Business Context and Reporting Period
TASER International, Inc. (now Axon Enterprise, Inc.) filed its Form 10-K for the fiscal year ended December 31, 2015. The company operated through two segments: TASER Weapons, comprising conducted electrical weapons and related products, and Axon, comprising body-worn cameras, digital evidence management, cloud and mobile products, and related services.
The filing also provides unaudited fourth-quarter data. The business strategy emphasized continued growth in Axon hardware and Evidence.com, international expansion, upgrades to X2 and X26P weapons, and investment in research and development.
Key Financial Metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Net sales | $197.9 million | $164.5 million | 20.3% increase |
| Gross margin | $128.6 million; 65.0% | $101.5 million; 61.7% | Margin up 330 bps |
| Operating income | $35.3 million; 17.9% | $32.5 million; 19.8% | 8.7% increase; margin down |
| Net income | $19.9 million | $19.9 million | Essentially flat |
| Diluted EPS | $0.36 | $0.37 | Decline |
| Operating cash flow | $46.4 million | $35.4 million | 31.1% increase |
| Cash and cash equivalents | $59.5 million | $48.4 million | Increase of $11.2 million |
| Short- and long-term investments | $58.8 million | $42.1 million | Increase |
| Total debt and capital leases | $0.2 million | $0.1 million | Minimal debt |
Fourth-quarter 2015 net sales were $56.0 million, gross margin was $37.0 million, and net income was $5.1 million. Fourth-quarter diluted EPS was $0.09.
Segment Performance
| Segment | 2015 Sales | 2014 Sales | 2015 Operating Income/(Loss) |
|---|---|---|---|
| TASER Weapons | $162.4 million | $145.6 million | $61.4 million |
| Axon | $35.5 million | $18.9 million | ($26.1 million) |
- TASER Weapons sales increased 11.5%, primarily from adoption of the X26P and X2 smart weapons. Segment gross margin improved to 69.9% from 67.3%.
- Axon sales increased 87.8%; Evidence.com revenue increased 191.3% to $11.8 million. Axon bookings increased 136.7% to $135.1 million, but the segment remained unprofitable.
- International sales increased 11.7% to $36.1 million and represented 18.2% of total sales.
- Backlog increased to $183.9 million from $75.3 million, including $51.0 million of deferred revenue.
Material Changes Versus the Prior Comparable Period
- Revenue growth accelerated through stronger smart-weapon upgrades and rapid Axon adoption.
- Consolidated gross margin improved because of higher average selling prices, manufacturing leverage, and improved Axon SaaS margins.
- SG&A increased 28.7% to $69.7 million, while research and development increased 58.6% to $23.6 million. Spending reflected expanded sales, engineering, marketing, international and customer-support capabilities.
- Operating margin declined from 19.8% to 17.9% as operating expenses grew faster than sales.
- The effective tax rate increased to 43.6% from 38.4%, partly because losses in a newly formed foreign entity did not produce a tax benefit and because of a higher valuation allowance.
- The company acquired MediaSolv for approximately $8.8 million and Tactical Safety Responses for approximately $3.3 million, adding $7.5 million of goodwill in 2015.
- Cash used in investing activities increased to $36.0 million, including acquisitions, investments, property and equipment, and intangible assets.
- The company completed its $30.0 million stock-repurchase authorization during the third quarter; approximately $7.6 million was spent on repurchases in 2015.
Liquidity, Debt and Cash Flow
- Operating cash flow of $46.4 million exceeded net income, supported substantially by a $15.3 million increase in deferred revenue.
- Total assets were $229.9 million, total liabilities were $72.9 million, and stockholders’ equity was $157.0 million at December 31, 2015.
- The company had a $10.0 million secured revolving credit facility, no borrowings, $3.0 million of outstanding letters of credit, and $7.0 million of net availability. The facility matures July 31, 2017.
- The company was in compliance with its leverage and fixed-charge coverage covenants and stated that cash, investments and expected operating cash flow should fund 2016 operations and strategic initiatives.
- Contractual obligations totaled $27.3 million, including $4.3 million of non-cancelable operating leases, $23.0 million of open purchase orders and $0.03 million of capital-lease obligations.
Guidance, Outlook, Risks and Unusual Items
- Management expected SG&A and research and development expenses to increase in 2016 as it expanded sales, marketing, engineering and customer-facing teams.
- Management planned additional investment in Evidence.com functionality and a new Axon revenue-generating product. Axon Fleet was expected to ship during fiscal 2016; Axon Body 2 became available for limited shipment in the first quarter of 2016.
- Management anticipated further increases in Axon trials and believed they could lead to additional sales, although SaaS adoption may involve lengthy sales cycles and revenue is generally recognized over one to five years.
- Key risks include dependence on X2 and X26P demand, government budget and appropriation constraints, product liability litigation, cybersecurity and loss of stored evidence, third-party cloud-service interruptions, component shortages, international regulation, foreign exchange, competition and lower Axon margins relative to TASER Weapons.
- The company disclosed nine pending product-liability lawsuits involving alleged wrongful death or personal injury. Management considered material loss individually or in the aggregate not reasonably possible, but acknowledged litigation outcomes are inherently uncertain.
- Digital Ally filed an amended patent and related commercial claims complaint in February 2016 concerning Signal technology. The company characterized the litigation as frivolous and intends to defend it.
- Unrecognized tax benefits totaled approximately $3.4 million, and a $1.7 million valuation allowance was recorded against deferred tax assets.
- The company did not pay dividends and did not expect to pay them in the foreseeable future.
- The company early adopted ASU 2015-17, reclassifying deferred tax balances as noncurrent without affecting reported earnings or comprehensive income.
Most Important Facts for Investors to Verify
- Whether Axon bookings convert into recognized revenue and profitable recurring SaaS revenue, given multiyear recognition periods and appropriation clauses.
- Whether Axon can achieve sustained profitability while maintaining product development, cloud-storage and customer-acquisition investments.
- The durability of smart-weapon upgrade demand and the effect of declining legacy X26 sales.
- Future gross-margin trends as Axon becomes a larger proportion of consolidated sales.
- The status and potential financial exposure of product-liability, patent and other litigation.
- Actual shipment timing and customer acceptance for Axon Body 2, Axon Fleet and other new products.
- Utilization of deferred tax assets and resolution of the $3.4 million unrecognized tax-benefit balance.
- Customer renewals, contract cancellations, cash collection and the sustainability of deferred-revenue-driven operating cash flow.