Axon Enterprise, Inc. (AXON) Earnings

Management highlights

- **Strategic Positioning in the AI Era** • Management frames recent breakthroughs in generative AI as a collapse in the cost of original insight that plays directly to Axon's unique strength: Axon controls all links of the public safety technology chain (edge sensors, customer-controlled data infrastructure, AI analytics, and operational action tools) and has 30 years of experience building trusted, regulated solutions for public safety. • The company's mission to protect life and focus on responsible data stewardship (customer-controlled data, never treating customer data as Axon's own) is highlighted as a core sustainable competitive advantage, as trust is non-negotiable in public safety. - **Product and Operational Milestones** • D-Drone successfully delivered counter-drone security for all 11 U.S. host cities of the recent World Cup, a complex multi-agency deployment that further established Axon as the technology leader in counter-drone. • International business posted strong growth: Q2 international bookings were 3x higher than the prior year, with 3 of the top 5 AI era plan deals in the quarter coming from international customers; two large-scale Taser 10 deals were signed in the Middle East and Europe, matching the size of the largest U.S. deployments. • Two nine-figure municipal public safety deals, two eight-figure state corrections deals, and the first full-scope Axon 911 customer deal were signed, with the first 911 deal combining the Prepared and Carbine solutions just months after both acquisitions closed. • Enterprise bookings grew 3x year over year, with early pilot programs converting to meaningful large-scale deployments; Axon Body Mini for non-police frontline workers is seeing growing enterprise trial momentum. • The federal business showed strong promise: Axon was selected as a participant for the $1.5 billion DHS Counter UAS program, and a major Axon Assistant deployment was closed with a federal agency. - **Business Model Dynamics** • The end-to-end connected Axon ecosystem generates strong network effects and expansion within existing customer bases, with large deals typically representing expanded product adoption (not just renewals, adding more hardware and software than prior contracts). • The company maintains a deliberate approach to AI deployment, focusing on use cases that improve public safety outcomes rather than deploying AI for its own sake, with internal hackathons to encourage productive AI adoption.

Guidance

- Full-year 2025 revenue guidance was raised to 32-34% year-over-year growth, a 200 basis point upward revision from the prior 30-32% target range. • Management expects full-year 2025 normalized five-year bookings growth to reach the 30% range, with strong current pipeline supporting this target. • Q3 2025 body camera shipments are expected to grow 20-30% sequentially and 15-20% quarter over quarter, with management noting growth is likely closer to the 30% end of the range. • Q3 2025 adjusted EBITDA margin is expected to reflect higher memory costs and no tariff refund benefit, with margins expected to scale back to current levels in Q4 to hit the full-year target.

Segment performance

Total company revenue was $904 million, up 35% year over year. Software and services revenue hit $398 million, up 36% year over year, and represented 44% of total revenue. More than 33% of software revenue comes from offerings beyond the core Axon Evidence platform (including real-time operations, productivity applications, the AI era plan, counter-drone software, and Axon 911), and this non-core software segment grew 70% year over year, with the AI era plan growing almost 700% year over year. Annual recurring revenue increased 39% year over year to $1.6 billion, and net revenue retention reached 126%. Platform Solutions revenue grew 123% year over year to $150 million, with D-Drone (CounterDrone, added at the end of 2024) driving most of this performance, and D-Drone surpassed $100 million in quarterly revenue. Taser segment revenue was not explicitly stated, but Taser unit volume hit an all-time quarterly high; cumulative bookings of Taser 10 units already exceed lifetime bookings of the prior Taser 7 model, with significant remaining pipeline. Gross bookings overall were up 20% year over year (on top of 50% growth in the prior year quarter), and five-year normalized bookings (adjusted for contract duration) grew more than 30% year over year. Future contracted bookings grew more than 40% year over year to $15.1 billion. Adjusted gross margin was 62.9%, up 130 basis points sequentially. Adjusted EBITDA was $242 million, representing a 26.8% margin. Adjusted operating cash flow improved to $20 million from a $92 million outflow in the prior year quarter.

Risks & headwinds

- Public sector technology procurement is inherently risk-averse, and there is ongoing public and regulatory scrutiny of AI and surveillance technology in public safety (including the broader anti-surveillance deflock movement), rooted in concerns about data privacy, security, and potential abuse of access. • Counter-drone is a rapidly evolving regulatory space, and drone mitigation is not yet fully legalized for U.S. state and local governments, limiting near-term demand in that large segment. • Large multi-million dollar public sector deals require multiple layers of approval and extended contract negotiation, leading to potential timing variability in quarterly bookings and revenue. • Newer high-growth segments like counter-drone have lower near-term margins as the business scales, creating mix drag on overall company margins until the segment matures. • Body camera shipment volume tracks prior quarter bookings, leading to inherent quarter-to-quarter seasonality and shipment volatility.

Analyst Q&A

• Q: What areas of AI innovation are customers requesting, and where is customer resistance still seen?

  A: Customers most frequently request solutions that speed up emergency response, save officer time to focus on community work, and directly improve officer and community safety. Resistance to new AI and surveillance technology stems from legitimate privacy and data security concerns, driven by high-profile past cases of data access abuse by law enforcement. Axon addresses these concerns by embedding independent ethical review, building privacy controls like anomalous behavior monitoring for data access, and positioning AI as a tool to amplify — not replace — human judgment, which has helped win over customers switching from competing providers.

• Q: Is D-Drone growth just a one-time World Cup boost, or is there sustained underlying demand across other use cases?

  A: The World Cup deployment was not an outlier; the hardware used for the event has already been repurposed for other customer projects, and underlying demand is broad and growing. Geopolitical conflict has increased global awareness of drone threats to critical infrastructure, leading to demand from enterprise customers (data centers, corporate campuses, private events, celebrity/executive security) in addition to federal and international government clients. When counter-drone mitigation is legalized for U.S. state and local governments, management expects another major demand surge.

• Q: Why did Axon start disclosing the five-year normalized bookings metric, and what does it signal about the business?

  A: The new metric was introduced to adjust for shifting contract durations as the business expands into new markets: international and enterprise customers more commonly sign 1-5 year contracts, compared to the 10+ year contracts common with U.S. state and local clients. Normalization also removes distortion from very large multi-decade international deals that can swing headline bookings numbers but do not reflect annual underlying demand. The metric provides clearer visibility into sustained demand growth, with five-year normalized bookings growing over 30% year over year, matching the strength of historical headline bookings growth.

• Q: What is driving recent growth in body camera win-backs from competing providers?

  A: Customers are switching to Axon because competing products failed to deliver on promised performance and functionality. Axon's reputation for trust, reliable end-to-end ecosystem integration, and consistent product delivery has attracted these migrating customers, with several high-profile early switches generating positive word-of-mouth across the close-knit public safety community. Network effects from the integrated Axon ecosystem further reinforce these wins, as the value of the full platform exceeds that of standalone point products from competitors.