Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition as of March 31, 2024, and results of operations for the three months ended March 31, 2024 and 2023, should be read in conjunction with the condensed consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and related notes in our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on February 27, 2024. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in such forward-looking statements as a result of certain factors, including but not limited to those described under “Part II, Item 1A. Risk Factors.” See also “Special Note Regarding Forward-Looking Statements” on page ii of this Quarterly Report on Form 10-Q.

Overview

Axon is a technology leader in global public safety. Our moonshot goal is to cut gun-related deaths between police and the public by 50% before 2033. Axon is building the public safety operating system of the future by integrating a suite of hardware devices and cloud software solutions that lead modern policing. Axon’s technology suite includes TASER energy devices, body-worn cameras, in-car cameras, cloud-hosted digital evidence management solutions, productivity software and real-time operations capabilities. Axon’s growing global customer base includes first responders across international, federal, state, and local law enforcement, fire, corrections, and emergency medical services, as well as the justice sector, commercial enterprises, and consumers.

Our revenues for the three months ended March 31, 2024 were $460.7 million, an increase of $117.7 million, or 34.3%, from the comparable period in the prior year. We had income from operations of $16.3 million compared to $16.6 million for the comparable period in the prior year. Gross margin dollars increased $55.9 million and decreased as a percentage of revenue to 56.4% from 59.5% compared to the three months ended March 31, 2023. The decrease was primarily driven by higher stock-based compensation expense and payroll taxes related to vesting events from a one-time RSU program for employees under a specified compensation threshold, as well as intangibles amortization from acquired developed technology. Excluding the impacts of stock-based compensation expense and intangibles amortization in cost of goods sold, gross margin increased to 63.2% for the three months ended March 31, 2024, compared to 59.9% for the same period in the prior year due to increased mix of high-margin Axon Cloud & Services revenue and the absence of one-time items related to inventory and other cost adjustments recognized in the first quarter of 2023. Operating expenses increased $56.3 million, reflecting an increase in salaries, benefits and stock-based compensation expense and an increase in professional and consulting expense related to transaction costs. For the three months ended March 31, 2024, we recorded net income of $133.2 million, which included a realized gain of $42.3 million related to our acquisition in Fusus, an unrealized gain of $75.6 million related to a strategic investment, and noncash unrealized gain of $21.8 million related to our investment in CLBT. Net income of $45.1 million for the comparable period in the prior year included an unrealized gain of $15.6 million related to our investment in CLBT.

Results of Operations

Three Months Ended March 31, 2024 Compared to the Three Months Ended March 31, 2023

The following table presents data from our condensed consolidated statements of operations as well as the percentage relationship to total net sales of items included in our statements of operations (dollars in thousands):


	Three Months Ended March 31,
	2024				2023
Net sales from products	$	272,048	59.0	%	$	219,389	64.0	%
Net sales from services		188,688	41.0			123,654	36.0
Net sales		460,736	100.0			343,043	100.0
Cost of product sales		151,698	32.9			107,584	31.4
Cost of service sales		48,992	10.7			31,357	9.1
Cost of sales		200,690	43.6			138,941	40.5
Gross margin		260,046	56.4			204,102	59.5
Operating expenses:
Sales, general and administrative		152,669	33.1			116,567	34.0
Research and development		91,097	19.8			70,927	20.7
Total operating expenses		243,766	52.9			187,494	54.7
Income from operations		16,280	3.5			16,608	4.8
Interest income, net		10,374	2.3			9,666	2.8
Other income, net		139,066	30.2			15,610	4.6
Income before provision for income taxes		165,720	36.0			41,884	12.2
Provision for income taxes		32,502	7.1			(3,255)	(1.0)
Net income	$	133,218	28.9	%	$	45,139	13.2	%

The following table presents our revenues disaggregated by geography (in thousands):


	Three Months Ended March 31,
	2024				2023
United States	$	392,406	85	%	$	290,938	85	%
Other countries		68,330	15			52,105	15
Total	$	460,736	100	%	$	343,043	100	%

International revenue increased compared to the prior-year comparable period, primarily driven by increased sales in our Europe, Middle East and Africa and our Asia Pacific regions.

