Document


 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 8-K
 
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

February 27, 2018
Date of Report (Date of earliest event reported)
 
Axon Enterprise, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 (State or other jurisdiction of
 incorporation)
 
001-16391
 (Commission File Number)
 
86-0741227
 (IRS Employer
 Identification No.)

17800 N. 85th St.
Scottsdale, Arizona 85255
(Address of principal executive offices, including zip code)

(480) 991-0797
(Registrant’s telephone number, including area code)

Not Applicable
(Former name or former address, if changed since last report)


Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

o
 
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
 
 
o
 
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
 
 
o
 
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
 
 
o
 
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
 

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§ 230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§ 240.12b-2 of this chapter).  Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

 





TABLE OF CONTENTS

Item 2.02 Results of Operations and Financial Condition
Item 9.01 Financial Statements and Exhibits
SIGNATURE


Item 2.02 Results of Operations and Financial Condition

On February 27, 2018 Axon Enterprise, Inc. (the "Company" or "Axon"), issued a shareholder letter regarding the Company’s financial results for its fourth quarter of 2017. The full text of the letter, together with the unaudited condensed consolidated statements of operations, segment reporting, balance sheets, selected cash flow information, statistical measures and reconciliations of GAAP to non-GAAP financial measures are attached hereto as Exhibit 99.1. The Company has also provided additional unaudited statistical data for its fourth quarter of 2017 as attached hereto as Exhibit 99.2.

The information pursuant to Item 2.02 in this report on Form 8-K is being furnished and shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that Section.

Item 9.01 Financial Statements and Exhibits

(d)        Exhibits
Exhibit
Number
 
Exhibit Description
99.1
 
99.2
 





 






SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
 
 
 
 
 
Dated: February 27, 2018
Axon Enterprise, Inc.
 
 
By:  
 /s/ JAWAD A. AHSAN
 
 
 
Jawad A. Ahsan
 
 
 
Chief Financial Officer 
 













Exhibit


FOR RELEASE ON: February 27, 2018 at 1601 ET

Exhibit 99.1

CONTACT:
Investor Relations
Axon Enterprise, Inc.
IR@axon.com

Axon Reports Record Revenue of $95 Million for Q4 2017 and $344 Million for Full Year 2017; Introduces 2018 Financial Guidance

Scottsdale Ariz., February 27, 2018 - Axon (Nasdaq: AAXN), the global leader in public safety technology, today released the following quarterly update letter to shareholders.

Record annual revenue of $344 million, up 28% from 2016
Q4 revenue of $94.7 million, up 15% year-over-year
Q4 GAAP EPS of ($0.04) includes $8 million tax reform-related charge; Non-GAAP EPS of $0.13
$82 million of cash and short-term investments and zero debt at December 31, 2017
Completed the largest ever cloud data migration, moving 20 PB of data onto Microsoft's Azure cloud
Introduces 2018 financial guidance, including 16%-18% revenue growth and 300-400 basis points of operating margin expansion

Dear shareholders,

Today we are reporting our financial results for the fourth quarter ended December 31, 2017 and we are providing our 2018 outlook.

We've just completed a pivotal year where we changed our company name from TASER International to Axon Enterprise (Axon) to better reflect our go-forward mission and made significant investments to drive progress within our four strategic growth areas: 1) TASER conducted electric weapons (CEWs), 2) body-worn cameras and evidence management, 3) Axon Fleet in-car video systems, and 4) Axon Records. We also made investments in our international direct sales strategy and artificial intelligence and machine learning capabilities.

We don't intend to slow down in 2018. At our Investor & Analyst day in November 2017, we laid out a financial strategy to shift to recurring cash flows, to invest in products and features that expand our total addressable market and to drive profitability through disciplined execution.

This year, we plan to introduce several new products and services and improve upon our existing suite of offerings - which we believe will grow recurring cash flows and increase average revenue per user. We're also scaling up our offices across the world and cross-pollinating our internal groups to ensure we execute against one vision for Axon. In short, we are focused on disciplined execution and preparing for significant growth across the globe.

Finally, we are driving toward profitability in the Software & Sensors segment and remain committed to expanding total company operating margins, which we address in more detail below.

Summary of Q4 2017 Results:
Net sales increased 15% to $94.7 million in Q4 2017 compared to $82.1 million in Q4 2016.
Consolidated gross margin was 66.6% in Q4 2017 compared to 55.1% in Q3 2017 and 60.6% in Q4 2016.





Sequential gross margin improvement was tied to a favorable mix of product shipments, lower data storage costs, lower costs associated with Axon Fleet shipments, more favorable pricing, and fewer shipments into new international markets at beachhead pricing. We expect 300 to 400 basis points of the gross margin strength to be non-recurring.
Total operating expenses in Q4 2017 were $55.4 million, compared to $40.4 million in Q4 2016.
Q4 2017 operating expenses include $0.9 million in costs associated with our Q4 reduction in force and a non-cash intangible asset abandonment charge of $1.1 million. Excluding these items, operating expenses would have been $53.3 million, up 5.5% sequentially from Q3 2017, which is in line with our guidance of 5% to 8% sequential operating expense growth.
We estimate that the Q4 restructuring will result in approximately $4.5 million in annual operating expense savings beginning in 2018. We are also pleased to note that we're starting to see a positive impact from the expense control initiatives put into place in early November. In fact, we have started to bend the cost-growth curve compared to prior trend. Travel expenses in November and December, for example, declined 9% year-over-year.
Income from operations was $7.6 million in Q4 2017 compared to $9.4 million in Q4 2016. Operating margin in Q4 2017 was 8.1%.
Our GAAP net loss for Q4 2017 was ($2.1 million), or ($0.04) per diluted share, compared to net income of $6.3 million, or $0.12 per diluted share, in Q4 2016.
Non-GAAP net income for Q4 2017 was $7.1 million, or $0.13 per share, and excludes the following:
An $8.0 million non-cash write down of our net deferred tax asset due primarily to a decrease in the US tax rate under the Tax Cuts and Jobs Act that was signed into law on December 22, 2017. Our net deferred tax asset was valued at a 35% federal tax rate and thus, is worth less under the new lowered corporate tax rate of 21%, and requires a one-time tax adjustment. (The net result of the Act is positive for us in the long term, however.)
A $1.1 million non-cash intangible asset abandonment charge.
For the first time this quarter, we are introducing a new non-GAAP net income that excludes stock-based compensation expenses, and we will provide that going forward. With this added adjustment, our non-GAAP net income was $9.7 million, or $0.18 per share, which compares to $8.0 million, or $0.15 per share, in Q4 2016.
Adjusted EBITDA for Q4 2017 was $14.8 million compared to $13.1 million in Q4 2016. This represents 13% growth year-over-year. We calculate adjusted EBITDA by adding back or subtracting to EBITDA the following:
adding $4.2 million in stock-based compensation expense;
adding $1.1 million in one-time losses on the disposal and abandonment of intangible assets.
In Q4 2017, cash provided by operating activities was $24.3 million. Cash, cash equivalents and short-term investments were $82.0 million at December 31, 2017, compared with $61.8 million at the end of Q3 2017.
We executed on our stated objective of managing inventory down to below $50 million by year end. Total inventory for Q4 2017 decreased to $45.5 million from $52.7 million at the end of Q3 2017 and $60.7 million at the end of Q2 2017.

