Business Context and Reporting Period
Axon Enterprise, Inc. filed this Form 10-K for the fiscal year ended December 31, 2019. Axon provides conducted energy weapons, body-worn and in-car cameras, cloud-based digital evidence management, and related software and services to law enforcement and adjacent public-safety markets. Its reportable segments are TASER and Software and Sensors.
The filing reports full-year 2019 results and unaudited fourth-quarter data. Fourth-quarter revenue was $171.9 million, gross margin was $92.6 million, and net loss was $12.4 million, compared with fourth-quarter 2018 revenue of $114.8 million and net income of $2.1 million.
Financial Metrics
| Metric | 2019 | 2018 |
|---|---|---|
| Net sales | $530.9 million | $420.1 million |
| Product revenue | $399.5 million | $327.6 million |
| Service revenue | $131.4 million | $92.4 million |
| Gross margin | $307.3 million; 57.9% | $258.6 million; 61.5% |
| Operating income (loss) | $(6.4) million; (1.2%) | $24.8 million; 5.9% |
| Net income | $0.9 million; 0.2% | $29.2 million; 7.0% |
| Diluted EPS | $0.01 | $0.50 |
| Operating cash flow | $65.7 million | $63.9 million |
| Cash and cash equivalents | $172.3 million | $349.5 million |
| Cash, cash equivalents and investments | $396.3 million | $349.5 million |
Software and Sensors revenue increased 49.3% to $249.2 million, while TASER revenue increased 11.3% to $281.7 million. Axon Evidence and cloud services revenue was $131.0 million, up from $90.3 million. Axon Body revenue increased 101.2% to $44.0 million, including $19.3 million from Axon Body 3.
Operating expenses increased 34.2% to $313.7 million, including $213.0 million of sales, general and administrative expense and $100.7 million of research and development expense. Stock-based compensation expense was $78.5 million, compared with $21.9 million in 2018. Adjusted EBITDA, a non-GAAP measure, was $84.9 million, compared with $57.7 million.
At December 31, 2019, working capital was $423.5 million, total assets were $845.6 million, total liabilities were $302.1 million, and stockholders’ equity was $543.5 million. Total debt and finance lease obligations were less than $0.1 million. The company had no borrowings under its $50.0 million revolving credit facility; $47.3 million remained available after letters of credit.
Investing cash outflow was $240.7 million, primarily reflecting $224.4 million of net investment purchases and $16.3 million of capital expenditures and intangible-asset purchases. Financing cash outflow was $3.9 million.
Material Changes Versus the Prior Comparable Period
- Revenue increased $110.8 million, or 26.4%, driven primarily by Software and Sensors growth, higher cloud revenue, Axon Body 3 shipments, and increased cartridge sales.
- Gross margin percentage declined from 61.5% to 57.9%. TASER segment margin declined to 61.9% from 68.3%, primarily because TASER 7 had lower selling prices, higher unit costs, trade-in credits, and launch-related costs.
- The company moved from $24.8 million of operating income to a $6.4 million operating loss, reflecting increased investments in sales, research and development, and infrastructure, as well as higher stock-based compensation.
- Net income declined by $28.3 million to $0.9 million. The 2019 result included a $51.6 million increase in stock-based compensation related to the CEO Performance Award and XSPP.
- Cash and cash equivalents declined by $177.2 million, although total cash, cash equivalents and investments increased by $46.8 million because the company shifted funds into investments.
- Total backlog increased from $812.7 million to $1.1 billion, including $1.026 billion in Software and Sensors backlog and $55.2 million in TASER backlog.
Guidance, Outlook, Risks and Unusual Items
Management projected 2020 revenue of $615 million to $625 million, approximately 13% first-quarter 2020 revenue growth, and a normalized income tax rate of 20% to 25%. Management expected future growth in Software and Sensors to improve operating margins over time and anticipated gradual gross-margin improvement.
Remaining performance obligations were approximately $1.23 billion at year-end 2019. Management expected to recognize 20% to 25% during the next twelve months and the remainder over the following five to seven years, subject to delayed deployments, budget appropriations, and contract-cancellation provisions.
- Government customers may delay, cancel, or decline to renew contracts because of appropriations, political considerations, or termination-for-convenience provisions.
- The subscription model may delay cash collections, increase receivables and contract assets, and expose the company to customer credit risk.
- Cloud-service interruptions, data loss, cybersecurity breaches, privacy regulation, or reliance on third-party cloud providers could materially affect demand and liability exposure.
- The company relies on certain single-source suppliers and reported prior production constraints affecting TASER 7 and cartridge availability. A cloud-storage agreement has a total commitment of $50.0 million, including a $43.0 million remaining commitment at year-end.
- The FTC filed an enforcement action in January 2020 concerning the 2018 VIEVU acquisition. Potential remedies could include divestiture of VIEVU and other assets. The company recorded no liability because the outcome was not determinable.
- The company was defending eight product-liability lawsuits, a Digital Ally patent appeal, and a consumer class action. Management stated that current matters were not expected to be material, but litigation outcomes remain uncertain.
- 2019 included $2.0 million of impairment charges related to abandoned enterprise-resource-planning software and headquarters planning activities, as well as approximately $3.0 million of TASER 7 ramp-up and optimization costs.
- The filing identified the late-2019 coronavirus outbreak as a potential supply-chain risk that could affect 2020 guidance if conditions deteriorated.
Most Important Facts to Verify
- Whether 2020 revenue guidance of $615 million to $625 million remains achievable given government-budget timing, supply-chain conditions, and the coronavirus-related risk identified in the filing.
- Whether Software and Sensors growth and the $1.1 billion backlog convert into revenue and improved margins as projected.
- The sustainability of gross margins following the TASER 7 rollout, product-mix changes, cloud-storage costs, and subscription adoption.
- The recurring effect and potential dilution associated with the CEO Performance Award, XSPP, and other equity awards; unrecognized stock-based compensation remained substantial at year-end.
- The outcome, timing, potential divestiture requirements, and legal costs associated with the FTC’s VIEVU enforcement action.
- Cash conversion under the subscription model, including growth in accounts receivable and contract assets and the timing of deferred-revenue recognition.
- Exposure from product-liability, patent, consumer, tax, cybersecurity, privacy, regulatory, and supplier-continuity matters.