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SPRUCE POINT CAPITAL MANAGEMENT AND ANSON FUNDS HAVE BOTH PLACED BETS AGAINST STUN GUN DEVELOPER AXON ENTERPRISE

Wednesday, July 31, 2019

AXON ENTERPRISE MARKET CAP: $4.0B (MID CAP) EXCHANGE: NASDAQ TICKER: AAXN HQ: SCOTTSDALE, AZ SECTOR: INDUSTRIAL GOODS 17 ACTIVIST INSIGHT MONTHLY AUGUST 2019 | WWW.ACTIVISTINSIGHT.COM position itself as a software as a service (SaaS) provider to law enforcement agencies. “Our biggest long-term concern is how will Axon deliver on its ambitious goals and grow into the ever-expanding total addressable market (TAM) it is promoting as it tries to position itself more as a software company,” Ben Axler told Activist Insight Monthly. The short seller said Axon’s reported TAM is largely unproven and is being exaggerated with unrealistic pricing assumptions. In addition, its software and sensors unit (including Axon Cloud) is experiencing a slowdown, while the segment’s margins are contracting. “We believe these trends will continue as costs escalate from offering unlimited video storage, and competition increases,” Spruce Point said in its report. Axler told Activist Insight Monthly that he would be “impressed” if Axon won a major records or dispatch management software deal with a top-10 city. Axon, however, said in a presentation at the Baird 2019 Global Consumer, Technology & Services Conference that it is driving TAM through “value-added features” as it expands into international markets and captures adjacent markets like military and federal, fire and EMS, and commercial enterprise. STUNNINGLY STAGNANT As for the taser business, Anson learned that Axon has been pulling forward sales using aggressive accounting. Specifically, the firm reports disproportionate revenue upfront instead of over the life of its five-year contracts with police departments. “Because of the aggressive sales methods, including financing plans,… growth of Axon’s taser business is likely to be incrementally difficult going forward and the inflection point may already be behind us.” In addition, Anson predicted that Axon will face fierce competition later this year when peer PhaZZer releases tasers, thereby challenging Axon’s margins and potentially threatening its top line in its taser business. Spruce Point echoed Anson’s sentiment, stating that Axon’s core stun gun product is mature with limited domestic unit growth opportunities. The short seller said Axon’s newest model will only provide a short-term benefit. “Now five years into the taser 60 program introduced in 2014, and with the Taser having a five-year expected life, we believe its early mover advantage is being eroded by competitors pricing and solutions on the software and sensor side,” Spruce Point wrote in its report. “Axon’s best gains are now behind it” JUSTICE WILL PREVAIL Other red flags listed by Spruce Point include an increase in operating cash burn, a selloff of insider stock, and a failure to disclose accounting errors tied to compensation expenses. Moreover, the short seller noted Axon’s reliance on imports from China, predicting that costs associated with ongoing tariffs will weigh on margins. Anson, meanwhile, pointed to Axon’s history of giving perks to police department officials. Axon, however, denied the accusations and noted the short sellers’ motives of trying to decrease the firm’s stock price. “While short sellers seek to spread fear, uncertainty, and doubt in hopes of knocking our stock down to make a short-term profit, Axon is focused on long-term solutions such as making the bullet obsolete, improving police community relations, and enabling a fairer justice system,” a spokesperson told Activist Insight Monthly. The firm said it is actively mitigating its China exposure, adding that it is not concealing the fact that it has suppliers in China. Moreover, the firm said it “feels great” about its ability to disrupt the police Records Management Systems and Computer Aided Dispatch markets. “We feel great about our market position

 

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