TASER Weapons:
TASER Weapons segment revenue increased 10% to $64.4 million in Q4 2017 compared to $58.3 million in Q4 2016 as we executed against our mission to make a TASER conducted electric weapon available to every officer.
TASER Weapons segment gross margin was 70.9% in Q4 2017 compared to 69.3% in Q4 2016. The margin strength is due to favorable mix and leverage on higher revenue.






In Q4 2017, approximately 38% of units ordered, including from international customers, were on the TASER 60, Officer Safety Plan, or TASER Assurance Plan payment options. This compares to the 43% of weapons sold on a payment plan in Q3 2017, which indicates our customers continued willingness to pay for weapons hardware via payment plan and supports our stated financial goal of increasing recurring cash flows.

Two of our top three TASER contracts signed in Q4 2017 were procured via the TASER 60 payment plan. We're also seeing increased adoption of our TASER X2 two-shot CEW, proving that customers see value in having an immediate backup shot.

Looking forward, our TASER weapons sales pipeline remains solid, reflecting continued strong demand domestically and increasing interest across international markets. We believe that continued investments in smart weapons technology and incident reporting will further enhance our value proposition over the long term.

Software & Sensors:

In early December 2017 we completed the migration of the U.S. instance of Evidence.com to Microsoft Azure. We announced the strategic decision to switch to Microsoft Azure in Q4 2015, with the goal of better aligning our cloud-hosted services with our customer preferences. We believe that ours was the largest application ever to migrate between two public cloud providers. Throughout the migration, we focused on the three priorities of correctness, minimal impact to customers and security. Preserving the integrity and privacy of our customers' evidence data continues to be our highest priority.

Although the initiative spanned two years and thousands of hours of work, the switch on a Sunday morning in early December required only one hour of downtime and resulted in no reported application bugs, nor security or compliance issues for our customers. This smooth transition highlights our team's competence and subject matter expertise in site reliability engineering, software engineering, product management, information security, and customer support engineering.

Importantly, our partnership with Microsoft is already generating positive results, helping us win several major city police agencies in the U.S. and one large international customer. The partnership will also allow us to reduce our storage and server costs going forward.

We incurred a total of $0.7 million of migration and duplicate storage cost in Q4 2017 compared with our projection of $1.0 million for the quarter and our Q3 2017 incurred costs of $1.4 million.

Software & Sensors segment revenue grew 27% year-over-year to $30.2 million in Q4 2017 compared to $23.7 million in Q4 2016.
Software & Sensors product revenue was $13.1 million in Q4 2017 compared to $12.5 million in Q4 2016.
Software & Sensors service revenue was $17.1 million in Q4 2017 compared to $11.2 million in Q4 2016.
Software & Sensors segment gross margin was 57.3% in Q4 2017 compared to 39.4% in Q4 2016.
Service gross margin was 68.2% in Q4 2017, compared to 82.7% in Q4 2016.
Hardware product gross margin (excluding services) was 43.0% in Q4 2017 compared to 0.5% in Q4 2016. Hardware product gross margins also benefited from a favorable mix and we believe that 1,100 to 1,300 basis points of the margin strength is non-recurring.
Annual recurring service revenue grew 74% year-over-year to $70.0 million in Q4 2017 compared to $40.2 million in Q4 2016.
Q4 2017 bookings were strong, coming in at $71.2 million, while Q4 2017 future contracted revenue rose to $536 million from $494 million in Q3 2017. Annual bookings grew 15% year-over-year from $254 million in 2016 to





$291 million in 2017. Unit shipments in Q4 2017 reflected the Q3 2017 or early Q4 completions of several large customer deployments.

Unit shipments also reflect some large deployments that pushed into Q1 2018. Q1 2018 is already off to a strong start for new orders. Australia's Victoria Police will deploy 11,000 body cameras backed by Evidence.com, which will represent our second largest body camera deployment.

We recorded 13 competitor conversion wins in Q4 2017 where our body-worn camera or Axon Fleet offering displaced a competitor, bringing our 2017 total to 46 customer conversions. In Q4 2017, we recorded 11 expansions where a state or major city police agency chose to upsize their contracts and expand their reliance upon the Axon network.

Independent research reports continue to validate the benefits of body camera technology. In Q4 2017, an independent study was published showing that use-of-force complaints fell 37% at the Las Vegas Metropolitan Police Department (LVMPD) after the agency deployed Axon body-worn cameras. Researchers also performed a cost-benefit analysis and found that body-worn cameras could ultimately save LVMPD up to $4 million per year in legal fees. The study was conducted by the University of Nevada, Las Vegas, and CNA, a non-profit research and analysis organization, and was funded by the U.S. Department of Justice.

