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Axon Enterprise, Inc. (AAXN) Q1 2019 Earnings Call Transcript

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Axon Enterprise, Inc. (NASDAQ: AAXN)
Q1 2019 Earnings Call
May. 9, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, my name is Mike, and I will be your conference operator today. At this time, I would like to welcome everyone to Axon Reports Q1, 2019 financial results. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions)

I will now turn the call over to Luke Larson, President of AXON, you may begin your conference.

Luke Larson -- President

Thanks, Mike. Good afternoon to everyone. I'm Luke Larson, the President of Axon. Welcome to Axon's First Quarter 2019 Earnings Conference Call. Before we get started, Andrea James our VP of Investor Relations will read the Safe Harbor statement.

Andrea James -- Vice President of Investor Relations

Hello everyone, here in the room in Scottsdale, we have Luke Larson; our CFO, Jawad Ahsan; and our Chief Revenue Officer, Josh Isner; and CEO, Rick Smith is joining us from San Francisco. This call is being broadcast online and is available on the Investor Relations section of the Axon Enterprise website, you can find our reported results in our quarterly shareholder later, which we have posted to investor.axon.com and we've also filed with the SEC.

Today's call will include forward-looking statements, including statements regarding our future expectations, beliefs, intentions, or strategies, including projections regarding revenue growth, profitability and product development. We intend that all forward-looking statements be subject to the Safe Harbor provided by the Private Securities Litigation Reform Act of 1995. Axon's forward-looking information is based on current information and expectation. Our estimates and statements speak only as of the date on which they are made, are not guarantees of future performance, and involve certain risks, uncertainties, and assumptions that are difficult to predict. All forward-looking statements that are made on today's call are subject to risks and uncertainties that could cause actual results to differ materially. These risks are discussed in greater detail in our Form 10-K and 10-Q under the caption risk factors. You may find these filings as well as our other SEC filings at investor.axon.com or at sec.gov by searching under the Axon ticker AAXN.Alright go ahead Rick.

Rick Smith -- Chief Executive Officer & Founder

Thanks, Andrea, and thanks for joining us to our investors today. This is a symbolic quarter for Axon because it is the first quarter where we are recognizing high margin software revenue on our TASER program. The revenue will grow as we move TASER 7 through the installed base and drive subscription contracts. And the marginal cost of that revenue is so low that this quarter it rounds to zero. So, that feels pretty good. That's why you build software businesses, our recurring revenue is now more than $122 million, up 47% from a year ago. Our shareholder letter is pretty robust this quarter, because our team accomplished a lot since our February update. Including significantly retiring product launch risk on our Axon Body 3, I'm moving closer to day-zero with a major city agency deploying Axon records. Our software product launches Axon performance and reduction assistant are setting new industry standards for using AI to drive efficiency, managing body camera programs.

And we're especially excited about our FedRAMP certification. That's a stealth initiative we've been working on for three years. Securing FedRAMP opens up the federal market for us. Last month, Luke and I attended an Axon Salute to Federal Law Enforcement on Capitol Hill. Formerly kicking off our entry into the federal market.

And of these accomplishments were announcing this quarter could have been impressive on its own and I'm really proud of Axon's teams, who continue to push hard and deliver on behalf of our customers. Every products we'll bring to market is the result of extensive discussions with our customers.

In the early days of TASER, we would develop new products in a black box and unveil them when they were finished. That's the model that can result in spectacular successes or failures. We spent millions of dollars developing the TASER X3, a three-shot TASER that I still believe with great weapon to my personal favorite, but it was a commercial failure and we've barely sold any because it was just too big and complicated.

I'm glad that I learned our lesson early on. Today no product is developed in a vacuum. We spend a lot of time listening to customers and what we're hearing is that the result of this means, TASER 7 Axon Body 3 with LTE connectivity and Axon records are all game changers and customers love them.

And while we've been confident in demand for these products, we are increasingly confident about the timelines we publicly announced, Q3 for Axon Body 3 and later in the year for Axon records. Making a slight pivot, I would like to note, I want all of you to note then I have a book coming to market later this month, it's called the End Of Killing. It's a personal project. I did not seek permission from the board before writing it because I believe it's a book that needs to be written and I wanted you to hear about it from me. The subject involved my life's work and much of the work at Axon, which is using technology to solve one of humanities all these problems, the killing of people. I'm been giving talks around the country to champion this idea. And one thing that I asked audiences is the gas under what scenarios police are trained to shoot to kill, it's a bit of a trick question actually, because police are not trained nor authorized to shoot to kill. Police are trained to shoot only to stop a threat. It just so happens that up untill now the best tools we've given them to stop the threat, or lethal bullets.

