Axon Enterprise, Inc.
AXON ENTERPRISE, INC. (Form: 8-K, Received: 11/07/2017 16:02:37)


 

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

November 7, 2017
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. 85 th 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 November 7, 2017 Axon Enterprise, Inc. (the "Company" or "Axon"), issued a shareholder letter regarding the Company’s financial results for its third 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 third 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: November 7, 2017
Axon Enterprise, Inc.
 
 
By:  
 /s/ JAWAD A. AHSAN
 
 
 
Jawad A. Ahsan
 
 
 
Chief Financial Officer 
 















FOR RELEASE ON: November 7, 2017 at 1601 ET

Exhibit 99.1

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

Axon Reports Record Revenues over $90 Million in Third Quarter 2017

SCOTTSDALE, Ariz., November 7, 2017 − Axon Enterprise, Inc. (Nasdaq: AAXN), today reported financial results for the third quarter ended September 30, 2017.

In Q3, we delivered solid growth against our long-term plan of delivering our end-to-end technology platform for public safety. We demonstrated leadership across product categories, furthering our dominance in TASER weapons and strengthening our position in body-worn cameras. Since our last update, we also made strides with our new in-car Axon Fleet offering, completed beta testing on Signal Sidearm, and rolled out new software updates and an entirely new software capability, Axon Citizen.

At the same time, we also made necessary investments to strengthen our finance and information technology functions to better position our company for long-term sustainable growth and profitability. While we continue to expand our addressable market with leading technology solutions and scale our organization accordingly, we are transitioning our body camera business to focus on improved operating leverage in 2018.

The body camera business is evolving from the early market formation and growth phase towards the profitability phase. As the body camera business enters the next phase, we are accelerating innovation. We have several major new growth initiatives, including the Axon Fleet in-car video system, International Markets, and Records Management System (“RMS”) where we are expanding our market-leading software and sensors platform with significant new revenue opportunities. We intend to provide more information on the profitability of our maturing business lines and significant new market opportunities at our upcoming Investor & Analyst Day on November 16 in New York.

We look forward to discussing our Q3 results on our conference call at 5 p.m. ET.

Summary of Q3 2017 Results:

Net sales increased 26% to $90.3 million in Q3 2017 compared to $71.9 million in Q3 2016. International sales were $17.1 million in the current quarter, up from $13.4 million in Q2 2017 and $11.3 million in Q3 2016.

Consolidated gross margin was 55% in Q3 2017 compared to 65% in Q3 2016. We discuss gross margin by segment in the sections below.






Gross profit of $49.8 million was impacted by the following factors:

$1.4 million of duplicate data storage and migration costs as we completed the transition from Amazon Web Services ("AWS") to Microsoft Azure.

$1.3 million of additional costs associated with deploying hardware into beachhead international markets at aggressive leaders' pricing. We have substantially completed shipments against these contracts and do not expect further shipments to materially affect Q4 or 2018.

$1.1 million of associated costs with the launch of Axon Fleet, including early customer accommodations and discounts, higher implementation costs as we refine our roll-out process, and deferred hardware revenue effects due to bundling.

Total operating expenses in Q3 2017 were $50.6 million compared to $35.5 million in Q3 2016.

Operating expenses were $3.1 million above guidance largely based on the following factors:

$1.4 million from increased commissions ($0.6 million) and selling expenses ($0.8 million) associated with sales that were $7.9 million above our internal budget for sales of $82.4 million.

$1.5 million in expenses related to international tax restructuring, remediation of material weaknesses and build out of infrastructure for new reporting guidelines (ASC 606) that take effect in Q1 2018. The tax restructuring is now complete and should yield a significant return on investment by reducing our effective tax rate by more than 10 percentage points, streamlining our administrative overhead, and simplifying our inventory management. The investments we are making in our core support functions and processes are bringing a new level of rigor and allowing us to upgrade our IT systems for scale.

Selling, general and administrative expenses were $36.4 million. SG&A also reflected new recurring amortization expense related to the acquisition of our Australian distributor, which was not in our original forecast. This acquisition sets the foundation for us to drive greater sales at higher net margins via direct customer relationships going forward.