As of December 31, 2017, 37 of the 69 U.S. major city law enforcement agencies had purchased Axon body-worn cameras or our digital evidence management solution: Albuquerque, Atlanta, Austin, Baltimore, Baltimore County, Charlotte-Mecklenburg, Chicago, Cincinnati, Cleveland, Dallas, Denver, Fort Worth, Fresno, Las Vegas, Los Angeles, Louisville, Memphis, Mesa, Miami, Milwaukee, Minneapolis, Montgomery County, New Orleans, Omaha, Philadelphia, Pittsburgh, Sacramento, Salt Lake City, San Antonio, San Diego, San Francisco, San Jose, Seattle, Tampa, Tucson, Washington DC, and Wichita.

Axon's Evidence.com platform user count continued to grow, extending our market leadership. During the three months ended December 31, 2017, we booked approximately 14,100 seats on our digital evidence management platform, Evidence.com, net of renewals. Since inception, we have booked cumulative Evidence.com licenses of approximately 201,500.

Product Pipeline:

Evidence.com - Evidence.com is a revolutionary way to manage digital evidence and the platform continues to expand its use cases. In fact, among agencies that are not yet ready to deploy body cameras, we are starting to see interest in Evidence.com products, including Axon Capture, which enables officers to capture evidence using their mobile phone cameras. Looking ahead, we see a significant opportunity to sell our software to agencies who are not using Axon hardware.

We are pleased to note that the new redaction studio capabilities we rolled out in Q4 2017 are being met with positive reception from our early access program customers. One police agency redaction specialist told us, “The Studio is a vast improvement on redaction! The object tracker works great, and when it misses, it’s easy to realign. Spray Paint is super as well! I am so glad we have this new tool, once we get the hang of it well, it’s going to be awesome, it already is! Thank you again."

Also, we are enhancing Evidence.com to make it easier for departments to ingest CCTV footage, which is currently a large pain point for our customers. Agencies want to put all forms of video into Evidence.com to take advantage of its advanced capabilities, such as sharing with detectives and prosecutors, as well as allowing videos to be redacted.

Axon Citizen - Axon Citizen, the public evidence submission tool that we announced in Q4 2017, is also receiving positive feedback from early access agencies. Axon Citizen allows members of the community to use their mobile phones to send evidence directly to departments. It's exciting for us to watch agency customers take ownership of the tool and inform their own constituencies about their efforts to make communities safer https://www.youtube.com/





watch?v=iYZQYZTKli4. In Q4, Axon Citizen helped with its first arrest after officers in an East Coast agency used the tool to allow a burglary victim to send videos of the suspect.

Without Axon Citizen, if a member of the community has evidence on a mobile phone, the officer has to confiscate the phone for a week or longer to obtain the data. Officers also receive photos from the public via e-mail, which means the photo evidence lacks the audit trails required by law to be admissible in court and lacks meta-data to tie it to a specific case. Axon Citizen solves these problems by allowing an officer to text a secure link to victims and eye-witnesses, who can upload evidence to the department via Axon's secure cloud-based system.

We're planning to launch a community-wide public evidence submission tool in mid-2018 that will allow departments to more easily manage evidence related to larger scale crimes, such as missing persons, shootings, bombings, or natural disasters.

Camera Hardware - We also continue to invest in and improve our camera hardware. In February, we opened a small R&D office in Tampere, Finland, the country's second largest metropolitan area. A new team of world-renowned imaging experts (formerly the Nokia camera imaging team) have begun working on our next-generation body camera and Axon Fleet hardware. This added team is budget-neutral relative to the three-year plan we laid out at our November 2017 Investor & Analyst Day.

Signal Sidearm - We have been improving and fine tuning our Signal Sidearm offering, which signals Axon cameras to begin recording after an officer removes a firearm from its holster. We're presently rolling out new functionality, which includes eliminating the production of nuisance videos generated when firearms are pulled in training or for reasons that don't include an intention to shoot.

Artificial Intelligence & Machine Learning - We are applying AI, machine learning and data science to common policing problems and eliminating pain points for agencies. Our AI investments in 2018 will span our product sets, including AI services at the edge (within devices) and in the cloud.

Axon Records - Axon Records remains an important area of focus and investment. We are continuing to hire new software engineering talent to help us build the next generation of policing software. Our 2018 product milestone targets include launching our records management system (RMS) with select agencies. We are also actively collecting feedback from our development partners, who are running early iterations of Axon Records. We plan to deploy video-based incident report writing capability in the second half of 2018 to our early access partners.

Our customer facing team is already engaged in pre-sales activities to support the launch of Axon Records later this year.

Full Year 2018 Outlook:

For the full year ending December 31, 2018, we expect to achieve the following:
Revenue growth of 16% to 18%;
We will disclose 2018 revenue amounts under accounting standards 605 and 606 beginning with our first quarter 10-Q;
Operating margin expansion of 300 basis points to 400 basis points;
A normalized tax rate of 20% to 25%, which can fluctuate depending on geography of income, change in stock price and the effect of discrete items; and
Capital expenditures in the range of $12 million to $16 million.
We remain confident in our goal of providing the premier end-to-end technology solution for law enforcement. We believe we are demonstrating the ability to morph from a hardware-only business into a subscription-hardware-plus-SAAS-solutions-and-enterprise-software company, and we look forward to updating you on our progress throughout 2018.






Signed,
Rick Smith, CEO
Luke Larson, President
Jawad Ahsan, CFO

QUARTERLY CONFERENCE CALL & WEBCAST:

The Company will host its Q4 2017 earnings conference call on Tuesday, February 27, 2018 at 2 p.m. PT / 5 p.m. ET. To join the live audio presentation, please dial toll free 877-303-9126, or for international callers, please dial+1-253-237-1156.

