It's hard to criticize too much of what TASER International, Inc. (NASDAQ:AXON) has done in 2016. Taser sales are up and the Axon line of body cameras is selling at a rapid clip around the world.
But there are still flaws in TASER International's business that investors should keep an eye on. Here are two that pop out this year.
Investment in Taser sales may not be paying off
Taser weapon sales have been surprisingly strong in 2016, which is great since the product line is the company's biggest revenue generator. In the first quarter, weapon sales were up 20.4% compared to the same period last year, to $45.5 million, or 84.5% of total sales.
But operating costs associated with weapons are growing more quickly than sales. Operating costs grew 33.9%, to $15.9 million, and as a result operating income was up only 3.2%, to $15.1 million, in the quarter.
There's good reason operating expenses are up. Management is investing heavily in a growing sales force to sell Tasers around the world, which is helping drive revenue growth. But long-term operating expenses should be growing more slowly than sales, so investors will want to watch this dynamic in the weapons segment because profits aren't growing as quickly as they could be.
Not staying two steps ahead in body cameras
The body camera business has been growing like gangbusters for TASER International over the past year. Axon body camera sales are up, but the real news is that future contracted revenue, primarily from Evidence.com subscriptions, rose from $94.9 million in the second quarter of 2015 to $262.8 million in this year's second quarter.
The challenge will be keeping that product ahead of competitors, who see clear market growth in law enforcement body cameras. And the worry should be that TASER International isn't doing enough to stay two steps ahead of the competition.
Earlier this year, TASER International announced a partnership with Cradlepoint, a company that provides 4G LTE solutions. The plan is to "provide a secure means for officers to connect and offload video from TASER's Axon cameras in the field using Wi-Fi, commercial LTE, and/or FirstNet's Band 14 LTE."
Think about it this way: Twitter's Periscope launched over a year ago and Facebook Live is now on hundreds of millions of smartphones around the world. And products for law enforcement officers still can't offload past video from the field, much less provide live video.
When the average person walking around has a better ability to take and share video than law enforcement, there's a gap in capability. That's a gap that TASER International needs to fill quickly before someone else does.
The big picture still looks strong
Despite expenses in weapons being higher than investors might like and body camera tech falling behind that of the average smartphone, TASER International is still a leader in less lethal weapons and body cameras. And with the market for both growing quickly, there's a lot of potential ahead for the company, especially if the expanded sales force continues to book new customers around the world.