Net Sales

Net sales by product line were as follows (dollars in thousands):


	Three Months Ended March 31,								Dollar		Percent
	2024				2023				Change		Change
TASER segment:
TASER Devices (Professional)	$	98,676	21.4	%	$	67,472	19.7	%	$	31,204	46.2	%
Cartridges		56,198	12.2			46,800	13.6			9,398	20.1
Axon Evidence and Cloud Services		12,221	2.7			7,201	2.1			5,020	69.7
Extended Warranties		8,526	1.8			7,670	2.2			856	11.2
Other (1)		3,127	0.7			5,139	1.5			(2,012)	(39.2)
Total TASER segment		178,748	38.8			134,282	39.1			44,466	33.1
Software and Sensors segment:
Axon Body Cameras and Accessories		51,205	11.1			38,797	11.3			12,408	32.0
Axon Fleet Systems		28,387	6.2			32,972	9.6			(4,585)	(13.9)
Axon Evidence and Cloud Services		175,458	38.1			118,314	34.5			57,144	48.3
Extended Warranties		18,474	4.0			14,085	4.1			4,389	31.2
Other (2)		8,464	1.8			4,593	1.4			3,871	84.3
Total Software and Sensors segment		281,988	61.2			208,761	60.9			73,227	35.1
Total net sales	$	460,736	100.0	%	$	343,043	100.0	%	$	117,693	34.3	%

	(1)	TASER segment “Other” includes smaller categories, such as VR hardware, weapons training revenue such as revenue associated with our Master Instructor School, and TASER consumer device sales.

	(2)	Software and Sensors segment “Other” includes revenue from items including Signal Sidearm, Interview Room, Axon Air and other sensors and equipment.

Net sales for the TASER segment increased 33.1% for the three months ended March 31, 2024 as compared to the prior-year quarter, primarily due to increases of $31.2 million in TASER devices (professional) revenue and $9.4 million of cartridge revenue. The increase in TASER devices (professional) revenue was primarily related to strong adoption of our next generation product, TASER 10, which began shipping in the first quarter of 2023. The increase in cartridge revenue was primarily related to growing sales of next generation TASER products. Net sales for Axon Evidence and cloud services increased $5.0 million in the three months ended March 31, 2024 due to an increase in the number of cloud-connected TASER devices in the field, as well as an increase in VR revenue.

Net sales for the Software and Sensors segment increased 35.1% for the three months ended March 31, 2024 as compared to the prior-year quarter as we continue to add users and associated devices to our network. The increase in the aggregate number of users and increasing adoption of our premium add-on features by our existing customers drove the majority of the increase in Axon Evidence and cloud services revenue of $57.1 million. Net sales of Axon Body cameras and accessories increased $12.4 million due to higher volume. Partially offsetting the increases in the Software and Sensors segment was a decrease of $4.6 million in Axon Fleet revenue primarily reflecting lower unit volumes on more normalized deployment timelines. An increase in cameras, docks and Axon Fleet systems in the field drove the $4.4 million increase in extended warranties revenue, as most of those devices are sold with extended warranties.

We consider total company future contracted revenues a forward-looking performance indicator. As of March 31, 2024, we had approximately $7.0 billion of total company future contracted revenue, which included both recognized contract liabilities as well as amounts that will be invoiced and recognized in future periods. We currently expect to recognize between 15% - 25% of this balance over the next 12 months, and expect the remainder to be recognized over the following ten years, subject to risks related to delayed deployments, budget appropriation or other contract cancellation clauses.