The call will be available via live audio webcast and archived replay on Axon’s investor relations website at http://investor.axon.com/.

The Company has posted supplemental materials including its key operating metrics on its website to provide additional information about our fourth quarter financial results.

Statistical Definitions:

Bookings are an indication of the activity the Company is seeing relative to Software & Sensors hardware, software and Evidence.com. We consider bookings to be a statistical measure defined as the sales price of orders (not invoiced sales), including contractual optional periods we expect to be exercised, net of cancellations, placed in the relevant fiscal period, regardless of when the products or services ultimately will be provided. Most bookings will be invoiced in subsequent periods.

Due to municipal government funding rules, in some cases certain of the future period amounts included in bookings are subject to budget appropriation or other contract cancellation clauses. Although Axon has entered into contracts for the delivery of products and services in the future and anticipates the contracts will be fulfilled, if agencies do not exercise contractual options, do not appropriate money in future year budgets or do enact a cancellation clause, revenue associated with these bookings may not ultimately be recognized, resulting in a future reduction to bookings.

For more information relative to our revenue recognition policies, please reference our SEC filings.

Non-GAAP Measures:

To supplement the Company’s financial results presented in accordance with GAAP, we present the non-GAAP financial measures of EBITDA, Adjusted EBITDA and Free Cash Flow. Our management uses these non-GAAP financial measures in evaluating the Company’s performance in comparison to prior periods. We believe that both management and investors benefit from referring to these non-GAAP financial measures in assessing our performance, and when planning and forecasting our future periods. A reconciliation of GAAP to the non-GAAP financial measures is presented at the end of the release.

EBITDA is defined as consolidated net income before interest expense, income taxes and depreciation and amortization. Adjusted EBITDA, as presented herein, is defined as EBITDA before certain other items, including: stock-based compensation; net gain/loss on write-down/disposal/abandonment of property, equipment and intangible assets; and loss on impairment.

Free Cash Flow is defined as cash flows provided by operating activities minus purchases of property, plant and equipment, and intangible assets.

Caution on Use of Non-GAAP Measures






Although these non-GAAP financial measures are not consistent with GAAP, management believes investors will benefit by referring to these non-GAAP financial measures when assessing the Company’s operating results, as well as when forecasting and analyzing future periods. However, management recognizes that:
these non-GAAP financial measures are limited in their usefulness and should be considered only as a supplement to the Company’s GAAP financial measures;
these non-GAAP financial measures should not be considered in isolation from, or as a substitute for, the Company’s GAAP financial measures;
these non-GAAP financial measures should not be considered to be superior to the Company’s GAAP financial measures; and
these non-GAAP financial measures were not prepared in accordance with GAAP and investors should not assume that the non-GAAP financial measures presented in this earnings release were prepared under a comprehensive set of rules or principles.

Further, these non-GAAP financial measures may be unique to the Company, as they may be different from similarly titled non-GAAP financial measures used by other companies. As such, this presentation of non-GAAP financial measures may not enhance the comparability of the Company’s results to the results of other companies.

About Axon

The Axon network is a network of devices, apps and people that helps law enforcement become smarter and safer. Our mission is to protect life. Our technologies give law enforcement the confidence, focus and time they need to keep their communities safe. Our products impact every aspect of an officer's day-to-day experience:
In the field- Our Smart Weapons offer a less-lethal intermediate use of force response and our body-worn and in-car cameras collect video evidence to capture the truth of an incident; and our mobile applications enable simple evidence collection.
At the station- Our secure, cloud-based digital evidence management solution allows officers and command staff to manage, review, share and process digital evidence using forensic, redaction, transcription, and other tools.
In the courtroom- Our solutions for prosecutors make collaborating across jurisdictions and agencies easy so that cases can be resolved quickly.

We work hard for those who put themselves in harm's way for all of us. To date, there are more than 187,400 licensed users from around the world and more than196,000 lives and countless dollars have been saved with the Axon network of devices, apps and people. Learn more at www.axon.com or by calling (800) 978-2737.

Microsoft is a trademark of Microsoft Corporation and Nokia is a registered trademark of Nokia Corporation.

Axon, Axon Body 2, Axon Capture, Axon Citizen, the “Axon Delta” logo, Axon Fleet, Axon Flex 2, Axon Network, Axon Records, Axon Signal, Evidence.com, “Protect Life,” Smart Weapons, TASER, TASER CAM, X2, and X26P are trademarks of Axon Enterprise, Inc., some of which are registered in the US and other countries. For more information, visit www.axon.com/legal. All rights reserved.

Follow Axon here:

Axon on Twitter: https://twitter.com/axon_us
Axon on Facebook: https://www.facebook.com/Axon.ProtectLife/

Note to Investors






This press release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), including statements regarding our expectations, beliefs, intentions or strategies regarding the future. We intend that such forward-looking statements be subject to the safe-harbor provided by the Private Securities Litigation Reform Act of 1995. The forward-looking information is based upon current information and expectations regarding Axon Enterprise, Inc. These estimates and statements speak only as of the date on which they are made, are not guarantees of future performance, and involve certain risks, uncertainties and assumptions that are difficult to predict. Axon Enterprise, Inc. assumes no obligation to update the information contained in this press release, except as required by law.

