AXON Enterprise, Inc. (formerly TASER International, Inc.) — Form 10-Q Summary
Business context and reporting period
Filed November 9, 2016, for the quarter ended September 30, 2016. The company develops and sells conducted electrical weapons, accessories and related services, and operates the Axon business, which includes body cameras, digital evidence management and Evidence.com software subscriptions. Reportable segments are TASER Weapons and Axon.
Key financial metrics
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $71.9 million | $50.4 million | $186.2 million | $141.9 million |
| Gross margin | $46.6 million; 64.8% | $31.1 million; 61.7% | $120.8 million; 64.9% | $91.7 million; 64.6% |
| Operating income | $11.1 million; 15.4% | $6.7 million; 13.3% | $22.4 million; 12.1% | $26.8 million; 18.9% |
| Net income | $3.8 million | $1.5 million | $11.0 million | $14.8 million |
| Diluted EPS | $0.07 | $0.03 | $0.20 | $0.27 |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $22.0 million | $30.3 million |
- Q3 sales increased 42.7% year over year; nine-month sales increased 31.2%.
- Q3 TASER Weapons sales rose 34.0% to $52.9 million, while Axon sales rose 74.5% to $18.9 million. Nine-month growth was 24.7% and 60.0%, respectively.
- Evidence.com revenue increased 209.1% in Q3 to $8.5 million and 145.0% for the nine-month period to $18.0 million.
- Q3 gross margin expanded to 64.8%, aided by improved TASER Weapons leverage and improved Axon hardware and SaaS margins. Axon gross margin rose to 45.4% from 36.8%.
- Nine-month operating income and net income declined despite revenue growth because SG&A increased 61.6% to $77.3 million, including expanded sales, marketing, infrastructure, lobbying and legal spending. The nine-month effective tax rate was approximately 50.1%.
- At September 30, 2016, cash and cash equivalents were $50.6 million, short-term investments were $45.6 million and long-term investments were $6.3 million, totaling approximately $102.5 million in cash and investments.
- Total assets were $252.2 million and total liabilities were $110.9 million. Total deferred revenue was $77.3 million, compared with $51.0 million at December 31, 2015.
- Total debt and capital lease obligations were approximately $0.1 million. The company had no revolver borrowings and approximately $6.1 million of borrowing availability after $3.9 million of outstanding letters of credit.
Material changes versus prior comparable periods
- Growth was driven by adoption of Smart Weapons, higher cartridge sales, Axon body cameras, E-Docks and recurring Evidence.com subscriptions. Q3 Axon bookings increased 55.9% to $57.5 million.
- International Q3 revenue increased 69.3% to $11.3 million, representing 15.8% of sales.
- Operating expenses grew faster than revenue, reducing nine-month operating margin from 18.9% to 12.1% and nine-month net margin from 10.5% to 5.9%.
- Operating cash flow fell to $22.0 million from $30.3 million, primarily reflecting higher receivables, inventory, prepaid assets and other working-capital requirements, partly offset by increased deferred revenue.
- The company repurchased approximately 1.8 million shares for $33.7 million during the first nine months. No shares were repurchased in Q3; $16.2 million remained authorized, and the 10b5-1 plan was suspended.
- Inventory increased to $25.5 million from $15.8 million, while accrued liabilities increased to $16.1 million from $8.6 million.
Guidance, outlook, commentary, risks and unusual items
- Management estimated a full-year 2016 effective tax rate of approximately 42.3% before discrete adjustments, compared with approximately 50.2% for the first nine months. Actual tax expense may vary.
- Management stated that cash, investments, expected operating cash flow and available financing should fund operations and strategic initiatives for the remainder of 2016 and the foreseeable future.
- The company expects future Axon growth and increasing scale to support improved service and hardware margins, but cautions that a shift toward Axon devices could pressure consolidated gross margins.
- Deferred revenue and long-term receivables reflect multi-year Officer Safety Plan and TASER 60 arrangements. Some future bookings are subject to government budget appropriations or cancellation clauses and may not ultimately convert to revenue.
- A material weakness in internal control over financial reporting remained unremediated at September 30, 2016. Deficiencies involved liability accruals, revenue recognition, deferred revenue, account reconciliations and monitoring. Management expected remediation before year-end 2016, but disclosure controls were concluded to be ineffective as of quarter-end.
- An out-of-period adjustment of approximately $0.8 million was recorded in Q1 2016 for costs that should have been recorded in Q4 2015. Management determined the prior-period errors were not material.
- Warranty expense increased to $0.5 million for the first nine months, including supplemental reserves associated with the new Axon Body 2 camera. Inventory obsolescence provisions were approximately $0.8 million.
- The company disclosed eight active product-liability lawsuits, including wrongful-death and personal-injury claims, and stated that it did not believe the matters were reasonably likely to materially affect results. It also faces patent and other litigation, including a claim by Digital Ally and a French distributor arbitration claim of approximately $0.6 million.
- Other risks include government budget constraints, contract cancellations, product defects, cybersecurity and Evidence.com outages, competition, intellectual-property claims, foreign-exchange exposure, Brexit-related uncertainty, tax-credit realizability and dependence on third-party suppliers and cloud providers.
Most important facts for investors to verify
- Whether rapid Axon and Evidence.com growth continues to offset significantly higher sales, infrastructure, personnel, lobbying and legal costs.
- Conversion of the $77.3 million deferred-revenue balance and $57.5 million of quarterly Axon bookings into recognized revenue and cash, including the effect of appropriation clauses.
- Progress and final effectiveness of remediation for the material weakness in internal control over financial reporting.
- Warranty-return experience and inventory obsolescence following the Axon Body 2 launch and product transitions.
- Actual full-year tax rate, utilization or expiration of tax credits, and the $3.6 million of unrecognized tax benefits.
- Potential cash requirements from litigation, letters of credit, surety bonds, stock repurchases and working-capital growth.