AXON ENTERPRISE, INC. (then TASER International, Inc.) — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2014; filed November 4, 2014. The filing reports TASER International, Inc., which later became Axon Enterprise, Inc. The company develops conducted electrical weapons, AXON cameras, and EVIDENCE.com digital-evidence software and services.
Financial performance and liquidity
| Metric | Q3 2014 | Q3 2013 | Change |
|---|
| Net sales | $44.3 million | $35.2 million | +26.0% |
| Gross margin | $28.7 million; 64.7% | $22.1 million; 62.8% | +29.9%; +190 bps |
| Operating income | $12.5 million; 28.2% | $6.9 million; 19.5% | +81.8% |
| Net income | $7.6 million; 17.0% | $5.1 million; 14.5% | +47.8% |
| Diluted EPS | $0.14 | $0.10 | +40.0% |
| Metric | Nine months 2014 | Nine months 2013 | Change |
|---|
| Net sales | $117.7 million | $97.8 million | +20.3% |
| Gross margin | $74.1 million; 63.0% | $60.3 million; 61.6% | +23.0%; +140 bps |
| Operating income | $23.6 million; 20.0% | $18.9 million; 19.4% | +24.5% |
| Net income | $14.8 million; 12.6% | $12.9 million; 13.2% | +15.3% |
| Diluted EPS | $0.27 | $0.24 | +12.5% |
- Cash flow: Nine-month operating cash flow was $22.6 million versus $23.1 million in 2013. Investing cash use was $17.1 million, primarily from net investment purchases and $2.2 million of property and intangible purchases. Financing cash use was $9.3 million, principally from share repurchases.
- Cash and investments: Cash and cash equivalents were $38.6 million at September 30, 2014, compared with $42.3 million at December 31, 2013. Short- and long-term investments totaled $35.4 million at amortized cost.
- Working capital: Accounts receivable increased to $27.1 million from $22.5 million, and inventory increased to $16.1 million from $11.1 million. Total deferred revenue increased to $30.0 million from $20.2 million, including $6.9 million related to EVIDENCE.com and $20.3 million related to warranties.
- Debt and liquidity: The company had no borrowings under its $10.0 million revolving credit facility and approximately $47,000 of letters of credit outstanding. Capital lease obligations totaled approximately $77,000. The company stated that existing cash, operating cash flow, and available financing were expected to fund operations and initiatives through the remainder of 2014.
- Balance sheet: Total assets were $164.1 million and total liabilities were $46.1 million at September 30, 2014. Stockholders’ equity was $118.0 million.
Material changes versus the prior comparable period
- Growth was led by adoption of the TASER X26P, which generated $13.7 million in Q3 sales versus $5.6 million in Q3 2013. X26 sales declined by $4.5 million as customers migrated to the X26P platform.
- The EVIDENCE.com & Video segment increased Q3 revenue 21.5% to $4.3 million and increased nine-month revenue 58.8% to $12.5 million. Q3 AXON revenue increased 101.1% and EVIDENCE.com revenue increased 124.8%.
- Bookings for EVIDENCE.com, AXON body, and AXON flex increased to $15.3 million in Q3 and $32.5 million for the first nine months, compared with $5.8 million and $9.3 million, respectively, in the prior-year periods. Bookings remain subject to invoicing timing, municipal appropriations, and cancellation clauses.
- SG&A declined 2.6% in Q3 as a percentage of sales, primarily because of lower litigation and professional expenses and conference timing, but increased 13.9% for the first nine months. R&D increased 54.1% in Q3 and 67.9% year to date, reflecting investment in video and EVIDENCE.com capabilities.
- Share-based compensation increased to $4.1 million for the first nine months from $2.9 million. The company repurchased approximately 1.7 million shares for $22.4 million during the first five months of the repurchase program and had approximately $7.6 million remaining under the authorization.
- Deferred revenue increased $9.8 million year to date, supporting operating cash flow but also indicating that a significant portion of contracted billings will be recognized over future periods.
Guidance, outlook, risks, and unusual items
- Management expected higher SG&A in Q4 2014 and into 2015 because of the International Association of Chiefs of Police conference and continued investment in international sales, video sales, implementation, and customer-facing infrastructure.
- Management expected higher R&D spending in Q4 2014 and into 2015 to add functionality and capabilities to EVIDENCE.com.
- Management stated that EVIDENCE.com & Video gross margins would remain lower in the near term because service revenue is deferred and recognized over contract terms, while AXON flex and AXON body were being sold at low gross margins to accelerate market adoption.
- The estimated full-year 2014 effective tax rate before discrete adjustments was approximately 37.6%. The nine-month effective tax rate was 36.9%.
- The company had 16 active product-liability lawsuits and two additional matters on appeal involving alleged wrongful death or personal injury associated with TASER products. Management stated that material adverse effects were not reasonably possible based on its assessment, but acknowledged that litigation outcomes are inherently uncertain and insurance may not cover all exposure.
- The company paid approximately $4.5 million in the first half of 2014 to resolve the AA & SABA distributor litigation, including approximately $1.2 million of attorneys’ fees, costs, and expenses.
- Warranty expense included a change in estimate related to the first-generation E-Dock following the launch of an updated version. The warranty reserve was $0.8 million at September 30, 2014.
- Unrecognized tax benefits totaled approximately $3.3 million. Recognition of the liability would favorably affect the effective tax rate, but the company did not expect a significant change in the following 12 months.
- Key disclosed risks include dependence on X26, X26P, and X2 sales; adoption and profitability of EVIDENCE.com; product defects; data-security breaches and service outages; government budget and appropriation risks; international regulatory and currency exposure; litigation; intellectual-property claims; supplier and component risks; and rapid technological change.
- The company adopted an immaterial balance-sheet presentation change for unrecognized tax benefits and was evaluating the future impact of new revenue-recognition guidance, which was not expected to be adopted until periods beginning after December 15, 2016.
Investor verification checklist
- Verify the sustainability of X26P-driven growth and the pace of continued migration from X26 products.
- Reconcile EVIDENCE.com and AXON bookings with invoiced revenue, deferred revenue, renewal rates, and eventual recognized revenue.
- Monitor EVIDENCE.com & Video gross margins, implementation costs, cloud-storage costs, and the effect of low-margin hardware pricing.
- Assess whether higher sales, R&D, marketing, and infrastructure spending produces sufficient recurring software and service growth.
- Review cash conversion, inventory and receivables growth, and the extent to which operating cash flow depends on increased deferred revenue.
- Track product-liability litigation, insurance coverage, deductibles, appeals, and any settlements or judgments that could exceed recorded accruals.
- Evaluate the realizability of $16.8 million of net deferred tax assets and the potential resolution of $3.3 million of unrecognized tax benefits.
- Confirm the status of the $30.0 million share-repurchase authorization and its effect on cash, share count, and capital allocation.