We caution that these statements are qualified by important factors that could cause actual results to differ materially from those reflected by the forward looking statements herein. Such factors include, but are not limited to: market acceptance of our products; our dependence on sales of our TASER X26P and X2 CEWs; acceptance of our Evidence.com software as a service delivery model by our law enforcement customers; our ability to design, introduce and sell new products; delays in development schedules; rapid technological change and competition; product defects; breach of our security measures resulting in unauthorized access to customer data; outages and disruptions relating to our Evidence.com service; budgetary and political constraints of prospects and customers; the length of our sales cycle and our ability to realize benefits from our marketing and selling efforts; our exposure to cancellations of government contracts due to appropriation clauses or non-exercise of contractually optional periods; changes in civil forfeiture laws; the long-term revenue recognition cycle for our SaaS Evidence.com product; our reliance on third party cloud-based storage providers; litigation risks resulting from alleged product-related injuries and media publicity concerning allegations of deaths occurring after use of the TASER device and the negative impact this publicity could have on sales; the outcome of pending or future litigation; our ability to protect our intellectual property as well as intellectual property infringement claims and relating litigation costs; challenges obtaining and enforcing our patent rights in foreign countries; risks of governmental regulations, including regulations of our products by the United States Consumer Product Safety Commission, regulation of our products as a "crime control" product by the Federal government, state and local government regulation and foreign regulation and the adverse effects that could result from our products being classified as firearms by the United States Bureau of Alcohol, Tobacco, Firearms and Explosives; regulatory and political challenges presented by international markets; the possibility that the United States may withdraw from or materially modify the North American Free Trade Agreement; the adverse effect of the United Kingdom’s exit from the European Union; our compliance with regulations governing the environment, including but not limited to, regulations within the European Union; regulations relating to voice, data and communications services; regulations relating to conflict minerals; our dependence on third party suppliers for key components of our products; component shortages; rising costs of raw materials and transportation relating to petroleum prices; that we may experience declines in gross margins due to a shift in product sales from CEWs to Axon devices; our ability to manage our growth and increase manufacturing production to meet demand; establishment and expansion of our direct and indirect distribution channels; our ability to pursue sales directly with customers; risks relating to acquisitions and joint ventures; goodwill impairment; catastrophic events; the adverse effects on our operations and financial results from foreign currency fluctuations; fluctuations in our effective tax rate; counter-party risks relating to cash balances held in excess of FDIC insurance limits; employee retention risks; volatility in our stock price; quarterly fluctuations in our operating results; and other factors identified in documents filed by us with the Securities and Exchange Commission, including those set forth in our Form 10-K for the year ended December 31, 2016 or the soon-to-be-filed Form 10-K for the year ended December 31, 2017.

Please visit http://investor.axon.com, https://www.axon.com/press, www.twitter.com/axon_us and https://www.facebook.com/Axon.ProtectLife/where Axon discloses information about the company, its financial information, and its business.

Visit our Investor Relations Safe Harbor Statement at:http://investor.axon.com/safeHarbor.cfm

For investor relations information please contact Andrea James via email at IR@axon.com.

# # #





AXON ENTERPRISE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)

 
Three Months Ended December 31,
 
Twelve Months Ended December 31,
 
2017
 
2016
 
2017
 
2016
Net sales from products
$
77,508

 
$
70,828

 
$
285,859

 
$
238,573

Net sales from services
17,143

 
11,249

 
57,939

 
29,672

Net sales
94,651

 
82,077

 
343,798

 
268,245

Cost of product sales
26,180

 
30,364

 
117,997

 
91,536

Cost of service sales
5,455

 
1,943

 
18,713

 
6,173

Cost of sales
31,635

 
32,307

 
136,710

 
97,709

Gross margin
63,016

 
49,770

 
207,088

 
170,536

Operating expenses:
 
 
 
 
 
 
 
Sales, general and administrative
39,613

 
30,743

 
138,692

 
108,076

Research and development
15,755

 
9,614

 
55,373

 
30,609

Total operating expenses
55,368

 
40,357

 
194,065

 
138,685

Income from operations
7,648

 
9,413

 
13,023

 
31,851

Interest and other income (expense), net
(582
)
 
106

 
2,738

 
(354
)
Income before provision for income taxes
7,066

 
9,519

 
15,761

 
31,497

Provision for income taxes
9,137

 
3,178

 
10,554

 
14,200

Net income (loss)
$
(2,071
)
 
$
6,341

 
$
5,207

 
$
17,297

Net income (loss) per common and common equivalent shares:
 
 
 
 
 
 
 
Basic
$
(0.04
)
 
$
0.12

 
$
0.10

 
$
0.33

Diluted
$
(0.04
)
 
$
0.12

 
$
0.10

 
$
0.32

Weighted average number of common and common equivalent shares outstanding:
 
 
 
 
 
 
 
Basic
52,913

 
52,299

 
52,726

 
52,667

Diluted
52,913

 
53,173

 
53,898

 
53,536







AXON ENTERPRISE, INC.
SEGMENT REPORTING
(Unaudited)
(dollars in thousands)

 
Three Months Ended December 31, 2017
 
Three Months Ended December 31, 2016
 
TASER
Weapons
 
Software and Sensors
 
Total
 
TASER
Weapons
 
Software and Sensors
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
Net sales from products
$
64,409

 
$
13,099

 
$
77,508

 
$
58,337

 
$
12,491

 
$
70,828

Net sales from services

 
17,143

 
17,143

 

 
11,249

 
11,249

Net sales
64,409

 
30,242

 
94,651

 
58,337

 
23,740

 
82,077

Cost of product sales
18,713

 
7,467

 
26,180

 
17,932

 
12,432

 
30,364

Cost of service sales

 
5,455

 
5,455

 

 
1,943

 
1,943

Cost of sales
18,713

 
12,922

 
31,635

 
17,932

 
14,375

 
32,307

Gross margin
45,696

 
17,320

 
63,016

 
40,405

 
9,365

 
49,770

Sales, general and administrative
22,919

 
16,694

 
39,613

 
17,222

 
13,521

 
30,743

Research and development
2,446

 
13,309

 
15,755

 
2,114

 
7,500

 
9,614

Income (loss) from operations
$
20,331

 
$
(12,683
)
 
$
7,648

 
$
21,069

 
$
(11,656
)
 
$
9,413

 
 
 
 
 
 
 
 
 
 
 
 
