic updates on our earnings calls.

Software and services increased 39% year over year to $263 million, driven by continued strength across digital evidence management and premium add-ons, each contributing about half of our overall software growth. We continue to see growing adoption of our premium plans. Approximately 70% of our domestic user base is still on our basic plans, and our offerings continue to get better over time, convincing more customers to upgrade. Our NRR, also a measure of our existing customers coming back and buying more, remained at 123% and supported annual recurring revenue of $1.1 billion, an increase of 34% year over year. Connected devices revenue of $341 million grew 26% year over year. This was driven by growth across TASER 10 devices and cartridges, AB4s, which are now included in personal sensors, and fleet, counter drone, and VR, which are now included in platform solutions.

Adjusted gross margin of 63.6% was up 40 basis points year over year, largely based on mix shift to software. Adjusted operating expenses of $236 million were up 3% sequentially and down 140 basis points year over year. As a result, adjusted EBITDA margin came in ahead of expectations at 25.7%. Part of this leverage was driven by timing of our hiring ramp, and we do expect to continue to ramp investment through the year, especially in our R&D organization. We also expect some impact to the rest of the year from tariffs. As many of you know, we already manufacture our TASER devices in Arizona, but we do have an impact on the supply chain. The team has done a great job ensuring we can be flexible and nimble, and we think we are well-positioned to manage through the shifting environment. Based on timing, Q1 had a minimal impact.

For the full year, we have offset some of the tariff impact through other cost measures. Overall, we expect a net impact to our adjusted EBITDA margin guidance of approximately 50 basis points for the full year. This is based on where tariffs stand today. We are not planning any price increases to our customers at this point. We review pricing annually and will assess the need heading into next year. Turning to guidance for 2025, we expect revenue in a range of $2.6 billion-$2.7 billion, or 27% annual growth at the midpoint. This is up from $2.55 billion-$2.65 billion, or 25% growth. Our comfort in raising guidance is based on the strong Q1 bookings performance, as well as the pipeline we see for the year and the future contracted bookings of $9.9 billion.

On adjusted EBITDA, we continue to target margin of approximately 25% for the year, which raises our guidance to $650-$675 million from our previous outlook of $640-$670 million. Tariffs and exciting R&D investments are factored into this guidance, and we're very pleased to be able to maintain the 25% margin target. Overall, we're delivering another strong quarter in Q1, as well as a healthy outlook for the rest of 2025. This is based on our momentum across a wide range of product categories and end markets. We continue to be long-term focused on our investing in the business to deliver for our shareholders and for our customers well into the future. With that, we'll turn it over for questions.

Erik Lapinski (VP of Investor Relations)

Thanks, Brittany. Let's pull everyone up into gallery view. All right, we'll take our first question from Andrew Sherman at TD Cowen.

Andrew Sherman (VP)

Oh, great. Thanks. Good to see everyone. Great to see the strong cloud numbers. ARR growth was very strong, especially for Q1. Talk about anything that drove that strength in the quarter specifically. On Draft One, great to hear it was two of the top 10 deals. The 30,000 seats was great to hear at Exxon Week. Talk about what pipeline, any kind of pipeline update for Draft One would be great and how you're thinking about this in guidance.

Josh Isner (President)

Sure thing. Andrew, good to see you again and nice to see you at Exxon Week a couple of weeks ago. In terms of pipeline, I think the result in Q1 was really just a better, like a result of all the work that went into last year, not only converting on existing pipeline in 2024, but making sure that we had a far more predictable Q1 and driving a lot more activity into Q1 that last year kind of got delayed until Q2 and Q3. The team really took it upon themselves to up our game there, and I'm really happy about the way they responded. In doing so, we built a lot of pipeline for Q2 and beyond as well. As you mentioned, part of that is the AI Era Plan and Draft One.

In terms of expectation setting, I think the first half of this year is still about making sure that we have identified all the key opportunities in Draft One and the AI Era Plan. We think in the back half of the year, we'll start to see a lot more of those convert. Now, that's not to say the Draft One and AI Era Plan haven't been well adopted so far, but relative to what we saw at the end of last year, I think we're in for a far stronger result this year. Really in Q3 and Q4, you should start to kind of assume that'll show up in our future contracted bookings.

Andrew Sherman (VP)

Great, thanks.

Brittany Bagley (COO and CFO)

Just, Andrew, to give you a little color on ARR, because thank you for calling that out. It was a really nice number this quarter. It's usually about a quarter off from our booking. What you're really seeing come through in ARR was the strong bookings results we had in Q4. That's driving some of the growth. As I mentioned, it's really coming both from new users as well as people adding on some of the more premium subscription pieces. It's really nice, healthy growth that we're seeing driving that ARR number.

Andrew Sherman (VP)

Great. One more for you, Josh. The international commentary was great. There were a lot of countries and regions in there, and you said they had a record Q1. Great to see kind of two quarters of really strong momentum there. What are kind of the most adopted products, or is there a trigger point, or is it go-to-market improvements, or what's kind of causing that continued inflection up internationally?

Josh Isner (President)

Yeah, I think it starts with just a little more focus from all of our teams at Axon. I think historically, we've been a very U.S.-focused company. With the hire of Cameron Brooks a year ago as our Chief Revenue Officer, there's just been far better sponsorship for our international business. That's trickling down into our product focus, to our go-to-market focus, our services focus, and so forth. The level of execution is really the strongest it's been in international. On top of that, I think the product adoption is ranging from TASERS to body cam to more and more cloud openness. I think our plan is always the same. We've got to win with one product and then earn the right to sell more to the customer through a great customer experience and a lot of value provided through our products and services.

