Axon Enterprise, Inc. — FY2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018. The filing is an annual Form 10-K; quarterly data are provided but the primary results are full-year results. Axon provides conducted energy weapons, body and in-car cameras, digital evidence management, and other law-enforcement software through its TASER and Software and Sensors segments.
Financial performance and liquidity
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Net sales | $420.1 million | $343.8 million | +22.2% |
| Gross margin | $258.6 million; 61.5% | $207.1 million; 60.2% | +24.9%; margin up 1.3 points |
| Income from operations | $24.8 million; 5.9% | $13.0 million; 3.8% | +90.8% |
| Net income | $29.2 million; 7.0% | $5.2 million; 1.5% | + $24.0 million |
| Diluted EPS | $0.50 | $0.10 | + $0.40 |
| Operating cash flow | $63.9 million | $18.5 million | + $45.4 million |
| Cash and cash equivalents | $349.5 million | $75.1 million | + $274.4 million |
- Product revenue was $327.6 million, or 78.0% of sales; service revenue was $92.4 million, or 22.0%, up from 16.9% in 2017.
- TASER segment revenue increased 7.9% to $253.1 million, while Software and Sensors revenue increased 52.8% to $167.0 million.
- Axon Evidence and cloud services revenue increased 56.1% to $90.3 million. Axon Fleet revenue increased 324.1% to $12.5 million.
- SG&A increased 13.1% to $156.9 million, and research and development increased 38.8% to $76.9 million, reflecting continued investment in growth initiatives.
- Adjusted EBITDA was $57.7 million, compared with $38.7 million in 2017; stock-based compensation was $21.9 million.
- At year-end, total assets were $719.5 million, working capital was $392.1 million, and stockholders’ equity was $467.3 million.
- The company had approximately $0.1 million of long-term debt and capital lease obligations, no borrowings under its revolving facility, and $96.9 million of net availability under the $100 million facility after outstanding letters of credit.
Material changes versus the prior comparable period
- Revenue growth increasingly shifted toward recurring software and subscription-related services. Software and Sensors represented 39.6% of 2018 sales versus 31.8% in 2017.
- Software and Sensors gross margin improved to 51.4% from 40.8%, aided by revenue-accounting changes under ASC Topic 606 and lower non-recurring cloud-migration costs.
- Axon adopted ASC Topic 606 on January 1, 2018 using the modified retrospective method, increasing opening retained earnings by $19.0 million. The company estimated that 2018 revenue was $5.0 million higher and SG&A was approximately $3.6 million lower than under the prior standard.
- Cash generation benefited from a $54.2 million increase in deferred revenue and a $14.8 million inventory reduction, partly offset by a $67.6 million increase in receivables.
- In May 2018, Axon raised $234.0 million in net proceeds through a follow-on equity offering of 4.645 million shares.
- Axon acquired VIEVU for an estimated $17.6 million, including cash, shares, contingent consideration, and a supplier agreement. VIEVU contributed $6.7 million of revenue from acquisition through year-end and generated approximately $16.9 million of direct and legacy employee costs.
- Reported quarterly net income declined from $12.9 million in the first quarter to $2.1 million in the fourth quarter. Fourth-quarter results included approximately $1.8 million of out-of-period adjustments related to prior quarters and included initial TASER 7 shipments.
Guidance, outlook, risks, and unusual items
- Management expected 2019 revenue of $480 million to $490 million and a normalized income tax rate of 20% to 25%.
- Year-end backlog was $812.7 million, including $54.6 million in TASER backlog and $758.1 million in Software and Sensors backlog. Management expected approximately $247.2 million of this backlog to convert to revenue over the next 12 months.
- Remaining performance obligations were approximately $900 million, with 15% to 20% expected to be recognized in the next 12 months. Recognition remains subject to deployment timing, appropriations, optional periods, and cancellation provisions.
- Key risks include government budget constraints and contract cancellations, adoption of the SaaS model, cybersecurity breaches or cloud outages, loss or corruption of digital evidence, product defects and liability claims, supply-chain disruptions, regulatory changes, foreign-exchange exposure, acquisition integration, and competition.
- Axon was defending eight TASER-related product-liability lawsuits and a Digital Ally patent-infringement case involving Axon Signal. Management did not believe a material loss was probable, but litigation outcomes are inherently uncertain.
- The FTC requested information concerning the VIEVU acquisition; Axon stated that it was cooperating with the non-public investigation.
- The company recorded a $2.0 million impairment charge for abandoned developed technology and $3.8 million of inventory provisions, primarily related to phasing out legacy VIEVU cameras.
- The 2018 income tax benefit of $1.1 million, or a negative 3.9% effective tax rate, was affected by $8.9 million of excess tax benefits from stock compensation and $6.9 million of research and development credits.
- Cash balances of approximately $342.3 million were held at four institutions and regularly exceeded applicable deposit-insurance limits.
- Management and the independent auditor concluded that internal control over financial reporting was effective as of December 31, 2018. The assessment excluded VIEVU, representing approximately 2% of consolidated revenue and 3% of consolidated assets.
Investor verification checklist
- Verify the sustainability and cash-conversion profile of subscription bookings, deferred revenue, contract assets, and the $812.7 million backlog.
- Assess whether Software and Sensors revenue growth can offset continued elevated research, development, sales, and infrastructure spending.
- Reconcile reported 2018 results with the ASC 606 adoption effects and the disclosed fourth-quarter out-of-period adjustments.
- Evaluate the effect of stock-based compensation, including the 6.4 million-share CEO Performance Award and approximately $200.7 million of unrecognized expense for goals not considered probable.
- Monitor the Digital Ally litigation, product-liability claims, FTC inquiry, government appropriation risks, and cybersecurity or cloud-service disruptions.
- Review the VIEVU integration, legacy product phase-out costs, contingent consideration, and potential acquisition-related expenses.
- Confirm liquidity after considering $66.6 million of open purchase orders, $12.8 million of non-cancelable operating leases, letters of credit, surety bonds, and the planned headquarters land lease.