Gross margin %
70.9
%
 
57.3
 %
 
66.6
%
 
69.3
%
 
39.4
 %
 
60.6
%
Operating margin %
31.6
%
 
(41.9
)%
 
8.1
%
 
36.1
%
 
(49.1
)%
 
11.5
%

 
Twelve Months Ended December 31, 2017
 
Twelve Months Ended December 31, 2016
 
TASER
Weapons
 
Software and Sensors
 
Total
 
TASER
Weapons
 
Software and Sensors
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
Net sales from products
$
234,512

 
$
51,347

 
$
285,859

 
$
202,644

 
$
35,929

 
$
238,573

Net sales from services

 
57,939

 
57,939

 

 
29,672

 
29,672

Net sales
234,512

 
109,286

 
343,798

 
202,644

 
65,601

 
268,245

Cost of product sales
72,054

 
45,943

 
117,997

 
61,930

 
29,606

 
91,536

Cost of service sales

 
18,713

 
18,713

 

 
6,173

 
6,173

Cost of sales
72,054

 
64,656

 
136,710

 
61,930

 
35,779

 
97,709

Gross margin
162,458

 
44,630

 
207,088

 
140,714

 
29,822

 
170,536

Sales, general and administrative
78,202

 
60,490

 
138,692

 
63,617

 
44,459

 
108,076

Research and development
8,377

 
46,996

 
55,373

 
5,887

 
24,722

 
30,609

Income (loss) from operations
$
75,879

 
$
(62,856
)
 
$
13,023

 
$
71,210

 
$
(39,359
)
 
$
31,851

 
 
 
 
 
 
 
 
 
 
 
 
Gross margin %
69.3
%
 
40.8
 %
 
60.2
%
 
69.4
%
 
45.5
 %
 
63.6
%
Operating margin %
32.4
%
 
(57.5
)%
 
3.8
%
 
35.1
%
 
(60.0
)%
 
11.9
%






AXON ENTERPRISE, INC.
Software and Sensors Bookings by Quarter
(Unaudited)
(in thousands)

 
December 31, 2017
 
September 30, 2017
 
June 30, 2017
 
March 31, 2017
 
December 31, 2016
 
 
 
 
 
 
 
 
 
 
Bookings
$
71,154

 
$
77,976

 
$
81,942

 
$
60,080

 
$
72,509






Software and Sensors Future Contracted Revenue
(Unaudited)
(in thousands)

 
December 31, 2017
 
September 30, 2017
Cumulative bookings, net of cancellations
$
755,731

 
$
684,577

Cumulative recognized revenue
(219,715
)
 
(190,424
)
Future contracted revenue
$
536,016

 
$
494,153


Future contracted revenue for the Software and Sensors segment represents a statistical measure defined as cumulative bookings minus cumulative recognized revenue related solely to that segment. Future contracted revenues are an indication of momentum of longer-term contracts being signed and the expectations of future revenues in the Software and Sensors segment. These financial metrics are exclusive of TASER CAM revenues.







AXON ENTERPRISE, INC.
UNIT SALES STATISTICS
(Unaudited)
Units in whole numbers

 
Three Months Ended December 31,
 
Twelve Months Ended December 31,
 
2017
 
2016
 
Unit Change
 
Percent Change
 
2017
 
2016
 
Unit Change
 
Percent Change
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
TASER X26P
23,350

 
20,833

 
2,517

 
12.1
 %
 
70,381

 
79,218

 
(8,837
)
 
(11.2
)%
TASER X2
21,683

 
13,003

 
8,680

 
66.8

 
76,106

 
47,700

 
28,406

 
59.6

TASER Pulse and Bolt
3,641

 
3,027

 
614

 
20.3

 
12,504

 
9,549

 
2,955

 
30.9

Cartridges
590,126

 
554,395

 
35,731

 
6.4

 
2,408,471

 
1,979,051

 
429,420

 
21.7

Axon Body
13,944

 
25,177

 
(11,233
)
 
(44.6
)
 
89,808

 
66,154

 
23,654

 
35.8

Axon Flex
5,253

 
3,147

 
2,106

 
66.9

 
26,025

 
14,173

 
11,852

 
83.6

Axon Fleet
2,197

 

 
2,197

 
*

 
3,795

 

 
3,795

 
*
Axon Dock
3,908

 
5,747

 
(1,839
)
 
(32.0
)
 
23,492

 
16,983

 
6,509

 
38.3

TASER CAM
2,245

 
3,106

 
(861
)
 
(27.7
)
 
6,432

 
9,566

 
(3,134
)
 
(32.8
)

* Not meaningful







AXON ENTERPRISE, INC.
RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES
(Unaudited)
In thousands, except per share data

 
Three Months Ended December 31,
 
Twelve Months Ended December 31,
 
2017
 
2016
 
2017
 
2016
EBITDA and adjusted EBITDA:
 
 
 
 
 
 
 
Net income (loss)
$
(2,071
)
 
$
6,341

 
$
5,207

 
$
17,297

   Depreciation and amortization
2,364

 
914

 
8,041

 
3,658

   Interest expense
54

 
3

 
186

 
13

   Provision for income taxes
9,137

 
3,178

 
10,554

 
14,200

EBITDA
$
9,484

 
$
10,436

 
$
23,988

 
$
35,168

 
 
 
 
 
 
 
 
Adjustments:
 
 
 
 
 
 
 
Stock-based compensation expense
$
4,187

 
$
2,627

 
$
15,610

 
$
9,369

(Gain) loss on disposal of property and equipment, net
(28
)
 

 
(28
)
 
40

Loss on disposal and abandonment of intangible assets
1,146

 

 
1,146

 
21

Adjusted EBITDA
$
14,789

 
$
13,063

 
$
40,716

 
$
44,598

Adjusted EBITDA as a percentage of net sales
15.6
 %
 
15.9
%
 
11.8
%
 
16.6
%
Net income (loss) as a percentage of net sales
(2.2
)%
 
7.7
%
 
1.5
%
 
6.4
%

 
Three Months Ended December 31,
 
Twelve Months Ended December 31,
 
2017
 
2016
 
2017
 
2016
Non-GAAP net income:
 
 
 
