Axon Enterprise (NASDAQ:AAXN) achieved another record for quarterly revenue in the third quarter of 2017 and is looking more and more like a body camera business, not just a Taser company. 

An initial look at falling net income might seem concerning, but Axon is investing in new products and in a global sales force to grow the business in the long term. Here's a look at what we learned from the quarter and what the future looks like. 

Officer interviewing a citizen while wearing a body camera.

Image source: Axon Enterprise.

Axon Enterprise Inc: The raw numbers

Metric Q3 2017 Q3 2016 Year-Over-Year Change
Sales $90.3 million $71.9 million  25.6% 
Net income $0.4 million  $3.8 million  (89%) 
Diluted EPS $0.01  $0.07  (85.7%) 

Data source: Axon Enterprise Q3 2017 earnings release. 

What happened with Axon Enterprise this quarter? 

Performance in the weapons segment continued to be strong, but it's body cameras that are growing the business. Here's a look at some segment details: 

  • Weapon sales increased 12% to $59.4 million and gross margin fell 400 basis points to 68%. Forty-three percent of unit orders were on the TASER 60 plan, which is a five-year annual payment plan that includes Taser upgrades. 
  • Software and sensor sales, which includes body cameras and cloud services, rose 63% to $30.8 million, and segment gross margin was 31%, down from 45% a year ago due to higher hardware sales and cloud migration charges. 
  • International sales grew from $11.3 million a year ago to $17.1 million. This has been a major point of investment for management, and growth in international markets will be key in the long term. 
  • Operating expenses were up 43% to $50.6 million as management spent more on sales commissions to drive long-term sales growth. 
  • Revenue growth guidance was increased to 25% from a range of 15%-20% originally for 2017. 

New products also seem to be moving forward and could start contributing revenue in 2018.

  • Signal Sidearm, a holster that activates body cameras when a gun is drawn, has finished beta testing and is available to customers in the fourth quarter.
  • A new records management system that is intended to reduce officer paperwork and increase accuracy will be shipped in 2018. This could drive higher body camera adoption and high-margin services revenue.
  • Artificial intelligence products are still in their early stage of testing, but the Los Angeles Police Department chose Axon for a video analytics project. This segment is pre-revenue but could be another incremental revenue source going forward.  

What management had to say

Axon is transitioning from an emerging business to a more mature business that's expanding into new product offerings and pushing to expand margins. In the earnings release, the management team said: 

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. 

The combination of an expanding product portfolio of video hardware and services and the long-term contracts that are now offered with Axon's products should generate high margins and product lock-in at customers. That's a powerful combination long term if investors can look past the short-term investments required to develop and sell new products. 

Looking forward

Investors shouldn't be too concerned about the bottom line for Axon Enterprise today: It's growth that will drive the company for the next few years. Axon is locking up long-term sales with financing and service contracts that come with high margins and the promise of long-term revenue. 

What could really supercharge this stock is if new products like the Signal Sidearm and records management system are adopted on a widespread basis. These are the kind of products that could not only make Axon money but lock customers into the Axon ecosystem and generate years, if not decades, of long-term revenue for the company.