AXON Enterprise, Inc. (formerly TASER International, Inc.) — Q3 2015 Form 10-Q Summary
Reporting period: Quarterly and year-to-date periods ended September 30, 2015, compared primarily with the same periods in 2014. The company developed and sold conducted electrical weapons, Axon cameras, Evidence.com software and related services. The filing identified two reportable segments: TASER Weapons and Axon.
Key Financial Metrics
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Net sales | $50.4 million | $44.3 million | $141.9 million | $117.7 million |
| Gross margin | $31.1 million; 61.7% | $28.7 million; 64.7% | $91.7 million; 64.6% | $74.1 million; 63.0% |
| Income from operations | $6.7 million; 13.3% | $12.5 million; 28.2% | $26.8 million; 18.9% | $23.6 million; 20.0% |
| Net income | $1.5 million | $7.6 million | $14.8 million | $14.8 million |
| Diluted EPS | $0.03 | $0.14 | $0.27 | $0.27 |
| Operating cash flow | Not separately provided | Not separately provided | $30.3 million | $22.6 million |
- Revenue mix: Q3 TASER Weapons revenue declined 1.2% to $39.5 million, while Axon revenue increased 150.2% to $10.9 million. For the first nine months, TASER Weapons revenue rose 10.0% to $115.7 million and Axon revenue rose 108.5% to $26.2 million.
- Axon bookings: Evidence.com and Axon bookings were $36.9 million in Q3 and $90.5 million year to date, increasing 141.5% and 178.0%, respectively. Bookings include future periods and may be subject to government appropriation or cancellation clauses.
- Expenses: Q3 SG&A increased 43.3% to $17.8 million and research and development increased 73.7% to $6.5 million. Year-to-date SG&A increased 20.4% to $47.8 million and R&D increased 57.0% to $17.0 million.
- Margins: Q3 consolidated gross margin declined because Axon represented a larger share of sales and had lower margins than TASER Weapons. Axon gross margin improved to 36.8% in Q3 and 41.2% year to date, compared with 26.4% and 23.9%, respectively, in the prior-year periods.
- Liquidity: Cash, cash equivalents and investments totaled $104.6 million at September 30, 2015, including $45.9 million of cash and cash equivalents, $49.5 million of short-term investments and $9.2 million of long-term investments.
- Debt and credit: Notes payable and capital lease obligations totaled approximately $0.2 million. No borrowings were outstanding under the $10.0 million revolving credit facility; approximately $7.0 million remained available after $3.0 million of letters of credit.
- Balance sheet: Total assets were $213.5 million and stockholders’ equity was $149.5 million at September 30, 2015. Deferred revenue increased to $46.5 million from $35.7 million at December 31, 2014, reflecting advance billings for hardware, warranties and Axon services.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by adoption of Axon on-officer cameras, Evidence.com and related accessories, including several large camera deployments.
- Evidence.com revenue increased to $2.8 million in Q3 from $1.1 million in Q3 2014. Active paid Evidence.com users increased to approximately 33,000 from approximately 29,000 at June 30, 2015.
- TASER Weapons revenue was affected by lower sales of the legacy X26 and timing of larger smart-weapon transactions, partly offset by higher cartridge sales. The X26 production was scheduled for discontinuation as of December 31, 2015.
- Q3 operating income and net income fell substantially despite higher sales because of increased SG&A, R&D, lower consolidated gross margin and a high quarterly tax provision. Year-to-date net income was essentially unchanged from 2014.
- The company repurchased approximately 292,000 shares for $7.6 million during Q3 at an average cost of $25.86 per share. The $30.0 million repurchase authorization was fully utilized and expired as of September 30, 2015.
- Operating cash flow increased to $30.3 million, but investing activities used $33.3 million, including $11.2 million for acquisitions, $17.9 million net for investments and $4.2 million for property and intangible assets.
Guidance, Outlook, Risks and Unusual Items
- Management expected additional SG&A increases through the remainder of 2015 as it continued investing in Axon engineering, software, sales, marketing and support capabilities. The filing did not provide formal revenue or earnings guidance.
- Management expected Axon fixed costs to leverage with scale and reduce service costs as a percentage of revenue, but cautioned that consolidated margins could decline as Axon becomes a larger portion of sales and competition increases.
- The company completed acquisitions of MediaSolv for approximately $8.8 million and Tactical Safety Responses Limited, its UK distributor, for approximately $3.3 million. Purchase price allocations were preliminary and included $7.1 million of acquired goodwill in total.
- The company reported an explosion at its Scottsdale manufacturing facility during Q3 that injured several employees. An OSHA investigation was ongoing and could result in fines, sanctions, higher insurance premiums, or delays or cancellations of certain government sales contracts.
- The company was involved in 15 active product-liability lawsuits plus one matter on appeal. Management stated that material losses were not reasonably possible based on its assessment, while acknowledging that litigation outcomes are inherently uncertain and may exceed insurance coverage or recorded amounts.
- Outstanding off-balance-sheet commitments included approximately $3.0 million of letters of credit and $2.4 million of surety bonds.
- The effective tax rate for the first nine months was 44.0%; management estimated a full-year rate of approximately 45.5% before discrete adjustments. The filing also disclosed approximately $2.4 million of unrecognized tax benefits and potential expiration of certain Arizona R&D tax credits.
- Key operating risks included government budget and appropriation clauses, cybersecurity and Evidence.com service disruptions, product defects, litigation, competition, foreign exchange exposure, dependence on key suppliers, regulatory developments and rapid technological change.
Most Important Facts for Investors to Verify
- Whether Axon bookings convert into recognized revenue, particularly contracts subject to future government appropriations or cancellation provisions.
- Whether Axon and Evidence.com growth can offset the lower margins and declining demand for legacy TASER products.
- The sustainability of the improved Axon gross margin and the effect of continued investment in sales, R&D and infrastructure on operating leverage.
- The financial and operational consequences of the Scottsdale facility explosion and the outcome of the OSHA investigation.
- Potential exposure from product-liability litigation, insurance limits, deductibles and any settlements or judgments.
- The impact of the new international tax structure, uncertain tax positions and possible expiration of R&D tax credits.
- The final purchase accounting for MediaSolv and TSR, including acquired goodwill, intangible assets and contingent consideration.
- The filing contains an inconsistency in MD&A tax-provision commentary; investors should rely on the financial statements and notes, which report a Q3 income-tax provision of $5.2 million and a nine-month provision of $12.0 million.