Axon (AXON) Q3 2026 earnings review
Axon software sales accelerate, but delayed federal deals cut outlook
Axon, the maker of TASER devices and police body cameras, saw its cloud software accelerate while delayed federal hardware deals slowed total sales. Revenue rose 28% from a year ago to $909 million as software sales jumped 43%, but gross margin excluding one-offs fell 3.5 percentage points on counter-drone hardware mix and memory chip costs. The company also committed $1.2 billion for a 37% stake in drone maker Skydio and cut its full-year sales and cash flow plans.
| Revenue | $909M +28% from a year ago |
|---|---|
| Software and Services sales | $437M +43% from a year ago |
| Gross margin, excluding one-offs | 59.2% down 3.5 percentage points from a year ago |
| Full-year revenue outlook | Cut to ~30% from 32–34% ($130M Federal deals delayed) |
⚖️ Verdict: 🔴 Bearish
The story got worse because counter-drone hardware brought project delays, lower gross margins and a heavy inventory cash drain. Three delayed federal counter-drone deployments worth $130 million forced Axon to cut its full-year sales growth plan from 33% at the middle of the range to 30%, while a $225 million inventory build cut the free cash flow target to $350–400 million. The good news: without those three delayed deals, strong AI and 911 software demand would have pushed full-year sales 2 percentage points above the old plan.
The question now is whether counter-drone hardware and the $1.2 billion Skydio bet pull Axon toward lower-margin equipment or feed high-margin software subscriptions. If software wins out, gross margins will rebound and fourth-quarter cash collections will cover the $450 million needed to hit the lowered cash target; if hardware dominates, margins and cash conversion will stay under pressure. Fourth-quarter cash flow and the 2027 outlook will tell.
🐂 Bull Case
Software and AI Subscriptions Carry Growth
Axon sells cloud software for digital evidence, police records, 911 dispatch and artificial intelligence tools alongside its hardware. Software and Services revenue rose 43.2% from a year ago to $437 million, accelerating from 36.2% growth last quarter and offsetting slower hardware shipments.
- Annual recurring revenue (ARR), the yearly value of subscription contracts: $1.75 billion, up 40% from a year ago and up $111 million from last quarter
- AI annual recurring revenue: passed $100 million, with year-to-date AI bookings up more than 50%
- Newer software categories (real-time operations, Axon Records, Axon AI, Axon 911 and Dedrone software): nearly $500 million in annual run-rate revenue, more than double last year
- Net revenue retention, which tracks spending expansion by existing agency customers: held at 126%
Existing police and corrections agencies are upgrading to higher-priced bundles such as the AI Era Plan, which contributed to a $258 million state corrections contract this quarter. Because software-only gross margin stays above 80%, this recurring stream kept overall profit margins rising even while hardware margins fell. Axon also launched Axon Body 5, the TASER Ion compact device, and Axon Guardian live conflict alerts in October.
What to watch: fourth-quarter net new annual recurring revenue in the next earnings release. Another quarterly addition above $100 million would show that AI and 911 software upgrades can sustain 30% company growth even when hardware orders slip.
Multi-Year Contract Backlog Reaches $15.8 Billion
Future contracted bookings track all unfulfilled customer orders for hardware and software, typically spanning five to ten years. The backlog reached $15.8 billion at the end of September, up 39% from a year ago and up $700 million from June.
To compare deals across newer enterprise and international markets that sign shorter contracts, Axon also tracks five-year bookings, which cap longer contracts at their first five years of value. Those five-year bookings rose 25% over the first nine months of 2026, down from a pace above 30% in the first half. Third-quarter awards included a $21 million international TASER 10 contract and a $10 million healthcare agreement, while international revenue grew 17.0% from a year ago to $136.5 million.
What to watch: full-year five-year normalized bookings growth in the fourth-quarter release. Finishing the year at the 30% pace management targeted last quarter would prove that fourth-quarter contracting made up for the third-quarter dip.
🐻 Bear Case
Delayed Federal Counter-Drone Deals Force an Outlook Cut
Over the past year Axon positioned Dedrone, its counter-drone detection and airspace security system, as a major growth driver alongside its core police tools. While Platform Solutions revenue—which houses counter-drone equipment, in-car video and virtual reality hardware—more than doubled from a year ago to $125 million, it fell 16.6% from the second quarter's $149.8 million.