Killing is a technology problem. We're making a dent in it, and Axon is well positioned ultimately to help solve it. We're getting a lot closer to competing with the handgun with TASER 7 and I think we'll get even closer with TASER 8. I've challenged our internal team to develop the TASER weapon that outperforms the handgun as measured by time to incapacitation of a threat within the next decade, and I believe less legal energy weapons will surpass the performance of kinetic project out within the same timeframe.

The bullets days at the top of the force spectrum or numbered. Speaking of TASER, let me turn the call over to Luke to do a bit of a deep dive on building up TASER 7.

Luke Larson -- President

Thanks, Rick. And thank you to everyone who could make it out to Axon accelerate last week. We had nearly 2,000 attendees largely representing the top 1,200 US agencies in law enforcement as well as attendees from police forces around the world.

Our Axon accelerated attendance was very intentional get the right customers there. We also invited several analysts and investors, and it's great that they got to see the excitement as well. One of our key goals for the year is to create a rabid fan base and I'm here to tell you at the event we sold out our swag easier to have stuffed animals of canines, we sold over $30,000 worth of T-shirts and Axon branded swag.

We will never be complacent with building on our customer relationships, but selling out this stuff really blew me away, of course, the purpose of the conference is not to sell T-shirts, we also generated more contract pipeline at accelerate and we generate at IACP a conference with over 10,000 people. Now IACP is still very important conference to us, but to me, these numbers are a great leading indicator that we're building the preeminent Tech Conference and public safety.

In February, I told you that I was laser focused on three main execution items this year, ensuring the success of the TASER 7 launch, bringing Axon Body 3 to market and launching Axon records, let's drill down on the first one.

We feel confident that TASER 7 will be a major revenue and gross profit driver for our business over the next several years. In Q1 TASER segment gross margins were pressured by two main factors ASP, the average selling price and scrap rates both will improve over time and we are improving, even as we speak. On the ASP side, we are making the strategic decision to offer trading credits to major agencies, many of which were we're buying new TASER devices from us early as a year ago. We offer a pro-rated credit to incentivize customers to adopt TASER 7 sooner and this delivers a greater total customer lifetime value than if we waited for their existing existing TASER's to age beyond their useful life. So we are seeing some near term ASP compression related to these credits, but this was expected and will naturally fade out over time as existing devices in the field age, actually view this is an extremely positive and that means we've got a great response to our new weapon where customers want to upgrade early.

I want to touch on TASER 7 manufacturing yields and scrap rates, which are all tracking to plan especially want to shine a light here for the benefit of our software focused analysts and investors. Axon, and specifically our TASER unit has more than 25 years of experience manufacturing TASER devices and we've invested heavily in building out this capability. Anytime we introduced a new TASER there is a production ramp that requires us to -- refine the production process. Because TASER devices are used in tactical situations. We performed validation checks on every device before we shipped to the customer, if any part of the weapons does not pass our validation check, we scrap it and improve the manufacturing process.

This process is par for the course for historical TASER launches. With TASER 7, we are seeing a high demand and so we're ramping production more quickly than previous models. For example, our Q1 unit volume for TASER 7 is on par with the entire first year shipping of the TASER X2 which we introduced in 2011. I feel very confident that we have a clear line of sight to meeting customer demand while also improving yields with steady state production by the end of 2019. Regarding the other execution items, Rick already touched on those. We are very excited to talk more about Axon records once it is live with our first major city customer.

Now turning the call over to Jawad.

Jawad Ahsan -- Chief Financial Officer

Thanks, Luke, and thanks all of you for joining the call today. April marks my 2-year anniversary with the Company, and also coincided with the 2-year anniversary of changing our name from TASER to Axon. I'm really pleased with our execution and how we've strengthened the business model over the past 24 months. And I believe we're just getting started. As many of you know, we made a commitment to our investors to drive strong growth on the topline while also demonstrating levels. And a lot of my day to days ensuring we do exactly that.

I've done this before, grown a SaaS business while driving leverage and I'm thrilled that Axon is also proving that it can be done. In Q1 we were reported strong revenue, and you'll notice that we are raising our full year revenue outlook by $5 million while holding adjusted EBITDA guidance in line. This is very much by design. We've told our product teams that the way to earn more R&D budget is through the top line while we're confident we can deliver $80 million to $85 million in adjusted EBITDA were 34% growth at the midpoint, the adjusted EBITDA margin will vary depending on revenue as we look to accelerate our investments in R&D.