 
 
 
 
GAAP net income (loss)
$
(2,071
)
 
$
6,341

 
$
5,207

 
$
17,297

Plus non-recurring items:
 
 
 
 
 
 
 
Loss on disposal and abandonment of intangible assets
1,146

 

 
1,146

 
21

Income tax effects and adjustments
8,012

 

 
8,012

 
(8
)
Non-GAAP net income excluding non-recurring items
7,087

 
6,341

 
14,365

 
17,310

Stock-based compensation expense, net of income tax effects
2,609

 
1,638

 
9,727

 
5,843

Non-GAAP net income
$
9,696

 
$
7,979

 
$
24,092

 
$
23,153







AXON ENTERPRISE, INC.
RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES - (Continued)
(Unaudited)
In thousands, except per share data

 
Three Months Ended December 31,
 
Twelve Months Ended December 31,
 
2017
 
2016
 
2017
 
2016
Non-GAAP diluted earnings per share
 
 
 
 
 
 
 
GAAP net income (loss) per diluted share (a)
$
(0.04
)
 
$
0.12

 
$
0.10

 
$
0.32

Plus non-recurring items:
 
 
 
 
 
 
 
Loss on disposal and abandonment of intangible assets
0.02

 

 
0.02

 

Income tax effects and adjustments
0.15

 

 
0.15

 

Non-GAAP diluted earnings per share excluding non-recurring items
0.13

 
0.12

 
0.27

 
0.32

Stock-based compensation expense, net of income tax effects
0.05

 
0.03

 
0.18

 
0.11

Non-GAAP diluted earnings per share
$
0.18

 
$
0.15

 
$
0.45

 
$
0.43

 
 
 
 
 
 
 
 
Weighted average number of diluted common and common equivalent shares outstanding
54,069

 
53,173

 
53,898

 
53,536


(a) Reported GAAP net loss per share for the quarter ended December 31, 2017 was calculated using the basic share count. Non-GAAP diluted earnings per share was calculated using the diluted share count.


 
Three Months Ended December 31,
 
Twelve Months Ended December 31,
 
2017
 
2016
 
2017
 
2016
Composition of stock-based compensation:
 
 
 
 
 
 
 
Cost of product and service sales
$
140

 
$
95

 
$
508

 
$
342

Sales, general and administrative
2,765

 
1,510

 
9,047

 
5,707

Research and development
1,282

 
1,022

 
6,055

 
3,320

 
$
4,187

 
$
2,627

 
$
15,610

 
$
9,369





AXON ENTERPRISE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands)
 
December 31, 2017
 
December 31, 2016
 
 
 
 
ASSETS
Current Assets:
 
 
 
Cash and cash equivalents
$
75,105

 
$
40,651

Short-term investments
6,862

 
48,415

Accounts and notes receivable, net
56,064

 
39,466

Inventory, net
45,465

 
34,841

Prepaid expenses and other current assets
21,696

 
13,858

Total current assets
205,192

 
177,231

 
 
 
 
Property and equipment, net
31,172

 
24,004

Deferred income tax assets, net
15,755

 
19,515

Intangible assets, net
18,823

 
15,218

Goodwill
14,927

 
10,442

Long-term investments

 
234

Long-term accounts and notes receivable, net of current portion
36,877

 
17,602

Other assets
15,366

 
13,917

Total assets
$
338,112

 
$
278,163

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
 
 
 
Accounts payable
$
8,592

 
$
10,736

Accrued liabilities
23,502

 
18,248

Current portion of deferred revenue
70,401

 
45,137

Customer deposits
3,673

 
2,148

Current portion of business acquisition contingent consideration
1,693

 
1,690

Other current liabilities
89

 
80

Total current liabilities
107,950

 
78,039

 
 
 
 
Deferred revenue, net of current portion
54,881

 
40,054

Liability for unrecognized tax benefits
1,706

 
1,896

Long-term deferred compensation
3,859

 
3,362

Business acquisition contingent consideration, net of current portion
1,048

 
1,635

Other long-term liabilities
1,224

 
2,289

Total liabilities
170,668

 
127,275

 
 
 
 
Stockholders’ Equity:
 
 
 
Preferred stock

 

Common stock
1

 
1

Additional paid-in capital
201,672

 
187,656

Treasury stock
(155,947
)
 
(155,947
)
Retained earnings
123,185

 
118,275

Accumulated other comprehensive income (loss)
(1,467
)
 
903

Total stockholders’ equity
167,444

 
150,888

Total liabilities and stockholders’ equity
$
338,112

 
$
278,163






AXON ENTERPRISE, INC.
SELECTED CASH FLOW INFORMATION
(Unaudited)
(in thousands)

 
Three Months Ended December 31,
 
Twelve Months Ended December 31,
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
Net income (loss)
$
(2,071
)
 
$
6,341

 
$
5,207

 
$
17,297

Depreciation and amortization
2,364

 
914

 
8,041

 
3,658

Stock-based compensation
4,187

 
2,627

 
15,610

 
9,369

Net cash provided by (used in) operating activities
24,325

 
(4,034
)
 
18,490

 
17,925

Net cash provided by (used in) investing activities
9,531

 
(5,330
)
 
19,082

 
(3,045
)
Net cash used in financing activities
(2,254
)
 
(860
)
 
(3,854
)
 
(34,661
)
Cash and cash equivalents, end of period
75,105

 
40,651

 
75,105

 
40,651

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended December 31,
 
Twelve Months Ended December 31,
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
Net cash provided by (used in) operating activities
$
24,325

 
$
(4,034
)
 
$
18,490

 
$
17,925

Purchases of property and equipment
(1,347
)
 
(1,622
)
 
(10,419
)
 
(4,957
)
Purchases of intangible assets
(593
)
 
(3,156
)
 
(1,024
)
 
(3,495
)
Purchase of property and equipment and intangible assets, including goodwill, in connection with business acquisitions

