Business Context and Reporting Period
TASER International, Inc. (now Axon Enterprise, Inc.) filed its Form 10-K for the fiscal year ended December 31, 2013. The company operated through two reportable segments: TASER Weapons, comprising conducted electrical weapons, cartridges, accessories and related services; and EVIDENCE.com & Video, comprising TASER Cam, AXON cameras and cloud-based digital evidence management.
The filing includes audited annual results for 2013, 2012 and 2011, with unaudited quarterly data for 2013 and 2012. It is not a standalone quarterly filing, although fourth-quarter results are disclosed.
Financial Performance and Key Metrics
| Metric | FY 2013 | FY 2012 | Change |
|---|---|---|---|
| Net sales | $137.8 million | $114.8 million | 20.1% increase |
| Gross margin | $85.8 million; 62.3% | $67.7 million; 59.0% | Margin up 330 basis points |
| Operating income | $27.9 million; 20.3% margin | $22.5 million; 19.6% margin | 24.0% increase |
| Net income | $18.2 million; 13.2% margin | $14.7 million; 12.8% margin | 23.8% increase |
| Diluted earnings per share | $0.34 | $0.27 | Increase |
| Cash flow from operations | $32.4 million | $26.5 million | Increase |
- TASER Weapons revenue increased 16.9% to $127.5 million, led by the new X26P and continued upgrades to the X2. The segment generated $83.4 million of gross margin and $37.5 million of operating income.
- EVIDENCE.com & Video revenue increased 81.8% to $10.4 million. The segment remained loss-making, with a $9.6 million operating loss, although its gross margin improved to $2.4 million from a negative $2.0 million in 2012.
- Product concentration remained high: cartridges generated $35.7 million, or approximately 26% of net sales; the X26, X2 and X26P together represented approximately 57% of sales based on disclosed product-line data.
- Bookings for AXON flex, AXON body and EVIDENCE.com increased to $14.5 million from $3.8 million. Bookings are orders rather than recognized revenue, and certain future-year amounts are subject to government appropriations or cancellation clauses.
- Sales, general and administrative expense increased 19.2% to $46.6 million, while research and development expense increased 21.5% to $9.9 million.
- Deferred revenue rose to $20.2 million from $12.1 million, primarily due to extended warranties and EVIDENCE.com subscriptions. EVIDENCE.com service revenue is generally recognized over one to five years.
Liquidity, Capital Resources and Balance Sheet
- Cash and cash equivalents were $42.3 million at December 31, 2013, compared with $36.1 million a year earlier. Cash, cash equivalents and investments totaled approximately $63.4 million.
- Working capital was $74.3 million, compared with $60.9 million at year-end 2012; total assets were $148.4 million and stockholders’ equity was $108.3 million.
- The company had approximately $0.1 million of long-term debt and capital lease obligations and no borrowings under its $10.0 million revolving credit facility. After $0.6 million of letters of credit, $9.4 million remained available.
- Operating cash flow of $32.4 million was partly used for $19.7 million of net investment purchases, $2.1 million of capital and intangible expenditures, and the $1.3 million net cash acquisition of Familiar, Inc.
- The company repurchased $25.0 million of common stock, or approximately 3.0 million shares, during 2013. No cash dividends were paid or planned, and the credit agreement prohibited cash dividends.
- Contractual obligations totaled $12.7 million, including $11.9 million of open purchase orders, $0.7 million of operating leases and $0.1 million of capital leases.
Material Changes Versus the Prior Comparable Period
- Revenue growth accelerated through adoption of the X26P, ongoing X2 upgrades, and strong growth in AXON and EVIDENCE.com.
- Gross margin improved primarily from product mix, manufacturing leverage, moving EVIDENCE.com storage to a third-party provider, and completion of amortization of previously capitalized EVIDENCE.com software costs.
- The company introduced AXON body, EVIDENCE Mobile and the X26P, and acquired Familiar, Inc. to expand cloud and mobile application development. The acquisition added $2.2 million of goodwill and 107,749 shares were issued as partial consideration.
- The EVIDENCE.com & Video sales force increased from seven to 14 representatives, and the company expanded international and customer-facing personnel.
- Warranty expense increased to $1.0 million from $0.5 million, reflecting higher-than-expected Smart cartridge and AXON flex returns, as well as uncertainty associated with newly launched products.
- The company’s reserve for excess and obsolete inventory declined to $1.0 million from $2.3 million.
Outlook, Commentary, Risks and Unusual Items
- Management expected 2014 spending to increase for EVIDENCE.com & Video, international sales, customer-facing initiatives and research and development. It expected additional EVIDENCE.com bookings from the expanded sales force, particularly in the second half of 2014.
- Management anticipated more customer trials, increased international investment, continued CEW upgrades, growth in direct sales and continued development of cloud, mobile and wearable-video products. The filing does not provide formal revenue or earnings guidance.
- Management expected near-term EVIDENCE.com & Video gross margins to be lower because of a new pricing model that separately prices AXON cameras and EVIDENCE.com services, with service revenue deferred over the contract term. AXON flex and AXON body were being sold at low gross margins to accelerate market adoption.
- Fourth-quarter 2013 included approximately $2.6 million of additional litigation expense related to the AA & Saba distributor dispute and a $1.1 million reversal of the Turner litigation reserve. On February 28, 2014, a jury returned a $3.3 million verdict against the company in the AA & Saba case; judgment and potential attorneys’ fees remained unresolved at filing.
- The company reported 16 active product-liability lawsuits and two additional matters on appeal. Litigation outcomes, insurance coverage and uninsured defense costs could materially affect results.
- Key operating risks include dependence on government budgets and appropriations, lengthy sales cycles, reliance on the X2, X26P and X26 platforms, adoption and renewal of the EVIDENCE.com SaaS model, data security and cloud-service interruptions, product liability, regulatory restrictions, intellectual-property disputes, supplier concentration and foreign-exchange exposure.
- The company held approximately $63.4 million with three depository institutions, with balances regularly exceeding FDIC insurance limits. It also had $3.1 million of unrecognized tax benefits and no off-balance-sheet arrangements.
Most Important Facts for Investors to Verify
- Whether AXON and EVIDENCE.com bookings convert into recognized revenue, particularly contracts subject to appropriations or cancellation provisions.
- The adoption rate, renewal rate, gross-margin trajectory and cash requirements of the EVIDENCE.com SaaS business.
- The outcome and ultimate cost of the AA & Saba matter, the remanded Turner damages proceeding, and the remaining product-liability cases.
- Warranty claims and return rates for Smart cartridges, AXON flex, X26P and AXON body.
- The sustainability of revenue growth from CEW upgrades and the company’s continued concentration in a limited number of products.
- Whether planned increases in sales, marketing and R&D spending generate sufficient incremental revenue and operating leverage.
- The company’s ability to maintain liquidity while funding product development, acquisitions, capital expenditures and potential future share repurchases.