AXON ENTERPRISE, INC. quarterly report, Q1 FY2022

Axon Enterprise, Inc. — Q1 2022 Form 10-Q Summary

Business context and reporting period

Axon provides law-enforcement technology, including TASER devices, body and in-car cameras, digital evidence management, cloud software, sensors and related services. The filing covers the three months ended March 31, 2022, compared primarily with the three months ended March 31, 2021. Axon reports two segments: TASER and Software and Sensors.

Financial performance and key metrics

Metric	Q1 2022	Q1 2021	Change
Net sales	$256.4 million	$195.0 million	Up 31.5%
Product revenue	$176.2 million	$140.9 million	Up 25.1%
Service revenue	$80.2 million	$54.1 million	Up 48.2%
Gross margin	$155.7 million; 60.7%	$123.4 million; 63.2%	Margin down 250 basis points
Operating income (loss)	$17.2 million; 6.7%	$(50.3) million; (25.8%)	Improved by $67.5 million
Net income (loss)	$54.9 million; 21.4%	$(47.9) million; (24.6%)	Improved by $102.8 million
Diluted earnings (loss) per share	$0.76	$(0.75)	Improved
Operating cash flow	$44.0 million	$60.9 million	Down $17.0 million

Segment revenue: TASER revenue was $114.4 million, up 15.5%; Software and Sensors revenue was $142.1 million, up 48.0%.
Growth drivers: Axon Evidence and cloud services revenue increased to $83.0 million from $53.7 million. Axon Body revenue increased 50.4%, Axon Fleet revenue increased 267.3%, and TASER 7 revenue increased 47.3%.
Gross margin pressure: Consolidated margin declined because of higher freight, labor and manufacturing costs, product mix, and lower service margins.
Operating expenses: SG&A decreased 28.8% to $90.1 million, primarily because stock-based compensation declined. R&D increased 3.0% to $48.4 million.
Unusual earnings items: Interest and other income included a $70.4 million unrealized gain from observable price changes in strategic investments and related warrants, partly offset by a $14.6 million unrealized loss on Cellebrite marketable securities. These items materially increased reported net income.

Balance sheet, cash flow, debt and liquidity

Cash and cash equivalents were $386.4 million at March 31, 2022, compared with $356.3 million at December 31, 2021. Cash, cash equivalents and investments totaled approximately $424.1 million.
Total assets were $1.77 billion and total liabilities were $647.7 million. Stockholders’ equity was $1.12 billion.
Axon had no borrowings under its $50.0 million revolving credit facility. Outstanding letters of credit reduced available borrowing to approximately $43.7 million. The facility matures December 31, 2023 and permits an accordion increase to $100.0 million, subject to conditions.
The funded debt-to-EBITDA ratio was 0.00 to 1.00, versus a maximum covenant ratio of 2.50 to 1.00.
Capital expenditures were $17.1 million in Q1. Management expects 2022 capital expenditures of approximately $135 million to $160 million, including approximately $85 million for the Scottsdale manufacturing facility and campus and approximately $40 million for TASER capacity expansion and automation.
Operating cash flow declined despite reported profitability, reflecting inventory buildup, timing of accrued payments and other working-capital changes. Stock-based compensation of $25.1 million was a significant non-cash expense.

Material changes versus the prior comparable period

Revenue growth accelerated, with Software and Sensors becoming the larger segment and service revenue increasing as a percentage of total revenue to 31.3% from 27.8%.
Axon shifted toward newer products, particularly TASER 7, Axon Body, Axon Fleet and cloud services, while legacy TASER X2 and consumer-device revenue declined.
Operating results improved substantially because of revenue growth and a $64.1 million reduction in stock-based compensation expense, partly offset by higher personnel, marketing, commissions, travel and legal consulting costs.
Gross margin percentage declined from 63.2% to 60.7%, indicating that growth was accompanied by cost and product-mix pressure.
Deferred revenue increased to $467.6 million from $451.3 million at year-end 2021. Remaining performance obligations were approximately $2.97 billion; management expects to recognize 15%–20% over the next twelve months and generally the remainder over five to seven years.
Inventory increased to $122.2 million from $108.7 million as Axon proactively built inventory to address expected demand and supply-chain risks.

Guidance, outlook, risks and contingencies

Management expects 2022 revenue of approximately $1.05 billion to $1.10 billion and maintained its capital expenditure outlook of $135 million to $160 million.
Supply-chain disruptions, component shortages, freight costs, labor costs and local COVID-19-related closures could delay shipments and further pressure margins. Axon recognized $33.1 million of delayed TASER 7 orders and $13.0 million of delayed Axon Body 3 orders during Q1.
Government contracts may be subject to appropriations, cancellation clauses and non-renewal. Remaining performance obligations are therefore subject to delayed deployments, budget limitations and cancellations.
Axon faces product-liability litigation, including three lawsuits alleging wrongful death or personal injury involving TASER devices. The company self-insures the first $5.0 million of product claims made after 2014 and states that no current litigation is expected to be material, while acknowledging the inherent uncertainty of litigation.
The Federal Trade Commission litigation concerning Axon’s acquisition of Vievu remains stayed pending Axon’s Supreme Court challenge. Potential remedies could include divestiture or other measures and could be material; no liability has been recorded.
Axon is exposed to investment-market volatility, including Level 3 strategic investments and its Cellebrite position, as well as interest-rate and foreign-exchange risk.
On April 5, 2022, Axon exercised strategic-investment warrants for $6.6 million and preliminarily expected an approximately $60.0 million increase in investment carrying value and earnings in Q2 2022. On April 29, 2022, Axon made a $21.0 million preferred-stock investment in Fusus and received additional acquisition-related rights.
Management stated that available cash, investments, operating cash flow and financing capacity should satisfy anticipated needs for at least the next twelve months, but noted that future cash generation and financing availability are not assured.

Important facts for investors to verify

Whether reported earnings growth remains strong after excluding the $70.4 million strategic-investment gain and the $14.6 million Cellebrite unrealized loss.
Whether gross margins recover from the 60.7% Q1 level as freight, labor, product-mix and supply-chain pressures change.
The sustainability of Software and Sensors, cloud and subscription growth, including customer adoption, renewal rates and cash-collection timing.
Progress against the $1.05 billion–$1.10 billion 2022 revenue outlook and the $135 million–$160 million capital expenditure plan.
Inventory conversion, operating cash flow and the effect of subscription billing on liquidity.
The outcome and potential financial impact of the FTC Vievu proceeding and product-liability litigation.
The valuation, liquidity and earnings volatility associated with strategic investments, warrants and marketable securities.
Future dilution and expense from the CEO Performance Award, XSPP, RSUs and other stock-based compensation programs.