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Axon Enterprise Q3 Earnings Miss Estimates as Margins Narrow
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Key Takeaways
Axon's Q3 earnings rose 38.7% to $1.72 per share but missed estimates as revenues grew 28% to $909 million.
Software revenues surged 43.2%, but higher memory costs and counter-drone equipment mix squeezed margins.
Axon cuts its 2026 revenue outlook to $3.61-$3.63 billion due to delays in $130 million of federal projects.
Axon Enterprise, Inc. (AXON - Free Report) reported third-quarter 2026 adjusted earnings of $1.72 per share, up 38.7% year over year. The figure missed the Zacks Consensus Estimate of $1.90 by 9.5%.
Total revenues were $909 million, up 28% year over year but below the consensus estimate of $931 million by 2.4%. Strong software demand supported growth, while delayed federal counter-drone deployments weighed on revenues. Annual recurring revenues (ARR) increased 40% year over year to $1.75 billion.
Axon Enterprise, Inc Price, Consensus and EPS Surprise
Connected Devices revenues increased 16.3% year over year to $471.5 million, driven by Dedrone and strong Axon Body 4 adoption. Growth was partly offset by reduced legacy TASER volumes and the delayed recognition of approximately $30 million from a federal Dedrone deployment.
Platform Solutions revenues surged 106% year over year to $125 million, reflecting strong counter-drone demand. However, the segment's adjusted gross margin contracted to 44.6% from 52.1% in the year-ago quarter, primarily due to a higher mix of counter-drone equipment and increased memory costs.
Management highlighted continued TASER 10 demand and the recent introduction of TASER Ion. The company also unveiled Axon Body 5, with commercial availability expected in spring 2027, creating another potential hardware upgrade cycle.
Software Business Delivers Robust Growth
Software & Services revenues surged 43.2% year over year to $437 million, supported by customer additions and higher adoption of premium software solutions. Growth benefited from AI offerings, real-time operations, Axon Records and Axon 911.
The segment's adjusted gross margin declined to 75% from 76.8% in the prior-year quarter, reflecting investments in newer products and a higher proportion of professional services revenues. Software-only gross margin remained above 80%.
Net revenue retention stood at 126%, while future contracted bookings increased 39% year over year to $15.8 billion. AI annual recurring revenues surpassed $100 million, with AI bookings increasing more than 50% year to date.
AXON's Margin Profile Reflects Higher Costs
Axon Enterprise's cost of sales totaled $394 million, representing approximately 43% of revenues. Selling, general and administrative expenses were $280 million, while research and development expenses amounted to $192 million.
The adjusted gross margin contracted to 59.2% from 62.7% in the year-ago period. The decline primarily reflected increased memory costs, a higher mix of counter-drone equipment and investments in newer product categories.
Despite these pressures, adjusted EBITDA increased 33% year over year to $236 million, reflecting a margin of 25.9%. Non-GAAP net income increased to $144 million from $103 million in the prior-year period.
Axon Enterprise generated $20 million in operating cash flow during the third quarter compared with $60 million in the year-ago period. Free cash outflow was $19 million against an inflow of $33 million a year earlier.
The decline primarily reflected approximately $100 million of strategic inventory investments during the quarter. Management accelerated inventory purchases to strengthen product availability and mitigate potential supply-chain disruptions, particularly in its counter-drone business.
At September 2026-end, the company held $1.7 billion in cash, cash equivalents and short-term investments. Outstanding convertible and senior notes totaled $2.9 billion, leading to a net debt position worth $1.2 billion.
AXON Revises Its 2026 Revenue Outlook Downward
Management expects fourth-quarter 2026 revenues between $990 million and $1.01 billion, with adjusted EBITDA projected at $245-$250 million.
The company lowered its full-year revenue outlook to $3.61-$3.63 billion, representing approximately 30% annual growth, from its previous expectation of 32-34% growth. The downward revision stems from delays in three federal Dedrone projects worth approximately $130 million, prompting their removal from the 2026 revenue forecast.
Full-year adjusted EBITDA is expected between $924 million and $929 million, implying a margin of approximately 25.6%, slightly above the previous target of 25.5%.
Axon Enterprise Updates Cash Flow and Spending Expectations
Axon Enterprise lowered its full-year free cash flow forecast to $350-$400 million from the previous target of $450 million. The reduction reflects increased inventory investments, which management expects to consume approximately $225 million in cash during 2026.
The company reduced its capital expenditure projection to $130-$150 million from $160-$190 million anticipated earlier. Expected spending includes research and development projects, capacity enhancement, global facilities and new product introductions.
Management expects inventory investments to moderate after the first quarter of 2027. It also lowered its stock-based compensation expense forecast to $570-$600 million from the previous range of $590-$620 million.
Zacks Rank & Key Picks
The company currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks are discussed below.
GTES delivered a trailing four-quarter average earnings surprise of 6.6%. In the past 60 days, the Zacks Consensus Estimate for Gates Industrial’s 2026 earnings has increased 1.2%.
Applied Industrial Technologies (AIT - Free Report) presently carries a Zacks Rank of 2. It has a trailing four-quarter average earnings surprise of 3.6%.
The Zacks Consensus Estimate for AIT’s fiscal 2027 (ending June 2027) earnings has improved 0.5% in the past 60 days.
IDEX Corporation (IEX - Free Report) presently carries a Zacks Rank of 2. The company delivered a trailing four-quarter average earnings surprise of 7.6%.
In the past 60 days, the consensus estimate for IEX’s 2026 earnings has increased 1.5%.
