Axon Enterprise, Inc. — Q1 2020 Form 10-Q Summary
Business context and reporting period
Axon provides law-enforcement technology, including TASER conducted electrical devices, body cameras, cloud evidence management, sensors, applications and related services. This unaudited report covers the three months ended March 31, 2020, compared with the three months ended March 31, 2019. The quarter was affected by the COVID-19 pandemic, although management reported limited disruption to core production and shipments through the reporting date.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $147.2 million | $115.8 million | 27.1% increase |
| Product revenue | $107.3 million | $88.1 million | 21.8% increase |
| Service revenue | $39.9 million | $27.7 million | 43.8% increase |
| Gross margin | $88.6 million; 60.2% | $68.9 million; 59.5% | 70 basis-point improvement |
| Operating income (loss) | $(0.8) million; (0.5%) | $2.7 million; 2.3% | Declined |
| Net income | $4.1 million; $0.07 diluted EPS | $6.4 million; $0.11 diluted EPS | Net income declined $2.3 million |
| Cash flow from operations | $13.4 million | $(14.0) million | Improved $27.4 million |
- Software and Sensors revenue increased 41.3% to $71.3 million, led by Axon Evidence and cloud services revenue of $39.2 million, up 41.8%.
- TASER segment revenue increased 16.1% to $75.9 million. TASER 7 revenue increased 54.0%, while X26P revenue declined 30.3% as customers shifted toward newer-generation products.
- Consolidated gross margin improved primarily from product mix. Software and Sensors gross margin increased to 60.3% from 53.2%, while TASER gross margin declined to 60.1% from 64.4%.
- Operating expenses increased 35.0% to $89.4 million. SG&A increased 46.9% to $63.0 million, while R&D increased 13.0% to $26.4 million.
- Stock-based compensation expense increased to $20.2 million from $7.9 million, including expense associated with the CEO Performance Award and eXponential Stock Performance Plan.
- The reported $3.9 million income-tax benefit produced an unusually negative effective tax rate of 2,789.4%; a $4.1 million discrete benefit was primarily related to stock-based compensation windfalls.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $156.5 million at March 31, 2020, compared with $172.3 million at December 31, 2019.
- Cash, cash equivalents and investments totaled approximately $395.4 million before considering a $13.5 million payable for unsettled investment purchases, which was settled in early April.
- Total assets were $877.5 million and total liabilities were $317.9 million; stockholders’ equity was $559.6 million.
- The company had no borrowings under its $50.0 million unsecured revolving credit facility. Letters of credit reduced availability to approximately $47.3 million. The facility matures December 31, 2021.
- Operating cash flow was $13.4 million. Investing cash outflow was $22.1 million, including net investment purchases, a $4.7 million investment in Flock Group, and capital expenditures. Financing cash outflow was $5.2 million, primarily employee tax payments on net-settled stock awards.
- Management believes existing liquidity and other funding sources will cover anticipated requirements, including capital expenditures, working capital, potential acquisitions and other needs, for at least the next 12 months.
Material changes versus comparable periods
- Revenue growth accelerated through the Software and Sensors business and increased cloud adoption, while the revenue mix shifted toward services.
- Profitability weakened despite higher gross margin because of increased SG&A, litigation costs, stock-based compensation and COVID-19-related expenses.
- COVID-19 increased quarterly expenses by approximately $1.2 million, including approximately $0.8 million in TASER manufacturing costs and approximately $0.9 million of additional expected credit-loss expense.
- Compared with Q4 2019, Q1 revenue declined 14.4% to $147.2 million, primarily because of lower post-launch shipments of Axon Body 3 cameras and docks; Axon Evidence revenue nevertheless increased 6.4% sequentially.
- Deferred revenue increased to $211.7 million from $205.8 million at year-end 2019. Remaining performance obligations were approximately $1.27 billion, with 20%–25% expected to be recognized over the following 12 months, subject to deployment, appropriation and cancellation risks.
- The company adopted the current expected credit loss standard on January 1, 2020, recording a $0.6 million after-tax reduction to opening retained earnings.
Guidance, outlook, risks and unusual items
- Management did not provide a clear quantitative full-year revenue or earnings forecast in the filing. It expected 2020 FTC-related legal expenses of approximately $10 million–$15 million, with a greater portion expected in the first half of the year.
- The FTC filed an enforcement action concerning Axon’s acquisition of Vievu. The proceeding was stayed until June 4, 2020 and the hearing was reset for September 9, 2020. A potential divestiture of Vievu and other assets could be material; no liability was recorded because the outcome could not be predicted.
- COVID-19 risks include manufacturing or supplier disruption, reduced municipal budgets and appropriations, delayed collections, higher protective and facility costs, workforce disruption and reduced freight capacity.
- The company reported eight product-liability lawsuits involving alleged wrongful death or personal injury. Management did not believe the matters were likely to have a material effect, but litigation outcomes remain uncertain.
- Outstanding off-balance-sheet support included $2.7 million of letters of credit and $24.1 million of surety bonds.
- Interest-rate risk: a hypothetical 100-basis-point increase would reduce the fair value of the investment portfolio by approximately $1.1 million, with losses generally unrealized unless securities were sold before maturity.
- Potential dilution and future expense remain significant: approximately $12.2 million performance-based awards were outstanding, and substantial unrecognized stock-based compensation remained as of March 31, 2020.
Most important facts for investors to verify
- Whether COVID-19 materially affected subsequent demand, municipal appropriations, customer collections, supply-chain continuity and gross margins.
- The eventual resolution, timing, legal expense and potential remedies in the FTC litigation concerning Vievu.
- Conversion of the $1.27 billion contracted-revenue balance into recognized revenue and cash, including the effect of deployment delays or cancellation clauses.
- The sustainability of cloud and subscription growth and associated cash-collection requirements.
- The recurring impact of elevated stock-based compensation and the probability assumptions supporting performance awards.
- Changes in cash, investments, credit-loss reserves and availability under the revolving credit facility after March 31, 2020.