With that said, as you can see from our guidance with Q2 looking like Q1 in both revenue and adjusted EBITDA. We've set ourselves up for a strong back half with much higher margins versus the first half. Another important area of focus for us is corporate strategy including ways to grow our total addressable market or TAM. Today, we have an $8.4 billion TAM, which primarily reflects our four strategic areas of investment. TASER, cameras and digital evidence management, Axon records and Axon dispatch as we look out longer term we see a great deal of potential to extend Axon's growth outside of boring distinct scope.

Our successful transition to both a technology products and SaaS business leaves us incredibly well positioned to develop new revenue streams. We have a unique opportunity to take the same products and features that we've developed for law enforcement and find applications for enterprise users who want similar capabilities. Axon has the right balance sheet, the right customer relationships in the right foundation of law enforcement technology products from which to expand. We continually thinking about the best way to steward our capital and exploit our market leadership and ensure we do that in a disciplined way to drive shareholder value.

Thank you, everyone. And with that, we'll go to Q&A.

Questions and Answers:

Operator

(Operator Instructions) Your first question comes from Jonathan Ho from William Blair.

Jonathan Ho -- William Blair. -- Analyst

Hi, good afternoon, and congratulations on the strong results. I just wanted to start out with a question on -- I guess the TASER 7 impacts from, I guess the credits that are being offered. Can you maybe quantify for us a little bit how that works and help us understand maybe how that works through in the next couple of quarters as well as maybe over a longer time frame.

Rick Smith -- Chief Executive Officer & Founder

Yeah. So when we launch TASER 7 and this is actually historical practice that we've used is we offer trading credits for customers that have weapons that are under the 5-year useful life. And we have kind of a pro-rated calculation, where if you were to -- let's say buy an X2 three years ago or two years ago and now you want to upgrade to TASER 7, we'll give you some of the value of that useful life back in the trading credit. We usually users to make sure that we smooth out, good customer relationships. And again, I actually view this as a extreme positive in that we're seeing major city customers that want to upgrade to the TASER 7, because it's such a fantastic weapon.

Jonathan Ho -- William Blair. -- Analyst

Got it. And then -- just talking a little bit about Axon records. You noted that the initial launch customer is getting pretty close at this point toward the back half of the year. But can you maybe highlight what they can do with your system versus what could not be done before in particularly since you're integrating some of the camera capabilities as well?

Luke Larson -- President

Yeah. I'll take that one. So first I would say we just came out of our Axon accelerate conference, and I was talking with the head of records just a few moments ago. And we have a ton of customer interest across the board and we've been doing some demonstrations with various prospects across the country and getting very positive feedback.

So the way to think about records is our launch products. We'll have a couple of very unique features. Probably the most unique feature is the ability to integrate your digital evidence seamlessly in with the records. So, we call it video a heart of the record. If you think about it having your video and a totally separate system you have to log into. It's just a much clunky or experience, whereas the way human beings communicate now, we don't really send text only messages or documents, very much. We tend to communicate using pictures, video, text, even Emojis, even our current record system won't have Emojis it will have a very integrated, audio, video, capability, along with the tax elements.

So that's sort of the way to think of it at the outset, and then we've just really done a nice job the team has been hitting all of the basic foundational work, that you're not doing duplicate data entry for three different forms that there's a dynamic input form experience. So you're in putting only the data that's necessary based on the type of report you're filling out and that can grow if one incident ends up being a stolen vehicle and felony assault and some other things historically might require several different reports. We build out in sort of duplicate data entry, so that's sort of the foundation.

But what really will differentiate us over time is that we are evolving the use of AI to extract video from the audio datacenter. So this is we're having both hardware and software is unique advantage for us. So Axon Body 3 we spent a lot of time tuning it with a multiple microphone array to be able to optimize how we handle voice data that's coming in, so we can -- describe it more turn ascribe it more accurately and be able to have AI models that overtime we'll learn when the officer asks, what is your name. The next statement is likely to include the first name and last name. And to begin to extract that information and pre-populate the report.

