Axon Enterprise, Inc. — Q2 2021 Form 10-Q Summary
Business context and reporting period
Axon provides law-enforcement technology, including TASER conducted-energy devices, cameras, sensors, cloud-based digital evidence management, software and related services. The filing covers the three and six months ended June 30, 2021, compared primarily with the corresponding 2020 periods. Operations are reported through the TASER and Software and Sensors segments.
Key financial metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $218.8 million | $141.3 million | $413.8 million | $288.4 million |
| Revenue growth | 54.9% | — | 43.5% | — |
| Gross margin | 63.0% | 62.4% | 63.1% | 61.3% |
| Loss from operations | $(93.7) million | $(13.7) million | $(143.9) million | $(14.5) million |
| Net loss | $(47.1) million | $(30.8) million | $(95.0) million | $(26.7) million |
| Net loss per share | $(0.72) | $(0.51) | $(1.47) | $(0.44) |
| Operating cash flow | Not separately disclosed for the quarter | Not separately disclosed for the quarter | $95.1 million | $(7.0) million |
- Q2 revenue consisted of $156.4 million of product sales and $62.4 million of service sales. Six-month revenue consisted of $297.3 million of product sales and $116.5 million of service sales.
- Q2 gross margin improved modestly, supported by TASER product mix and manufacturing efficiencies. The TASER segment gross margin was 66.4%, versus 61.4% in the prior-year quarter; Software and Sensors gross margin declined to 59.5% from 63.5%.
- Operating expenses increased sharply to $231.6 million in Q2 and $405.2 million for the six-month period, primarily because of performance-award and other stock-based compensation, higher headcount and increased research and development.
- Stock-based compensation expense was $137.5 million in Q2 and $227.2 million for the six months, compared with $33.8 million and $54.0 million, respectively, in the prior-year periods.
- Adjusted EBITDA, as defined for the CEO Performance Award, was $89.5 million in Q2 and $133.2 million for the first six months, versus $23.2 million and $45.7 million, respectively, in the comparable periods. This non-GAAP measure excludes stock-based compensation and should not be viewed as a substitute for GAAP earnings.
- At June 30, 2021, cash and cash equivalents were $266.4 million, short-term investments were $388.9 million and long-term investments were $48.7 million. Total assets were $1.53 billion and stockholders’ equity was $1.10 billion.
- Axon had no borrowings under its $50.0 million revolving credit facility; $43.9 million was available after $6.1 million of letters of credit. The facility matures December 31, 2023. The reported funded debt-to-EBITDA ratio was 0.00 to 1.00 against a maximum covenant ratio of 2.50 to 1.00.
Material changes versus the prior comparable period
- TASER segment revenue increased 59.6% in Q2 and 44.5% for the six months. Growth was led by TASER 7 devices and cartridges, with Q2 cartridge revenue up 96.4% and TASER 7 revenue up 142.7%.
- Software and Sensors revenue increased 50.2% in Q2 and 42.4% for the six months. Axon Evidence and cloud services increased 44.1% in Q2 and 39.0% for the six months, driven primarily by higher users and associated devices.
- Gross margin improved overall, but Software and Sensors margins contracted as Axon invested in cloud infrastructure, applications and LTE capacity and incurred low-to-no-margin professional services for new installations.
- SG&A increased 145.8% in Q2 and 124.8% for the six months. R&D increased 82.5% in Q2 and 80.5% for the six months, reflecting increased personnel, product development and stock-based compensation.
- Operating cash flow improved from a $7.0 million use in the first six months of 2020 to $95.1 million provided in 2021. The improvement primarily reflected $227.2 million of stock-based compensation, higher deferred revenue and working-capital changes.
- Strategic investments increased to $58.5 million from $11.7 million at year-end 2020. Axon recorded a $40.9 million gain from observable price changes in strategic investments and related warrants, including $12.3 million realized from a partial sale.
Guidance, outlook, commentary and risks
- Management maintained 2021 revenue guidance of $825 million to $850 million and capital expenditure guidance of approximately $65 million to $70 million.
- Remaining performance obligations were approximately $2.04 billion at June 30, 2021. Management expected to recognize 20% to 25% over the following 12 months and generally the remainder over five to seven years, subject to deployment delays, government appropriations and cancellation clauses.
- Management expects continued investment in software, cloud-connected devices, artificial intelligence, digital evidence management, communications and computer-aided dispatch products. R&D expense is expected to increase in absolute dollars.
- Supply-chain risks included port constraints and higher raw-material costs. The company reported capacity expansion, supplier negotiations, secondary sourcing and inventory buffers to mitigate these pressures.
- COVID-19 remained a risk to operations, customer budgets, collections and demand. The company recorded an additional approximately $1.0 million credit-loss reserve related to pandemic conditions.
- The Federal Trade Commission’s challenge to Axon’s 2018 Vievu acquisition remained pending. The FTC administrative proceeding was stayed while Axon pursued Supreme Court review; potential divestiture or other remedies could be material, but no liability was recorded because the outcome was not predictable.
- Axon was defending four product-liability lawsuits involving alleged wrongful death or personal injury. Management did not believe the matters were likely to have a material effect, but litigation outcomes remain uncertain. The company is self-insured for the first $5.0 million of post-2014 product claims.
- Other risks include government contract cancellations or non-renewals, cybersecurity and cloud outages, customer adoption of subscription offerings, international and foreign-currency exposure, product defects, intellectual-property litigation, acquisition integration and the substantial volatility of performance-based stock compensation.
Most important facts for investors to verify
- Whether revenue growth, particularly Axon Evidence and cloud revenue, continues to support the $825 million to $850 million 2021 guidance.
- The sustainability of gross-margin improvements in TASER and the timing of margin recovery in Software and Sensors as cloud investments scale.
- The magnitude and timing of future stock-based compensation expense, including approximately $41.7 million of unrecognized CEO Performance Award expense and $42.3 million of unrecognized XSU expense at June 30, 2021.
- Conversion of the $2.04 billion performance-obligation balance into recognized revenue and cash, including the effect of government appropriations, deployment delays and cancellation rights.
- The outcome and potential remedies in the FTC litigation concerning Vievu.
- Operating cash flow excluding substantial non-cash stock-based compensation and gains on strategic investments.
- Exposure to supply-chain costs, product-liability claims, cybersecurity events, customer credit losses and subscription-model collection timing.