That's kind of the playbook we're running internationally, and we're starting to see the fruits of that.

Andrew Sherman (VP)

Perfect. Thank you.

Erik Lapinski (VP of Investor Relations)

Thanks, Andrew. Up next, we have Joe Cardoso at JPMorgan.

Joseph Cardoso (VP of Equity Research)

Hey, thanks. Thanks for the questions, guys. Maybe I just wanted to start off, and maybe this is more of a clarification for you, Josh. Based on your prepared remarks, you're sounding pretty bullish on demand, the pipeline, et cetera. However, obviously, there's this persistent concern around the macro, just given kind of the current backdrop. Maybe you can just clarify or touch on, are you seeing any signs in the conversations that you're having with customers that there's these prevailing concerns? Is that showing up in any of the deals that you guys are seeing? Maybe if you could bifurcate that in conversations with your traditional core base of state and local law enforcement versus kind of the other verticals that you guys are obviously gaining traction with.

Josh Isner (President)

Yeah, sure. I would say virtually no headwinds in terms of anything macro with U.S. state and local enterprise or international. I think there are little challenges along the way, but I think our team is prepared. We've built a great team to be able to handle challenges like we're seeing in the macro environment right now. I don't necessarily have a lot of concern in those markets. In federal, it just is one where right now it kind of is what it is. We know that until a new budget is passed and there's more clarity on where the federal civilian customers as well as the DoD will be spending money, our best strategy is just to focus on the deals that we know are right in front of us. That's what the team's doing. Some of those deals are very large and very exciting.

I'd say the volume of opportunity is a little bit at a standstill just until some of the budgeting and reconciliation stuff gets worked out. In terms of that impact on our overall bookings, it's minimal, and we're really excited about the rapid growth that we're still seeing in the U.S. and in international and in enterprise.

Joseph Cardoso (VP of Equity Research)

Got it. Clear. Thanks for the color. Maybe just a follow-up. Wanted to touch on some of the recent product introductions, maybe on the hardware side. Obviously, you disclosed the two new fixed mobile hardware products that you guys kind of put out there. I guess the crux of my question is just really around, obviously, you had Fusus, and that was kind of giving you an entry point in kind of the fixed mobile market there. What was the main drivers in kind of owning the hardware stack there? Was it more of a customer push? Did you not see that you were getting enough traction on deals? Any way you can flesh that out in terms of what drove kind of the entry there?

I guess the second part of that question is, is this kind of more of a test in the waters, and then you can expand that product set there in terms of addressing other applications, or I guess how you're thinking about the opportunity there?

Rick Smith (Founder & CEO)

Yeah, let me start with that one. Much like we started with body cameras, and then we added fleet cameras to expand our ecosystem deeper. The fleet camera is already a real-time camera in car that does ALPR and live streaming video. This was a natural extension where one of our advantages, we've got just an awesome imaging team, and we felt we could provide really best in class for fixed ALPR, which has been a growing category, and especially in the context of Fusus, making sure that we had a really great overall experience. We identified this as a very interesting and fast-growing expansion opportunity for us. It would not have fit very naturally with all the things we were already doing in mobile. Why not take the same technology, repackage it, and have the best in class fixed cameras?

You layer that on top of then also this whole works with Axon workflow where how do we go identify all the different sources of different camera feeds and then find a way to connect them into our ecosystem? You'll notice I started our keynote very much focused on the privacy issues. We certainly get it. What we're building is really powerful tech, and we want to be really thoughtful about it, as do our partners. I mean, each of the partners we brought on stage are the market leaders in their segment. I think bringing this together to do it the right way, again, with this idea, what we don't want to do is create a surveillance state where we're being tracked everywhere we go.

What we do want to create is a state where people who need help or people that are dangerous or vehicles that are wanted for some reason can be quickly identified, primarily so we can get help where it's needed or deter criminal activity. I actually think right now the U.S. has sort of got the balance is completely wrong. When you're incarcerating a ton of people, but your deterrence isn't high enough to stop crime, that's like the worst outcome. The best outcome is you deter crime by having a very high probability you're going to get caught, such that it just doesn't make sense for people to start to engage. I think we're seeing a real swing back from post the early pandemic and George Floyd.

We saw the pendulum swing very hard against public safety, and there was the decriminalization of shoplifting and retail crimes with catastrophic consequences. We've seen just city urban centers hollowed out as retailers had to move out of town. We've seen they've got to lock up the shampoo and the toothpaste. That's where our partnership with ORR, I think, comes in here really well as well. People realize you have to have fundamental stability and safety and rules that are enforced in society or the little things escalate. I was shocked to learn as I got to know ORR that the significant majority of retail crime is associated with people who are either part of a criminal network and/or involved in violent crimes as well.

The scene from Les Misérables where it's a woman trying to steal bread for her children is not, and I don't think that's what anybody's talking about. It's when gangs of people rush into a Best Buy, grab TVs, and run out in a mob. That is organized criminal activity. We really looked at this to expand where we can do partners well and where we want to be first party so that we make sure that we've got best-in-class capabilities.