Research and development expenses were $14.2 million in the quarter, which reflects our investment in new product offerings, including Axon Fleet, RMS, and another significant program that we expect to announce and ship in 2018.

Loss from operations was $0.8 million in Q3 2017 compared to income of $11.1 million in Q3 2016. The decrease in operating income was tied to gross margin compression as well as an increase in total operating expenses in the quarter.

Net income for Q3 2017 was $0.4 million, or $0.01 per diluted share, compared to $3.8 million, or $0.07 per diluted share, in Q3 2016.






Adjusted EBITDA for Q3 2017 was $7.0 million compared to $13.8 million in Q3 2016. We calculate adjusted EBITDA by adding back $4.0 million in stock-based compensation expense to EBITDA.

In Q3 2017, cash provided by operating activities was $6.6 million. Cash, cash equivalents and investments were $61.8 million at September 30, 2017, or flat sequentially, even after funding the $4.2 million purchase price of Breon Enterprises, our Australian distributor.

We are executing on our stated objective of managing down inventory. Total inventory in the quarter decreased to $52.7 million, from $60.7 million at the end of Q2 2017. We remain on track to be below $50 million of inventory by year end.

TASER Weapons:

TASER Weapons segment revenue increased 12% to $59.4 million in Q3 2017 compared to $52.9 million in Q3 2016 as we executed against our mission of making a TASER conducted electric weapon ("CEW") available to every officer.

TASER Weapons segment gross margin was 68% in Q3 2017 compared to 72% in Q3 2016. The weapons margin performance in Q3 reflects a greater mix of X2 weapons and the pricing impact of bundling with initial Axon Fleet orders. Our entry into the Axon Fleet market is showing signs of early success, but with new product launches into new markets, our ramp carries increased costs of deployment as well as customer accommodations and discounts. Under generally accepted accounting principles, a discount on one element of a multi-element deal must be applied proportionally across the elements, regardless of the appearance on the customer invoice statement.

Three large domestic weapons orders benefited the quarter including a large state's department of public safety, a metropolitan police department, and a US federal agency. Internationally, we are demonstrating traction on our improved go-to-market strategy in which we are investing in direct sales teams rather than relying on third-party distributors. For the first time, this quarter we offered our TASER 60 plan in the UK and received an order for 2,700 X2 weapons via the TASER 60 Premium subscription plan. We also received another international order for more than 1,000 X26P weapons. Both orders resulted from our improved international sales strategy.

The TASER 60 payment plan, which we introduced in Q2 2016, continues to be well-received. In Q3, approximately 43% of units ordered, including from international customers, were on the TASER 60, Officer Safety Plan, or TASER Assurance Plan payment options. The TASER 60 is a five-year annual payment plan that allows agencies to reliably budget for the TASER CEW in their operating budget, which is simpler for many customers than procuring and maintaining the CEW via their capital budgets. The payment plan is also a key step in our long-term strategy of shortening upgrade cycles, increasing the ratio of TASER CEWs to patrol officers, and setting the stage to launch additional software and service plans in 2018.






Software & Sensors:

Software and Sensors segment revenue grew 63% year over year to $30.8 million in Q3 2017 compared to $18.9 million in Q3 2016.

Annual recurring service revenue doubled year over year to $63.7 million in Q3 2017 compared to $32.0 million in Q3 2016.

Both product and service revenue broke records in Q3 2017. Software and Sensors product revenue was $14.6 million in Q3 2017 compared to $10.3 million in Q3 2016. Software and Sensors service revenue was $16.3 million in Q3 2017 compared to $8.7 million in Q3 2016.

Software and Sensors segment gross margin was 31% in Q3 2017 compared to 45% in Q3 2016.

Service gross margin was 64% in Q3 2017, compared to 81% in Q3 2016. Cost of services delivered was $5.9 million in the third quarter. The data migration from AWS to Microsoft Azure's government cloud negatively affected Software and Sensors service gross margin. We incurred a total of $1.4 million of migration and duplicate storage cost in Q3 compared with our previous forecast of $0.8 million. Additionally, cost of services included $0.5 million of intangible asset amortization expense related to the Misfit acquisition, which was put into service in 2017 after previously having been classified as research and development expense. Net of the duplicate storage and migration costs and the amortization reclassification, cost of services delivered would have been $4.0 million, and service margin would have been 75%.

