Axon Enterprise, Inc. — 2021 Q1 Form 10-Q Summary
Business context and reporting period
Axon provides law-enforcement technology, including TASER conducted electrical devices, body-worn and in-car cameras, digital evidence management, cloud software, sensors and related services. The filing covers the three months ended March 31, 2021, compared primarily with the three months ended March 31, 2020.
Operations are reported in two segments: TASER and Software and Sensors. The company describes its subscription and cloud offerings as a strategic growth area.
Financial performance and key metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $195.0 million | $147.2 million | Up 32.5% |
| Product sales | $140.9 million | $107.3 million | Up 31.3% |
| Service sales | $54.1 million | $39.9 million | Up 35.8% |
| Gross margin | $123.4 million; 63.2% | $88.6 million; 60.2% | Up 300 basis points |
| Operating income (loss) | $(50.3) million; (25.8%) | $(0.8) million; (0.5%) | Material deterioration |
| Net income (loss) | $(47.9) million | $4.1 million | Declined $52.0 million |
| Diluted EPS | $(0.75) | $0.07 | Declined $0.82 |
| Adjusted EBITDA | $43.7 million | $22.5 million | Up 94.0% |
| Cash flow from operations | $60.9 million | $13.4 million | Up $47.5 million |
Revenue growth was broad-based. TASER segment revenue increased 30.4% to $99.0 million, led by TASER 7 and cartridge sales. Software and Sensors revenue increased 34.7% to $96.0 million, including a $13.1 million increase in Axon Evidence and cloud-services revenue.
Gross margin benefited from premium TASER product mix, manufacturing improvements and fixed-cost leverage. Software and Sensors gross margin decreased modestly to 59.7% from 60.3%, reflecting investment in cloud environments, applications, LTE costs and lower-margin implementation services.
Operating expenses increased 94.2% to $173.6 million. Stock-based compensation rose to $89.6 million from $20.2 million, including a $51.4 million increase related to updated estimates for the CEO Performance Award and eXponential Stock Performance Plan. SG&A increased 100.9% and R&D increased 78.2%.
Liquidity, cash flow and capital structure
- Cash and cash equivalents were $154.8 million at March 31, 2021, compared with $155.4 million at December 31, 2020.
- Cash, cash equivalents and investments totaled approximately $674.1 million, up $21.5 million from year-end 2020.
- Operating cash flow was $60.9 million, supported substantially by $89.6 million of noncash stock-based compensation and a $31.3 million favorable change in receivables and contract assets.
- Investing cash outflow was $54.1 million, including $23.6 million of net investment purchases, $20.0 million for a strategic minority investment in RapidSOS and $10.6 million for property, equipment and intangible assets.
- The company had no borrowings under its $50.0 million revolving credit facility. Outstanding letters of credit reduced available borrowing to $43.9 million. The facility matures December 31, 2023.
- The reported funded debt-to-EBITDA ratio was 0.00 to 1.00, versus a maximum covenant ratio of 2.50 to 1.00.
- Capital expenditure guidance for 2021 remained approximately $65 million to $70 million.
Material changes versus comparable periods
- Revenue increased 32.5% year over year, while the company moved from net income to a substantial GAAP net loss.
- Gross margin improved from 60.2% to 63.2%, but operating leverage was more than offset by significantly higher operating expenses.
- Adjusted EBITDA increased to $43.7 million, although the measure excludes $89.6 million of stock-based compensation.
- Cash generation improved materially year over year, but the quarter’s operating cash flow depended heavily on noncash compensation and working-capital timing.
- Compared with the immediately preceding quarter, revenue declined 13.8% to $195.0 million. TASER revenue fell 27.1%, while Software and Sensors revenue increased 6.2%.
- Deferred revenue increased to $281.2 million from $275.2 million at December 31, 2020. Remaining performance obligations were approximately $1.79 billion; management expects to recognize 20% to 25% over the following 12 months and generally the remainder over five to seven years.
Guidance, outlook, risks and unusual items
Management projected 2021 revenue of $780 million to $820 million and maintained capital expenditure guidance of $65 million to $70 million. Management expects continued investment in cloud infrastructure, software, product development, manufacturing capacity and personnel.
- COVID-19 continues to create risks involving customer budgets, collections, supply chains, employee operations and demand. The company recorded an additional approximately $0.8 million credit-loss reserve related to pandemic conditions.
- Government contracts may be subject to appropriations, termination-for-convenience provisions and optional renewal periods. These provisions could delay or reduce contracted revenue.
- The FTC continues to challenge Axon’s 2018 acquisition of Vievu. Potential remedies could include divestiture of Vievu or related assets and could be material; no liability was recorded because the outcome could not be predicted.
- Axon was a defendant in five product-liability lawsuits involving alleged wrongful death or personal injury. The company self-insures the first $5.0 million of product claims made after 2014 and believes the current matters are not expected to be material.
- On April 8, 2021, after quarter-end, Axon agreed to purchase 9.0 million Cellebrite shares for $90.0 million, subject to closing conditions and completion of Cellebrite’s business combination.
- Supply-chain risks include component availability, shipping disruption and raw-material inflation. Management reported mitigating actions including secondary sourcing, inventory buffers and supplier negotiations.
- Stock-based compensation estimates depend on subjective assessments of performance-goal probability and timing. Changes in those estimates may materially affect future reported expenses and earnings.
- Interest-rate risk includes a potential $1.7 million decline in investment portfolio fair value from a hypothetical 100-basis-point rate increase, although the securities are classified as held-to-maturity.
Most important facts for investors to verify
- Whether revenue growth, particularly Axon Evidence and cloud revenue, remains consistent with the $780 million to $820 million 2021 outlook.
- The sustainability of gross-margin improvement as product mix, cloud infrastructure spending and supply-chain costs evolve.
- The magnitude and timing of future stock-based compensation, including the approximately $113.6 million of unrecognized CEO Performance Award expense and $96.7 million of unrecognized XSPP expense.
- Underlying cash generation excluding working-capital timing and noncash stock-based compensation.
- Progress and potential remedies in the FTC litigation concerning Vievu.
- Completion, funding and strategic rationale of the $90.0 million Cellebrite investment.
- Conversion of the $1.79 billion remaining performance obligation balance into recognized revenue and cash, including the effects of government appropriations and cancellation provisions.