2018 could be a transformational year for Axon Enterprise (NASDAQ:AXON). The company has had tremendous success with body cameras and Tasers, but it is expanding into new products like a camera system for squad cars and a records management system that could ingrain the company further into law enforcement. On top of new products, it's putting greater emphasis on profitability, which has lagged as the company has invested in growth over the last few years. 

By the look of early results, the company's growth strategies are starting to pay off. 

A man in a police uniform putting a body camera in a dock.

Image source: Axon Enterprise.

Axon Enterprise: The raw numbers

Metric Q1 2018 Q1 2017 Year-Over-Year Change
Sales $101.2 million $79.2 million  27.7% 
Net income $12.9 million  $4.6 million  182.2% 
Diluted EPS $0.24  $0.09  166.7% 

Data source: Axon Enterprise Inc's Q1 2018 earnings release. 

What happened with Axon Enterprise this quarter? 

For now, Tasers continue to account for most of the revenue and earnings for Axon. But that will change as bookings for body cameras and software products increase. Here are some of the segment highlights that show where Axon's money is coming from. 

  • Taser weapon sales rose 10.1% to $63.5 million in the quarter and income from operations was $18.8 million. Gross margin was 67.7% for weapon sales. 
  • Software and sensors revenue, which includes body cameras and Evidence.com cloud subscriptions, rose 74.7% to $37.7 million, and operating loss was $5.2 million. The loss was the result of $26.7 million of SG&A (selling, general, and administrative) and research and development expenses intended to drive long-term sales growth and an increase in bookings. 
  • Axon and Evidence.com bookings were $97.5 million in the quarter. Total backlog for software and sensors hit $570 million, and there was $83.3 million of annualized recurring revenue from the segment. 93% of the net contracts signed were multiyear agreements, so the software and sensor operating expenses noted above are driving a huge increase in long-term revenue. 
  • 25,400 new Evidence.com seats were booked in the quarter, and there were a total of 226,900 cumulative seats booked at the end of the quarter. The pace of bookings was the strongest in the company's history. 
  • Axon's balance sheet stayed debt-free, and the company had $96.8 million of cash and short-term investments. 

In a big development this past week, Axon announced the acquisition of VIEVU, the camera subsidiary of The Safariland Group. VIEVU was one of Axon's biggest competitors in body cameras, so this will clear the field for Axon to take an even larger share of the market. As part of the deal, Axon will gain five major city customers, including New York City and Miami-Dade. 

Management said that the acquisition cost will be $4.6 million in cash, $2.5 million in common stock, and potentially 141,000 shares of common stock contingent on hitting certain milestones over the next two years. There's also a provision that Axon has to purchase a minimum number of holsters from The Safariland Group. 

What management had to say

One of the big pushes for Axon in 2018 is to increase operating margins and begin showing the profitability it can have over the long term. Operating margins are starting to creep higher, even if the sensors and software segment isn't yet profitable. In the earnings release, CEO Rick Smith said this about the company's strategic investment priorities: "[W]e are right-sizing our investments to match the opportunity set and continuing to work toward delivering break-even operating margins in our Software & Sensors segment by the end of 2020."

That may seem like a long time from now, but remember that Axon is investing operating expenses today to book customers in multiyear contracts. Those contracts keep stacking up as the company grows and will drive strong profitability as Axon signs more customers. 

Looking forward

There's nothing slowing down Axon Enterprise today, and management sees 2018 being even better than previously anticipated. Revenue growth guidance was increased by 200 basis points to 18%-20%, showing the growth Axon sees ahead. Operating margins are still expected to increase 300-400 basis points as well, which would increase profitability. 

With new products like the Signal Sidearm (a smart holster), and a records management system still set to launch later this year, Axon Enterprise seems poised for long-term growth. 

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