So I'll just wrap I think in our conference we talked a bit about how, if you think about autonomous driving we're calling this autonomous report writing and actually it's not as difficult a problem as autonomous driving is but it will evolve in several stages. So we're sort of stage zero to one right now, which is all about getting all the basic data structure right so that we can begin to optimize some of the AI data extraction using our smart sensors when those go live this summer as well. So launch of Axon Body 3 in records really complement each other and that Axon Body 3 is a sense of its optimized to begin moving into this AI driven future.

Jonathan Ho -- William Blair. -- Analyst

Thank you.

Operator

Your next question comes from Mark Strouse from JPMorgan.

Mark Strouse -- JP Morgan -- Analyst

Hey, good afternoon. Thanks for taking our questions. So it sounds like you can't divulge too much information yet about the major city that's adopting Axon records. But are you able to say, was that a competitive displacement and then are they adopting your entire solution as it stands today, or are they kind of cherry picking certain modules?

Luke Larson -- President

I'll take that one. So this was a customer that's been a development partner, they did look at the available options in the records space, but there we've been primarily focused heavily on developing the record system with them. So you could think of it with them as a stand-alone that it's not part of a big, bigger economic package. This is really focused on developing a record system.

Mark Strouse -- JP Morgan -- Analyst

Okay. And then congrats on getting the redaction assistant out the door. I guess, can you just kind of talk about based on the trials that you've run so for kind of the efficiency gains that customers are seeing. And I've -- I think you guys are throwing out this data of multiple hours in the past for certain minutes of video. I mean it is that process now down to minutes of Redaction. Maybe you can compare that to kind of your prior redaction tool and some of the other competitors that are out there.

Luke Larson -- President

Yeah. So, great question. So we just launched, one of the launch partners was a city prosecutor that was meticulously tracking with time that we're spending on reduction and before the redaction assistant compared to afterwards. Once they deployed redaction assistant the City Attorney reported there were spending 80% last time per video on redaction and that actually was going to lead to a change in how they budgeted they wouldn't need to budget for more people to be able to do the reductions. So that's the one that comes to mind. We're a little early in the game in terms of having a bunch of agencies but that first feedback of 80% was pretty enlightening. Our target was to reduce reduction times by at least 50%. We're looking graph for performing that.

Mark Strouse -- JP Morgan -- Analyst

Got it. Okay. And then just one more quick one, if I can for to Josh. Can you just remind us when the TASER 7 upgrade your credits end? And I guess kind of secondary to that, do that kind of window down over time each quarter.

Josh Isner -- Chief Revenue Officer

Hi, Mark. Yes, absolutely. They do go down overtime. They will start to -- we had an offering in Q4 of last year, it went down as of Q1. It has stayed flat Q1 and Q2, and then it is declining every quarter after that. So essentially, that's done to be fair customers, but also to drives emergency around upgrade cycles. So you'll see a lower trading credit as of July 1, compared to what we are offering in this quarter.

Mark Strouse -- JP Morgan -- Analyst

Are you able to say does that completely ends though by the end of 2019 or does it drag on into the '20?

Josh Isner -- Chief Revenue Officer

We are planning to assess that decision at the end of the year. So I think, Kimberly, given the answer there other than will continue to decline through the end of this year and we'll assess it in December.

Mark Strouse -- JP Morgan -- Analyst

Okay. Okay. Thank you very much.

Operator

Your next question comes from James Faucette from Morgan Stanley.

James Faucette -- Morgan Stanley -- Analyst

Great. Thanks very much. I wanted to ask maybe for Jawad. Can you just walk us through a little bit. One thing that kind of looks it -- I look at is when you see the magnitude of upside versus your guide for the full year. I don't think it's a big deal, but I just want to make sure I understand the puts and takes of why maybe the guide for the full year isn't -- isn't at least as much as what the upside was in the first quarter?

Jawad Ahsan -- Chief Financial Officer

Yes. So what we are actively doing we're making a conscious decision to reinvest the upside from revenue into the business. When we came in its 2019, as we put together our budget process. We were oversubscribed there were more things that folks wanted to do then we had the budget for. And so what we said was that as we progress throughout the year as we beat on revenue, we are going to lead basically take that and reinvested into the business. And so that's what we're it -- what we're doing and we've raised our guidance for the year on revenue but we've held it on EBITDA.

James Faucette -- Morgan Stanley -- Analyst

Got it, got it. Okay, that's clear. And then, I guess, I'll open it up to whomever, but as we're rolling out just thinking about long-term as we're rolling out the different software products and it's applicability beyond just police forces et cetera. How do we think about the opportunity beyond that and what needs to happened even start to expand it further into whether it's this core systems prosecutors offices or even more broadly and within the emergency response -- within the emergency response field. Thank you.

