Other content sent so far this week:

5-year normalized bookings growth (which accounts for contract duration) rose by more than 20% Y/Y. This compares to 30%+ growth last quarter and is being held back by some contract timing delays. This lowered connected devices revenue by about $30M and led to the miss. Without this headwind, revenue would have been ever-so-slightly ahead and segment growth would have been 24% Y/Y instead of 16% Y/Y. More on this later.

Axon’s newer products are having a large impact on overall bookings and ARR growth. Within bookings, Dedrone, Fusus (real-time command center) and their AI business all doubled Y/Y and crossed $1B in year-to-date bookings in aggregate. The pipeline supports reaching $2B in Q4. Its new solutions in aggregate, which include these tools, Axon 911 and a few more modules, neared a $500M annual revenue run rate this quarter, more than doubling Y/Y. All of this shows how strong underlying momentum currently is. Confusing to hear amid the revenue miss, but we’ll get to that.

The sizable gross margin contraction is mainly due to higher counter-drone revenue mix, other new product growth and rampant memory inflation. That last note is hitting GPM by about 50 bps on its own, and the headwind is expected to step up to 200 bps in 2027. For subscription and service GPM, aside from the aforementioned mix shift to new products, faster service revenue growth weighed on the margin. Subscription GPM in isolation remained over 80%. They are planning on hefty OpEx-based leverage in 2027 to offset that expected GPM pressure.

FCF worsened from $33M to -$19M Y/Y. This compares to estimates looking for over $100M. Axon decided to invest $100M in an inventory buildout during the quarter that greatly weighed on this metric. Axon is doing this to “strengthen product availability and supply chain resilience” during a time when both demand and geopolitical uncertainty remain elevated. This is the best way to prepare, and Axon can do so comfortably considering how long the useful lives are for its hardware. For context, they still sell a lot of body-worn cameras (BWCs) from a model introduced 15 years ago. As we’ll see later, they’re not quite through this investment period, but expect to be in two quarters.

Quite the ugly guide from a company that is usually a beat-and-raise machine. The aforementioned contract timing delays were the culprit and cost Axon $130M in 2026 revenue and $200M in bookings. They think it’s election distraction-related. Without this timing-based issue, growth guidance would have been raised from 33% Y/Y to 35% Y/Y rather than cut to 30%. It’s important to reiterate that none of these deals were lost. I confirmed that with leadership. This is not a demand issue in the slightest, as year-to-date bookings for the federal segment are up 5x.

Specifically, Axon saw 3 large federal Dedrone deals slip out of Q3 when they were expected to close during this period. It’s a new go-to-market and sales cycle for this company, and they miscalculated how seamless, visible and reliable the timing of these deals truly is. Like any great team would be, they’re determined to fix this and make sure it doesn't happen again. That entails getting overly pessimistic by excluding Dedrone deals from guidance if the closing date isn’t certain. That means assuming Axon closed none of the $30M delayed this quarter and none of the $100M it previously assumed it would close in Q4. If any of these deals do happen during the period, which is a real possibility, that would represent pure upside to current forecasts. There are also “several very large federal opportunities” still in the pipeline for Dedrone, TASER and its body cameras, which come with “good lines of sight” but weren’t included in guidance because of the frustrating Q3 delays.

Going forward, this will be the new approach to guidance. It’s a significant and warranted change considering how chunky and uneven the Dedrone dealflow is and how immediate the revenue recognition is. It’s much tougher to model than other products they sell, so prudence makes good sense. I think this likely positions them for significant outperformance in the quarters to come, as they’ll almost surely do better than the overly pessimistic assumption.

Heading into the report, AXON traded for 48x forward EPS and 48x forward FCF. EPS is expected to grow by 12% this year, 38% next year and 32% the year after. FCF is expected to grow by 465% Y/Y this year, 81% Y/Y next year and 35% Y/Y the following year. Based on where the stock is right now ($350), each multiple would be about 3 turns lower.