Gross Margin

As a percentage of net sales, gross margin for the TASER segment decreased to 50.7% from 62.2% for the three months ended March 31, 2024 and 2023, respectively. The decrease was primarily due to increased stock-based compensation expense and payroll taxes related to vesting events from a one-time RSU program. Excluding the impacts of stock-based compensation expense, gross margin for the TASER segment is 61.8% for the three months ended March 31, 2024, compared to 62.4% for the same period in 2023. The decrease is due to the introduction of our next generation device, TASER 10, which began shipping at the end of the first quarter of 2023 and is still ramping toward full scale in manufacturing, partially offset by the absence of non-recurring inventory reserves recognized in the first quarter of 2023.

As a percentage of net sales, gross margin for the Software and Sensors segment increased to 60.1% from 57.8% for the three months ended March 31, 2024 and 2023, respectively. Within the Software and Sensors segment, hardware gross margin increased to 38.7% for the three months ended March 31, 2024 compared to 38.2% for the same period in 2023. Excluding the impacts of stock-based compensation expense and intangibles amortization, hardware gross margin increased to 46.9% for the three months ended March 31, 2024, compared to 38.6% for the same period in 2023 due to favorable product mix and manufacturing overhead reallocations made in the second quarter of 2023. Service margin decreased to 72.8% for the three months ended March 31, 2024 from 73.2% for the same period in 2023 primarily due to increased stock-based compensation expense and payroll taxes related to vesting events from a one-time RSU program. Excluding the impacts of stock-based compensation expense and intangibles amortization, service margin increased to 74.5% for the three months ended March 31, 2024, compared to 73.8% for the same period in 2023 due to a lower mix of professional services revenue.

We anticipate an increase in stock-based compensation expense reflected within cost of goods sold as a result of RSUs granted in January 2024 that generally vest in five annual installments from March 2024 through March 2028. These RSUs were granted to employees whose compensation was under a specified threshold, including production-line employees. As previously disclosed in Note 15 to our consolidated financial statements included within our Annual Report on Form 10-K for the year ended December 31, 2023, Patrick W. Smith, our Chief Executive Officer, agreed to compensation in a lesser amount than the Compensation Committee of our Board of Directors was otherwise willing to provide so that the Company could instead provide enhanced compensation opportunities to other employees of the Company. If instead he had accepted higher compensation, it would have been reflected in SG&A expenses over a similar period.

Sales, General and Administrative Expenses

SG&A expenses were comprised as follows (dollars in thousands):


	Three Months Ended March 31,						Dollar		Percent
	2024			2023			Change		Change
Total sales, general and administrative expenses	$	152,669		$	116,567		$	36,102	31.0	%
Sales, general, and administrative expenses as a percentage of net sales		33.1	%		34.0	%

Professional and consulting expense increased $8.3 million in comparison to the prior year comparable period, which was primarily attributable to transaction costs related to the recent acquisition of Fusus.

Stock-based compensation expense increased $7.7 million in comparison to the prior year comparable period, which was primarily related to increased headcount and additional grants that were awarded to employees whose compensation was under a specified threshold.

Salaries, benefits and bonus expense increased $5.7 million in comparison to the prior year comparable period, which was primarily attributable to an increase in headcount and higher wages.

Sales and marketing and travel expense increased $7.3 million in comparison to the prior year comparable period. The increase was primarily attributable to an increase of commissions of $5.2 million as a result of higher revenue. Travel

expense increased $2.6 million due to higher seasonal travel for company events compared to the prior-year comparable period.

Research and Development Expenses

R&D expenses were comprised as follows (dollars in thousands):



	Three Months Ended March 31,						Dollar		Percent
	2024			2023			Change		Change
Total research and development expenses	$	91,097		$	70,927		$	20,170	28.4	%
Research and development expenses as a percentage of net sales		19.8	%		20.7	%

Salaries, benefits and bonus expense increased $14.1 million in comparison to the prior year comparable period, which was primarily attributable to an increase in headcount and higher wages.

