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 September 30, 2024, and results of operations for the three and nine months ended September 30, 2024 and 2023, should be read in conjunction with the unaudited 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 September 30, 2024 were $544.3 million, an increase of $131.0 million, or 31.7%, from the comparable period in the prior year. We had income from operations of $24.1 million, compared to $57.4 million for the same period in the prior year. Gross margin dollars increased $74.1 million but decreased as a percentage of revenue to 60.8% from 62.1% compared to the three months ended September 30, 2023. The decrease was primarily driven by higher stock-based compensation expense and related payroll taxes, as well as amortization of acquired intangibles. Excluding the impacts of stock-based compensation expense and intangibles amortization in the cost of goods sold, gross margin increased from 62.7% to 63.2% year over year due to an increased mix of high-margin Axon Cloud & Services revenue. Operating expenses increased by $107.4 million, reflecting increased headcount and an increase in stock-based compensation expense. Net income of $67.0 million included a noncash unrealized gain of $44.0 million in our marketable securities. Net income of $61.3 million for the comparable period in the prior year included a noncash unrealized gain of $4.1 million on our investment in marketable securities.

Our revenues for the nine months ended September 30, 2024 were $1.5 billion, an increase of $377.1 million, or 33.4%, from the comparable period in the prior year. We had income from operations of $74.3 million, compared to $114.1 million for the same period in the prior year. Gross margin dollars increased $204.1 million but decreased as a percentage of revenue to 59.4% from 61.2% compared to the nine months ended September 30, 2023. The decrease was primarily driven by higher stock-based compensation expense and related payroll taxes, as well as amortization of acquired intangibles. Excluding the impacts of stock-based compensation expense and intangibles amortization in the cost of goods sold, the gross margin increased to 63.2% for the nine months ended September 30, 2024, compared to 61.8% for the same period in the prior year, primarily due to an increased mix of high-margin Axon Cloud & Services revenue and investments in TASER automation and cost-reduction initiatives. Operating expenses increased $243.9 million, reflecting an increase in salaries, benefits, and stock-based compensation expenses, as well as an increase in professional and consulting expenses related to transaction costs. For the nine months ended September 30, 2024, we recorded net income of $241.9 million, which included realized and unrealized gains of $192.2 million related to our acquisition of Fusus, strategic equity investment and marketable securities. Net income of $118.7 million for the comparable period in the prior year reflected a noncash unrealized gain of $29.6 million on our investment in marketable securities and a noncash unrealized impairment loss of $71.9 million, net, related to a strategic investment and related warrants.

Certain prior period amounts previously reported on our consolidated financial statements have been revised to correct for immaterial errors, as described in Note 1 and Note 19 to our condensed consolidated financial statements included in Part 1, Item 1 of this Quarterly Report on Form 10-Q.

Results of Operations

Three Months Ended September 30, 2024 Compared to the Three Months Ended September 30, 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 September 30,
	2024				2023
Net sales from products	$	327,900	60.2	%	$	255,055	61.7	%
Net sales from services	216,374		39.8		158,223		38.3
Net sales	544,274		100.0		413,278		100.0
Cost of product sales	156,167		28.7		114,613		27.7
Cost of service sales	57,360		10.5		42,009		10.2
Cost of sales	213,527		39.2		156,622		37.9
Gross margin	330,747		60.8		256,656		62.1
Operating expenses:
Sales, general and administrative	192,189		35.3		122,357		29.6
Research and development	114,477		21.0		76,880		18.6
Total operating expenses	306,666		56.3		199,237		48.2
Income from operations	24,081		4.5		57,419		13.9
Interest income, net	10,978		2.0		10,458		2.5
Other income (loss), net	44,510		8.1		3,852		0.9
Income (loss) before provision for income taxes	79,569		14.6		71,729		17.3
Provision for (benefit from) income taxes	12,544		2.3		10,420		2.5
Net income	$	67,025	12.3	%	$	61,309	14.8	%

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


	Three Months Ended September 30,
	2024				2023
United States	$	482,596	89	%	$	341,767	83	%
Other countries	61,678		11		71,511		17
Total	$	544,274	100	%	$	413,278	100	%

International revenue decreased compared to the prior year comparable period, primarily driven by a large hardware deal in our Europe, Middle East and Africa (“EMEA”) region during the third quarter of 2023.

Net Sales

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


	Three Months Ended September 30,								Dollar Change		Percent Change
	2024				2023
TASER segment:
TASER Devices (Professional)	$	130,515	24.0	%	$	86,718	21.0	%	$	43,797	50.5	%
Cartridges	60,179		11.1		54,279		13.1		5,900		10.9
Axon Evidence and Cloud Services	13,861		2.5		8,975		2.1		4,886		54.4
Extended Warranties	9,729		1.8		8,078		2.0		1,651		20.4
Other (1)	7,450		1.4		4,520		1.1		2,930		64.8
Total TASER segment	221,734		40.8		162,570		39.3		59,164		36.4
Software and Sensors segment:
Axon Body Cameras and Accessories	70,363		12.9		52,488		12.7		17,875		34.1
Axon Fleet Systems	23,239		4.3		27,336		6.6		(4,097)		(15.0)
Axon Evidence and Cloud Services	203,481		37.4		151,518		36.7		51,963		34.3
Extended Warranties	17,306		3.2		14,046		3.4		3,260		23.2
Other (2)	8,151		1.4		5,320		1.3		2,831		53.2
Total Software and Sensors segment	322,540		59.2		250,708		60.7		71,832		28.7
Total net sales	$	544,274	100.0	%	$	413,278	100.0	%	$	130,996	31.7	%