While the migration of existing data was completed, we expect to incur another $1.0 million in expense to fully compete the transition to Microsoft Azure.

Hardware product margin (excluding services) was negative 5% in Q3 2017 compared to positive 15% in Q3 2016. Gross margin was largely affected by three factors: the large hardware shipments at low pricing into international beachhead markets, greater discounts and costs during the Axon Fleet launch, and costs and discounts associated with discounts on up-front hardware on multi-year contracts.

Hardware gross margin for the segment in the quarter reflects pricing on certain large international beachhead accounts at levels that we do not expect going forward.

Our early Axon Fleet deals, some of which were booked in 2015 and early 2016, included discounted pricing and strategic concessions on accessories such as routers needed for data flows. We started to meaningfully scale Axon Fleet with approximately 1,600 units shipped in Q3 2017. Newer Axon Fleet deals do not have the same level of discounting as earlier contracts.

Further, we did not receive the full benefit we expected from standardizing the terms and conditions across our contracts as it relates to cancellation provisions. These provisions will allow us to recognize the revenue allocated to the hardware at the time of shipment. We expect to see some





uplift in margins in Q4 2017 to the extent we ship a larger percentage of contracts with the modified contract terms.

We expect significant improvements in hardware margins in our body camera segment over the next several quarters, and expect margins to exceed 25% in Q1 2018, excluding Axon Fleet pass-through hardware.

While the segment's margin performance in the period obscures the long-term margin strength in our business model, our positioning has never been stronger in the market. Customer demand remains very high as highlighted by our $78.0 million in bookings in the period. Recent investments in new product functionality and better performance are driving larger contracts upfront and early contract renewals with higher annual contract values. Our customers see and appreciate the value in our end-to-end solution. This total solution improves the workflow of everyone in the network, including officers, prosecutors and defenders.

For example, one of our earliest metropolitan area body-worn camera customers recently chose to upgrade its camera contract before it came up for renewal. The department signed onto our Officer Safety Plan, which bundles one TASER smart weapon, two body-worn camera upgrades, unlimited Evidence.com storage, and full warranty, repair and replacement coverage over a five-year contract, and carries an MSRP of $99 per month per officer.

As of the end of the third quarter of 2017, 38 of the 68 U.S. major city law enforcement agencies have purchased Axon body-worn cameras and/or its 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, Toronto, Tucson, Washington DC, and Wichita.

Axon's Evidence.com platform user count continued to grow, extending our market leadership. During the three months ended September 30, 2017, we booked approximately 18,400 seats on our digital evidence management platform, Evidence.com, net of renewals. Since inception, we have booked cumulative Evidence.com licenses of approximately 187,400.

We also recorded 12 competitor conversion wins in Q3 2017 where our body-worn camera or Axon Fleet offering displaced a competitor, and we recorded four expansions where a state or major city police agency chose to upsize their contracts and expand their reliance upon the Axon network.

Product Pipeline:

We are pleased with the pace of our software product development as we study our customers' market needs and respond with technology solutions. Since our last quarterly update in August, we released Axon Citizen, a public safety portal that allows community members to submit evidence directly to law enforcement agencies for crimes under investigation. The two components to Axon Citizen are a tool that allows one-on-one communication between an officer and the citizen and a





capability that allows a community-wide broadcast requesting information on a specific crime. The one-on-one tool is available now for Axon customers signed up for early access and will be available to U.S. customers on the Evidence.com Pro, Ultimate, or Unlimited licensing tiers at no incremental cost later this year. The large-event community broadcast Citizen tool will be priced later this year as an Enterprise add-on.

Evidence.com is continuously improving as we roll out monthly updates to agency customers. In Q3 2017, we released enhancements to our search, access control, and reporting functionalities. These updates were driven by customer feedback and collaboration with our sales, customer support, and product management teams. Positive customer feedback validates our cloud-based digital evidence management approach.

We are seeing strong customer interest in Signal Sidearm, which we announced in Q1 2017. We finished beta testing in October and it is available to ship for all Axon customers in Q4 2017. Signal Sidearm is a smart sensor that attaches to most firearm holsters currently used by law enforcement. When a firearm is removed from its holster, a wireless alert is sent to all Axon cameras within range to begin recording and capture buffered video from a set number of seconds before the incident.