Stock-based compensation expense increased $4.8 million in comparison to the prior year comparable period, which was primarily related to increased headcount.

Interest Income, Net

Interest income, net, was as follows (dollars in thousands):


	Three Months Ended March 31,
	2024		2023
Interest income	$	12,130	$	11,390
Interest expense		(1,756)		(1,724)
Total interest income, net	$	10,374	$	9,666

Other Income, Net

Other income, net, was as follows (dollars in thousands):


	Three Months Ended March 31,
	2024		2023
Realized and unrealized gains on fair value adjustments of strategic investments, net	$	117,931		—
Unrealized gain on marketable securities, net		21,780		15,570
Gain (loss) on foreign currency transactions, net		88		(37)
Other, net		(733)		77
Other income, net	$	139,066	$	15,610

Provision for Income Taxes

The provision for income taxes was $32.5 million for the three months ended March 31, 2024, which was an effective tax rate of 19.6%. Our estimated annual effective income tax rate for 2024, before discrete period adjustments, is 21.9%, which differs from the federal statutory rate primarily due to the impact of R&D tax credits and net gain related to an investment transaction not recognized for tax, offset by the executive compensation limitation under IRC Section 162(m) on projected pre-tax income for the year. The effective tax rate was favorably impacted by a $4.1 million discrete tax benefit associated with net windfalls related to stock-based compensation for RSUs and PSUs that vested during the three months ended March 31, 2024.

The provision for income taxes was a benefit of $3.3 million for the three months ended March 31, 2023, which was an effective tax rate of -7.8%. Our estimated full year effective income tax rate for 2023, before discrete period adjustments, is 22.8%, which differs from the federal statutory rate primarily due to the impact of R&D tax credits and decrease in valuation allowance offset by the executive compensation limitation under IRC Section 162(m) and an increase in unrecognized tax benefits, on projected pre-tax income for the year. The effective tax rate was favorably impacted by a

$13.0 million discrete tax benefit associated with net windfalls related to stock-based compensation for RSUs and PSUs that vested and stock options that were exercised during the three months ended March 31, 2023, primarily attributable to the vesting of tranche 10 of the eXponential Stock Plan (“2019 XSPP”) in March 2023.

In December 2021, the Organization for Economic Co-operation and Development (“OECD”) published a framework for Pillar Two of the Global Anti-Base Erosion Rules (“GloBE”). The GloBE rules were designed to coordinate participating jurisdictions in updating the international tax system to ensure that large multinational companies pay a minimum level of income tax. Recommendations from the OECD regarding a global minimum income tax and other changes are being considered and/or implemented in jurisdictions where we operate. We believe enactment of the recommended framework in jurisdictions where we operate will result in minimal impacts to our financial results in the near term.

Net Income

We recorded net income of $133.2 million for the three months ended March 31, 2024 compared to net income of $45.1 million for the same period in 2023. Net income per basic share was $1.77 for the three months ended March 31, 2024 compared to $0.62 net income per basic share for the same period in 2023. Net income per diluted share was $1.73 for the three months ended March 31, 2024 compared to $0.61 net income per diluted share for the comparable period in 2023.

Three Months Ended March 31, 2024 Compared to the Three Months Ended December 31, 2023

Net Sales

Net sales by product line were as follows (dollars in thousands):