Josh Isner (President)

Two just really quick things to add on that. Like you mentioned, Fusus, this is all about doubling down and going even further above and beyond the momentum that has started with Fusus.

You've heard both Rick and myself talk before about we're at this unique moment in time where the intersection of real-time crime center, DFR, and vehicle intelligence broadly because of the crucial role that vehicle intelligence plays in solving so many crimes. The intersection of all of those three and the power that new AI capabilities brings to making them be able to be more powerful and effective than ever is really at the heart of this and making sure that we bring our best foot forward on all three legs of that stool, both with what we do ourselves and with what we partner with. The second part on responsible AI innovation, as Rick said, that's always been a cornerstone of how we build and what we build.

If you go back to the beginning when we first laid out and shipped Fleet 3, we were extraordinarily careful and extraordinarily clear in how our view and why we felt compelled to bring ALPR technology ourselves in the first place was to deliver better results for customers with better ethical and responsible design built in from the ground up. We choose partners like Orr and others that embody that same approach. You'll see that continue to play out as we go forward.

Joseph Cardoso (VP of Equity Research)

Yep. Got it. Thanks for the insight, guys. Thanks for having me.

Rick Smith (Founder & CEO)

Thanks, Joe. Up next, we have Alyssa Shreeves at Barclays.

Alyssa Shreves (VP of Equit Research)

Hi, everyone. Just a quick few ones on Draft One and AI Era Plan. I saw the success with Draft One, but is there any kind of difference with the AI Era Plan penetration versus the early days of OSP? I heard the callouts on Draft One, but it seems like AI Era might be a little bit different. I just had a follow-up on that.

Josh Isner (President)

Sure thing, Alyssa. Thanks for the question. I'd say Draft One launched a full year before the AI Era Plan. So in terms of just pipeline conversion, Draft One, we just started from a bigger foundation that we're already in the ask to councils and working through budgets. I think over the last quarter and certainly into Q2 as well, after we converted some of those early deals, we're still seeing them come in. But some of the larger ones, like this is the time where we're getting them integrated into our quotes with our customers for the back half of the year. Some of the larger police departments will be sponsoring large deployments to their communities and putting those on city council agendas in Q3 and Q4.

I think it's just a matter of Draft One had a faster head start, and thus it's a little more well adopted right now. We're starting to see more and more Draft One conversations become AI Era Plan conversations and a lot more excitement, especially after we announced all the new inclusions in the AI Era Plan after Exxon Week. I think the future is very, very bright for the AI Era Plan. Again, we'll start to see that really convert in a much bigger way to bookings in the back half of this year.

Alyssa Shreves (VP of Equit Research)

Okay. And then just a quick one on that. How are you guys longer term kind of thinking about EBITDA target with this kind of growth in Draft One AI Era, given it's kind of all SaaS? Thanks.

Brittany Bagley (COO and CFO)

Yeah. I mean, I think it's been really nice that software in general has been a great tailwind to our margins from a gross margin basis. I would say at the same time, we are bringing on new hardware products as well, which are also really exciting. Those will sort of balance out. I think you've seen over the last year or so, we've had a little bit of a tailwind from software, but we really do have mixed factors that you have to consider. We don't have a specific long-term target out there after this year, but obviously it helped in software, helped in this quarter. In general, we're really happy. We're continuing to blend out at that 25% even with tariffs.

We'll probably think about longer-term margins as we come up at the end of this year and really think about refreshing what that long-term model looks like for everyone.

Alyssa Shreves (VP of Equit Research)

Great. Thank you.

Brittany Bagley (COO and CFO)

Thanks.

Rick Smith (Founder & CEO)

Thanks, Alyssa. Up next, we have Jamie Reynolds at Morgan Stanley.

Jamie Reynolds (Senior Associate of Equity Research)

Great. Thanks, guys. And congrats on the strong results. Maybe just following up on that, I mean, as you've layered in some of this newer AI functionality kind of beyond Draft One, are you seeing sort of increased hurdles from an adoption standpoint or greater concerns from some of those prosecutor-type constituents? Or now that Draft One's been in the market for a year, is that conversation kind of getting easier? And then I have a follow-up.

Josh Isner (President)

Let me start on this one. I would say, look, things like the real-time translator, enormous interest. I have not really heard any critique of that. It is just so powerful for an officer to be able to communicate clearly with something in front of them. We are leading with the productivity enhancements and things that sort of have extremely high benefits with sort of the smallest risk footprint. As we get into things like vehicle intelligence, now you are starting to find vehicles, et cetera, you are going to face a little more maybe opposition from some of the police skeptics there. There we just think it is important to make sure that we really feel good that we are winning right, that we are doing this the right way. We have got our ethics framework we spent a lot of time developing.

There will be, I think, some jurisdictions will be slower to adopt that tend to be a little more skeptical of police. The ones that are more supportive will probably be faster to adopt. The other thing I would say is the AI Era stuff, a lot of those features like the real-time translator, I do not think it is fully shipped. We are in beta with customers now. It is really just preparing to roll out. Of course, there is also the need to get the stuff out in the hands of customers. They typically want to get some cycles in before they have made a large purchasing commitment.