Jawad Ahsan -- Chief Financial Officer

Yeah. So oftentimes these first responder units will use the same technology platforms and we've actually seen some very interesting inbound demand from these adjacent markets. We are being pretty tight-lipped for competitive reasons. On our exact approach, I would say we're definitely looking at the adjacent public safety spaces. In addition making a strong push into the federal space as well as international markets as well.

James Faucette -- Morgan Stanley -- Analyst

That's great. Thank you.

Rick Smith -- Chief Executive Officer & Founder

Yeah, this is Rick. Let me add one more detail. One thing that I think will be, will really help make body cameras more appealing in additional markets is once they're real time connected and can live stream. I think they just add opens up a whole bunch of additional use cases from the traditional work done so far, which is record an event. And then some hours later you dark the camera and that information becomes available. Being able to live stream that information opens up as you can imagine just a whole host -- different types of services that I don't think we even understand yet will once the cameras out there we believe this is one of the things that will evolve and will iterate together with our customers. But I think that both in law enforcement and for these other markets like for emergency medical services being able to live-streaming video from a scene using a system that is made law enforcement public safety and (inaudible) types of regulations to be extremely valuable for emergency room positions where others will be able to see what's happening out in the field. So that's just one example of where that live connectivity. We think really could open up the available markets, there would be interested.

James Faucette -- Morgan Stanley -- Analyst

Great. Absolutely. Thanks.

Operator

Your next question comes from Scott Berg from Needham.

Scott Berg -- Needham -- Analyst

Hi, everyone. Congrats on a good quarter and thanks for taking my questions. I guess we'll start with on the FedRAMP side, Rick. Or maybe Luke wants to take the question. How should we think of what products are going to be sold into that area is going to TASER's, cameras, drones, software, help us understand what that opportunity looks like?

Rick Smith -- Chief Executive Officer & Founder

Yes. Basically all of the above are options now we have been selling TASER's in Fed -- historically did federal markets. But they've not been using our cloud services. So FedRAMP now opens up the entire platform up to FedRAMP moderate which covers most of the use cases for all the above for fleet in car systems for body cameras for FedRAMP uses start using Evidence.com for managing their TASER weapons. And certainly we think drones could be an interesting space there as well.

Scott Berg -- Needham -- Analyst

Got it. Helpful. And then the, I guess, Jawad, on the future contract value. You got nicely a little bit less than 50% year-over-year. But in new bookings and software and sensors is down. How should we think about that metric. My guess is there some camera movement in there, given the expectations of some of those sales are being pushed out to the second half on AB3 is ready?

Luke Larson -- President

Yes. The first thing I'd say, Mr. Josh is here with us, say, so I'd love for him to weigh in, but one of the first things to note is that in Q1 last year we had a large, very large international booking about $30 million if you strip that out we were actually up year-over-year. And then, Josh, would you like to add color?

Josh Isner -- Chief Revenue Officer

Yeah, I'd say the Q1 results in video bookings are purely at this point. Seasonality, I think Q1 is kind of our softest quarter of the year. Sometimes there's a large one-time and like was the case last year in Q1, but I certainly have a lot of confidence that this is not the sign of kind of anything to worry about. I actually think we're going to have a very strong rebound in the next few quarters in terms of Axon bookings so.

On Q1, people get new regions, people love new quarters, with the sales meeting first week of the year, kind of a dead least so just naturally kind of our slowest quarter of the year. And again, I think there's a lot of reasons to be optimistic about that number bounces back.

Luke Larson -- President

And I would just add your -- I think your comment on AB3 was correct. We announced AB3 to a great standpoint (ph) at ICP in October and then reemphasize some of the -- all of the capability to Rick addressed with aware and live streaming. So we expect that to start shipping at the end of Q2 and we think that will end of Q2 -- beginning of Q3 we think that will drive to high demand.

Scott Berg -- Needham -- Analyst

Great. That's all I have. I will jump in the queue. Thanks guys.

Operator

(Operator Instructions) Thank you. Your next question comes from Will Power from Baird.

