Over the next several weeks, subscribers will get 40+ earnings reviews, ongoing fundamental news coverage and real-time updates of my own portfolio/performance.
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My Axon deep dive can be found here. If there’s a product in the review that you’re not familiar with, it is defined in the deep dive. I’d recommend searching for the term in there.
Table of Contents
a. Demand
- Beat revenue estimate by 3.2%.
- Beat bookings estimate by 3%.
- Beat cloud ARR estimate by 3%.
- Beat $99M net new ARR estimate by $47M or 47%.
Gross bookings rose by 20% Y/Y and 30% when accounting for evolving business mix by adjusting contract duration for all deals to 5 years. This bookings calculation standardization is going to become increasingly important for the company going forward. 2 reasons for that. First, Axon’s enterprise deals are shorter-term in nature than the 10-year state and local government contracts that it signs. Bookings include expected business from every year of a contract, so a $10M/year deal with an enterprise over 3 years has a much smaller impact than a $10M/year deal with a police department over 10 years.
Next, the 10-year international deals they’re signing are truly gigantic. As a reminder, these global agencies are highly consolidated compared to the USA, with one win (in some cases) being much bigger than a large U.S. department. This means deals and their bookings impact are humongous and the cadence of these deals is jumpy. One big contract signed a year ago can greatly drag growth for a quarter.
Removing the years 6-10 impact from these landmark 10-year international deals helps make them less of an outlier and gives a better sense of normal growth. As these two segments become a bigger portion of the overall business, this is why adjusting contracts for a 5 year duration offers a clearer picture of growth.
b. Profits & Margins
- Missed 61.2% GAAP GPM estimate by 80 basis points (bps; 1 basis point = 0.01%).
- Gross margin pressure continues to be driven by the software and services segment. And just like last quarter, this pressure was tied to higher professional services revenue as they support adoption for a boatload of new products. This part of their operations carries a very low GPM. Software GPM was again over 80%.
- The improvement in Connected Devices GPM was powered by tariff refunds. It was not structural in nature.
- Beat EBITDA estimate by 10%.
- This was helped a bit by $47M in tariff refunds. At the same time incremental component inflation weighed a bit on things during the quarter. One good surprise and one bad surprise.
- Beat $1.84 EPS estimate by $0.04 (noisy metric here).
- A blend of payroll tax accounting and equity portfolio valuation swings both make net income noisy. This is the one rare case where EBITDA is actually the most useful metric among headline numbers.
- Axon is lapping a $75M tax benefit this quarter. 29% net income growth and around 28% EPS growth excluding this comp headwind.
- Missed $98M FCF estimate by $99M. This metric is very noisy on a quarterly basis based on inventory order timing. They reiterated full year FCF guidance.
- Axon continues to build inventory ahead of expected strong multi-year demand. Its hardware generally comes with a very long useful life and slow depreciation schedule, so the risk of getting stuck with unwanted product is low.
c. Balance Sheet
- $685M cash & equivalents.
- $1.8B in outstanding notes.