Hi Multis
On Wednesday, August 5, Axon reported its Q2 earnings. I was on holiday in Sardinia then, but of course, I want to know what’s going on with the companies you and I hold in our portfolios. That’s also because, as you probably know, I add money to my portfolio every two weeks and that’s why I want to know if the stock is attractive to add to my position. Here we go!
The Numbers
Revenue: $904 million, up 35% YoY, beating the consensus by $28 million, a beat of 3.2%, which is pretty significant for such a big and widely followed company. It’s also the tenth consecutive quarter with revenue growth of more than 30%.
Software & Services revenue: $398 million, up 36% YoY.
Connected Devices revenue: $507 million, up 35% YoY. Within that category, Platform Solutions (in-car video, fixed cameras, drones, counter-drone, VR hardware) grew to $150 million, up 123% YoY.
Dedrone: passed $100 million in revenue in a single quarter for the first time.
Annual recurring revenue: $1.639 billion, up 39%.
Net revenue retention: 126%, versus 124% a year ago.
Future contracted bookings: $15.1 billion, up 41%.
Adjusted gross margin: 62.9%, down from 63.3% a year ago, up from 61.6% last quarter.
Adjusted EBITDA: $242 million, a 26.8% margin, up more than 40%.
Operating income: $47 million, versus a loss of $1 million a year ago.
Non-GAAP EPS: $1.88, versus $2.18.
Free cash flow: negative $1 million, versus negative $115 million.
Axon also raised full-year revenue guidance from 30-32% to 32-34%, the second raise this year, and held the adjusted EBITDA margin guide at 25.5%.
This is an overview in the company’s earnings slide deck.
Earnings per share dropped while revenue grew 35%. That looks awful, right? It isn’t.
In Q2 2025, Axon’s pre-tax income was negative $38.9M. But it reported positive net income of $36.1M, because it booked a $75M tax benefit that quarter. So, you can’t really compare the quarters on this basis. This quarter, pre-tax income was $32.7 million, so much better than last year’s Q2 numbers.
You can also see the improvement in operating income. It came in at $47M this quarter, while there was still a $1M loss in Q2 2025.
I also like to see operating leverage. If you grow revenue by 35%, as Axon did, but the costs grow faster, you are not doing better with scale. But that’s not the case. SG&A (Selling, General and Administrative) grew 20% and R&D (Research and Development) 28%. So, there is operating leverage. President Josh Isner on the call:
A little over a year ago, we began flattening the organization to empower people closest to the work, reducing layers of friction and moving faster. We paired that organizational change with disciplined investment in AI tools for our teams. We didn’t rush to deploy every tool or ask people to use AI for the sake of using AI. We rolled it out deliberately, and we focused on where it can make our people more effective.
I like that, of course. Empowering the people closest to the work is a recipe for success.
In the last quarter, GAAP net income came in at $169M. But that was because of $189M of rising value of Axon’s investments. That’s a distortion, because the company doesn’t sell, but it has to adapt to the market value of its investments every quarter. Shopify is another company that has this.
Axon gives revenue per product line, but I prefer the Fiscal chart.
If you want a Fiscal subscription as well (highly recommended, I use it multiple times every single day), you can get 15% off through this link.
As you can see, the two legacy products, TASERS and body cameras (personal sensors) grew the least, at 21% (still very strong) and 3% respectively.
Software and services, mostly Evidence. com, was up 36% to almost $400M, and Platform Solutions was up a whopping 123% to $150M.
Last quarter I wrote “34% Growth Before Optionality.” What I meant was that Axon grew 34% while the new products contributed almost nothing. This quarter the optionality showed up just in time to offset the slowdown in body cameras.
But the body cameras are only in a temporary dip. Q1 is the worst quarter for new bookings for body cameras. As these are shipped a quarter later, that’s the effect you see. President John Isner said to expect camera shipments to grow by 20% to 30% QoQ in Q3 and probably closer to 30%.
The story is not that much different for TASER. Even if growth is still 21%, very respectable, it would have been higher without the seasonally weak Q1. In Q3, Axon booked the highest TASER unit volume ever. It also signed its biggest TASER order ever. President John Isner on the call:
That may sound crazy for a product category that has been around for three decades. Well, it’s real, and it speaks to how much opportunity remains.
I also want to talk about free cash flow because the company seems to be at a turning point there as well. It was still negative, $1M, but that was a negative $115M last year. That’s already a big improvement, but COO and CFO . It was negative $1 million against negative $115 million a year ago. A big improvement, and COO and CFO Brittany Bagley reaffirmed the full-year target of $450 million in free cash flow.
We are two quarters into the year and the mid-term score is negative $56M. In other words, for that $450 million target, Axon has to generate $506 million in free cash flow in the second half of the year. That’s a big acceleration. Q4 is seasonally Axon’s best quarter each year, so that won’t be different this year. Management also said that the inventory investments it made with the tariffs will moderate after this year.
In the first half of the year, Axon spent $145M to build out its inventory. That depressed FCF, but it was not even the biggest contributor. The biggest drain on FCF was receivables and contract assets, with $257M. Receivables are when the invoice is already out, but not paid yet. Contract assets are customers paying over the years they take the subscription for both hardware and software, for example. In both cases, Axon has already spent to deliver the goods, but it hasn’t received payment yet. FCF is, therefore, systemically suppressed.
So the numbers are excellent. But the most interesting stories of this quarter are not in the numbers.
Below: the protest movement that’s smashing cameras in 460 American cities (and why I think it’s actually good news for Axon), my Selling Rules, my proprietary Quality Score and Valuation. Don’t want to miss these? Subscribe now!