Axon Enterprise, Inc. — Q3 2022 Form 10-Q Summary
Business Context and Reporting Period
Axon is a public-safety technology company providing TASER conducted electrical devices, body-worn and in-car cameras, cloud-hosted digital evidence management, productivity software, and real-time operations solutions. The filing covers the unaudited three and nine months ended September 30, 2022, compared with the same periods in 2021. Axon reports two segments: TASER and Software and Sensors.
Key Financial Metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Net sales | $311.8 million | $232.0 million | $853.8 million | $645.8 million |
| Product sales | $210.4 million | $165.8 million | $586.7 million | $463.1 million |
| Service sales | $101.4 million | $66.2 million | $267.1 million | $182.7 million |
| Gross margin | $193.3 million; 62.0% | $144.6 million; 62.4% | $523.0 million; 61.3% | $405.8 million; 62.9% |
| Income from operations | $32.1 million; 10.3% | $2.9 million; 1.3% | $70.7 million; 8.3% | $(141.1) million; (21.8)% |
| Net income (loss) | $12.1 million | $48.5 million | $118.0 million | $(46.5) million |
| Diluted EPS | $0.17 | $0.67 | $1.63 | $(0.71) |
| Adjusted EBITDA | $54.2 million | $37.1 million | $254.3 million | $170.3 million |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $104.2 million | $111.6 million |
- Q3 revenue increased 34.4%; nine-month revenue increased 32.2%.
- Software and Sensors revenue grew 51.0% in Q3 and 46.7% for the first nine months, reaching $166.9 million and $459.0 million, respectively.
- TASER revenue grew 19.3% in Q3 and 18.6% for the first nine months, reaching $144.9 million and $394.8 million, respectively.
- Cash and cash equivalents were $147.7 million at September 30, 2022, compared with $356.3 million at December 31, 2021. Cash, cash equivalents, and investments totaled $370.9 million.
- Working-capital balances included $418.3 million of accounts and notes receivable, $217.1 million of net contract assets, and $173.0 million of inventory.
- Deferred revenue was $560.3 million, including $246.4 million current and $313.8 million long term. Remaining performance obligations were approximately $3.73 billion.
- Axon had no borrowings under its $50.0 million revolving credit facility. Letters of credit reduced available borrowing to $43.5 million, and the funded debt-to-EBITDA ratio was 0.00 to 1.00.
Material Changes Versus the Prior Comparable Period
- Revenue growth was led by Axon Evidence and cloud services, Axon Body cameras, TASER 7, cartridges, and Axon Fleet.
- Service revenue increased to 32.5% of Q3 sales from 28.5% in the prior-year quarter, reflecting continued growth in cloud and recurring offerings.
- Gross margin declined modestly in Q3 and for the nine-month period, primarily because of higher labor, freight, raw-material, and manufacturing costs. Software and Sensors Q3 margin improved, but nine-month service margins declined due partly to product mix and low-to-no-margin professional services.
- Operating profitability improved substantially. Nine-month operating income shifted from a $141.1 million loss to $70.7 million of income, primarily because stock-based compensation expense declined by $187.8 million year over year.
- Q3 net income declined despite higher operating income because of $10.6 million of unrealized losses on the Cellebrite investment and $0.7 million of losses on strategic investments. The prior-year quarter benefited from a favorable tax item.
- Nine-month net income included $129.4 million of net unrealized gains from strategic investments and related warrants, partly offset by a $36.9 million unrealized loss on Cellebrite securities; these items materially affected reported earnings.
- Operating cash flow declined to $104.2 million from $111.6 million despite higher earnings. Cash was absorbed by increases in receivables and contract assets of $115.0 million and inventory of $66.3 million.
- Investing cash flow changed from $93.4 million provided in the prior-year period to $302.0 million used, driven by investment purchases, $70.5 million of strategic investments, $44.2 million of capital expenditures, and warrant exercises.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- Management expects to recognize 15% to 20% of the approximately $3.73 billion remaining performance obligations over the next 12 months, with most of the remainder recognized over the following ten years. Timing remains subject to delayed deployments, government appropriations, and cancellation clauses.
- Management expects research and development expense to continue increasing in absolute dollars as Axon invests in cameras, TASER devices, artificial intelligence, digital evidence, productivity software, communications, and real-time situational awareness.
- Management estimated a 28.0% full-year 2022 effective tax rate before discrete adjustments; the nine-month effective rate was 27.1%.
- Axon entered into a six-year cloud-hosting agreement with a total commitment of $425.0 million. The remaining commitment at September 30, 2022 was $413.8 million.
- Product liability exposure includes two pending lawsuits involving alleged wrongful death or personal injury. Axon is self-insured for the first $5.0 million of product claims made after 2014 and states that no product judgment or settlement has exceeded that amount.
- The FTC continues to challenge Axon’s acquisition of Vievu. The administrative proceeding remains stayed while constitutional challenges proceed in federal court and before the U.S. Supreme Court. Potential strategic alternatives include divestiture of Vievu or related assets and licensing of intellectual property.
- Supply-chain disruption, higher labor and freight costs, component shortages, inventory levels, product defects, cybersecurity incidents, cloud outages, foreign exchange, government contract cancellations, customer adoption of subscription offerings, and litigation remain significant risks.
- Strategic investments increased to $290.3 million from $83.5 million at year-end 2021, increasing exposure to valuation volatility and private-company investment risk.
- Stock-based compensation remained material at $74.5 million for the first nine months of 2022. Unrecognized compensation included $126.9 million for RSUs, $22.4 million for PSUs, and additional amounts related to the CEO Performance Award and XSPP.
Most Important Facts for Investors to Verify
- Whether strong Software and Sensors and cloud growth continues to offset slowing or declining legacy TASER product demand.
- Whether gross margins recover as labor, freight, raw-material, hosting, and professional-service costs evolve.
- The sustainability of operating cash flow given substantial receivables, contract assets, inventory investment, and deferred commissions.
- The extent to which reported earnings continue to be affected by unrealized gains and losses on strategic investments and Cellebrite securities.
- Execution against the $3.73 billion remaining performance obligations, including government budget, deployment, and cancellation risks.
- The cash and liquidity impact of the $413.8 million cloud-hosting commitment, capital expenditures, strategic investments, and potential acquisitions.
- The potential financial, operational, or strategic consequences of the FTC litigation and any Vievu divestiture or settlement.
- Future dilution and expense from the CEO Performance Award, XSPP, RSUs, PSUs, and other equity-based compensation.