5 Things Axon Enterprise's Management Wants You to Know

2018 may be the year Axon Enterprise makes the turn to profitability.

Travis Hoium
Travis Hoium
Nov 13, 2017 at 1:04PM

Earnings reports are the time investors get to check up on their companies, but it's the conference call that gives the most insight into a business. Management often gives a much deeper look at the business than an earnings report can. 

For Axon Enterprise (NASDAQ:AAXN), the conference call is when management gives investors an update on what's going right and wrong with the rapidly growing business and when we can expect new products to start driving more growth. Here are my five biggest takeaways from last week's call. 

Axon's headquarter building.

Image source: Axon Enterprise.

The elevator pitch

CEO Rick Smith started the conference call with a line I think all investors should know and understand. Here's his elevator pitch for Axon investors: 

In Q3 we executed against our long-term plan of creating the end-to-end technology platform for policing and public safety.

Axon isn't just a product company, it's a technology platform that law enforcement agencies will use for years to come, making their jobs easier and the public safer. That's the vision, and every new sale or new product offering should emanate from that central vision. 

Show me the money

The challenge Axon has had recently is turning its growth into profitability. Smith thinks that will change soon, saying: 

[O]ur domestic body camera business is now transitioning from the early market formation phase where growth is the dominant focus to our scaling phase where we are now placing significant emphasis on operating leverage and building the foundations of long-term profitability.

Axon is past discounting body cameras in most markets, which should allow it to expand margins on the growing base of users in the next few years. 

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Why margins were low in Q3

The transition to higher profits will take time, partly because management has been discounting products to grow in international markets. Smith put it this way: 

[W]hen we enter a new market we usually do so with disruptive upfront discounting, which compresses initial ASPs and gross margins. We did this with TASER weapons 20 years ago, with the domestic body-worn camera and Evidence.com starting five years ago. This is the case today as we penetrate international greenfield markets with body-worn cameras as well as the introduction of our new fleet product domestically, which began to scale in the third quarter.

This is a good strategy long term because it builds the relationships Axon can profit from over the next 10 or 20 years, but it's a short-term hit to the income statement. Investors have to balance the near-term cost with the long-term upside for Axon's business. 

Building in an upgrade cycle

One way to expand margins and increase sales is to have your product be a regular line item in a law enforcement agency's budget. Axon thinks that will improve the upgrade cycle and keep the company's products locked into agencies. Smith said: 

Getting on a budget line item [for a] police department grows the long-term revenue stream from the customers by giving them a clear mechanism to be able to consistently upgrade every five years. Without these budget line items in place, we estimate our historic upgrade cycle was closer to the eight-to-10-year range. We believe that we can shorten that cycle to five years for agencies with a budget line item in place.

Look for long-term financing plans to be a growing part of Axon's weapon sales, which should drive more consistent revenue and margins for the company. 

Growth will continue

I think product launches in 2018 will be when Axon's business takes a major step forward, particularly with a records management system that will be an integral part of law enforcement's day-to-day operations. Smith gave the bullish case for the business:

In 2018 we expect to begin launching some of these premier services that are made possible by the network that we've built. These new services will create significant and unique value for our customers and will create high-margin services that will accelerate long-term profitability.

Records management and artificial intelligence offerings will be services that can be layered on top of weapon and body camera sales. When Axon talks about building a platform and using that platform to grow sales and profits, this is a key point of leverage. I wouldn't be surprised if 2018 ends up being a highly profitable year for the company.