10-QPeriod: Q3 FY2020

AXON ENTERPRISE, INC. Quarterly Report for Q3 Ended Sep 30, 2020

Filed November 6, 2020For Securities:AXON

Summary

Axon Enterprise, Inc. reported significant revenue growth for the nine months ended September 30, 2020, up 26.7% year-over-year to $454.9 million. This growth was primarily driven by its Software and Sensors segment, which saw a 38.9% increase in net sales, highlighting the continued adoption of cloud-based solutions and new hardware like the Axon Body 3. Despite revenue expansion, the company experienced a net loss of $27.6 million for the nine-month period, a notable decrease from the $13.3 million net income in the prior year. This was largely influenced by a substantial increase in operating expenses, particularly stock-based compensation related to executive performance awards and increased legal expenses associated with FTC litigation. The balance sheet shows robust growth in current assets, including a significant increase in short-term investments and inventory. The company ended the period with $176 million in cash and cash equivalents, and a strong liquidity position. The balance of future contracted revenues remains substantial at $1.51 billion, providing a degree of revenue visibility, with expected recognition over the next 5-7 years. Investors should note the ongoing investments in research and development and the strategic shift towards subscription-based models. Key areas of focus for investors include the substantial increase in stock-based compensation, the material impact of the FTC litigation, and the ongoing investment in growth initiatives. While the revenue trajectory is positive, the profitability is being impacted by these significant expense items. The company's substantial future contracted revenue provides a positive outlook, but close monitoring of expense management and litigation outcomes will be crucial.

Financial Highlights

49 data points
Beta

Revenue

$166.44M

59.0% Gross Margin

Net Income

-$873K

-0.5% Net Margin

EPS (Diluted)

$-0.01

Total Assets

$1.28B

Cash & Equivalents

$176.11M

Free Cash Flow

-$47.33M

Financial Statements
Beta
Revenue$166.44M
Cost of Revenue$68.20M
Gross Profit$98.24M
R&D Expenses$29.25M
SG&A Expenses$74.44M
Operating Expenses$103.69M
Operating Income-$5.45M
Net Income-$873K
EPS (Basic)$-0.01
EPS (Diluted)$-0.01
Shares Outstanding (Basic)63.50M
Shares Outstanding (Diluted)63.50M

Key Highlights

  • 1Revenue increased by 26.7% to $454.9 million for the nine months ended September 30, 2020, compared to the same period in 2019.
  • 2The Software and Sensors segment showed strong growth with net sales up 38.9% for the nine months ended September 30, 2020.
  • 3Net loss for the nine months ended September 30, 2020, was $27.6 million, compared to a net income of $13.3 million in the prior year.
  • 4Operating expenses significantly increased, driven by a $44.8 million rise in stock-based compensation expense and increased legal costs related to FTC litigation.
  • 5The company maintained a strong liquidity position, with $176.0 million in cash and cash equivalents as of September 30, 2020.
  • 6Future contracted revenues stood at approximately $1.51 billion as of September 30, 2020, indicating significant revenue visibility.
  • 7Significant investments are being made in research and development, particularly within the Software and Sensors segment.

Frequently Asked Questions

The substantial increase in stock-based compensation expense, which rose by $44.8 million for the nine months ended September 30, 2020, is primarily attributed to the CEO Performance Award and the eXponential Stock Performance Plan (XSPP). Eleven operational goals for these plans are now considered probable of attainment, compared to three in the prior year, leading to increased expense recognition. Additionally, headcount growth also contributed to higher compensation costs.

The FTC litigation regarding the Vievu LLC acquisition has resulted in increased professional, consulting, and lobbying expenses, totaling $19.5 million more for the nine months ended September 30, 2020. The company anticipates these litigation expenses to be in the range of $19.0 million to $21.0 million for the full year. The FTC could require divestiture of assets or other remedial measures, which could be material. Axon is vigorously defending itself and is also evaluating strategic alternatives. No liability has been recorded as the outcome is unpredictable.

The approximately $1.51 billion in future contracted revenue as of September 30, 2020, represents a strong indicator of future revenue streams. This includes recognized contract liabilities and amounts to be invoiced. The company expects to recognize 20%-25% of this balance in the next twelve months, with the remainder spread over the subsequent five to seven years. This provides significant revenue visibility, although it is subject to risks like delayed deployments and budget appropriations.

Axon maintains a strong liquidity position, with $176.0 million in cash and cash equivalents and $627.5 million in total cash and investments as of September 30, 2020. The company also has an available $50.0 million unsecured revolving line of credit. While investing heavily in R&D and facing litigation costs, the substantial revenue growth and future contracted revenue provide a solid foundation. Management believes its current liquidity and potential financing sources are sufficient to meet anticipated cash requirements for at least the next 12 months.