As we have said before, we are investing in artificial intelligence (“AI”) and machine learning. While our AI Research investments are pre-revenue, we received a major validation of our growing capability in the quarter. The Los Angeles Police Department chose Axon over several competitors to be its AI technology supplier for a special video analytics project. A panel of reviewers evaluated each competitor's work and Axon's solution resulted in the most accurate results with the greatest potential to assist the department directly. LAPD received a federal grant to pay for the project, and though it is not material to results, we believe the win points to our strategic advantage of having an industry leading team specifically focusing on AI solutions for law enforcement.

Our Records Management System ("RMS") remains on track to ship in 2018 to select agencies in our early access program. In Q3 2017, we signed one major agency and a number of smaller agencies as early access RMS partners. Customers tell us that our RMS offering cannot come soon enough — today's police officers can spend up to two-thirds of a given shift performing administrative tasks. Outdated software prevents front-line officers from maximizing their time spent in their communities. In 2016, we announced our plans to reduce police paperwork by 80% within the next ten years through an RMS solution that seamlessly integrates with an agency's computer-aided dispatch system (CAD). Axon's cloud-based digital evidence management solution, Evidence.com and our wide array of audio video sensors using new AI processing capabilities will automate the capture and processing of information. We are executing against that goal.

Outlook:

We expect full year revenue growth to exceed 25%, well above our original expectation of 15% to 20% growth in 2017.






We expect Q4 2017 gross margin to show slight improvement, benefiting from lower data migration expenses and higher pricing on upfront hardware on multi-year deals, but offset by our aggressive move into the in-car video market.

We expect a sequential increase in operating expenses of 5% to 8% in Q4 2017, driven by R&D investments and seasonal sales and marketing activities. We are actively working to adjust the trajectory of our operating expense growth rate to drive leverage.

We remain excited about the strength of our team and our product offering and look forward to providing an overview of our long-term vision at our Investor & Analyst Day in New York on November 16, which will be Webcast at http://investor.axon.com/.

Signed,

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


QUARTERLY CONFERENCE CALL & WEBCAST:

The Company will host its Q3 2017 earnings conference call on Tuesday, November 7, 2017 at 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 third quarter financial results.

Statistical Definitions:

Bookings are an indication of the activity the Company is seeing relative to Axon hardware and Evidence.com. We consider bookings to be a statistical measure defined as the sales contract value (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 years.

Due to municipal government funding rules, in some cases certain of the future year amounts included in bookings are subject contractual options being exercised and 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 completed, 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 will not ultimately be recognized,





resulting in a future reduction to bookings. In the third quarter of 2017, the Company did not record any reversals related to prior period bookings due to non-appropriation or other cancellation reasons.
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 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 than 191,000 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.

Axon, the “Axon Delta” logo, Axon network, Axon Body 2, Axon Fleet, Axon Flex 2, Axon Citizen, Axon Signal, Evidence.com, Smart Weapons, and TASER are trademarks of Axon Enterprise, Inc., some of which are registered in the U.S. 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; 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.

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 September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Net sales from products
$
73,985

 
$
63,204

 
$
208,351

 
$
167,745

Net sales from services
16,277

 
8,678

 
40,796

 
18,423

Net sales
90,262

 
71,882

 
249,147

 
186,168

Cost of product sales
34,573

 
23,664

 
91,817

 
61,172

Cost of service sales
5,924

 
1,653

 
13,258

 
4,230

Cost of sales
40,497

 
25,317

 
105,075

 
65,402

Gross margin
49,765

 
46,565

 
144,072

 
120,766

Operating expenses:
 
 
 
 
 
 
 
Sales, general and administrative
36,398

 
28,121

 
99,079

 
77,333

Research and development
14,166

 
7,358

 
39,618

 
20,995

Total operating expenses
50,564

 
35,479

 
138,697

 
98,328

Income (loss) from operations
(799
)
 
11,086

 
5,375

 
22,438

Interest and other income (expense), net
1,430

 
(455
)
 