Brittany Bagley (COO and CFO)

I think the flip side to that too, though, is it also gives people more reasons to be excited about AI and to get excited about adopting AI. I think we just have not seen higher enthusiasm from our customers about the whole suite of the AI products we have. That really encourages them to push to adopt and get over those hurdles. I actually totally agree, but also I would call out for you that the broader the product suite we have, the more the return for them that they see on using it. I think that just gives them a lot of momentum to go look at that whole product suite.

Rick Smith (Founder & CEO)

Once again, just like Josh was talking about with the Era Plan and the brightness there, the beauty of having a plan that includes everything that we do, not just right now, but over the next five years, is it gives any individual agency a palette of choices. Even if in that particular agency, one particular thing might not yet be for them, there are many different ways to stack up the points on the board within the plan for the plan to be a fantastic value for any given customer.

Jamie Reynolds (Senior Associate of Equity Research)

Got it. And then maybe just on the drone side, I think a couple of weeks ago, the FAA might have made some improvements to the waiver process specific maybe to DFR. So I guess how has that changed conversations? And then what do you think we still need to see from a regulatory standpoint to see broader-based adoption?

Rick Smith (Founder & CEO)

I don't know, Jeff, do you want to talk at all about the more detailed portion? I can tell you that we're definitely seeing DFR go mainstream. The timing is just really phenomenal. Our partners at Skydio are really just now scaling the manufacturing of their docks. I'd say the DFR limitation is probably somewhat production constrained right now. In the back half of the year, we really expect that to grow strongly. Skydio has really become a pretty well-oiled machine at getting waivers, particularly if you're going to fly below 200 feet, where I think Skydio is really the only viable solution in that space because they have such solid autonomy and collision avoidance. If you want to come up a little higher into the 200-400 foot range, really then pairing it with Dedrone helps there.

There the FAA wants to see more airspace awareness. You're more likely to need visual observers or things like high-zoom cameras and radar, whereas down below 200 feet, there's just less concern about drones being involved in air traffic issues. Jeff, anything you'd want to add?

Jeff Kunins (CPO and CTO)

No, I mean, that's pretty good. I think the key is really meaningful step forward with the FAA stuff. Obviously, it's not all the way done, but the changes that really expedited the path to getting these waivers was a very meaningful step forward for the industry.

As Rick said, the key to having the best solution is arming customers with the full palette of the ability to have what you need to do to fly low and with a lot of autonomy and a lot of capability in a diverse range of situations close to the ground and equally to have access to that fly high. Again, that's why we're investing the way that we are and think we're bringing by far the broadest and most comprehensive range of options that are moving in lockstep as the regulatory framework keeps unveiling.

Jamie Reynolds (Senior Associate of Equity Research)

Awesome. Thank you so much. Congrats again.

Erik Lapinski (VP of Investor Relations)

Thanks, Jamie. Up next, we have Jordan Lyonnnais at Bank of America.

Jordan Lyonnais (Equity Research Associate)

Hey, thank you for taking the question. On the federal side, the FY26 skinny budget called out a $44 billion increase for DHS. How are you guys thinking about that across the verticals? Because it also said they need advanced border security technologies. They need to prep for the World Cup and the Olympics. Where are you guys most excited about that Axon can help?

Josh Isner (President)

Yeah, for sure. I think on the border bill, or on the border focus, there's a lot of focus on drones and counter-drone, which I think we are excited to participate in, as well as real-time video, which is kind of what we do at this point. I think all the work we've done in the last few years with some of the federal agencies to make body cameras, Evidence.com and live streaming available to them is kind of the precursor to fill in some of the existing blanks around better video in more places, better counter-drone solutions, and of course, more drone solutions that are U.S.A. made and fit for purpose for the U.S. government. That's where our focus will start.

Of course, we're working on a number of deals across the FedCiv agencies and a number of use cases, but specifically for kind of new money coming into the federal government, I think those are really the focal points along the border. Yeah, I would add the real-time translation can be hugely beneficial. I had a regional commander for Border Patrol a year ago come to me asking for exactly that capability because they're constantly dealing with people coming across the border, and they have no idea what language they're going to run into. Today, it's a very manual process. You've got to call, get an operator, that operator at a service provider then has to figure out even what the language is and how you pat somebody through.

Rick Smith (Founder & CEO)

I think I may have mentioned, but I was in Norway showing an early prototype, and one of the instructors from Iceland wanted to see if it could work with Icelandic. It was pretty flawless. Icelandic is one of those languages you do not run into very often. I am not as close as Josh to the actual pipeline with the federal government, but I can tell you the fundamental underlying demand, I think the translator is going to be a huge interest for border.

Jordan Lyonnais (Equity Research Associate)

Got it. Is there anything else that has to get done on the federal side so things can move quicker? I do not know if Fusus was FedRAMP certified yet or if you guys are starting to see existing Dedrone contracts where agencies are jumping into those that might not have been initially thought that it would be for that, but okay, we can procure Body Cam 4 and Draft One now.

Rick Smith (Founder & CEO)

That is a great question, particularly on Fusus. Jeff, do you want to give a—I want to make sure we give an accurate—we're making progress with Fusus. I don't know what we can say publicly about where we're at. Yeah, I think we can—you know the process for all the FedRAMPing stuff is you go through, we submit sort of every six months or whatever our updates to our things. The official assessors make their official recommendation that says, "Yes, this is ready for extension." It just takes another couple of months for the formal kind of paperwork approval on the back end. With Fusus, we passed that submission stage very, very recently. We're in the chute. Fusus is absolutely FedRAMP ready. It has been officially recommended by the auditors, and now it just needs to finish the last little bit of certification.

