10-QPeriod: Q2 FY2017

AXON ENTERPRISE, INC. Quarterly Report for Q2 Ended Jun 30, 2017

Filed August 9, 2017For Securities:AXON

Summary

Axon Enterprise, Inc. (AXON) reported strong top-line growth in its second quarter and first six months of 2017, driven by significant increases in both its TASER Weapons and Software and Sensors segments. Net sales for the second quarter of 2017 rose by 35.5% to $79.6 million, with the Software and Sensors segment nearly doubling its revenue, up 101.4% to $26.6 million. This growth was fueled by increased adoption of on-officer cameras, related technologies, and Evidence.com services, alongside continued strength in TASER weapons and cartridge sales. While revenue growth was robust, the company experienced a decrease in net income to $2.3 million for the quarter and $6.9 million for the six months, compared to $3.7 million and $7.1 million in the prior year periods, respectively. This was largely due to an increase in cost of goods sold and services delivered, particularly within the Software and Sensors segment, and a significant rise in research and development expenses, reflecting ongoing investment in new product development. The company is also actively working to remediate identified material weaknesses in internal controls over financial reporting, particularly in revenue recognition and income tax accounting, with expectations for completion by year-end 2017.

Financial Highlights

51 data points
Beta

Revenue

$79.64M

57.3% Gross Margin

Net Income

$2.28M

2.9% Net Margin

EPS (Diluted)

$0.04

Total Assets

$316.31M

Cash & Equivalents

$28.04M

Free Cash Flow

-$9.25M

Financial Statements
Beta
Revenue$79.64M
Cost of Revenue$34.01M
Gross Profit$45.64M
R&D Expenses$12.99M
SG&A Expenses$31.82M
Operating Expenses$44.81M
Operating Income$824K
Net Income$2.28M
EPS (Basic)$0.04
EPS (Diluted)$0.04
Shares Outstanding (Basic)52.74M
Shares Outstanding (Diluted)53.77M

Key Highlights

  • 1Total net sales increased by 35.5% to $79.6 million for the three months ended June 30, 2017, compared to $58.8 million in the prior year period.
  • 2The Software and Sensors segment experienced substantial growth, with net sales up 101.4% to $26.6 million in Q2 2017, driven by strong demand for Axon cameras, docks, and Evidence.com services.
  • 3TASER Weapons segment sales grew by 16.4% to $53.0 million, supported by increased purchases under installment programs and a U.K. government approval for Smart Weapons.
  • 4Net income for the second quarter decreased to $2.3 million ($0.04 per share) from $3.7 million ($0.07 per share) in Q2 2016, due to higher cost of sales and increased R&D investment.
  • 5Research and Development expenses more than doubled, increasing by 93.6% to $13.0 million, primarily in the Software and Sensors segment, signaling a strong focus on innovation.
  • 6The company reported a net cash usage of $12.4 million from operating activities for the six months ended June 30, 2017, a significant shift from $10.3 million generated in the same period of 2016, largely due to increased inventory and prepaid expenses.
  • 7Axon is actively addressing material weaknesses in its internal controls over financial reporting, focusing on revenue recognition, cost of goods sold, deferred revenue, and income tax accounting.

Frequently Asked Questions

Axon's revenue growth is primarily driven by strong performance in both its TASER Weapons segment and its Software and Sensors segment. The Software and Sensors segment saw a significant surge (101.4%) due to increased adoption of on-officer cameras (like Axon Body and Axon Flex), docking stations, and its Evidence.com cloud-based evidence management software. The TASER Weapons segment also grew (16.4%) due to increased sales of TASERs, cartridges, and extended warranties, benefiting from installment payment programs and recent approvals in the UK.

Net income decreased in the second quarter of 2017 compared to the prior year despite higher sales. This was primarily due to a substantial increase in the 'Cost of products sold and services delivered,' particularly impacting the Software and Sensors segment's gross margin. Additionally, Research and Development expenses nearly doubled, reflecting a strategic investment in developing new technologies and products for future growth. These higher costs outpaced the revenue gains, leading to lower net income.

Axon is actively implementing remediation plans to address identified material weaknesses in its internal controls over financial reporting. These efforts include adding staff to accounting and tax teams, enhancing internal reporting and review processes for revenue and cost recognition, implementing additional system controls to prevent data entry errors, and improving communication between departments. The company expects to complete these remediation efforts by the end of fiscal year 2017.

As of June 30, 2017, Axon had $61.8 million in cash, cash equivalents, and investments. However, for the first six months of 2017, the company used $12.4 million in cash from operating activities, a notable shift from generating $10.3 million in the same period of 2016. This change is attributed to significant increases in inventory and prepaid expenses, alongside increased accounts receivable. The company also has a $10.0 million revolving line of credit, with approximately $7.3 million available after accounting for letters of credit, and believes its current liquidity is sufficient for its needs.