	Three Months Ended				Three Months Ended				Dollar		Percent
	March 31, 2024				December 31, 2023				Change		Change
TASER segment:
TASER Devices (Professional)	$	98,676	21.4	%	$	94,758	21.9	%	$	3,918	4.1	%
Cartridges		56,198	12.2			43,781	10.1			12,417	28.4
Axon Evidence and Cloud Services		12,221	2.7			10,105	2.4			2,116	20.9
Extended Warranties		8,526	1.8			8,226	1.9			300	3.6
Other (1)		3,127	0.7			4,473	1.0			(1,346)	(30.1)
Total TASER segment		178,748	38.8			161,343	37.3			17,405	10.8
Software and Sensors segment:
Axon Body Cameras and Accessories		51,205	11.1			58,957	13.7			(7,752)	(13.1)
Axon Fleet Systems		28,387	6.2			22,481	5.2			5,906	26.3
Axon Evidence and Cloud Services		175,458	38.1			165,204	38.2			10,254	6.2
Extended Warranties		18,474	4.0			17,272	4.0			1,202	7.0
Other (2)		8,464	1.8			6,885	1.6			1,579	22.9
Software and Sensors segment		281,988	61.2			270,799	62.7			11,189	4.1
Total net sales	$	460,736	100.0	%	$	432,142	100.0	%	$	28,594	6.6	%

	(1)	TASER segment “Other” includes smaller categories, such as VR hardware, weapons training revenue such as revenue associated with our Master Instructor School, and TASER consumer device sales.

	(2)	Software and Sensors segment “Other” includes revenue from items including Signal Sidearm, Interview Room, Axon Air and other sensors and equipment.

Net sales within the TASER segment increased by approximately $17.4 million, or 10.8%, during the three months ended March 31, 2024 compared to the prior quarter. The increase is related to strong adoption of TASER 10 and higher international cartridge volume. Fluctuations in cartridge revenue are generally attributable to customers who are not on cartridge subscriptions plans and periodically purchase in bulk.

Within the Software and Sensors segment, net sales increased $11.2 million, or 4.1%, during the three months ended March 31, 2024 compared to the prior quarter. The increase in the aggregate number of users and increasing adoption of our premium add-on features by our existing customers drove the majority of the increase in Axon Evidence and cloud services revenue of $10.3 million. Axon Fleet revenue increased $5.9 million primarily due to higher unit sales. Partially offsetting the increases in the Software and Sensors segment was a decrease in Axon Body cameras and accessories revenue of $7.7 million on lower units sales due to seasonality, partially offset by premium product mix. An increase in Axon Body cameras, docks and Axon Fleet systems in the field drove the $1.2 million increase in extended warranties revenue, as most of those devices are sold with extended warranties.

Non-GAAP Measures

We utilize certain non-GAAP financial measures such as EBITDA, Adjusted EBITDA, and Adjusted Gross Margin as defined below to enhance understanding of our financial results and related measures. Beginning with our first fiscal quarter of 2024, we have added Adjusted Gross Margin to our non-GAAP financial measures. We have adjusted for expenses that we believe are not indicative of our core operating results, including stock-based compensation expense and amortization of acquired intangible assets. To improve comparability, prior periods have been conformed to the current period presentation. Our management uses these non-GAAP financial measures in evaluating our operating performance in comparison to prior periods. We believe that both management and investors benefit from referring to these non-GAAP financial measures in assessing our performance, and when planning and forecasting our future periods. A reconciliation of GAAP to the non-GAAP financial measures is presented below.

	●	EBITDA (Most comparable GAAP Measure: Net income) - Earnings before interest expense, investment interest income, income taxes, depreciation and amortization.

	●	Adjusted EBITDA (Most comparable GAAP Measure: Net income) - Earnings before interest expense, investment interest income, income taxes, depreciation, amortization, non-cash stock-based compensation expense, fair value adjustments to strategic investments and marketable securities, transaction costs related to acquisitions and strategic investments, and other unusual, non-recurring pre-tax items that are not considered representative of our underlying operating performance.

	●	Adjusted Gross Margin (Most comparable GAAP Measure: Gross margin) – Gross margin before non-cash stock-based compensation expense and amortization of acquired intangible assets.