We're very excited about that.

Jordan Lyonnais (Equity Research Associate)

Awesome. Thank you.

Josh Isner (President)

I would just—Jordan, I would just add that I love that you're highlighting some of these opportunities just from a guidance standpoint. As you can imagine, we've been pretty conservative on what we've assumed for the year on federal. Some of these things would be upside and tailwind if they started to happen faster.

Jordan Lyonnais (Equity Research Associate)

Got it. Thank you.

Rick Smith (Founder & CEO)

Thanks, Jordan. Up next, we have Will Power at Baird.

William Power (Equity Research Associate)

Awesome. All right, yeah. Congratulations on another great quarter. I wanted to start with a question on enterprise. I know you all view this as a significant TAM expander. I think last quarter, you talked about a big logistics company win. I think that's how it was phrased. A, I'd be curious just kind of how that's going. B, just any other color you can share on what the pipeline looks like there and how do you get these deals converted, whether it's retail or other verticals you're targeting there?

Brittany Bagley (COO and CFO)

Yeah. So we said a large logistics provider last quarter. I think everything's going nicely with that, and everything's on track there. Just from a pipeline standpoint, I think getting a big customer like that is a really great signal to the market and a really great blueprint for us to go show other customers how we can roll those out and how we can get traction. Again, we're sort of rebuilding the pipeline for the year in Q1, but we continue to be really excited about enterprise as a category in a long-term market.

Rick Smith (Founder & CEO)

Yeah. I was invited to a keynote at RELA, which is the retail security. I can't remember what the acronym is for, but it's basically all the retail security.

Brittany Bagley (COO and CFO)

Retail Industry Leaders Association, RILA.

Rick Smith (Founder & CEO)

There we go. Thank you for the phone-a-friend help there. I can tell you, I was talking to our Head of Enterprise, and his feedback was, "Rick, it's happening. This is really coming together." Now, again, these deals, the bigger the agency or the bigger the company, the longer the time it is. We have sort of baked all that into our guidance for the year, but we think enterprise is going to become a more and more meaningful contributor.

William Power (Equity Research Associate)

Okay. And then my second question, whether Rick, you want to take it, or Josh, or whoever wants to take it, just looking at this fixed ALPR opportunity, how do we maybe help us kind of size the opportunity? I guess I'd also just be curious in early feedback you're getting. It'll take some time, obviously, to build the bookings there and the opportunity, but any help just kind of sizing the opportunity, early conversations, and then just the sales process. Can you use your existing force? Are there distinctions you're going to need to make as you deal with municipal governments, etc., getting access? How does that work?

Josh Isner (President)

Sure. Maybe Rick, I'll start, and then you can fill in any blanks. Ultimately, this is a very, very competitive space right now, and we're excited to be a part of that competition. I'm going to keep the kind of commentary at a very high level here. Ultimately, we were really thrilled with the customer reaction during Axon Week. Agencies that took us 10-15 years to win on body cameras and digital evidence management are asking us for very large deployments out of the gate of this product. I think we're excited to be in this market because ultimately, this capability is very complementary to the other products that we build, and we can offer it at a far more reasonable price than some of our competitors and give them the opportunity to have other options out in the market.

For us, to answer your question about the sales team, we have a dedicated sales team to this product. Of course, our key account leaders that manage the relationships with our large agencies will be a big part of that as well. We are gearing up, and we expect to win in this market.

Rick Smith (Founder & CEO)

Yeah. I would add the other thing that was really a pleasant surprise was how well Ubiqua was received. Just doing the permitting and all the logistics behind that is a real sort of issue and challenge for our customers. And Ubiqua brings with them preset access to tens of millions, if not hundreds of millions of streetlights. I can't remember the number. It's huge because they already have relationships where they're putting equipment on these light poles, and they have relationships with the utilities that run them. That Ubiqua, they showed on stage, they could do an installation in like a minute. Now, of course, you got to get out there with a truck and all that. The fact they do not have to go through permitting because it's all preset, the poles are already there. These are sturdy poles with power and a universal adapter plug.

I think Ian told me there's like 450 million streetlights worldwide that all share that same plug-in. We think that could also be a real accelerator.

Makes sense. Thank you.

Erik Lapinski (VP of Investor Relations)

Thanks, Will. Up next, we have Joshua Riley at Needham.

Joshua Reilly (Senior Analyst)

All right. Thanks for taking my questions. Kind of following up on Will's question there. How are you thinking about the ramping up production of the camera units for the Outpost and the Lightpost? Obviously, you've done some different things in terms of manufacturing for the TASER versus the body camera. Just wanted to get a sense so we level set expectations that I assume it'll be supply constrained for a while. Just wanted to get a sense there.

Josh Isner (President)

Yeah. Plan on no major revenue impact this year as we go through trials and then maybe some early shipments at the end of the year. This year is about getting trials out there, getting really good at the installations, delivering a very, very high-quality product, and really converting those opportunities to revenue next year. The fact that we build cameras every day in a lot of different form factors, but a lot of the same underlying technology has accelerated our path to market here. We're really excited to kick off trials this summer.

