AXON ENTERPRISE, INC. quarterly report, Q3 FY2021

Axon Enterprise, Inc. — Q3 2021 Form 10-Q Summary

Business context and reporting period

Axon is a global provider of law-enforcement technology, including TASER conducted electrical devices, body and in-car cameras, digital evidence management, cloud software, sensors, and related services. The filing covers the three and nine months ended September 30, 2021, compared with the corresponding 2020 periods. Operations are reported in two segments: TASER and Software and Sensors.

Key financial metrics

Metric	Q3 2021	Q3 2020	9M 2021	9M 2020
Net sales	$232.0 million	$166.4 million	$645.8 million	$454.9 million
Product revenue	$165.8 million	$120.1 million	$463.1 million	$326.1 million
Service revenue	$66.2 million	$46.4 million	$182.7 million	$128.7 million
Gross margin	$144.6 million; 62.4%	$98.2 million; 59.0%	$405.8 million; 62.9%	$275.0 million; 60.5%
Operating income (loss)	$2.9 million	$(5.4) million	$(141.1) million	$(19.9) million
Net income (loss)	$48.5 million	$(0.9) million	$(46.5) million	$(27.6) million
Adjusted EBITDA	$37.1 million	$24.9 million	$170.3 million	$70.6 million
Operating cash flow	Not separately provided	Not separately provided	$111.6 million	$4.2 million

Q3 revenue increased 39.4% year over year, while nine-month revenue increased 42.0%. Q3 gross margin expanded primarily from favorable product mix, strong demand for premium TASER products, and manufacturing efficiencies. Nine-month operating losses were heavily affected by stock-based compensation, which totaled $262.2 million versus $80.1 million in the prior-year period.

TASER revenue increased 43.9% in Q3 and 44.3% for the first nine months, led by TASER 7 and cartridge sales.
Software and Sensors revenue increased 34.7% in Q3 and 39.6% for the first nine months, led by Axon Evidence and cloud services.
Q3 net income included a $51.2 million income tax benefit, including a $44.3 million discrete benefit primarily related to equity-award vesting.
Nine-month net loss included a $57.7 million tax benefit, a $40.9 million gain from observable price changes in strategic investments and related warrants, and a $6.7 million unrealized loss on Cellebrite marketable securities.

Balance sheet, liquidity, debt, and cash flow

Cash and cash equivalents were $281.7 million at September 30, 2021, up from $155.4 million at December 31, 2020.
Total cash, marketable securities, and investments were approximately $631.0 million, compared with approximately $652.6 million at year-end 2020.
Total assets were $1.645 billion and total liabilities were $531.5 million; stockholders’ equity was $1.114 billion.
There were no borrowings under the $50.0 million revolving credit facility. After $6.1 million of letters of credit, approximately $43.9 million remained available. The facility matures December 31, 2023.
Net cash provided by operating activities was $111.6 million, compared with $4.2 million in the first nine months of 2020. The improvement reflected higher deferred revenue and substantial noncash stock-based compensation, partly offset by increases in receivables and contract assets.
Investing activities provided $93.4 million, primarily from net investment maturities and sales of strategic investments, partly offset by capital expenditures and new strategic investments.
Financing activities used $76.9 million, primarily due to $182.5 million of employee tax payments related to net-settled stock awards, partially offset by $105.6 million of net ATM offering proceeds.
Capital expenditures were $36.5 million through September 30, 2021; full-year capital expenditure expectations remained approximately $65 million to $70 million.

Material changes versus the prior comparable period

Revenue growth accelerated across both segments, with TASER 7 revenue up 131.9% for the first nine months and Axon Evidence and cloud services revenue up 39.1%.
Gross margin improved from 59.0% to 62.4% in Q3 and from 60.5% to 62.9% for the first nine months.
Operating expenses increased 36.6% in Q3 and 85.4% for the first nine months. The principal driver was stock-based compensation related to the CEO Performance Award and the eXponential Stock Performance Plan, together with higher personnel costs.
Q3 operating results improved to profitability, but nine-month operating loss widened substantially because of $172.6 million of additional stock-based compensation recognized from updated estimates for performance awards.
Deferred revenue increased to $362.5 million from $275.2 million at December 31, 2020. Contract assets were $174.4 million at September 30, 2021.
Remaining performance obligations were approximately $2.39 billion. Management expected to recognize 15% to 20% over the following 12 months and generally the remainder over five to seven years.
Common stock issued and outstanding increased to 67.6 million shares from 63.8 million at December 31, 2020, primarily reflecting employee awards and equity issuance.

Guidance, outlook, commentary, risks, and unusual items

Management forecast 2021 revenue of $840 million to $850 million. Approximately $30 million of TASER revenue expected in Q4 was shifted into the first half of 2022 because of delayed receipt of a TASER 7 manufacturing component.
Management expects research and development expense to continue increasing as it invests in cloud-connected devices, artificial intelligence, digital evidence, productivity and communications software, and situational-awareness technologies.
Supply-chain disruptions, port constraints, component shortages, raw-material inflation, and lower Q4 production output could pressure revenue and gross margins.
The company is expanding into justice software and consumer safety products and increased its estimated total addressable market from $27.0 billion to $51.6 billion.
The Federal Trade Commission litigation concerning the 2018 Vievu acquisition remained stayed pending Axon’s Supreme Court challenge. Potential remedies could include divestiture of Vievu or related assets; no liability was recorded because the outcome and potential loss could not be predicted.
Axon was defending two product-liability lawsuits involving alleged wrongful death or personal injury. Management did not believe the matters were reasonably likely to have a material effect, but litigation outcomes remain uncertain.
COVID-19 risks included supply-chain disruption, municipal budget pressure, customer credit risk, employee attrition, and potential impacts from the U.S. federal vaccine mandate.
The company recorded an additional approximately $1.2 million credit-loss reserve related to COVID-19 economic conditions. Total allowance for expected credit losses was $4.1 million at September 30, 2021.
As a subsequent event, approximately 0.9 million CEO Performance Award options were exercised in October and November 2021. The company also expected approximately $8.0 million of incremental XSPP compensation expense in Q4 2021 following achievement of a market-capitalization goal.

Most important facts for investors to verify

Whether 2021 revenue ultimately falls within the $840 million to $850 million guidance range and the extent of the TASER 7 component delay.
The sustainability of reported growth and margins after unusually large tax benefits, investment gains, and noncash stock-based compensation adjustments.
The future cash and dilution effects of performance awards, including remaining unrecognized compensation expense and potential share issuance.
Conversion of the $2.39 billion performance-obligation balance into revenue and cash, including delays, appropriations, renewals, and cancellation clauses in government contracts.
Progress in resolving the FTC litigation and any resulting divestiture, licensing, settlement, or remediation requirements.
Supply-chain resilience, component availability, manufacturing capacity, and the effect of raw-material and logistics costs on gross margin.
Collection of receivables and contract assets, particularly under municipal-government subscription arrangements.