3,320

 
(460
)
Income before provision for income taxes
631

 
10,631

 
8,695

 
21,978

Provision for income taxes
209

 
6,788

 
1,417

 
11,022

Net income
$
422

 
$
3,843

 
$
7,278

 
$
10,956

Net income per common and common equivalent shares:
 
 
 
 
 
 
 
Basic
$
0.01

 
$
0.07

 
$
0.14

 
$
0.21

Diluted
$
0.01

 
$
0.07

 
$
0.14

 
$
0.20

Weighted average number of common and common equivalent shares outstanding:
 
 
 
 
 
 
 
Basic
52,831

 
52,206

 
52,663

 
52,791

Diluted
53,843

 
53,141

 
53,762

 
53,656







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

 
Three Months Ended September 30, 2017
 
Three Months Ended September 30, 2016
 
TASER
Weapons
 
Software and Sensors
 
Total
 
TASER
Weapons
 
Software and Sensors
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
Net sales from products
$
59,416

 
$
14,569

 
$
73,985

 
$
52,938

 
$
10,266

 
$
63,204

Net sales from services

 
16,277

 
16,277

 

 
8,678

 
8,678

Net sales
59,416

 
30,846

 
90,262

 
52,938

 
18,944

 
71,882

Cost of product sales
19,237

 
15,336

 
34,573

 
14,973

 
8,691

 
23,664

Cost of service sales

 
5,924

 
5,924

 

 
1,653

 
1,653

Cost of sales
19,237

 
21,260

 
40,497

 
14,973

 
10,344

 
25,317

Gross margin
40,179

 
9,586

 
49,765

 
37,965

 
8,600

 
46,565

Sales, general and administrative
20,575

 
15,823

 
36,398

 
16,439

 
11,682

 
28,121

Research and development
1,856

 
12,310

 
14,166

 
1,408

 
5,950

 
7,358

Income (loss) from operations
$
17,748

 
$
(18,547
)
 
$
(799
)
 
$
20,118

 
$
(9,032
)
 
$
11,086

 
 
 
 
 
 
 
 
 
 
 
 
Gross margin %
67.6
%
 
31.1
 %
 
55.1
 %
 
71.7
%
 
45.4
 %
 
64.8
%
Operating margin %
29.9
%
 
(60.1
)%
 
(0.9
)%
 
38.0
%
 
(47.7
)%
 
15.4
%

 
Nine Months Ended September 30, 2017
 
Nine Months Ended September 30, 2016
 
TASER
Weapons
 
Software and Sensors
 
Total
 
TASER
Weapons
 
Software and Sensors
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
Net sales from products
$
170,103

 
$
38,248

 
$
208,351

 
$
144,307

 
$
23,438

 
$
167,745

Net sales from services

 
40,796

 
40,796

 

 
18,423

 
18,423

Net sales
170,103

 
79,044

 
249,147

 
144,307

 
41,861

 
186,168

Cost of product sales
53,341

 
38,476

 
91,817

 
43,998

 
17,174

 
61,172

Cost of service sales

 
13,258

 
13,258

 

 
4,230

 
4,230

Cost of sales
53,341

 
51,734

 
105,075

 
43,998

 
21,404

 
65,402

Gross margin
116,762

 
27,310

 
144,072

 
100,309

 
20,457

 
120,766

Sales, general and administrative
55,283

 
43,796

 
99,079

 
46,395

 
30,938

 
77,333

Research and development
5,931

 
33,687

 
39,618

 
3,773

 
17,222

 
20,995

Income (loss) from operations
$
55,548

 
$
(50,173
)
 
$
5,375

 
$
50,141

 
$
(27,703
)
 
$
22,438

 
 
 
 
 
 
 
 
 
 
 
 
Gross margin %
68.6
%
 
34.6
 %
 
57.8
%
 
69.5
%
 
48.9
 %
 
64.9
%
Operating margin %
32.7
%
 
(63.5
)%
 
2.2
%
 
34.7
%
 
(66.2
)%
 
12.1
%






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

 
September 30, 2017
 
June 30, 2017
 
March 31, 2017
 
December 31, 2016
 
September 30, 2016
 
 
 
 
 
 
 
 
 
 
Bookings
$
77,976

 
$
81,942

 
$
60,080

 
$
72,509

 
$
57,491






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

 
September 30, 2017
 
June 30, 2017
Cumulative bookings, net of cancellations
$
684,577

 
$
606,601

Cumulative recognized revenue
(190,424
)
 
(160,500
)
Future contracted revenue
$
494,153

 
$
446,101


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 recorder revenues.