Joshua Reilly (Senior Analyst)

Got it. That's helpful. What's the feedback from customers in terms of their sense of urgency of closing some of the leader pricing deals for Draft One and the AI Era Plan? I believe, correct me if I'm wrong, it was June 30 because you mentioned that some of those deals might actually be closing in the second half now. Just wanted to get a sense of the price sensitivity there.

Josh Isner (President)

Yeah. Great question, Josh. We're working through that right now. I think whenever we quote something, sometimes there's a reality that some of those deals could slip quarter after quarter. The leader's pricing is to potentially ensure that there is a sense of urgency from the customer as well. If anything changes there, we'll certainly let everybody know. At this point, we're still focused on making sure we convert everything in the pipeline in Q2 here.

Joshua Reilly (Senior Analyst)

Awesome. Thanks, guys.

Josh Isner (President)

Thanks. Nice to see you a couple of weeks ago, Josh. Appreciate it.

Erik Lapinski (VP of Investor Relations)

Next, we have Jeremy Hamblin at Craig-Hallum.

Jeremy Hamblin (Senior Research Analyst)

Thanks and congrats on another really strong quarter. I want to come back to kind of your traditional cloud services business. I think there's about 40% of revs. You crossed over to having a million platform users at the end of last year. As we look into '25 and think about the growth that you're expecting, 27% total revenue growth, as we think about the cloud services, do you expect more of that growth to come from growing your user base versus kind of that ASP per user per month as we're kind of looking about that and then maybe contrasting that to what we've seen here over the last couple of years?

Rick Smith (Founder & CEO)

Yes.

Brittany Bagley (COO and CFO)

Jeremy, I'd say the last couple of quarters, we've called out that it's been split about 50-50 between our user growth and our premium adoption. I mean, not perfectly, but I would say that's a really good rule of thumb to use, at least as we go through the rest of this year. Then with things like AI and Draft One that will really ramp even more next year, we'll see if that mix changes at all.

Jeremy Hamblin (Senior Research Analyst)

Got it. Okay. That was the second part or follow-up there on how it looks in '26 and beyond. Okay. I wanted to shift gears then and ask about Dedrone. Right? There is a lot that is kind of going on in the space. There is a lot on a geopolitical sense and a lot of speculation about the opportunities with the current administration and how capabilities might be utilized both domestically, close relations, but then also we are seeing an uptick, unfortunately, in geopolitical activity. I just wanted to get a sense for what you were kind of sensing out there in the market now that kind of these overseas wars are not fading away, but seem to be increasing in terms of magnitude and presence.

Rick Smith (Founder & CEO)

Yeah. I would say we continue to believe that we're really excited about the acquisition because we got into one of the most important spaces in the world right now, whether it's military, whether it's political leaders. We have interest from enterprise, executive protection. We're seeing Dedrone systems used there to protect headquarters and to protect people's homes. I think people are rapidly realizing if you're an actor who's out to do something bad, a drone is a unique threat vector that everybody who's in the security business has got to think about and deal with. Now some of these too, like when you start talking about military customers and other, some of those are longer programs and ones where we're really not at much liberty to talk about what's going on there. There's certainly a ton.

President Trump has talked about this, the American equivalent of the Iron Dome in terms of ballistic missile defense. We believe that's going to be a multi-layered system that's going to include close-quarter air support from things like first-person view and consumer drones. We think it's going to be a really exciting business long-term. Yeah. We're glad we're in it, and we're really excited. AD and the team at Dedrone are pretty fantastic. They're doing great work.

Jeremy Hamblin (Senior Research Analyst)

Just as a quick follow-up, maybe for Brittany, in terms of thinking about that segment of business, going forward, is it going to be a reportable segment? I know it may not quite be material just yet, but hopefully, it will become material. If it's not a reportable segment, would that just fall under your software and services?

Brittany Bagley (COO and CFO)

Yeah. Dedrone has two components. It has a hardware component and a software component. The software piece you'll see show up in our software and services, and the hardware component you'll see show up in our platform solutions. I think it's unlikely to get broken out separately, at least for a while. One of the reasons we're really happy to do the break apart of our segments is you can see inside of our connected devices, that platform solution segment. Inside of there, the big drivers of that will really be fleet, VR, and some of the counter-drone pieces. It gives us a little bit more visibility into some of those drivers to share with all of you.

Jeremy Hamblin (Senior Research Analyst)

Great. Thanks for taking the questions. Best wishes.

Brittany Bagley (COO and CFO)

Thank you.

Erik Lapinski (VP of Investor Relations)

Thanks, Jeremy. Up next, we have Trevor Walsh at Citizens.

Trevor Walsh (Director and Senior Equity Research Analyst)

Great. Thanks, Eric. Thanks, Team, for taking the questions. Rick, maybe for you, if I can, it was cool to hear about the Apollo Cartridge plans. I know it's been maybe kind of the last piece of T-10 kind of getting through the thicker pieces of clothing. I think you've talked about that in the past more in the international opportunity and the kind of cold weather areas. We obviously have our fair share of cold weather environments here in the U.S. and domestic markets. Can you just talk about kind of where that cartridge is at and then what type of opportunities get locked if there is domestic kind of holdouts, if you will, or if it's more, again, internationally focused and kind of as a primary weapon in those or primary kind of servicing for that?