 
(3,500
)
 
(10,629
)
 
(3,500
)
Free cash flow (deficit), a non-GAAP measure
$
22,385

 
$
(12,312
)
 
$
(3,582
)
 
$
5,973



# # #



Exhibit


http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12087767&doc=4

Operating Metrics (unaudited)
 
 
2017
 
2016
 
 
Q4
Q3
Q2
Q1
 
Q4
Q3
Q2
Q1
 
 
 
 
 
 
 
 
 
 
 
Axon & Evidence.com Bookings (millions)
 
$
71.2

$
78.0

$
81.9

$
60.1

 
$
72.5

$
57.5

$
72.0

$
52.1

Sequential % Change
 
-9
 %
-5
 %
36
%
-17
 %
 
26
%
-20
 %
38
%
17
%
 
 
 
 
 
 
 
 
 
 
 
Annual Service Revenue (millions) (1)
 
$
70.0

$
63.7

$
54.7

$
46.2

 
$
40.2

$
32.0

$
21.1

$
18.1

 
 
 
 
 
 
 
 
 
 
 
Future Contracted Revenue (millions) (2)
 
$
536.0

$
494.2

$
446.4

$
390.0

 
$
350.8

$
302.0

$
262.8

$
202.3

Sequential % Change
 
8
 %
11
 %
14
%
11
 %
 
16
%
15
 %
30
%
27
%
 
 
 
 
 
 
 
 
 
 
 
Weapons Op Inc %
 
32
 %
30
 %
33
%
35
 %
 
36
%
38
 %
33
%
34
%
 
 
 
 
 
 
 
 
 
 
 
Evidence.com new seats booked
 
14,100

18,400

20,600

16,400

 
21,400

15,600

20,200

15,800

 
 
 
 
 
 
 
 
 
 
 
Evidence.com cumulative seats booked
 
201,500

187,400

169,000

148,400

 
132,000

110,600

95,000

74,800

 
 
 
 
 
 
 
 
 
 
 
(1) Monthly recurring license, integration, warranty and storage revenue annualized.
(2) Cumulative bookings for the Software and Sensors segment minus cumulative recognized revenue related solely to Software and Sensors segment





http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12087767&doc=4

SG&A Expenses by Segment (unaudited - dollars in thousands)
 
Three Months Ended December 31,
 
Dollar Change
 
Percent Change
 
2017
 
2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
TASER Weapons segment:
 
 
 
 
 
 
 
 
 
 
 
Salaries, benefits and bonus
$
9,005

 
22.7
%
 
$
7,450

 
24.2
%
 
$
1,555

 
20.9
 %
Stock-based compensation
1,735

 
4.4

 
912

 
3.0

 
823

 
90.2

Professional, consulting and lobbying
4,055

 
10.2

 
2,073

 
6.7

 
1,982

 
95.6

Sales and marketing
2,870

 
7.2

 
2,178

 
7.1

 
692

 
31.8

Travel and meals
988

 
2.5

 
1,216

 
4.0

 
(228
)
 
(18.8
)
Other
4,266

 
10.8

 
3,393

 
11.0

 
873

 
25.7

Total TASER Weapons segment
22,919

 
57.9

 
17,222

 
56.0

 
5,697

 
33.1

Software and Sensors segment:
 
 
 
 
 
 
 
 
 
 
 
Salaries, benefits and bonus
6,238

 
15.7

 
5,651

 
18.4

 
587

 
10.4

Stock-based compensation
1,031

 
2.6

 
598

 
1.9

 
433

 
72.4

Professional, consulting and lobbying
4,105

 
10.4

 
3,587

 
11.7

 
518

 
14.4

Sales and marketing
2,416

 
6.1

 
1,702

 
5.5

 
714

 
42.0

Travel and meals
1,321

 
3.3

 
1,161

 
3.8

 
160

 
13.8

Other
1,583

 
4.0

 
822

 
2.7

 
761

 
92.6

Total Software and Sensors segment
16,694

 
42.1

 
13,521

 
44.0

 
3,173

 
23.5

Total sales, general and administrative expenses
$
39,613

 
100.0
%
 
$
30,743

 
100.0
%
 
$
8,870

 
28.9











http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12087767&doc=4

R&D Expenses by Segment (unaudited - dollars in thousands)
 
Three Months Ended December 31,
 
Dollar Change
 
Percent Change
 
2017
 
2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
TASER Weapons segment:
 
 
 
 
 
 
 
 
 
 
 
Salaries, benefits and bonus
$
1,447

 
9.2
%
 
$
881

 
9.2
%
 
$
566

 
64.2
 %
Stock-based compensation
124

 
0.8

 
211

 
2.2

 
(87
)
 
(41.2
)
Professional and consulting
236

 
1.5

 
427

 
4.4

 
(191
)
 
(44.7
)
Travel and meals
63

 
0.4

 
119

 
1.2

 
(56
)
 
(47.1
)
Other
576

 
3.7

 
476

 
5.0

 
100

 
21.0

Total TASER Weapons segment
2,446

 
15.5

 
2,114

 
22.0

 
332

 
15.7

Software and Sensors segment:
 
 
 
 
 
 
 
 
 
 
 
Salaries, benefits and bonus
8,434

 
53.5

 
4,291

 
44.6

 
4,143

 
96.6

Stock-based compensation
1,158

 
7.4

 
811

 
8.4

 
347

 
42.8

Professional and consulting
425

 
2.7

 
545

 
5.7

 
(120
)
 
(22.0
)
Travel and meals
355

 
2.3

 
145

 
1.5

 
210

 
144.8

Other
2,937

 
18.6

 
1,708

 
17.8

 
1,229

 
72.0

Total Software and Sensors segment:
13,309

 
84.5

 
7,500

 
78.0

 
5,809

 
77.5

Total research and development expenses
$
15,755

 
100.0
%
 
$
9,614

 
100.0
%
 
$
6,141

 
63.9