10-KPeriod: FY2017

AXON ENTERPRISE, INC. Annual Report, Year Ended Dec 31, 2017

Filed March 1, 2018For Securities:AXON

Summary

Axon Enterprise, Inc. reported robust top-line growth in 2017, with net sales increasing by 28.2% to $343.8 million. This growth was driven by both its established TASER Weapons segment, which saw a 15.7% increase in net sales, and its rapidly expanding Software and Sensors segment, which experienced a significant 66.6% surge in net sales. The company's strategic focus on its integrated ecosystem of devices, apps, and cloud services for law enforcement and public safety appears to be paying off. The substantial investment in R&D, particularly in AI and new sensor technologies, positions Axon for future innovation. However, investors should note the decline in net income and a decrease in gross margin percentage in 2017, primarily attributed to increased R&D spending and higher costs within the Software and Sensors segment, including data migration expenses and hardware discounting. Additionally, the company is addressing a material weakness in internal controls related to its UK subsidiary, which is being remediated.

Financial Highlights

52 data points
Beta

Revenue

$343.80M

60.2% Gross Margin

Net Income

$5.21M

1.5% Net Margin

EPS (Diluted)

$0.10

Total Assets

$338.11M

Cash & Equivalents

$75.11M

Free Cash Flow

$8.05M

Financial Statements
Beta
Revenue$343.80M
Cost of Revenue$136.71M
Gross Profit$207.09M
R&D Expenses$55.37M
SG&A Expenses$138.69M
Operating Expenses$194.06M
Operating Income$13.02M
Net Income$5.21M
EPS (Basic)$0.10
EPS (Diluted)$0.10
Shares Outstanding (Basic)52.73M
Shares Outstanding (Diluted)53.90M

Key Highlights

  • 1Net sales grew by 28.2% to $343.8 million in 2017, driven by strong performance in both TASER Weapons and Software and Sensors segments.
  • 2The Software and Sensors segment demonstrated impressive growth, with net sales increasing by 66.6% to $109.3 million, indicating strong market adoption of Axon's connected solutions.
  • 3Investment in Research & Development significantly increased by 80.9% to $55.4 million, reflecting a strategic focus on innovation and new product development, particularly in AI.
  • 4Gross margin as a percentage of net sales decreased to 60.2% in 2017 from 63.6% in 2016, primarily due to hardware discounting and increased costs in the Software and Sensors segment.
  • 5Net income saw a significant decline, falling to $5.2 million in 2017 from $17.3 million in 2016, impacted by increased operating expenses, particularly R&D.
  • 6The company reported a substantial increase in backlog to $582.7 million as of December 31, 2017, signaling strong future revenue potential, especially in the Software and Sensors segment.
  • 7A material weakness in internal controls over financial reporting was identified concerning the UK subsidiary, Axon Public Safety U.K. Ltd., with remediation efforts underway.

Frequently Asked Questions

Axon's revenue growth in 2017 was driven by strong performance across both its segments. The TASER Weapons segment saw an increase of 15.7% due to higher sales of TASER X2 and increased cartridge sales. The Software and Sensors segment experienced a more substantial growth of 66.6%, fueled by the increasing adoption of Axon body cameras, related technologies, and the Evidence.com platform.

Axon's growth strategy is built on three foundations: Devices (expanding TASER CEW adoption and developing new weapon technologies), Apps (enhancing the Evidence.com platform for evidence management), and People (leveraging its network and bringing modern IT capabilities to law enforcement). Key strategic areas include expanding CEW market share, increasing Evidence.com market share and ARPU, capturing in-car video market share with Axon Fleet, and expanding into records management and dispatch software.

The company's financial outlook appears positive due to strong sales growth and a growing backlog. However, key risks identified include a decline in net income and gross margin percentage in 2017 due to increased R&D and operating expenses, a material weakness in internal controls, dependence on law enforcement market acceptance, rapid technological change, potential product defects, and cybersecurity risks related to its cloud services.

Axon significantly increased its investment in Research and Development by 80.9% to $55.4 million in 2017. This investment is focused on developing next-generation technology across its product platforms, including a new AI group, advancements in smart cameras, and the expansion of its Software and Sensors offerings like records management systems and computer-aided dispatch software.