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

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
Unit Change
 
Percent Change
 
2017
 
2016
 
Unit Change
 
Percent Change
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
TASER X26P
13,472

 
23,259

 
(9,787
)
 
(42.1
)%
 
47,031

 
58,385

 
(11,354
)
 
(19.4
)%
TASER X2
21,896

 
12,481

 
9,415

 
75.4

 
54,423

 
34,697

 
19,726

 
56.9

TASER Pulse and Bolt
2,944

 
1,936

 
1,008

 
52.1

 
8,863

 
6,522

 
2,341

 
35.9

Cartridges
643,077

 
544,671

 
98,406

 
18.1

 
1,818,345

 
1,424,656

 
393,689

 
27.6

Axon Flex
8,298

 
4,961

 
3,337

 
67.3

 
20,772

 
11,026

 
9,746

 
88.4

Axon Body
28,669

 
25,093

 
3,576

 
14.3

 
75,864

 
40,977

 
34,887

 
85.1

Axon Fleet
1,598

 

 
1,598

 
*

 
1,598

 

 
1,598

 
*

Axon Dock
6,440

 
6,432

 
8

 
0.1

 
19,584

 
11,236

 
8,348

 
74.3

TASER Cam
1,512

 
1,323

 
189

 
14.3

 
4,187

 
6,460

 
(2,273
)
 
(35.2
)

* Not meaningful







AXON ENTERPRISE, INC.
RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES
(Unaudited)
Dollars in thousands

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
Net income
$
422

 
$
3,843

 
$
7,278

 
$
10,956

   Depreciation and amortization
2,277

 
901

 
5,677

 
2,744

   Interest expense, net
49

 

 
132

 
10

   Provision for income taxes
209

 
6,788

 
1,417

 
11,022

EBITDA
$
2,957

 
$
11,532

 
$
14,504

 
$
24,732

 
 
 
 
 
 
 
 
Adjustments:
 
 
 
 
 
 
 
Stock-based compensation expense
$
4,000

 
$
2,216

 
$
11,423

 
$
6,742

Net loss on disposal of property, equipment and intangible assets

 
64

 

 
61

Adjusted EBITDA
$
6,957

 
$
13,812

 
$
25,927

 
$
31,535

Adjusted EBITDA as a percentage of net sales
7.7
%
 
19.2
%
 
10.4
%
 
16.9
%
Net income as a percentage of net sales
0.5
%
 
5.3
%
 
2.9
%
 
5.9
%
 
 
 
 
 
 
 
 
Composition of stock-based compensation:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
Cost of product and service sales
$
134

 
$
77

 
$
368

 
$
247

Sales, general and administrative
2,099

 
1,348

 
6,282

 
4,197

Research and development
1,767

 
791

 
4,773

 
2,298

 
$
4,000

 
$
2,216

 
$
11,423

 
$
6,742






AXON ENTERPRISE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
 
September 30, 2017
 
December 31, 2016
 
(Unaudited)
 
 
ASSETS
Current Assets:
 
 
 
Cash and cash equivalents
$
43,471

 
$
40,651

Short-term investments
18,372

 
48,415

Accounts and notes receivable, net
51,204

 
39,466

Inventory, net
52,692

 
34,841

Prepaid expenses and other current assets
23,002

 
13,858

Total current assets
188,741

 
177,231

 
 
 
 
Property and equipment, net
31,263

 
24,004

Deferred income tax assets, net
22,845

 
19,515

Intangible assets, net
20,758

 
15,218

Goodwill
14,923

 
10,442

Long-term investments

 
234

Long-term accounts and notes receivable, net of current portion
32,543

 
17,602

Other assets
16,534

 
13,917

Total assets
$
327,607

 
$
278,163

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
 
 
 