Although these non-GAAP financial measures are not consistent with GAAP, management believes investors will benefit by referring to these non-GAAP financial measures when assessing our operating results, as well as when forecasting and analyzing future periods. However, management recognizes that:

	●	these non-GAAP financial measures are limited in their usefulness and should be considered only as a supplement to our GAAP financial measures;

	●	these non-GAAP financial measures should not be considered in isolation from, or as a substitute for, our GAAP financial measures;

	●	these non-GAAP financial measures should not be considered to be superior to our GAAP financial measures; and

	●	these non-GAAP financial measures were not prepared in accordance with GAAP and investors should not assume that the non-GAAP financial measures presented in this Quarterly Report on Form 10-Q were prepared under a comprehensive set of rules or principles.

EBITDA and Adjusted EBITDA reconcile to net income as follows (in thousands):


	Three Months Ended
	March 31,		December 31,		March 31,
	2024		2023		2023
Net income	$	133,218	$	57,271	$	45,139
Depreciation and amortization		11,564		10,051		6,689
Interest expense		1,756		1,772		1,724
Investment interest income		(12,130)		(14,097)		(11,390)
Provision for (benefit from) income taxes		32,502		(1,469)		(3,255)
EBITDA	$	166,910	$	53,528	$	38,907

Non-GAAP adjustments:
Stock-based compensation expense		75,115		35,130		34,350
Unrealized gain on strategic investments and marketable securities, net		(97,419)		(521)		(15,570)
Gain on remeasurement of previously held minority interest, net		(42,292)		—		—
Transaction costs related to strategic investments and acquisitions		6,357		2,708		843
Loss on disposal, abandonment, and impairment of property, equipment and intangible assets, net		—		—		156
Costs related to antitrust and FTC litigation		224		169		—
Payroll taxes related to 2019 XSPP vesting and 2018 CEO Performance Award option exercises		—		50		6,392
Adjusted EBITDA	$	108,895	$	91,064	$	65,078

Adjusted Gross Margin reconciles to gross margin as follows (in thousands):


	Three Months Ended March 31, 2024									Three Months Ended March 31, 2023
				Software and									Software and
	TASER			Sensors			Total			TASER			Sensors			Total
Gross margin	$	90,690		$	169,356		$	260,046		$	83,519		$	120,583		$	204,102
Stock-based compensation expense		19,781			9,814			29,595			310			1,010			1,320
Amortization of acquired intangible assets		—			1,686			1,686			—			—			—
Adjusted gross margin	$	110,471		$	180,856		$	291,327		$	83,829		$	121,593		$	205,422
Gross margin		50.7	%		60.1	%		56.4	%		62.2	%		57.8	%		59.5	%
Adjusted gross margin		61.8	%		64.1	%		63.2	%		62.4	%		58.2	%		59.9	%

Liquidity and Capital Resources

Summary

As of March 31, 2024, we had $403.9 million of cash and cash equivalents, a decrease of $194.7 million as compared to December 31, 2023. Cash and cash equivalents and available-for-sale investments totaled $964.1 million as of March 31, 2024, representing a decrease of $278.5 million from December 31, 2023.

Our most significant source of liquidity continues to be funds generated by operating activities and available cash and cash equivalents and short-term investments. In addition, our $200.0 million revolving credit facility is available for additional working capital needs or investment opportunities. Under the terms of the line of credit, available borrowings are reduced by outstanding letters of credit. Advances under the line of credit bear interest at Term SOFR plus 1.25% to

1.75% per year determined in accordance with a pricing grid based on our net debt to EBITDA ratio, which for purposes of the credit agreement excludes investment interest income.

As of March 31, 2024, we had letters of credit outstanding of $7.5 million, leaving the net amount available for borrowing of $192.5 million. The credit agreement will mature on the earlier of December 15, 2027 or the date that is six months prior to the stated maturity date of our 2027 Notes unless the Notes have been redeemed, repurchased, converted or defeased in full. Additionally, the credit agreement has an accordion feature that allows for an increase in the total line of credit up to $300.0 million, in each lender’s sole discretion. At March 31, 2024 and December 31, 2023, there were no borrowings outstanding under the line.