That drop broke Axon's streak of raising its full-year plan: "The reduction from our prior expectations is concentrated in three large Federal Dedrone deployments representing approximately $130 million of revenue we no longer expect in 2026," the company wrote. One $30 million deployment missed the third quarter, and two deals worth $100 million slipped out of the fourth quarter.
Axon cut its full-year revenue growth plan from 32–34% to about 30%, noting that "the size and hardware-heavy nature of these deployments can create greater quarter-to-quarter variability in revenue timing." If those three contracts had shipped on schedule, full-year growth would have been nearly 5 percentage points higher, so the miss proves that counter-drone hardware brings project delays that subscription software did not.
What to watch: 2027 revenue outlook and confirmation that the $130 million in Federal Dedrone orders shipped in early 2027. Further delays would show that federal counter-drone budgets are harder to convert into revenue than police subscriptions.
Counter-Drone Hardware and Memory Costs Squeeze Gross Margins
Gross margin measures the share of sales left after paying the direct cost of making products and delivering software. Company gross margin fell 3.4 percentage points from a year ago to 56.7%, and gross margin excluding stock compensation and acquisition amortization dropped 3.5 percentage points to 59.2%, as cost of sales rose from 39.9% of revenue to 43.3%.
- Connected Devices gross margin excluding one-offs: 44.6%, down 7.5 percentage points from a year ago and down 8.8 points from last quarter
- Software and Services gross margin excluding one-offs: 75.0%, down 1.8 percentage points from a year ago
- Operating expenses (sales, administrative and research costs): fell from 60.4% of revenue a year ago to 52.0%, keeping EBITDA margin excluding one-offs up 1.0 point to 25.9%
Axon attributed the gross margin drop to an "increased mix of counter-drone equipment, higher memory costs and scaling of new product categories," while the sequential hardware drop also reflected the absence of second-quarter tariff refunds. Lower overhead spending protected overall profit margins this quarter, but hardware cost pressure is getting worse rather than fading.
What to watch: Connected Devices gross margin excluding one-offs in the fourth quarter. A rebound toward 50% would show that memory inflation and new product launch costs are stabilizing.
Inventory Build Drains Cash and Cuts the Full-Year Target
Free cash flow—operating cash flow minus property and equipment purchases—was an outflow of $18.9 million in the third quarter, down from a $33.4 million inflow a year ago. Over the first nine months of 2026, Axon burned $74.5 million of free cash flow, forcing management to cut its full-year free cash flow target from $450 million to a range of $350 million to $400 million.
The company spent about $100 million on extra inventory during the quarter as a "strategic inventory investment to support product availability and supply chain resilience," and expects that buildup to use $225 million of cash for the full year before moderating after the first quarter of 2027. Balance-sheet inventory has climbed 69% since December to $579.2 million, while receivables and contract assets used another $192.0 million of cash in the quarter.
What to watch: fourth-quarter free cash flow, which by our math must reach about $450 million to hit the middle of the lowered full-year range. Missing that figure would show that working-capital demands are structural rather than a temporary inventory build.
Risks this quarter didn't answer
Several standing risks and prior-quarter watch items could not be tested from the third-quarter shareholder letter alone and await the conference call or quarterly Form 10-Q filing.
- Body camera unit shipments: Personal Sensors revenue rose 19.0% from last quarter to $113.5 million, near the 20–30% unit shipment rise management forecast, but exact unit counts were not disclosed.
- Contract termination clauses: GAAP remaining performance obligations (RPO) were not in the release, leaving the gap against the $15.8 billion bookings figure unreadable until the 10-Q.
- Stock-based compensation: Axon trimmed its full-year stock compensation outlook by $20 million to $570–600 million (with $240 million tied to employee and chief executive performance awards), still above 16% of guided revenue.
- AI commoditization, privacy pushback on license-plate readers, and patent or antitrust lawsuits: no new quantitative updates in the release.
👓 Other Themes
Axon Commits $1.2 Billion for 37% of Drone Maker Skydio
"Today, we announce the largest single investment in Axon's history: a $1.2 billion investment in Skydio," the public safety group wrote, lifting its diluted ownership stake in the US drone maker to 37%. Axon also signed an "exclusive public safety distribution partnership with Skydio in the U.S. and Canada" and will record its commission share as pure-margin net revenue inside Software and Services, while Skydio expects about $1 billion in total bookings this year.
