NEW YORK, June 19, 2019 /PRNewswire/ -- Report
entitled "A Stunning Short" outlines how Axon, formerly known as
Taser International, faces 40-60% downside risk to approximately
$27.50 to $40.00 per share due to its inability to gain
traction on proposed software offerings, aggressive revenue
recognition and future margin erosion, and a valuation predicated
on management's unrealistic attempt at transforming the company
into a comprehensive SaaS business.
- Management's SaaS-Driven Growth Story Is Highly Unrealistic And
Likely To Disappoint: Axon successfully took significant share of
the Taser and body-worn camera (BWC) spaces by entering both
markets as a first-mover just as demand in each exploded.
Management is now effectively claiming that, by pairing artificial
intelligence (AI) with control of BWC video storage for client
police departments, it can achieve similarly rapid growth by
displacing deeply-entrenched players in the records management
system (RMS) and computer-assisted dispatch (CAD) spaces. However,
police departments are generally heavily entrenched with existing
CAD and RMS providers, many of which already provide end-to-end
solutions including CAD, RMS, case management, etc., and which are
extremely sticky.
We believe that management's plan to offer an end-to-end CAD / RMS
solution by next year is extremely aggressive given the complexity
of developing viable CAD / RMS solutions from scratch, particularly
for a hardware company with no real software experience. Few
attractive M&A targets remain for Axon in CAD and RMS, as
competitors have spent billions of dollars acquiring the
highest-quality players in each space through the past ~5 years. As
management's aggressive RMS / CAD rollout timeline underpins its
near-term growth forecast, we believe that Axon is set up to
disappoint investors as it fails to capture significant (or any)
RMS / CAD business through the coming years.
In addition to its unrealistic software and AI aspirations, Axon
has repeatedly promised significant international growth, but
management has failed to deliver on these claims and offers limited
transparency into its international business. It recently pivoted
to distributor acquisitions to accelerate international growth, but
at the same time slashed its TAM from $2.7bn (2016) to $2.4bn (2019). Our field research suggests that
Axon is many years away from scaling its business abroad.
- Aggressive Revenue Recognition And Undisclosed Dependence On
China: Axon released its Taser 60 plan in 2014, allowing customers
to save by bundling and paying for product and services over 5
years. Axon increasingly recognizes revenue under "multiple
performance obligation" accounting tests which give it discretion
over revenue allocation and timing. It claims its hardware/software
bundles have "stand-alone" value, and books revenue for hardware
up-front, but allocates no stated value to certain hardware on its
public contracts, obscuring the quantity of revenue which may be
subject to accelerated recognition. Furthermore, our research
reveals that Axon's hardware must operate with its software, which
calls into question its "stand-alone" value. We estimate aggressive
revenue polices have front-loaded revenues by 6% - 9% over the past
several years.
Furthermore, we believe that Axon has concealed its dependence on
Chinese components just as Chinese imports have grown increasingly
subject to tariffs. Management removed the word "China" from its recent 10-K, but in Q1'19 said
that "tariff and customs expenses" weighed on margins without
quantifying the amount or country source. Based on import
records, we believe that Axon has grown increasingly dependent on
Chinese imports for its body cam business through the past several
years, and through the troubled acquisition of VIEVU. We believe
associated tariffs will weigh on margins and could easily cause
Axon to miss 2019E EBITDA by 10%. Based on our field research, we
find some evidence that Axon has attempted to implement undisclosed
price increases upwards of 5% in Q1'19. Yet, despite this increase,
gross margins were still pressured and missed company estimates by
250bps.
- Valuation Predicated On Transformation Into A Steady-Growing
SaaS Company: Analysts have bought into management's
narrative that Axon is on its way to becoming an AI-powered
end-to-end safety platform, complete with recurring SaaS revenue
from a healthy cloud business. However, we believe that its
ongoing move to a subscription-based model represents a one-time
boost for its existing hardware products, and that future
software-oriented opportunities will strongly disappoint.
Axon's Q1'19 cash burn was its worst since coming public, and it
increased its line of credit capacity from $10m to $100m
despite having $350m of cash and no
debt.
Analysts' average price target for Axon is $72.30, just 9.5% above current levels, and
conveniently overlook its past SEC investigations, material
weaknesses, and legal spats. Unlike most of the Street, we believe
it is important to evaluate Axon's two distinct businesses when
valuing the Company. We view Taser as a mature business and
value it at a 7x-9x multiple of 2020 EBITDA – a premium to peers in
the weapon space, acknowledging its above-average margins and
market dominance. Alternatively, we value the Software and Sensors
segment at a discount to SaaS peer multiples at 3.5x – 5.5x 2020
sales, based on evidence of revenue accounting issues, slowing
sales growth, compressing margins, a smaller TAM than advertised,
and its lack of a clear path to material RMS and CAD sales. In
addition, while Axon is promising improved profitability, we
believe that tariffs and rising storage costs leave the company
with no material upside to margins. Factoring in the excess
cash, we estimate a price target of $27.50 – $40.00.
About Spruce Point Capital
Spruce Point Capital Management, LLC, is a forensic
fundamentally-oriented investment manager that focuses on
short-selling, value and special situation investment
opportunities.
Contact
Sean
Donohue
Spruce Point Capital Management
sean.donohue@sprucepointcap.com
212-519-9813
Spruce Point Capital Management, LLC is a member of the
Financial Industry Regulatory Authority, CRD number 288248.
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SOURCE Spruce Point Capital Management, LLC