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Axon Enterprise's Growth Continues Ahead of New Product Launches

Travis Hoium, The Motley Fool

Axon Enterprise (NASDAQ: AAXN) has been working on new products like Taser 7, Body 3, and Axon Records for a few years now, and 2019 is when we'll see fruit from that labor. In the first quarter of 2019, the company set up product launches and began rolling out its newest stun gun, but it was largely anticipation about upcoming launches that management was focused on. 

Axon reported its first-quarter results on May 9. Here's an overview of the numbers and what we can expect as new products hit the market. 

Axon Body 3 is one of Axon's new products in 2019.

Image source: Axon Enterprise.

Axon Enterprise: The raw numbers

Metric Q1 2019 Q1 2018 Year-Over-Year Change
Sales $115.8 million $101.2 million  14.4% 
Net income $6.4 million  $12.9 million  (50.3%) 
Diluted EPS $0.11  $0.24  (54.2%) 

Data source: Axon Enterprise Q1 2019 earnings release. 

What happened with Axon Enterprise this quarter? 

The drop in net income may seem alarming, but when you look at segment results, it isn't surprising at all. And it shows how much management is investing in growing the business. Here are segment highlights and when we can expect new products: 

  • Axon 3, which is an LTE cellular connected device, is set to ship in the third quarter of 2019. Management said it has demonstrated live streaming with carriers and begun the certification process. 
  • Axon Records continues to take longer than hoped but should go live with a customer later this year. Investors will have to wait until 2020 for significant traction on this product, but if it works well it could be a game changer for Axon and law enforcement. 
  • The drop in earnings that you see above was due in large part to the launch of Taser 7, which had low yields in early production runs. Management said margins should improve in coming quarters and expects gross margins of more than 70% long term. 
  • Taser sales were up just 2.9% versus a year ago to $65.4 million, and gross margins fell 330 basis points to 64.4%. The changes were due largely to more subscription-based sales and lower yields, as noted above. 
  • Axon Cloud sales rose 36.5% year over year to $27.6 million and generated a 73.6% gross margin. 
  • Sensor sales, which include body cameras, were up 30.6% versus a year ago to $22.8 million and gross margin was 28.4%, lower than other segments because body cameras enabled the high-margin cloud sales. 
  • As Axon builds its customer base, seats booked and recurring revenue are key operating metrics to watch. In the first quarter, seats booked increased to 371,100 from 226,900 a year ago, and annual recurring revenue rose from $83.3 million to $122.3 million with $930 million of total contracted revenue. 

What management had to say

The first quarter is like a setup for the new products coming later this year, and President Luke Larson summed up the quarter well, saying, "We feel confident that Taser 7 will be a major revenue and gross profit driver for our business over the next several years. In Q1, Taser segment gross margins were pressured by two main factors -- ASP, the average selling price, and scrap rates both will improve over time, and we are improving, even as we speak." 

The fact that Axon is growing double digits without the help of these new products is extremely impressive. Investors should be excited about what's to come later in 2019. 

Looking forward

Management increased its 2019 revenue expectations by $5 million to between $485 million and $495 million. Second-quarter revenue is expected to be up 16% to 17% year over year, and growth should pick up in the second half of the year. With Taser 7 and Axon Records due out later this year, Axon could keep its double-digit growth streak growing for years to come. 

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Travis Hoium owns shares of Axon Enterprise. The Motley Fool owns shares of and recommends Axon Enterprise. The Motley Fool has a disclosure policy.