William Power -- Baird -- Analyst

Yeah. Great. Thanks for taking the questions. Yeah. First one, maybe a bit of a follow-up perhaps for Rick or Luke. But I just qualitatively love to get your perspective or color on conversations that accelerate around AB3. And how you're thinking about the pipeline and what your customers are perhaps most excited about with that product. I guess as part of that, should we expect something similar to AB3 overseeing TASER 7 with respective potential trade-ins and credits. How do we think about that and what that might mean for gross margins in the back half of the year?

Luke Larson -- President

Got it. So yeah, one of the really nicest surprises I would say it accelerate this year was just how much interest there was in the live connected services. When we first really started talking about live services with our customers, there is a lot of questions about whether that's something that they would actually use. And we decided to go all in -- our customers, almost all of our customers are on a hardware-upgrade program and we could have chosen to do in on AB2-plus where we could have done a next generation body camera and focused on cost optimization on the hardware and met our financial obligations. But we felt the right thing to do was to extend ourselves and actually make this a really powerful camera upgrade.

So while our customers are effectively on the iPod upgrade program we're giving them an iPhone and we believe that was the right thing to do because it's basically enables a whole host of new services that we can begin to sell once the hardware can support real time connectivity. I would say a year ago there was a little bit dicey, it was not be super easy decision to make in that as we are calibrating with customers. It was not universally clear that they would basically value those connected services enough to want to pay for them. And I think we've put that concern largely to rush this year. I think our team has done a really good job of understanding what the customer use cases are and I'll give you one example. So one of the downsides you worry about sometimes with please union management relationships is -- if it's seen as a micro managing tool where the chief is going to be walking around his cellphone remotely and trying to micro manage the same. That is the sort of thing that customers would absolutely not react well to.

But when we help them understand. Hey, if you're going into a situation where you're just uncomfortable that you as an officer could activate the live stream and ask your fellows to watch your back and know that other people are going to be able to see what's happening and begin to rally support if they see it starting to go down hill -- like this, sometimes before an officer calls their intuition is starting your calls for help is starting to -- they're starting to see things that make them uneasy and for us to give them ability to share that with the rest of their team actually gives them a real sense of comfort going into the unknown. And I think is as a result, somewhat of the positioning and a lot of great work the products done in the product design. Every customer I talk to this year was very interested in the connected real time services. And maybe every customer making overstatement, maybe some other people on team, it might have found some customers that were less interested. But I would say it was a real home run, making the move to include LTE and Axon Body 3.

William Power -- Baird -- Analyst

Okay. Great. Yeah. And just any color from -- I guess any one on the team on -- how to think about gross margins were just really the broader sensor segment in the second half of the year as AB3 rolls out?

Rick Smith -- Chief Executive Officer & Founder

Yeah. So what we expected that -- we're not going to like it -- I mean, when we talk to are not going to really see any -- there is no trading credit on the body camera and those margins we're managing that segment to about 25% margin, and we expect that will continue in the second half.

William Power -- Baird -- Analyst

Okay. Great. Thank you.

Operator

Your next question comes from Steve Dyer from Craig-Hallum Capital.

Ryan Sigdahl -- Craig-Hallum -- Analyst

Hey, guys, Ryan Sigdahl on for Steve Dyer. Quick question as it relates to guidance. So in the press release you expect significantly higher growth rates in the second half of 2019. But based on Q1 actual Q2 growth of 16% to 17%, it implies something like 16% to 20% in the second half of the year. So that basically brackets Q2 expectations, what am I missing there?

Rick Smith -- Chief Executive Officer & Founder

I don't think you're missing anything. We expect Q2 is going to look very similar to Q1, and we're really ramping up for a strong second half.

Ryan Sigdahl -- Craig-Hallum -- Analyst

So the significantly higher growth rates in the second half of the year. Just maybe some color there on that comment.

Luke Larson -- President

Sure. It will be in full production on TASER 7 and shipping (inaudible) and going into Q4 with shipping our records product as well.

Ryan Sigdahl -- Craig-Hallum -- Analyst

Alright. Sounds like a little bit of conservatism that in that 2019 guidance based on, based on that. Secondly, just on the TASER 7 what of the orders in the quarter, what percentage were upgrades versus new users. And then, what percentage of those TASER 7 orders received trading credits. Thanks.

Luke Larson -- President

Yeah. So just if I understand the question correctly, it's what percentage -- we kind of view every customer as being a previous TASER customer. The question is what percentage are using the trade-in credits at this point. I think the majority of the deals would have some trade-in credit.

Josh Isner -- Chief Revenue Officer

Yeah, by definition, the only one that wouldn't no one else have never have deployed TASER's before.

