This Company’s Earnings Chase Even Higher

Axon Enterprises (AXON)  has just reported impressive quarterly results and inched its guidance for 2023 higher.

Axon now sees revenue in the range of $1.44 billion-$1.46 billion, up around 22% year over year — and up from its prior forecast of up 20%. All in all, we would say it was a solid quarter marked by solid revenue growth at each of its business segments offset by modest margin contraction given the ramp in the new “Taser 10” and “Axon Body 4” during the quarter. As we head into the company’s earning call this evening, we’ll be listening for comments on margins as well as pricing for its newer products. Based on what we learn during the earnings call, we’ll revisit our $240 price target as necessary.

The company’s total revenue rose more than 33% on a year-over-year basis to $343 million, which equates to a more modest increase vs. the December quarter. Service revenue jumped by more than 50% to $123.65 million, accounting for 36% of total revenue for the quarter. Product revenue climbed 2% vs. the March 2022 quarter to $219.4 million, 64% of Axon’s revenue mix. We attribute that slower pace of revenue growth vs. the December quarter to the timing of the company’s newer hardware products mentioned above.

One of the frustrating things with Axon is the multiple ways they slice and dice their reporting segments. In addition to “products” vs. “services,” Axon also reports its business through software and sensors and taser segments. Software and services make up its “cloud” and “sensors & other” line items, which saw their respective revenue soar 51% and almost 42% year over year in the March quarter. What we like here is the company’s highest margin business — cloud — continues to become a larger piece of the overall business. For the March quarter, Axon Cloud and its 73% gross margin accounted for 34% of revenue vs. 30% in the year-ago quarter.

The product business is segmented into the Taser business and Sensors & Other. Again, why the company doesn’t formally segment this out we have no idea, but back to the quarter. Taser sales climbed just over 17% year over year to $134.8 million, making it the second-largest business at the company with the second-largest gross margin at 62.2%. That leaves the sensors & other business which grew 42% year over year to $92.3 million, with a gross margin of 38.2%.

What’s important is to understand the margin leverage inherent in Axon’s business and how it relates to the business mix. While the products in the sensors & other segment are on-officer body cameras, Axon fleet cameras, and other hardware sensors carry lower margins they are also the source of revenue for the company’s higher margin Axon cloud revenue that consists largely of recurring cloud-hosted software revenue. While growth in sensors & other may restrain overall company margins in the short-term, it paves the way for higher margin, recurring revenue over the medium to longer term. That, in turn, helps boost Axon’s recurring revenue stream, which exiting the March quarter stood at $520 million on an annual basis, up from $348 million in the year-ago quarter and $473 million exiting 2022. The two key factors in that recurring revenue stream are Amazon cloud and taser devices sold on a recurring revenue plan, which hit 63% of total taser devices in the March quarter. Circling back to our segment margin comments, it stands to reason that the recurring revenue stream is comprised of the company’s higher margin offerings and suggests favorable EPS growth prospects ahead.

Also exiting the March quarter, total company future contracted revenue stood at $4.8 billion, up more than 60% vs. the year-ago quarter, and up nicely compared to the end of 2022. Per management, it targets 15%-25% of that $4.8 billion being recognized in the next 12 months, which offers another layer of revenue comfort on top of its annual recurring revenue.

One thing we will note is that in looking at Axon’s new revenue guidance of $1.44 billion-$1.46 billion, annualizing the company’s March-ending quarter revenue of $343 million gives us $1.372 billion. That suggests 5%-6% revenue growth over the coming quarters. When we listen to the company’s earnings call, we’ll be sure to check that logic out looking to see if Axon management is being a bit overly conservative in its forward view given public safety spending prospects. But let’s remember, the key here is margin and mix, which is something else we’ll be listening to during the company’s earnings call.

At the end of the quarter, Axon had $1.07 billion in cash, equivalents, and investments, and outstanding convertible notes in principal amount of $690 million, for a net cash position of $380 million.