AXON ENTERPRISE, INC. annual report, FY2020

Axon Enterprise, Inc. — FY2020 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2020; filed February 25, 2021. The filing is an annual report, not a quarterly filing, although it includes selected fourth-quarter information. Axon provides conducted-energy devices, body and fleet cameras, digital evidence management, productivity software, real-time operations tools, training, and related cloud services. Reportable segments are TASER and Software and Sensors.

Financial performance and operating metrics

Metric	FY2020	FY2019	Change
Net sales	$681.0 million	$530.9 million	+28.3%
Product revenue	$500.3 million	$399.5 million	+25.2%
Service revenue	$180.8 million	$131.4 million	+37.6%
Gross margin	$416.3 million; 61.1%	$307.3 million; 57.9%	Margin +3.2 points
Operating loss	$(14.2) million; $(2.1)%	$(6.4) million; $(1.2)%	Loss widened
Net income (loss)	$(1.7) million; $(0.03) per share	$0.9 million; $0.01 per share	Declined to a loss
Operating cash flow	$38.5 million	$65.7 million	Declined $27.2 million
Adjusted EBITDA	$135.7 million	$84.9 million	+59.8%

Revenue growth was led by TASER 7, cartridges, Axon Body cameras, and Axon Evidence and cloud services. TASER revenue increased 30.1% to $366.6 million, while Software and Sensors revenue increased 26.2% to $314.5 million. Axon Evidence and cloud services revenue across both segments increased to $179.7 million from $131.0 million. Annual recurring revenue was $221.3 million at December 31, 2020.

Gross margin improved in both segments: TASER margin increased to 62.6% from 61.9%, and Software and Sensors margin increased to 59.4% from 53.3%. Operating expenses increased 37.2% to $430.5 million, including $133.6 million of stock-based compensation, up from $78.5 million. Management attributed the higher operating loss primarily to increased stock compensation, FTC litigation expenses, higher headcount, and growth investments.

Balance sheet, cash flow, debt, and liquidity

Cash and cash equivalents were $155.4 million at year-end, compared with $172.3 million in 2019.
Cash, cash equivalents, and investments totaled approximately $652.6 million, up $256.4 million year over year.
Total assets were $1.381 billion and stockholders’ equity was $976.3 million.
Inventory increased to $90.0 million from $38.8 million as Axon built safety stock. Accounts receivable and contract assets also increased materially, primarily due to subscription sales.
Investing cash use was $356.5 million, including $276.7 million of net investment purchases, $72.6 million of property and equipment and intangible purchases, and $7.1 million of investments in unconsolidated affiliates.
Financing cash flow was $299.3 million, primarily reflecting $306.8 million of net proceeds from a June 2020 equity offering.
Axon had no borrowings under its $50.0 million unsecured revolving credit facility. Outstanding letters of credit reduced availability to $43.9 million at year-end. The facility was subsequently amended in January 2021 to extend maturity to December 31, 2023 and increase letter-of-credit capacity.
The company reported no long-term debt or financing lease obligations at December 31, 2020 and believes liquidity is sufficient for at least the next 12 months.

Material changes versus FY2019

Revenue increased $150.1 million, or 28.3%, with international revenue rising to $145.9 million from $84.8 million and increasing from 16% to 21% of total revenue.
TASER 7 revenue increased 89.8% to $107.5 million, while TASER X26P revenue declined 20.6% to $41.7 million, reflecting migration toward the newer platform.
Cartridge revenue increased 34.0% to $115.2 million; cartridge units increased 35.0% to 3.7 million.
Software and Sensors backlog increased to $1.4 billion from $1.0 billion. Total backlog was $1.5 billion, with approximately $398.9 million expected to be recognized as revenue during the following 12 months.
Remaining performance obligations were approximately $1.73 billion at year-end; management expected to recognize 20% to 25% over the next 12 months.
SG&A increased 44.3%, driven principally by stock-based compensation and FTC litigation costs. Professional, consulting, and lobbying expense increased by $24.0 million, including a $19.1 million increase related to FTC litigation.
Operating cash flow declined because of increased receivables and contract assets, inventory investment, and deferred commissions, partly offset by higher deferred revenue.
The company purchased Scottsdale land and incurred related capital expenditures in preparation for a new manufacturing and office facility.

Guidance, outlook, unusual items, and risks

For FY2021, management expected revenue of $740 million to $780 million, approximately 12% year-over-year revenue growth for the first quarter, and capital expenditures of approximately $65 million to $70 million. Planned 2021 capital expenditures included approximately $25 million for TASER manufacturing capacity and automation and approximately $20 million for the new Scottsdale facility.

COVID-19 increased 2020 expenses by approximately $4.1 million. Axon reported limited manufacturing disruption but continued to identify risks involving employee health, supply-chain interruptions, municipal budgets, customer credit, travel restrictions, and future pandemic developments. The company deferred certain employer Social Security taxes, with half due December 31, 2021 and half due December 31, 2022.

Significant unusual items included $133.6 million of stock-based compensation, $19.1 million of incremental FTC litigation expense, a $2.1 million net gain from an observable price change in the Flock Group investment and related warrants, and $1.2 million of impairment charges related to abandoned planning, site-development, and office-improvement activities.

The FTC alleges that Axon’s 2018 Vievu acquisition was anticompetitive and could seek divestiture of Vievu and other assets or other remedies. Axon recorded no liability because the outcome could not be predicted. The company also faced seven product-liability lawsuits, although management did not believe their outcomes would materially affect financial position, results, or cash flows. Other important risks include dependence on government and law-enforcement budgets, contract appropriation and termination provisions, cybersecurity and data privacy, cloud-service reliability, product liability, supply-chain concentration, regulatory restrictions on conducted-energy devices, foreign exchange, and intense competition.

Stock-based compensation is particularly material: the CEO Performance Award and XSPP generated substantial expense based on management’s probability assessments of future operating goals, although the related awards had not vested as of year-end. Changes in those estimates could materially affect future earnings.

Important facts for investors to verify

Whether revenue growth and the $1.4 billion Software and Sensors backlog convert into cash and recognized revenue as projected, given government appropriation and cancellation risks.
The sustainability of the 61.1% consolidated gross margin as software, sensors, cloud infrastructure, and professional services expand.
The magnitude and timing of future stock-based compensation, including the CEO Performance Award and XSPP, and its effect on GAAP profitability and dilution.
The outcome and potential remedies in the FTC’s Vievu litigation, including any divestiture, licensing, settlement, or related costs.
Whether accounts receivable, contract assets, and inventory growth normalize and whether credit losses remain controlled.
Execution of the planned Scottsdale facility, manufacturing automation, and the $65 million to $70 million 2021 capital expenditure program.
COVID-19, semiconductor and other supply-chain impacts, customer budget pressure, cybersecurity exposure, and data-privacy compliance.
The company’s use of non-GAAP Adjusted EBITDA, which excludes $133.6 million of stock-based compensation and should not be treated as a substitute for GAAP earnings or operating cash flow.