Ryan Sigdahl -- Craig-Hallum -- Analyst

So just to clarify that. So it's anyone that has the TASER gets a credit, not just ones that are under the 5-year useful life warranty?

Josh Isner -- Chief Revenue Officer

Correct, but it's scaled to how was the weapon so, by far the least valuable trade-ins are the ones that are older than five years and most valuable ones are the ones that are within one year old. And it just scales throughout the life cycle of the weapon.

Ryan Sigdahl -- Craig-Hallum -- Analyst

Great. Thanks guys. I'll turn it over from there. Good luck.

Operator

Your next question comes from George Godfrey from CL King.

George Godfrey -- CL King. -- Analyst

Thank you. Two questions. Jawad Is the 300 basis point to 400 basis point margin improvement on an annual basis now off the table.

Jawad Ahsan -- Chief Financial Officer

Yes, George, we are at the beginning of the year we changed our guidance. We're still over a three-year period, managing to driving leverage in the business and what we said specifically for 2019 is that we're going to deliver $80 million to $85 million in adjusted EBITDA. Now the margin rate the reason we don't want to guide that specifically is that's going to vary depending on where revenue comes in. And given that we've committed to reinvesting any additional revenue into the business, the margin rate is going to be really difficult for us to guide to. So rather than guide to that we're guiding to the $80 million to $85 million in EBITDA.

George Godfrey -- CL King. -- Analyst

Okay. So just I'm clear, is we could have that type of improvement in any given year. But are you saying that three-year cumulative will average out to that range. So that still on the table or no. I just want to make sure, I understand that?

Jawad Ahsan -- Chief Financial Officer

When we put together our budgeting for '19 for '20, our expectation is that we are very much going to be driving leverage. And again, if it turns out that it's 300 basis points to 400 basis points, but we really are looking at when we set our budget for example for the $80 million to $85 million. We wanted to stay within that range. When we put together budget for 2020, it will likely be in the same range as well. We wanted to consistently year-over-year continued to drive our EBITDA margins up. But again, what we're really more focused on is not so much. What we wanted to do is invest in the business and make the right investments in R&D. So capture this opportunity ahead of us. While at the same time driving leverage but it's both of those, we are not prioritizing a specific margin target.

George Godfrey -- CL King. -- Analyst

Okay. And then looking at the balance sheet, DSOs this quarter, 117 days -- Q1, two years ago, that was 51 days that the new level we should expect going forward.

Rick Smith -- Chief Executive Officer & Founder

No, that's an anomaly. And what we're seeing is that as we expected when we did our follow-on offering. There is a greater shift to subscription. Many of these invoices are paid annually in advance. It's a different model. And as we are making this transition, we're working with our customers to make sure that we're working with them and doing what's right for them and in helping them transition to these longer term or sorry, these recurring contracts. And so that's something that in that transition we're experiencing a bit of an anomaly but we don't expect that to continue.

George Godfrey -- CL King. -- Analyst

And could you give an estimate of the CapEx? And that's my final question. Thank you very much for the answers.

Jawad Ahsan -- Chief Financial Officer

So we are anticipating in the range of $12 million to $15 million for the year.

Operator

Your next question comes from Jeremy Hamblin from Dougherty & Company.

Jeremy Hamblin -- Dougherty & Company -- Analyst

Thanks, guys. Congrats on the good results. Wanted to come back to the weapon segment for a second, and you've had some nice traction thus far on the TASER 7 (ph). But in terms of thinking about the kind of the units and how they're going to play out the remainder of 2019 the growth that you might see in that segment from the TASER 7. How do we expect that in terms of taking over the total units that you sell in 2019 given the trading credits and so forth versus what we saw in the first quarter, we had about 25,000 of the legacy units and about 9,000 of the TASER 7?

Rick Smith -- Chief Executive Officer & Founder

Yeah, I think the expectation is things are starting to becomes a larger percentage of total handles sold in each quarter. I think as we rolled out T&E units and so forth, it's going to take time for TASER 7 to scales to that point. And there is some international orders and it was Q4 in the UK or Q1. So X choose the only legal lesson there. So some of those dynamics led to selling more smart weapons and T7. But over time, our expectations and what we're driving toward is making sure that T7 becomes the most commonly sold handle as we go throughout the year.

Jeremy Hamblin -- Dougherty & Company -- Analyst

To be more specific, yes we get into let's say Q3, Q4, would you expect T7 to be at least 50% of the total unit sold?

