AAXN stock has formed an interesting bullish hammer on the daily chart on February 28, 2020. A day earlier, on February 27, 2020, the company reported excellent earnings and revenue beats. Normally, AAXN stock would have surged higher but with the panic selling going on over the coronavirus, the stock was pulled lower.

On February 24, 2020, JPMorgan analyst Mark Strouse raised the firm’s price target on Axon to $92 from $78 and keeps an Overweight rating on the shares ahead of the company’s Q4 results on February 27. The analyst remains optimistic regarding Axon’s long-term growth prospects and he sees a favorable setup during the first half of 2020 due to “easy” year-over-year comps, particularly in the weapons segment. His higher price target reflects improved trading multiples for the company’s peers.

On February 27, 2020, Axon (Nasdaq: AAXN), the global leader in connected public safety technologies, released the following quarterly update letter to shareholders.

Dear Shareholders,

We are pleased to report a strong finish to 2019.

Revenue grew 26% to $531 million for the year, driven by demand for our latest generation camera, Axon Body 3, the cloud-connected TASER 7, and our cloud software.

Bottom line performance reflects our ability to scale manufacturing of TASER 7, continued growth of higher margin Axon Cloud revenue (up 41% for the full year), and cost control discipline. While net income was affected by catch-up stock compensation expense, we delivered a record $88 million in adjusted EBITDA for the full year, up 43%, and Q4 2019 adjusted EBITDA more than tripled to $38 million, reflecting a 22% margin.

The successful launch of Axon Body 3 drove record Q4 2019 sales of $172 million, up 50%, and holds tremendous strategic value. Customers are enthusiastic about better core performance and situational awareness features such as live-video streaming and real-time alerts. With LTE connectivity, GPS and a more powerful CPU for edge-AI processing, Axon Body 3 is designed to improve officer performance and drive adoption of SaaS features. Importantly, this is expected to fuel continued growth in annual recurring SaaS revenue. Axon Body 3’s communications capabilities also pave the way for adoption of the emergency dispatch solution we are bringing to market this year.

Our strategic focus on driving recurring cash flow and building a self-reinforcing SaaS-centric business is working. For example, in 2019:

  • We achieved $161 million in annual recurring SaaS revenue, up 49% over 2018;
  • 71% of our full-year revenue was in recurring contracts, up from 55% in 2018 and 46% in 2017;
  • More than 100 agencies adopted Officer Safety Plan 7, which carries per-officer-per-month pricing of $149 to $229 and created a pipeline of customers that have gained access to Axon Records;
  • More than 70% of Officer Safety Plan 7 users are on the top-tier 7+ plan; and
  • More than 550 agencies adopted the cloud-connected TASER 7, with 80% of those selecting our highest value plans.
  • We continue to see customer enthusiasm for Axon Records, which underscores the effectiveness of our go-to-market strategy. We’ve made it attractive for agencies to start using Records by including it as a built-in benefit to our highest tier Officer Safety Plan — and some agencies will be able to fund the majority of their upgrade to that tier with savings from transitioning their legacy records management system to Axon Records.

Our strategic priorities in 2020 include continuing to execute in our core market, while accelerating our path-to-market in new product categories such as de-escalation and communications, and expanding to new customer categories. This will position us to achieve a higher level of annual recurring SaaS revenue over the long term. Specifically:

  • We are accelerating our R&D investments in developing real-time command-and-control software for public safety, which represents a $2 billion rapidly growing market. Axon’s cloud-based software will be designed to empower everyone involved in incident response: dispatchers, call takers, command staff, patrol officers, firefighters and medical personnel. We intend to fundamentally improve the workflow that the industry refers to as Computer Aided Dispatch, or CAD — enabling entire agencies to respond as one team to get the right people with the right information to the right place at the right time. We expect to be live by mid-year with our first paying customer.
  • We see a major opportunity in the corrections and federal law enforcement channels. In Q4 2019, Axon won a Department of Justice contract to equip Bureau of Alcohol, Tobacco, Firearms and Explosives officers with body cameras. This contract vehicle will also allow other federal law enforcement agencies to join the Axon network. We are now proud to support both the US Forest Service’s adoption of body cameras and TASER devices, and the DOJ’s new body camera pilot effort, both representing significant milestones in Axon’s federal expansion efforts. We estimate these two markets add $1.5 billion to our core municipal public safety market.