View the Zacks #1 Rank List
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Axon Enterprise Q3 Earnings Miss Estimates as Margins Narrow
Key Takeaways
Axon Enterprise, Inc. (AXON - Free Report) reported third-quarter 2026 adjusted earnings of $1.72 per share, up 38.7% year over year. The figure missed the Zacks Consensus Estimate of $1.90 by 9.5%.
Total revenues were $909 million, up 28% year over year but below the consensus estimate of $931 million by 2.4%. Strong software demand supported growth, while delayed federal counter-drone deployments weighed on revenues. Annual recurring revenues (ARR) increased 40% year over year to $1.75 billion.
Axon Enterprise, Inc Price, Consensus and EPS Surprise
Axon Enterprise, Inc price-consensus-eps-surprise-chart | Axon Enterprise, Inc Quote
AXON's Connected Devices Revenues Rise 16%
Connected Devices revenues increased 16.3% year over year to $471.5 million, driven by Dedrone and strong Axon Body 4 adoption. Growth was partly offset by reduced legacy TASER volumes and the delayed recognition of approximately $30 million from a federal Dedrone deployment.
Platform Solutions revenues surged 106% year over year to $125 million, reflecting strong counter-drone demand. However, the segment's adjusted gross margin contracted to 44.6% from 52.1% in the year-ago quarter, primarily due to a higher mix of counter-drone equipment and increased memory costs.
Management highlighted continued TASER 10 demand and the recent introduction of TASER Ion. The company also unveiled Axon Body 5, with commercial availability expected in spring 2027, creating another potential hardware upgrade cycle.
Software Business Delivers Robust Growth
Software & Services revenues surged 43.2% year over year to $437 million, supported by customer additions and higher adoption of premium software solutions. Growth benefited from AI offerings, real-time operations, Axon Records and Axon 911.
The segment's adjusted gross margin declined to 75% from 76.8% in the prior-year quarter, reflecting investments in newer products and a higher proportion of professional services revenues. Software-only gross margin remained above 80%.
Net revenue retention stood at 126%, while future contracted bookings increased 39% year over year to $15.8 billion. AI annual recurring revenues surpassed $100 million, with AI bookings increasing more than 50% year to date.
AXON's Margin Profile Reflects Higher Costs
Axon Enterprise's cost of sales totaled $394 million, representing approximately 43% of revenues. Selling, general and administrative expenses were $280 million, while research and development expenses amounted to $192 million.
The adjusted gross margin contracted to 59.2% from 62.7% in the year-ago period. The decline primarily reflected increased memory costs, a higher mix of counter-drone equipment and investments in newer product categories.
Despite these pressures, adjusted EBITDA increased 33% year over year to $236 million, reflecting a margin of 25.9%. Non-GAAP net income increased to $144 million from $103 million in the prior-year period.
Axon Enterprise's Cash Flow Faces Inventory Pressures
Axon Enterprise generated $20 million in operating cash flow during the third quarter compared with $60 million in the year-ago period. Free cash outflow was $19 million against an inflow of $33 million a year earlier.
The decline primarily reflected approximately $100 million of strategic inventory investments during the quarter. Management accelerated inventory purchases to strengthen product availability and mitigate potential supply-chain disruptions, particularly in its counter-drone business.
At September 2026-end, the company held $1.7 billion in cash, cash equivalents and short-term investments. Outstanding convertible and senior notes totaled $2.9 billion, leading to a net debt position worth $1.2 billion.
AXON Revises Its 2026 Revenue Outlook Downward
Management expects fourth-quarter 2026 revenues between $990 million and $1.01 billion, with adjusted EBITDA projected at $245-$250 million.
The company lowered its full-year revenue outlook to $3.61-$3.63 billion, representing approximately 30% annual growth, from its previous expectation of 32-34% growth. The downward revision stems from delays in three federal Dedrone projects worth approximately $130 million, prompting their removal from the 2026 revenue forecast.
Full-year adjusted EBITDA is expected between $924 million and $929 million, implying a margin of approximately 25.6%, slightly above the previous target of 25.5%.
Axon Enterprise Updates Cash Flow and Spending Expectations
Axon Enterprise lowered its full-year free cash flow forecast to $350-$400 million from the previous target of $450 million. The reduction reflects increased inventory investments, which management expects to consume approximately $225 million in cash during 2026.
The company reduced its capital expenditure projection to $130-$150 million from $160-$190 million anticipated earlier. Expected spending includes research and development projects, capacity enhancement, global facilities and new product introductions.
Management expects inventory investments to moderate after the first quarter of 2027. It also lowered its stock-based compensation expense forecast to $570-$600 million from the previous range of $590-$620 million.
Zacks Rank & Key Picks
The company currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks are discussed below.
Gates Industrial (GTES - Free Report) currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
GTES delivered a trailing four-quarter average earnings surprise of 6.6%. In the past 60 days, the Zacks Consensus Estimate for Gates Industrial’s 2026 earnings has increased 1.2%.
Applied Industrial Technologies (AIT - Free Report) presently carries a Zacks Rank of 2. It has a trailing four-quarter average earnings surprise of 3.6%.
The Zacks Consensus Estimate for AIT’s fiscal 2027 (ending June 2027) earnings has improved 0.5% in the past 60 days.
IDEX Corporation (IEX - Free Report) presently carries a Zacks Rank of 2. The company delivered a trailing four-quarter average earnings surprise of 7.6%.
In the past 60 days, the consensus estimate for IEX’s 2026 earnings has increased 1.5%.