Rick Smith -- Chief Executive Officer & Founder

I'm not sure I can give a specific number because again it does rely on like this is large international deals in process with other units or if there's a big one-time order of X26 PRX2 if it's kind of temporarily skew the numbers. But we certainly expect the trend to be that T7 becomes a larger and larger percentage of total handle sold throughout the year.

Luke Larson -- President

Yeah. And I think we have a very illustrative chart from our road show that shows how we've been very effective at transitioning to the new technology from the original X26 to the X26P and the X2 and we would expect our execution to be the same as we transition to TASER 7.

Jeremy Hamblin -- Dougherty & Company -- Analyst

Okay. And then one other question on the -- on Axon cloud service revenue, you saw your gross margins fall down 90 basis points sequentially and down in almost 500 basis points from where you were a year ago. Can you give me a sense just in terms of that change, what's driving that and how we would expect that to play out the remainder of '19?

Rick Smith -- Chief Executive Officer & Founder

Sequentially, we're not really seeing much of an impact, all right. There's always -- there's some cyclicality, but our pure, the pure software component of that is still flat, it's a very high margin. It could be driven by the mix of lower margin professional services. So, that's something that that tends to wind up, but again that's part of the cyclicality.

Jeremy Hamblin -- Dougherty & Company -- Analyst

Okay. Thanks, guys. Good luck.

Operator

(Operator Instructions) The next question comes from Keith Housum from Northcoast Research. Keith Housum, your line is open.

Keith Housum -- Northcoast Research -- Analyst

I'm sorry, can you hear me now.

Luke Larson -- President

Yeah.

Keith Housum -- Northcoast Research -- Analyst

Sorry about that (inaudible). Can you just provide a little more color on the third ramp opportunity, in the first-off is that included in the $8.4 billion TAM and perhaps as the numbers around how many perhaps production uses out there?

Rick Smith -- Chief Executive Officer & Founder

Yeah. So today, our TAM is largely focused on -- (technical difficulty) forces as we look to grow that overtime we see federal being a very real opportunity to get deeper penetrations into the federal police forces, but also our ultimate goal would be to have the actual like big army and more penetration into the larger operating units.

Keith Housum -- Northcoast Research -- Analyst

But right now, that number is not including the FedRAMP -- $8.4 billion (ph) opportunity.

Rick Smith -- Chief Executive Officer & Founder

No, it's not.

Keith Housum -- Northcoast Research -- Analyst

Okay. Got you. And then as a follow-up question, can you just provide color on in the international efforts during the quarter and how they were comparing to last year. And how -- I guess, some of the RFPs are looking for the rest of the year.

Rick Smith -- Chief Executive Officer & Founder

Sorry, you are looking for an update on the international weapons?

Keith Housum -- Northcoast Research -- Analyst

International overall weapons and the body sensors inside the country?

Rick Smith -- Chief Executive Officer & Founder

Yeah. Certainly that's been where most of my attention is focused along with the T7 upgrades, I think we're seeing a lot of good indicators, our Q1 -- sorry, our tier 1 markets are performing well, upgrading weapons, consolidating video contracts and so forth, I think we're starting to see some really good signs even back in the last year in tier 2 markets and I'd expect to see that momentum continue into some of our tier 2 markets this year. So certainly the expectation we're working toward (technical difficulty)

Keith Housum -- Northcoast Research -- Analyst

Great. Thank you.

Operator

And there are no further questions at this time, I will turn the call back over to the presenters.

Rick Smith -- Chief Executive Officer & Founder

Great. Well, thank you everyone for a good Q1, and we will talk to you on the next earnings call. Thank you.

Operator

This concludes today's conference call. You may now disconnect.

Duration: 45 minutes

Call participants:

Luke Larson -- President

Andrea James -- Vice President of Investor Relations

Rick Smith -- Chief Executive Officer & Founder

Jawad Ahsan -- Chief Financial Officer

Josh Isner -- Chief Revenue Officer

Jonathan Ho -- William Blair. -- Analyst

Mark Strouse -- JP Morgan -- Analyst

James Faucette -- Morgan Stanley -- Analyst

Scott Berg -- Needham -- Analyst

William Power -- Baird -- Analyst

Ryan Sigdahl -- Craig-Hallum -- Analyst

George Godfrey -- CL King. -- Analyst

Jeremy Hamblin -- Dougherty & Company -- Analyst

Keith Housum -- Northcoast Research -- Analyst

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