Unlocking new opportunities means Axon’s strategic growth areas have evolved and expanded into:

  • De-escalation: Developing tools that support public safety officers in avoiding or minimizing use of force is a key component of Axon’s mission to protect life. These tools include the cloud-connected TASER conducted energy device as well as a suite of Augmented Reality and Virtual Reality (AR/VR) training services for law enforcement, delivered through our Axon Academy training platform. To obsolete the bullet, we intend to not only develop more effective TASER devices over time but also drive training and adoption of the best practices in modern policing.
  • Sensors: Our digital evidence management software, Axon Evidence, supports our network of cloud-connected cameras and sensors. Axon Evidence is the world’s largest cloud-hosted data repository of law enforcement video data and other types of electronic evidence. In September 2019, we began shipping Axon Body 3, a camera with an LTE antenna and GPS chip, which supports real-time awareness.
  • Productivity: Our productivity suite of tools reduce time spent on paperwork. Axon Records takes a disruptive modern approach to displace legacy on-premises Records Management Systems (RMS) by putting body camera video at the heart of incident records. Axon Records includes Axon Standards, a radically simpler approach to use-of-force reporting. Another software solution in this suite, Axon Performance, helps agencies ensure that officers are adhering to agency policies, and provides analytics on the effectiveness of body-worn camera programs. And Redaction Assistant enables agencies to redact videos in a fraction of the time through the use of artificial intelligence (AI).
  • Communications: We are developing communication tools that support real-time situational awareness through the sharing of information across various channels, including voice, messaging, location mapping, and intelligence and evidence sharing. Products include Axon Aware, which allows agencies to know the GPS location of their officers and what those officers are experiencing through live video streaming and more; and Axon Dispatch, the emergency dispatch solution we are bringing to market this year.

By 2030, we believe:

  • TASER devices will be the primary means to stop a threat
  • AI-enabled body cameras will eliminate the majority of manual report writing
  • Cloud-enabled devices will be the primary means to dispatch officers in the field
  • Axon will be a household name by virtue of the transformative value we’ll create for society and all of our stakeholders

Summary of Q4 2019 results:

  • Record quarterly revenue of $172 million, up 50% year over year, included $26 million of Axon Body 3 hardware shipments, and reflected a successful product launch.
  • Total company gross margin of 53.9% reflected a higher-than-usual mix of body camera hardware and TASER 7 cartridges, as expected. For more details, please see gross margin commentary by segment, below.
  • Operating expenses of $107 million included $47.5 million in stock-based compensation expenses, including $33 million of incremental “catch up” expense. Operating expenses excluding stock-based compensation declined sequentially, reflecting rigorous cost controls.
  • SG&A of $78 million included $40.2 million in stock-based compensation expenses, including $29.9 million in “catch up” expenses.
  • R&D of $29 million included $7.3 million in stock-based compensation expenses, including $2.9 million in “catch up” expenses.
  • These “catch up” expenses are tied to Axon’s CEO Performance Award and eXponential Stock Performance Plan (“XSPP”), for which six additional performance goals became probable of attainment during Q4 2019 due to our strengthened outlook, bringing the total number of performance goals that are statistically probable to nine.
  • GAAP EPS was ($0.21); Non-GAAP EPS of $0.41 excludes non-cash stock-based compensation expense.
  • GAAP EPS includes the “catch-up” stock-based compensation expense referred to above.

Quarterly Adjusted EBITDA was a record $38 million, representing 22% margin on revenue, and 48% incremental contribution margin. For the full year, adjusted EBITDA grew 43% to $88 million.

Cash and investments grew $43 million sequentially to approximately $396 million. Axon’s strong balance sheet, with zero debt, provides us with the latitude to continue growing our subscription contracts as a percentage of revenue.

On February 28, 2020, Needham analyst Scott Berg raised AAXN stock price target to $90 from $80. Berg liked the company’s strong Q4 results, with body camera sales driving a 17% revenue beat. Berg also believes that Axon’s initial FY20 EBITDA guidance is conservative, offering a positive view on the management’s cost discipline over the past two years and the potential of its new products such as the soon to be released CAD software. Berg has a Buy rating on the stock.

Large players volume ticked higher on February 28, 2020, which is incredible considering most stocks plunged lower on coronavirus fears. The Twiggs Money Flow is positive which suggests the stock is being accumulated. Notice the bullish hammer pattern.

We believe the stock is not a good entry right now but it could become one over the next few days. Specifically, watch for a consolidation or candle over candle reversal on rising large players volume before considering a long entry.

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