Rick Smith (Founder & CEO)

We're about a year out from scaled automated production. We wanted to get ahead of it. This is such a fundamental shift. It takes the TASER from sort of this less lethal capture device to a self-defense weapon. As you heard probably from Espen, our friend from Norway, he's coming to conclude intellectually, he was already concluded that if you're in close-quarter combat, a T-10 plus this new Apollo e is a better, more effective, safer option for you to use than a gun. Now, you even have to be careful saying that. We were a little nervous about putting him on stage because that's such a high bar. It's almost a little bit of a lightning rod. Where this is going to make a difference in the U.S., there will be some marginal revenue from it.

We'll probably have some kind of upgrade tactical package that includes that cartridge. It is obviously looking at it, it's a bit more sophisticated. It's going to be a little higher price point than our traditional cartridges have been. I think really the impact in the U.S. is going to be on the moonshot. Our goal today, an officer, their weapon of last resort is their gun, but their weapon of first resort is also their gun. The thing in their hand, if they don't know what's behind the door, is a gun. We've all seen the catastrophic consequences when you go through and you have to make an immediate decision. I think over time, we're going to see the T-10 be a first choice. Now, look, if you know you're going into a gunfight, they're going to go to their firearm.

We think especially around edge weapons and others, this is the piece that really gives us a shot at displacing lethal force. Our estimates are about 40% of situations where people are shot and killed in the U.S. today. Here, I'd say it's probably more about the moonshot internationally. The reason I say that is most agencies in the U.S. are already buying TASERS. Yes, there's going to be a little bit of upgrade opportunity there. In the U.S., it's going to drive the mission more than a pure revenue driver. Internationally, though, I think that's where TASERS are not standard issue in most countries. They're shared among specialty teams.

When we get to the point where it's like, "Hey, we're going to use this as our primary defensive weapon," now you go from 3% to 10% of the agency using it to potentially 100% of patrol. That should begin to pull through with it much of the rest of our ecosystem. I think from a pure financial business sense, I think T10 is going to be much more impactful in global markets. Frankly, in enterprise and other places where whether you're somebody like Loomis who's in the business of moving cash around or casino guards or anywhere you see armed private guards, we think T10 plus the Apollo is going to begin to be much more widely deployed there because maybe they'll still carry their gun. They might start to look more like a cop where they have two weapons.

We think all the business operators pay a ton of attention to the liability issue. If they can avoid a shooting, there's a lot of financial incentive in addition to the moral imperative. I'd say this is going to its biggest impact will be opening new markets for TASER.

Trevor Walsh (Director and Senior Equity Research Analyst)

Awesome. Super helpful. Maybe one just quick follow-up for Brittany. Appreciate the color around tariffs and the 50 basis point impact to the adjusted EBITDA for the year. Would you call that kind of your, I guess, worst case where all the kind of adjustments and adaptability that you've built in around supply chain kind of not happening exactly? Or just give us, I guess, a sense of kind of where that falls in terms of your high side, low side sort of expectations around the impacts?

Brittany Bagley (COO and CFO)

Yeah. I mean, I think it's our best guess at being realistic. And that's obviously with what we know today. It's always hard to caveat that this has been dynamic, and it doesn't assume new retaliatory tariffs or anything like that. But just based on what we know today, what we're able to offset, I would say it's realistic. Of course, we're going to try and do more if we can do more and continue to work those supply chain muscles. But I think it's a fair bet knowing what we know right now.

Trevor Walsh (Director and Senior Equity Research Analyst)

Got it. Awesome. Thanks for the questions.

Erik Lapinski (VP of Investor Relations)

Thanks, Trevor. Up next, we have Keith Housum at Northcoast.

Keith Housum (Senior Research Analyst)

Yep. Thanks, guys. Appreciate it. Hey, Rick, we saw at Exxon Week, the Axon ecosystem is growing and becoming more and more important to your agencies that you serve. Is there a point where your customers become concerned that you're too big a part of their ecosystem, that you're too important, they're too levered to you? How do you address that? Is that a risk to your growth going forward if it's next year, five years, ten years down the road?

Rick Smith (Founder & CEO)

Yeah. I would actually say we started hearing that maybe five years ago, six years ago. That was coming up as a concern. I've been hearing it less recently. What we've been hearing from our customers more is like, "Hey, we've got all this technology that doesn't play particularly well together. Can you take on more?" Last year, when we exited the CAD business doing the dispatch software, the thing we heard from a lot of our customers was like, "Oh, gosh, we really wanted you to take that over too." Because when Axon does it, we know it just works, and we know that we're going to get a great response if we have an issue, and it's going to be supported. I'd say it feels to me like it's less of a concern than it was a few years ago.

I think we've sort of crossed this Rubicon where we're such an integral part of they're already kind of all in with us. Kind of even including more stuff, I think, doesn't really increase their risk. If Axon went out of business or there was some catastrophic event, it would be majorly disruptive already. I think what they continue to tell us is, though, things just work better the more they work with us. That's why also this year we really wanted to lean into the partnerships.

We're both signaling and living up to a commitment to our customers that's, "Hey, we know we can't be everything, and we're going to identify best-in-class partners and bring them to you and have an open ecosystem so that you can feel more comfortable working with us, that we're not going to try to box you into a walled garden, and that ultimately you'll be able to use the parts of our ecosystem you want and the parts that you don't want to use. You can use other tech solutions, and we'll keep things open so you can integrate with us.