Our agreement with the bank requires us to comply with a net leverage ratio, defined as consolidated total indebtedness to EBITDA, of no greater than 3.50 to 1.00 based upon a trailing four fiscal quarter period. At March 31, 2024, our net leverage ratio was (0.15) to 1.00. Additionally, we must comply with a consolidated interest coverage ratio, defined as EBITDA to consolidated interest expense, of no less than 3.50 to 1.00 based upon a trailing four fiscal quarter end. At March 31, 2024, our consolidated interest coverage ratio was 51.03 to 1.00.

TASER subscription and installment purchase arrangements typically involve amounts invoiced in five equal installments at the beginning of each year of the five-year term. This is in contrast to a traditional CED sale in which the entire amount being charged for the hardware is invoiced upon shipment. This impacts liquidity in a commensurate fashion, with the cash for the subscription or installment purchase received in five annual installments rather than up front. Our strategy includes continuing to shift an increasing amount of our business to a subscription model, to better match the municipal budgeting process of our customers as well as to allow for multiple product offerings to be bundled into existing subscriptions. We carefully considered the cash flow impacts of this strategic shift and regularly revisit our cash flow forecast with the goal of maintaining a comfortable level of liquidity as we continue to offer products and services in which we incur upfront cash costs to produce and fulfill hardware sales ahead of the cash inflows from our customers.

Our primary sources of liquidity are cash flows from operations, existing cash and cash equivalents and investments and credit capacity under our existing credit facility. Additionally, we believe we have access to additional financing. However, there is no assurance that such funding will be available on terms acceptable to us, or at all.

We believe that our sources of funding will be sufficient to satisfy our currently anticipated cash requirements, including capital expenditures, working capital requirements, potential acquisitions or investments, income and payroll tax payments for net-settled stock awards, and other liquidity requirements through at least the next 12 months. We and our Board of Directors may consider repurchases of our common stock. Further repurchases of our common stock would take place on the open market, would be financed with available cash and are subject to authorization as well as market and business conditions.

Cash Flows

The following table summarizes our cash flows from operating, investing and financing activities (in thousands):


	Three Months Ended March 31,
	2024		2023
Operating activities	$	(15,938)	$	(56,323)
Investing activities		(174,044)		(72,674)
Financing activities		(2,710)		37,990
Effect of exchange rate changes on cash and cash equivalents		(1,978)		779
Net increase (decrease) in cash and cash equivalents and restricted cash	$	(194,670)	$	(90,228)

Operating activities

Net cash used by operating activities in the first three months of 2024 of $15.9 million reflects net income of $133.2 million, non-cash income statement items totaling $33.8 million, and a decrease of $115.4 million for the net change in operating assets and liabilities. Included in the non-cash items were a gain of $97.4 million on strategic

investments and marketable securities, $75.1 million in stock-based compensation expense, a $42.3 million gain on remeasurement of a previously held minority interest, net, $20.7 million related to an increase in deferred income taxes, $11.6 million in depreciation and amortization expense, and $5.0 million in bond amortization. Cash used in operations was impacted by an increase in accounts and notes receivable and contract assets of $51.1 million, an increase of $0.7 million in inventory, and a decrease in accounts payable, accrued and other liabilities of $84.3 million. Offsetting this activity was an increase in deferred revenue of $20.7 million. The increase in accounts and notes receivable and contract assets was due to increased sales and timing of satisfied performance obligations compared to customer payments of accounts receivable. The decrease in accounts payable, accrued and other liabilities was driven primarily by lower commissions payable and by the timing of the annual bonus payout.

