01—Abstract
Summary
Summary of the 10-Q filed August 9, 2017. Cited figures are marked; the original filing is the authoritative source.
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 milliona, 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.
02—Key points
Key Highlights
- Total 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.
- The 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.
- TASER 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.
- Net 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.
- Research 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.
- The 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.
- Axon 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.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in Q2 FY2017, Axon Enterprise, Inc. kept $0.03.
- Revenue$79.6M100.0%
- Cost of revenue−$34.0M42.7%
- Gross profit$45.6M57.3%
- Operating costs−$44.8M56.3%
- Operating income$824,0001.0%
- Interest, other & tax$1.5M1.8%
- Net income$2.3M2.9%
04—Financials
Financial Highlights
Figures from 10-QQ2 FY2017filed August 9, 2017Financial Statements
Q2 FY2017 against Q2 FY2016
| Line item | Q2 FY2017Q2 FY2016 | Change |
|---|---|---|
| Revenue | $79.64M$58.76M | +35.5% |
| Cost of Revenue | $34.01M$21.46M | +58.5% |
| Gross Profit | $45.64M$37.30M | +22.4% |
| R&D Expenses | $12.99M$6.71M | +93.6% |
| SG&A Expenses | $31.82M$24.38M | +30.5% |
| Operating Expenses | $44.81M$31.09M | +44.1% |
| Operating Income | $824K$6.21M | −86.7% |
| Net Income | $2.28M$3.65M | −37.6% |
| EPS (Basic) | $0.04$0.07 | −42.9% |
| EPS (Diluted) | $0.04$0.07 | −42.9% |
| Shares Outstanding (Basic) | 52.74M52.48M | +0.5% |
| Shares Outstanding (Diluted) | 53.77M53.29M | +0.9% |
05—Questions
Frequently Asked Questions
What are the main drivers behind Axon's revenue growth in the reported quarter?
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.
Why did net income decrease despite the significant revenue increase?
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.
What is the company doing about the material weaknesses in internal controls?
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.
What is the company's liquidity position and cash flow situation?
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.
06—Continue