Growth companies frequently spend profits to expand their market share, but when a more mature company posts a loss, investors take note. Axon Enterprise (AXON +3.46%), founded in 1993, has been riding a wave of growth driven by the subscription revenue from its software and sensors business segment, but the company posted a loss in its most recent quarter. On a Fool Live episode recorded on July 14, Fool contributors Brian Feroldi and Toby Bordelon discuss the company's recent results, its expanding gross margin, and why its bottom line was underwater.
Brian Feroldi: Axon had a really good quarter in their most recent quarter. Their software sales grew 34% to $52 million. That helped their recurring revenue segment grew 39% in total to $242 million. Better yet, that software metric we all love, net revenue retention was 119% during the quarter. Add it all up, combined it with the camera sales and their taser sales and total revenue for the company grew 33% to $195 million.
Now, the company is an international business and domestic revenue in the U.S. really led the way. Revenue growth in the U.S. was 37%. Revenue growth in the international markets was just 17% but the company points out that you shouldn't be fooled by that. In the quarter, it signed new deals with Canada, the U.K., Hungary, Brazil, New Zealand, and Italy. In fact, total new bookings in international markets grew 35%, so that business is about to accelerate.
Now, that switch to high-margin recurring revenue helped gross margin expand to 63.3%, that was up 310 basis points. The bottom line didn't look good on a GAAP basis, but that was because there was a huge amount of stock-based compensation in the quarter. On an adjusted basis, the company had about $0.31 per share, so it is profitable.
Moving forward, the name of the game is continue to grow in its core markets, launch new products, expand geographically, and drive operational efficiencies. The company has been doing just that for the last couple of years, so my takeaway is this is on track.
Toby Bordelon: Thanks for that, Brian. I'm focusing on what you said on those bottom-line expenses. Spending to grow even if you have a loss it's fine, especially for young growth companies, but we got a company here that's almost 30 years old. Are expenses out of control here or is this just a one-time thing? Is it just this comp that's a one-time thing or [do] we have issues here with expenses?
Feroldi: I believe that it was a one-time thing. If memory serves, the CEO here had an equity deal that was in the vein of Elon Musk's equity deal with Tesla, where at certain market caps, they get a huge tranche of stock. The loss here was all on a GAAP basis related to stock-based compensation.
But for the last couple of years, the company has been pivoting toward its subscription models, so really pushing its software and as a result, they are actually giving away the software for free for a year to get involved and that helps the switching costs. That's a trade-off that investors should be willing to make, but if you look at cash flow and free cash flow, those have been growing going in the right direction. The losses do not bother me at all.
