Business Context and Reporting Period
TASER International, Inc. (now Axon Enterprise, Inc.) filed this unaudited Form 10-Q for the quarter ended March 31, 2015. The company operated two reportable segments: TASER Weapons, consisting of conducted electrical weapons and related products and services, and AXON, consisting of cameras, digital evidence management and EVIDENCE.com software.
The filing covers the three months ended March 31, 2015, compared with the three months ended March 31, 2014. The company had 53.4 million common shares outstanding as of April 30, 2015.
Financial Performance and Position
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales | $44.8 million | $36.2 million | +23.7% |
| Gross margin | $29.9 million | $22.2 million | +34.5% |
| Gross margin percentage | 66.7% | 61.4% | +530 bps |
| Income from operations | $10.7 million | $4.9 million | +121.3% |
| Net income | $7.2 million | $3.4 million | +112.4% |
| Diluted earnings per share | $0.13 | $0.06 | + $0.07 |
| Operating cash flow | $13.0 million | $4.3 million | + $8.7 million |
TASER Weapons revenue increased 18.1% to $38.3 million, primarily from adoption of the X26P and X2 weapons. AXON revenue increased 73.1% to $6.4 million, driven by AXON cameras and EVIDENCE.com. AXON represented 14.3% of total sales, compared with 10.3% in the prior-year quarter.
Overall gross margin improved primarily from higher production volumes, fixed-cost leverage, higher average selling prices and improved AXON/EVIDENCE.com margins. TASER Weapons gross margin was 71.1%, versus 66.4%; AXON gross margin was 40.6%, versus 17.5%.
Operating expenses were $19.1 million, or 42.7% of sales, compared with $17.4 million, or 48.0% of sales. SG&A increased 6.0% to $14.6 million, while research and development increased 26.4% to $4.6 million. Stock-based compensation expense was $1.5 million.
At March 31, 2015, cash and cash equivalents were $46.8 million, short-term investments were $43.2 million and long-term investments were $14.7 million, for combined cash, cash equivalents and investments of $104.8 million. Total assets were $195.8 million and stockholders’ equity was $140.0 million.
Total liabilities were $55.8 million. The company had less than $0.1 million of capital lease obligations, no borrowings under its $10.0 million revolving credit facility, and approximately $7,000 of letters of credit. The facility matures July 31, 2016 and is subject to leverage and fixed-charge coverage covenants, which the company was meeting at quarter-end.
Cash Flow, Liquidity and Capital Allocation
- Operating activities generated $13.0 million, aided by a $9.7 million reduction in accounts receivable and a $1.4 million increase in deferred revenue.
- Investing activities used $16.7 million, primarily for net purchases of investments of approximately $16.2 million. Capital expenditures and intangible-asset purchases totaled $0.5 million.
- Financing activities provided $2.1 million, including $0.6 million from option exercises and $1.7 million of excess tax benefits, partly offset by employee payroll-tax payments.
- Cash and cash equivalents decreased $1.5 million during the quarter to $46.8 million because investment purchases exceeded operating and financing cash inflows.
- Deferred revenue increased to $37.1 million from $35.7 million at December 31, 2014, reflecting advance payments for warranties, AXON services and hardware.
- No stock repurchases occurred during the quarter. Approximately $7.6 million remained available under the existing $30.0 million authorization.
Material Changes Versus the Prior Comparable Period
- Revenue growth accelerated across both segments, with particularly strong increases in X26P, X2, AXON solutions and EVIDENCE.com.
- International revenue declined to $9.3 million from $10.6 million, while U.S. revenue increased to $35.5 million from $25.6 million.
- Gross margin expanded substantially, including significant improvement in AXON margins as the business scaled and leveraged fixed costs.
- Net income more than doubled despite higher research, development, sales and customer-facing investments.
- Inventory increased to $22.6 million from $18.3 million as the company replenished safety stock in anticipation of higher sales. The excess and obsolete inventory reserve increased to $1.6 million from $1.4 million.
- Bookings for AXON products and EVIDENCE.com were $22.9 million, compared with $5.9 million in the prior-year quarter. Some future bookings remain subject to government appropriations or cancellation clauses.
Guidance, Outlook, Commentary and Risks
Management expected 2015 SG&A to increase as it continued investing in domestic and international customer-facing personnel, sales and marketing. Management also expected future income to trend upward and believed available cash, investments and operating cash flow would fund operations and strategic initiatives for 2015 and the foreseeable future.
Management cautioned that AXON gross margins could remain lower in the near term and that a larger AXON contribution could reduce consolidated margins over time. The filing does not provide a specific revenue or earnings-per-share forecast.
The company reported 12 active product-liability lawsuits and two additional matters on appeal. Management stated that the matters were not reasonably expected to materially affect results, financial condition or cash flows, but acknowledged that litigation outcomes are inherently uncertain and insurance may not fully cover potential losses.
The company was under an IRS audit for tax year 2012 and reported total unrecognized tax benefits of approximately $3.4 million. Management believed up to $0.5 million could be released within the next 12 months. The reported effective tax rate was 32.6%, and management estimated a 2015 full-year rate of approximately 32.9% before discrete adjustments.
The filing identifies risks involving government budgets and appropriation clauses, adoption of EVIDENCE.com, data-security breaches, service outages, product defects, competition, rapid technological change, component availability, foreign currency exposure, litigation, intellectual property, regulatory requirements and tax-rate volatility.
On May 5, 2015, after quarter-end, the company agreed to acquire MediaSolv Solutions Corporation, a digital evidence-management provider. The acquisition was expected to be accounted for in the second quarter of 2015; purchase-price allocation and financial effects were not provided in this filing.
Important Facts for Investors to Verify
- Whether AXON and EVIDENCE.com bookings convert into recognized revenue, particularly where customer funding or cancellation clauses apply.
- The sustainability of the sharp improvement in AXON gross margin and the effect of AXON mix expansion on consolidated margins.
- Inventory turnover and the adequacy of the increased excess and obsolete inventory reserve.
- The ultimate outcome and insurance coverage of the pending product-liability litigation.
- Changes in the effective tax rate, deferred tax asset realizability and unrecognized tax benefits following the IRS audit.
- The purchase price, funding, purchase accounting and operating contribution of the MediaSolv acquisition.
- Execution of planned increases in sales, marketing and research and development spending.
- Compliance with the revolving-credit facility covenants and continued availability of liquidity.