Accounts payable
$
12,354

 
$
10,736

Accrued liabilities
22,431

 
18,248

Current portion of deferred revenue
60,453

 
45,137

Customer deposits
2,648

 
2,148

Current portion of business acquisition contingent consideration
1,735

 
1,690

Other current liabilities
470

 
80

Total current liabilities
100,091

 
78,039

 
 
 
 
Deferred revenue, net of current portion
51,574

 
40,054

Liability for unrecognized tax benefits
1,763

 
1,896

Long-term deferred compensation
3,533

 
3,362

Business acquisition contingent consideration, net of current portion
2,715

 
1,635

Other long-term liabilities
1,851

 
2,289

Total liabilities
161,527

 
127,275

 
 
 
 
Stockholders’ Equity:
 
 
 
Preferred stock

 

Common stock
1

 
1

Additional paid-in capital
197,978

 
187,656

Treasury stock
(155,947
)
 
(155,947
)
Retained earnings
125,256

 
118,275

Accumulated other comprehensive income
(1,208
)
 
903

Total stockholders’ equity
166,080

 
150,888

Total liabilities and stockholders’ equity
$
327,607

 
$
278,163







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

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
Net income
$
422

 
$
3,843

 
$
7,278

 
$
10,956

Depreciation and amortization
2,277

 
901

 
5,677

 
2,744

Stock-based compensation
4,000

 
2,216

 
11,423

 
6,742

Net cash provided by (used in) operating activities
6,611

 
11,623

 
(5,835
)
 
21,959

Net cash provided by investing activities
7,514

 
639

 
9,551

 
2,285

Net cash provided by (used in) financing activities
(253
)
 
719

 
(1,600
)
 
(33,801
)
Cash and cash equivalents, end of period
43,471

 
50,600

 
43,471

 
50,600

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
Net cash provided by (used in) operating activities
$
6,611

 
$
11,623

 
$
(5,835
)
 
$
21,959

Purchases of property and equipment
(3,331
)
 
(1,371
)
 
(9,072
)
 
(3,335
)
Purchases of intangible assets
(261
)
 
(154
)
 
(431
)
 
(339
)
Purchase of property and equipment and intangible assets, including goodwill, in connection with business acquisitions
(4,150
)
 

 
(10,629
)
 

Free cash flow (deficit), a non-GAAP measure
$
(1,131
)
 
$
10,098

 
$
(25,967
)
 
$
18,285



# # #





AXONHORIZONTALA02.JPG

Operating Metrics (Unaudited)
 
 
2017
 
2016
 
2015
 
 
Q3
Q2
Q1
 
Q4
Q3
Q2
Q1
 
Q4
Q3
 
 
 
 
 
 
 
 
 
 
 
 
 
Axon & Evidence.com Bookings (millions)
 
$
78.0

$
81.9

$
60.1

 
$
72.5

$
57.5

$
72.0

$
52.1

 
$
44.7

$
36.9

Sequential % Change
 
-5
 %
36
%
-17
 %
 
26
%
-20
 %
38
%
17
%
 
21
%
21
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Annual Service Revenue (millions)  (1)
 
$
63.7

$
54.7

$
46.2

 
$
40.2

$
32.0

$
21.1

$
18.1

 
$
16.7

$
12.0

 
 
 
 
 
 
 
 
 
 
 
 
 
Future Contracted Revenue (millions) (2)
 
$
494.2

$
446.4

$
390.0

 
$
350.8

$
302.0

$
262.8

$
202.3

 
$
159.0

$
122.4

Sequential % Change
 
11
 %
14
%
11
 %
 
16
%
15
 %
30
%
27
%
 
30
%
29
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Multiple Year Contract % (3)
 
98
 %
97
%
94
 %
 
88
%
89
 %
95
%
95
%
 
92
%
91
%
 
 
 
 
 
 
 
 
 
 
 
 
 
LTV/CAC
 
4.2x

5.5x

4.3x

 
6.0x

4.9x

6.2x

5.1x

 
4.3x

4.6x

 
 
 
 
 
 
 
 
 
 
 
 
 
Weapons Op Inc %
 
30
 %
33
%
35
 %
 
36
%
38
 %
33
%
34
%
 
37
%
35
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Evidence.com new seats booked
 