💲 Other KPIs
Personal Sensors—mainly body cameras—rose 19.0% from last quarter and 6.4% from a year ago to $113.5 million, rebounding from a 12.3% sequential drop in the second quarter ahead of the Axon Body 5 launch. TASER device and cartridge sales fell 2.1% from a year ago and 10.8% from last quarter to $233.0 million on lower legacy volume.
Axon issued $1.15 billion of new notes in the third quarter and spent $114.9 million on capped calls tied to its 2031 convertible notes. Total debt principal rose to $2.90 billion against $1.65 billion of cash, restricted cash and short-term investments, pushing net debt up by $182 million from June and up $1.13 billion since December — before funding the new $1.2 billion Skydio deal.
Reported net income was $57.0 million ($0.68 per diluted share), up from a $2.2 million loss a year ago. However, third-quarter pre-tax profit of $78.9 million included $59.7 million of gains on strategic investments and marketable securities, leaving $19.2 million of pre-tax profit from core operations and interest by our math.
🔮 Guidance
New. The fourth-quarter plan points to 25.5% growth from a year ago and 10.1% growth from the third quarter at the middle of the range ($1.0 billion), by our math. That slows from 27.9% growth in the third quarter because two Federal counter-drone deployments worth $100 million were removed from the fourth-quarter schedule, and because the quarter compares against a strong fourth quarter of 2025.
Cut. The middle of the full-year growth plan dropped by 3 percentage points to about 30.2% ($3.62 billion) after two straight raises earlier this year (+2.5 points in Q1, +2.0 points in Q2). Removing $130 million of delayed Federal Dedrone deployments reduced full-year growth by nearly 5 percentage points, meaning the rest of the business beat the prior plan by about 2 percentage points.
Raised on full-year margin, lower on dollar total. By our math, the fourth-quarter target equals a 24.8% margin at the middle of the range, down from 25.9% in the third quarter on seasonal mix and hardware costs. However, full-year profit margin before interest, tax, depreciation and one-offs moves up 0.1 percentage point to 25.6% as higher-margin software takes a larger share of sales.
Cut. Management lowered the full-year cash target by $75 million at the middle of the range because its inventory build will consume $225 million in 2026. After a $74.5 million cash outflow over the first nine months, hitting the $375 million midpoint still requires $449.5 million of free cash flow in the fourth quarter by our math — nearly triple last year's fourth-quarter inflow of $155.4 million.
Cut. The company reduced its full-year property and equipment spending plan by $35 million at the middle of the range, which excludes any spending on its new Scottsdale headquarters. Having spent $82.8 million through September, the updated outlook leaves $57.2 million of capital spending for the fourth quarter by our math, up from $38.6 million in the third quarter.
Cut. Axon lowered its expected full-year stock compensation expense by $20 million, with the expected cost of its broad-based employee and chief executive performance awards dropping from about $280 million last quarter to $240 million. After $435.1 million of total stock compensation over the first nine months, the midpoint leaves about $149.9 million for the fourth quarter by our math.
❓ Key Questions
How will Axon fund the $1.2 billion Skydio investment?
Axon ended September with $1.65 billion in cash and short-term investments against $2.90 billion in debt principal. Management did not say whether the $1.2 billion Skydio purchase uses existing cash, new debt, or stock, nor when the transaction closes.
Why were three Federal counter-drone deployments delayed into 2027?
Three Federal Dedrone deployments worth $130 million slipped out of the 2026 outlook. Investors need to know whether federal budget approvals, site readiness, or technical requirements caused the delay, and whether the revenue is locked in for early 2027.
What drives the implied $450 million fourth-quarter cash inflow?
Hitting the lowered $350–400 million full-year free cash flow outlook requires about $450 million in the fourth quarter after a $74.5 million nine-month outflow. Management did not detail how much comes from customer collections versus slowing the inventory build.
What is the GAAP remaining performance obligation balance this quarter?
Future contracted bookings rose to $15.8 billion, but that company metric includes contracts with termination-for-convenience clauses and gross third-party agent orders. The release omits the stricter GAAP backlog figure, which sat $5.3 billion lower last quarter.