Net cash used in operating activities in the first three months of 2023 of $56.3 million reflects net income of $45.1 million, non-cash income statement items totaling $16.0 million, and a decrease of $117.4 million for the net change in operating assets and liabilities. Included in the non-cash items were $34.4 million in stock-based compensation expense, a decrease of $9.7 million in deferred income taxes, net, $6.7 million in depreciation and amortization expense, and a $15.6 million gain on the change in fair value of marketable securities. Cash provided by operations was favorably impacted by increased deferred revenue of $50.2 million, which was primarily attributable to increased sales where the customer is invoiced before performance occurs. Offsetting this activity was an increase of accounts and notes receivables and contract assets of $50.4 million, an increase in prepaid expenses and other assets of $64.3 million, an increase of $15.8 million in inventory, and a decrease in accounts payable, accrued and other liabilities of $37.0 million. The increase in accounts and notes receivable and contract assets is due to increased sales and timing of satisfied performance obligations compared to customer payments of accounts receivable. Inventory increases were a result of advance purchases to support future sales. Of the increase in prepaid expenses and other assets, $33.0 million was primarily driven by a receivable for proceeds from shares sold to cover the tax liability and option cost for options exercised during the first three months of 2023, but settled in April 2023. The decrease in accounts payable, accrued and other liabilities was driven primarily by the timing of the annual bonus payout.

Investing activities

Cash used in investing activities during the first three months of 2024 was $174.0 million. Cash inflows from investing activities included $89.0 million of proceeds from calls, maturities and sales of available-for-sale investments, net of purchases. The outflows from investing activities included $237.8 million for a business acquisition, $9.1 million for a strategic investment, and $16.2 million for purchases of property and equipment, net of proceeds.

We used $72.7 million of cash for investing activities during the first three months of 2023. Cash outflows from investing activities included $64.0 million for the purchase of available-for-sale investments, net of proceeds from calls and maturities. Property and equipment purchases totaled $8.5 million.

Financing activities

Net cash used in financing activities was $2.7 million during the first three months of 2024 and was primarily attributable to income and payroll taxes on behalf of employees who net-settled stock awards during the period.

Net cash provided by financing activities was $38.0 million during the first three months of 2023 and was primarily attributable to proceeds of $39.2 million from the exercise of stock options where shares were sold to cover the exercise price and net proceeds of $33.7 million received from our ATM offering. Partially offsetting net cash provided by financing activities was $34.8 million for the payment of income and payroll taxes on behalf of employees who net-settled stock awards during the period related to the vesting of tranche 10 of the 2019 XSPP.

Off-Balance Sheet Arrangements

The discussion under the heading off-balance sheet arrangements in Note 13 to our condensed consolidated financial statements within this Quarterly Report on Form 10-Q is incorporated by reference herein.

Critical Accounting Estimates

Our management’s discussion and analysis of our financial condition and results of operation is based on our condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances, and we evaluate our estimates and assumptions on an ongoing basis. While we do not believe that a change in these estimates is reasonably likely, there can be no assurance that our actual results will not differ from these estimates.

Our significant accounting policies are discussed in Note 1 to our consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023. Except as noted below, there have been no significant changes to these policies for the three months ended March 31, 2024.

Business Combinations

Accounting for business combinations requires us to make significant estimates and assumptions, notably at the acquisition date with respect to tangible and intangible assets acquired and liabilities assumed and pre-acquisition contingencies. The fair values of intangible assets are determined utilizing information available as of the acquisition date based on expectations and assumptions that are deemed reasonable by management. Given the considerable judgment involved in determining fair values, we typically obtain assistance from third-party valuation specialists for significant items. Any excess of the purchase price (consideration transferred) over the estimated fair values of net assets acquired is recorded as goodwill.

We may adjust provisional amounts recorded for assets acquired and liabilities assumed to reflect new information, provided we have not exceeded the maximum measurement period of one year from the acquisition date and subsequently obtained facts and circumstances existed as of the acquisition date. While we believe the expectations and assumptions used in valuing assets acquired and liabilities assumed are reasonable, they are inherently uncertain. Unanticipated market or macroeconomic events and circumstances may occur, which could affect the accuracy or validity of the estimates and assumptions, implying that an indicator of impairment could be present. Any such impairment charges could have a material effect on our results of operations.

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