Axon Enterprise Inc. (AXON -4.10%) reported a solid third quarter after the market closed on Tuesday, posting double-digit growth and a big jump in earnings. Growth has slowed a bit from earlier in the year, and management didn't increase guidance this time around, but the steady flow of customers to the company's platform continues.

What Axon is really set up for is a big 2019, when a new taser, body camera, and records platform are expected to draw new interest from customers. Here's a look at the third-quarter results and where Axon is headed. 

Police officer wearing Axon products.

Image source: Axon Enterprise.

Axon Enterprise Inc.: The raw numbers

Metric Q3 2018 Q3 2017 Year-Over-Year Change
Sales $104.8 million $90.3 million  16.1% 
Net income $5.7 million  $422,000  1,250%
Diluted EPS $0.10  $0.01  900% 

Data source: Axon Enterprise Q3 2018 earnings release. 

What happened with Axon Enterprise this quarter? 

Quarterly growth slowed from 25% in the second quarter, but investors should take a broader view of the business and its operating segments. Here's how results broke down: 

  • Weapon sales were up 7.2% versus a year ago, to $63.7 million. This is by far the company's biggest segment, but it's also the slowest growing, which is why you see slowing growth above. 
  • In software and sensors, Axon Cloud revenue was up 46.9% from a year ago to $23.9 million, and sensors revenue was up 18.5% to $17.3 million. This is the segment that includes body cameras and the platform, and will eventually house the Axon Records system being launched next year. As long as software and sensors are growing, Axon is doing well. 
  • Annualized recurring revenue, which is driven by subscriptions to Axon Cloud and accompanying hardware, was up from $63.7 million a year ago to $101.6 million at the end of the third quarter. 
  • Software and sensor bookings were $92.9 million in the quarter, and a total of 325,200 Axon Cloud seats have been booked. 
  • Expected growth for the full-year was unchanged at 18% to 20% and EBITDA margin guidance of 14% to 16% was flat as well. 

The recently launched Taser 7 weapon and Body 3 camera didn't account for significant sales during the quarter, so they aren't affecting operations yet. But management said that will change in a big way in 2019. 

What management had to say

This year is a bit of a transitional one, with Axon introducing some new hardware ahead of the launch of Axon Records in 2019. And that's when growth should really pick up. CEO Rick Smith said this about 2018: "These new products are a bridge to keep growth momentum going while we scale up Axon Record. All of our new hardware products drive software revenue, because we're really driving adoption of connected devices and the software to manage it all." 

When looking at results, software is the glue that binds all of Axon's products together, and Axon Records will augment what the company is already building with cloud services. That should help expand the market and increase recurring revenue very quickly. 

Looking forward

Axon's shares were trading sharply lower on Wednesday as investors worry about the slowing top-line growth. But investors should keep in mind that the top line is dominated by sales of Tasers, which are quickly becoming a legacy product. Body camera sales and subscriptions are growing quickly, and that's exactly what investors should want to see.