Jeff Kunins (CPO and CTO)

Great. And one more thing, Keith, there is just I think some of that is informed, some of that thinking is informed in how we've gotten to mark with our AI era plan where some of these software-heavy offerings, I think it's better to offer customers a fixed price with certainty and continue to delight them with more and more features in there that they don't have to pay additional dollars for. I think in a lot of the new disruptive technologies that we're entering, it's far more about de-risking the proposition for them by making sure that we're very fair and predictable on pricing and we overdeliver on the expectations in terms of features and service.

Keith Housum (Senior Research Analyst)

Okay. Gotcha. And just a quick follow-up. Yeah, obviously, you guys got a great net retention rate.

I'm assuming, right, you guys still have not lost a significant vendor or a significant agency to a competitor yet, correct, when it comes to the excellent body camera?

Jeff Kunins (CPO and CTO)

That's correct, Keith. Yep.

Keith Housum (Senior Research Analyst)

Thanks, guys. Good luck.

Rick Smith (Founder & CEO)

Thanks.

Thanks, Keith. Up next, we have Jonathan Ho at William Blair.

Josh Isner (President)

Hi, good afternoon, and thanks for sneaking me in. Just in terms of the TASER 10 growth, I think you've called out just some pretty phenomenal growth here. What gives you the confidence that with this rapid rate of adoption, do we kind of run into the risk of hitting the wall at some point or seeing that adoption rate as fast as it is sort of get in the way of growth in future quarters?

Yeah, Jonathan, it's a fair question. I personally don't see a lot of that, given that there are still customers that are using the X26P and customers that are using the X2. And a lot of what TASER 10 has done is accelerated the upgrade cycle. I think that would be much more of a concern if all customers predictably upgraded every five years. Eventually, we'd hit a rate problem there. In reality, historically, TASER 10 is the first one where customers are feeling like, "Hey, we must upgrade as soon as we possibly can, even if it's inside of five years." I do think there's still plenty of opportunity in the next three, four years in terms of TASER 10.

Of course, the name of the game there is not only filling out deployments and upgrading deployments in our state and local customer base, but extending T-10 to our international customers and a ton of white space there. We are seeing a lot of excitement, as Rick highlighted, in Europe and in other geographies as well.

Jonathan Ho (Partner)

Great. I'll keep it to one. Thank you.

Erik Lapinski (VP of Investor Relations)

Thanks, Jonathan. We've got one left with Mike Ng at Goldman Sachs.

Mike Ng (Analyst)

Great. Thanks for the question. I just have two quick ones. First, just on the AI Era Plan and AI services, are there any meaningful margin differences relative to Evidence.com just because you have to pay the cost to compute? Then secondly, I just wanted to ask about the state and local budget flush outlook, which I think typically happens in 2Q and 4Q. Just wondering if you had any early expectations on what you can expect there, just given what you're seeing in the pipeline. Thank you.

Josh Isner (President)

Sure. Brittany, do you want to cover the first one?

Brittany Bagley (COO and CFO)

I can take the margin one. Yeah. I mean, nothing that I would sort of factor in as a meaningful driver. We talk about our software business continuing to be above 80% gross margins. The AI era plan would certainly fit in that. Now, the interesting thing about the AI era plan is we do not actually know every product we are going to go put into the AI Era Plan because there is still more to come. Based on what we are releasing right now and what we are seeing, we are pretty happy that it falls in that range of what we would expect for our software business.

Josh Isner (President)

On the state and local budget items, Michael, I do not know that we are seeing a lot different there as it relates to us. Other companies are seeing at times that these grants that were out there are starting to dry up. A lot of those grants were helpful in paying for one-time upfront purchases. Most of our activity, as we have talked about in the past, is highly related to operational expenditures as opposed to capital ones. For us, I think as we work through budgetary quotes, for example, some large states, their budget ends on September 30 and starts again on October 1. We are working through, "Hey, here is a budgetary quote that you can kind of bank on for Q4." We are not seeing much difference in how we have handled those in the past years, if any at all.

Certainly something that we'll continue to monitor. At this point, we feel really good about what we're seeing in terms of availability of funds and opportunity to invest from some of our state and local customers.

Mike Ng (Analyst)

Great. Thanks, Josh. Thanks, Brittany.

Josh Isner (President)

Thanks a lot.

Brittany Bagley (COO and CFO)

Thanks, Mike.

Erik Lapinski (VP of Investor Relations)

All right. We'll kick it to Rick to close this out.

Rick Smith (Founder & CEO)

Sorry, I had myself muted there. Hey, everybody. Again, I hate to sound like a broken record because we keep breaking records, but it's exciting. Josh and Brittany and Jeff, the entire team, just the sheer breadth of the products that we've been bringing to market, the intensity of our sales and customer support teams to both get it to customers, but make sure it's working and deliver a world-class experience, and just everything it takes to run this business, it is pretty mind-blowing. I don't know that I can think of another tech company that has so much breadth across so many different areas. Then coupling that with the challenges of selling into public safety and the regulatory environment around managing government data, whether it's from FedRAMP to CJIS.

I'm just delighted that we're able to continue turning in these results. It's a privilege to work for all of our shareholders that are on today and to work with all the analysts. You guys ask great questions. You help us even take a hard look at different aspects of our own business. Together, we're doing great things. Excited to see you all again, maybe at our shareholder meeting in May. If not, certainly at the next earnings call in August. Thanks, everybody.