Axon Enterprise, Inc. Form 10-Q Summary
Business Context and Reporting Period
Axon provides connected public-safety technologies through two reportable segments: TASER and Software and Sensors, including body cameras, in-car cameras, cloud-based digital evidence management, software, sensors, and related services. This unaudited Form 10-Q covers the three and six months ended June 30, 2022, with comparisons to the same periods in 2021.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 |
|---|---|---|---|---|
| Net sales | $285.6 million | $218.8 million | $542.0 million | $413.8 million |
| Revenue growth | 30.5% | — | 31.0% | — |
| Services revenue | $85.6 million | $62.4 million | $165.8 million | $116.5 million |
| Gross margin | $174.0 million; 60.9% | $137.9 million; 63.0% | $329.7 million; 60.8% | $261.3 million; 63.1% |
| Income (loss) from operations | $21.4 million; 7.4% | $(93.7) million; (42.9%) | $38.6 million; 7.1% | $(143.9) million; (34.8%) |
| Net income (loss) | $51.0 million; 17.8% | $(47.1) million; (21.5%) | $105.8 million; 19.5% | $(95.0) million; (23.0%) |
| Diluted EPS | $0.71 | $(0.72) | $1.46 | $(1.47) |
| Adjusted EBITDA | $96.4 million | $89.5 million | $200.1 million | $133.2 million |
| Net cash from operating activities | Not separately provided | Not separately provided | $63.3 million | $95.1 million |
Software and Sensors revenue increased 41.2% in the second quarter and 44.4% in the first half, reaching $150.0 million and $292.1 million, respectively. TASER revenue increased 20.5% in the second quarter and 18.2% in the first half. Axon Evidence and cloud services revenue increased 35.7% in the second quarter and 43.7% in the first half.
Gross margin percentage declined year over year, primarily due to higher freight and labor costs, manufacturing overhead, product mix, and lower service margins. Operating expenses declined substantially because of lower stock-based compensation, particularly relating to the CEO Performance Award and the eXponential Stock Performance Plan.
Balance Sheet, Cash Flow, Debt and Liquidity
- Cash and cash equivalents were $212.8 million at June 30, 2022, compared with $356.3 million at December 31, 2021.
- Cash, cash equivalents and investments totaled approximately $402.2 million at June 30, 2022, including $45.9 million of marketable securities, $118.5 million of short-term investments, and $24.9 million of long-term investments.
- Total assets were $1.93 billion and total liabilities were $738.4 million. Stockholders’ equity was $1.19 billion.
- Operating cash flow was $63.3 million for the first six months, compared with $95.1 million in the prior-year period. Working-capital uses included an $80.2 million increase in receivables and contract assets and a $47.1 million increase in inventory.
- Investing activities used $198.8 million, including $61.5 million for strategic investments, $98.8 million net for available-for-sale investments, $29.8 million for property and equipment, and $6.6 million to exercise investment warrants.
- Axon had no borrowings under its $50.0 million unsecured revolving credit facility. Letters of credit reduced available borrowing to $43.5 million. The facility matures December 31, 2023 and includes an accordion feature that could increase commitments to $100.0 million, subject to conditions.
- The company reported no long-term debt and a funded-debt-to-EBITDA ratio of 0.00 to 1.00.
Material Changes Versus Prior Comparable Period
- Revenue increased $66.8 million, or 30.5%, in the second quarter and $128.2 million, or 31.0%, in the first half.
- The company moved from operating losses to operating income, principally because of lower stock-based compensation and strong revenue growth.
- Net income included significant investment-related gains: $59.7 million in the second quarter and $130.1 million in the first half from observable price changes and warrant activity. These gains were partly offset by unrealized losses on the Cellebrite investment of $11.7 million and $26.3 million, respectively.
- Stock-based compensation expense fell to $21.2 million in the second quarter and $46.3 million in the first half, compared with $137.5 million and $227.2 million in the respective prior-year periods.
- Inventory increased to $154.3 million from $108.7 million at year-end 2021, reflecting proactive purchases to support anticipated demand and mitigate supply-chain risks.
- Total deferred revenue increased to $522.7 million from $451.3 million at December 31, 2021, primarily because of higher Software and Sensors obligations.
- Remaining performance obligations were approximately $3.33 billion at June 30, 2022. Management expects to recognize 15% to 20% over the following twelve months, with the remainder generally recognized over the subsequent ten years, subject to deployment, appropriation, and cancellation risks.
Guidance, Outlook, Commentary and Risks
- Management revised full-year 2022 revenue expectations to approximately $1.07 billion to $1.12 billion.
- Expected 2022 capital expenditures were revised to approximately $80 million to $90 million, including up to $25 million for the Scottsdale manufacturing facility and campus and approximately $40 million for TASER capacity expansion and automation.
- A new six-year cloud-hosting agreement beginning July 1, 2022 carries a total commitment of $425.0 million. Management expects approximately $2.5 million of quarterly savings versus current hosting costs, although total hosting costs are expected to increase as network users grow.
- Supply-chain disruptions, freight and labor costs, component availability, COVID-19-related closures, product mix, and manufacturing expansion could pressure margins and delivery schedules.
- The company is defending three product-liability 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 stated that no prior judgment or settlement has exceeded that amount.
- The FTC administrative proceeding concerning Axon’s acquisition of Vievu remains stayed while constitutional challenges proceed in the U.S. Supreme Court. Possible strategic alternatives include divestiture of Vievu or related assets and licensing of intellectual property.
- Strategic investments are measured using significant unobservable inputs and may produce material period-to-period earnings volatility. At June 30, 2022, strategic investments totaled $281.7 million.
- The company identified interest-rate, foreign-exchange, customer-credit, cybersecurity, cloud-outage, regulatory, litigation, government-contract cancellation, acquisition-integration, and key-personnel risks. Management stated that there were no material changes to previously disclosed risk factors.
- The company believes available cash, investments, operating cash flow, and financing capacity are sufficient for anticipated requirements for at least the next twelve months, but noted that future cash generation and financing availability are not guaranteed.
Most Important Facts for Investors to Verify
- Whether the $1.07 billion to $1.12 billion 2022 revenue outlook remains achievable amid supply-chain and government-customer risks.
- The sustainability of reported profitability after excluding unusually large investment gains and considering ongoing stock-based compensation.
- Gross-margin trends, particularly the effect of freight, labor, cloud hosting, product mix, and manufacturing expansion.
- Conversion of the $3.33 billion remaining performance obligation balance into revenue and cash, including potential delays or contract cancellations.
- Cash-flow conversion and working-capital requirements as receivables, contract assets, and inventory continue to grow.
- Potential financial, operational, or strategic consequences of the FTC Vievu litigation and related settlement or divestiture alternatives.
- Exposure to valuation changes in strategic investments and the Cellebrite marketable-security position.
- The $425.0 million cloud-hosting commitment and the timing and realization of projected cost savings.
- The status and potential outcomes of product-liability claims, letters of credit, surety bonds, and other contingencies.