18,400

20,600

16,400

 
21,400

15,600

20,200

15,800

 
13,200

9,300

 
 
 
 
 
 
 
 
 
 
 
 
 
Evidence.com cumulative seats booked
 
187,400

169,000

148,400

 
132,000

110,600

95,000

74,800

 
59,000

45,800

 
 
 
 
 
 
 
 
 
 
 
 
 
(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
(3)  For orders booked with Evidence.com seats, the % that signed multiple year contracts
 





AXONHORIZONTALA02.JPG

SG&A Expenses by Segment (Unaudited)
 
Three Months Ended September 30,
 
Dollar Change
 
Percent Change
 
2017
 
2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
TASER Weapons segment:
 
 
 
 
 
 
 
 
 
 
 
Salaries, benefits and bonus
$
7,937

 
21.8
%
 
$
6,214

 
22.1
%
 
$
1,723

 
27.7
 %
Stock-based compensation
1,469

 
4.0

 
806

 
2.9

 
663

 
82.3

Professional, consulting and lobbying
3,701

 
10.2

 
2,165

 
7.7

 
1,536

 
70.9

Sales and marketing
1,977

 
5.4

 
1,357

 
4.8

 
620

 
45.7

Travel and meals
1,317

 
3.6

 
1,152

 
4.1

 
165

 
14.3

Other
4,174

 
11.5

 
4,745

 
16.9

 
(571
)
 
(12.0
)
Total TASER Weapons segment
20,575

 
56.5

 
16,439

 
58.5

 
4,136

 
25.2

Software and Sensors segment:
 
 
 
 
 
 
 
 
 
 
 
Salaries, benefits and bonus
7,411

 
20.4

 
4,742

 
16.9

 
2,669

 
56.3

Stock-based compensation
630

 
1.7

 
542

 
1.9

 
88

 
16.2

Professional, consulting and lobbying
2,922

 
8.0

 
2,643

 
9.4

 
279

 
10.6

Sales and marketing
2,242

 
6.2

 
1,568

 
5.6

 
674

 
43.0

Travel and meals
1,652

 
4.5

 
1,354

 
4.8

 
298

 
22.0

Other
966

 
2.7

 
833

 
3.0

 
133

 
16.0

Total Software and Sensors segment
15,823

 
43.5

 
11,682

 
41.5

 
4,141

 
35.4

Total sales, general and administrative expenses
$
36,398

 
100.0
%
 
$
28,121

 
100.0
%
 
$
8,277

 
29.4











AXONHORIZONTALA02.JPG

R&D Expenses by Segment (Unaudited)
 
Three Months Ended September 30,
 
Dollar Change
 
Percent Change
 
2017
 
2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
TASER Weapons segment:
 
 
 
 
 
 
 
 
 
 
 
Salaries, benefits and bonus
$
947

 
6.7
%
 
$
707

 
9.6
%
 
$
240

 
33.9
 %
Stock-based compensation
136

 
1.0

 
143

 
1.9

 
(7
)
 
(4.9
)
Professional and consulting
213

 
1.5

 
230

 
3.1

 
(17
)
 
(7.4
)
Travel and meals
71

 
0.5

 
34

 
0.5

 
37

 
108.8

Other
489

 
3.5

 
294

 
4.0

 
195

 
66.3

Total TASER Weapons segment
1,856

 
13.1

 
1,408

 
19.1

 
448

 
31.8

Software and Sensors segment:
 
 
 
 
 
 
 
 
 
 
 
Salaries, benefits and bonus
8,670

 
61.2

 
3,625

 
49.3

 
5,045

 
139.2

Stock-based compensation
1,631

 
11.5

 
648

 
8.8

 
983

 
151.7

Professional and consulting
476

 
3.4

 
443

 
6.0

 
33

 
7.4

Travel and meals
461

 
3.3

 
179

 
2.4

 
282

 
157.5

Other
1,072

 
7.6

 
1,055

 
14.3

 
17

 
1.6

Total Software and Sensors segment:
12,310

 
86.9

 
5,950

 
80.9

 
6,360

 
106.9

Total research and development expenses
$
14,166

 
100.0
%
 
$
7,358

 
100.0
%
 
$
6,808

 
92.5