(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 36.4% for the three months ended September 30, 2024 as compared to the prior-year quarter, primarily due to increases of $43.8 million in TASER devices (professional) revenue and $5.9 million of cartridge revenue. The increases are primarily related to increased TASER 10 device and cartridge volumes. Net sales for Axon Evidence and cloud services increased $4.9 million in the three months ended September 30, 2024 due to an increase in the number of cloud-connected TASER devices in the field.

Net sales for the Software and Sensors segment increased 28.7% for the three months ended September 30, 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 $52.0 million. Net sales of Axon Body cameras and accessories increased $17.9 million due to higher volume sales of Axon Body 4. The $2.8 million increase in “Other” revenue was primarily driven by demand for smaller product offerings within the Software and Sensors segment.

We consider total company future contracted revenues a forward-looking performance indicator. As of September 30, 2024, we had approximately $7.7 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 10 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 60.8% from 62.5% for the three months ended September 30, 2024 and 2023, respectively. The decrease was primarily due to increased stock-based compensation expense. Excluding the impacts of stock-based compensation expense, gross margin for the TASER segment was 63.0% for the three months ended September 30, 2024, compared to 62.8% for the same period in 2023. The increase is primarily driven by investment in automation and cost reduction initiatives.

As a percentage of net sales, gross margin for the Software and Sensors segment decreased to 60.8% from 61.9% for the three months ended September 30, 2024 and 2023, respectively. Within the Software and Sensors segment, hardware gross margin decreased to 41.4% for the three months ended September 30, 2024 compared to 46.0% for the same period in 2023. Excluding the impacts of stock-based compensation expense and intangibles amortization, hardware gross margin decreased to 43.3% for the three months ended September 30, 2024, compared to 46.5% for the same period in 2023 due to manufacturing overhead reallocations made in the prior year. Service margin decreased to 72.3% for the three months ended September 30, 2024 from 72.7% for the same period in 2023. Excluding the impacts of stock-based compensation expense and intangibles amortization, service margin increased to 75.2% for the three months ended September 30, 2024, compared to 73.7% for the same period in 2023 due to higher mix of software revenue.

Sales, General and Administrative Expenses

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


	Three Months Ended September 30,				Dollar Change		Percent Change
	2024		2023
Total sales, general and administrative expenses	$	192,189	$	122,357	$	69,832	57.1	%
As a percentage of net sales	35.3%		29.6%

Stock-based compensation expense increased $42.4 million in comparison to the prior-year comparable period, which was primarily related to the 2024 Employee XSP and the 2024 CEO Performance Award that were approved by shareholders in the 2024 Annual Meeting of Shareholders and increased headcount. As of September 30, 2024, we consider some of the tranches probable and will recognize the expense ratably over their respective expected vesting periods. This may result in volatility and higher upfront expense recognition and is subject to change based on periodic probability assessments.

Salaries, benefits and bonus expense increased $10.9 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 $3.8 million in comparison to the prior-year comparable period. The increase was partially attributable to an increase in travel expense of $2.3 million due to higher seasonal travel for company events compared to the prior-year comparable period. Sales and marketing fees increased $1.1 million as a result of in-person events.

Research and Development Expenses

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


	Three Months Ended September 30,						Dollar Change		Percent Change
	2024			2023
Total research and development expenses	$	114,477		$	76,880		$	37,597	48.9	%
As a percentage of net sales	21.0		%	18.6		%

Stock-based compensation expense increased $20.9 million in comparison to the prior-year comparable period, which was primarily related to the 2024 Employee XSP that was approved by shareholders in the 2024 Annual Meeting of Shareholders and increased headcount.

Salaries, benefits and bonus expense increased $12.9 million in comparison to the prior-year comparable period, which was primarily attributable to an increase in headcount and higher wages.

Interest Income, Net

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


	Three Months Ended September 30,
	2024		2023
Interest income	$	12,624	$	12,220
Interest expense	(1,646)		(1,762)
Total interest income, net	$	10,978	$	10,458

Other Income, Net

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


	Three Months Ended September 30,
	2024		2023
Realized and unrealized gain (loss) on fair value adjustments of strategic investments, net	$	449	$	(14)
Unrealized gain on marketable securities, net	44,010		4,050
Loss on foreign currency transactions, net	(233)		(473)
Other, net	284		289
Other income, net	$	44,510	$	3,852

Provision for Income Taxes

Our estimated annual effective income tax rate for 2024, before discrete period adjustments, is 23.3%, which differs from the federal statutory rate primarily due to the impact of state taxes net of federal benefit and executive compensation limitation under IRC Section 162(m) on projected pre-tax income for the year, partially offset by R&D tax credits and a net gain related to an investment transaction not recognized for tax. The effective tax rate was favorably impacted by a net $5.5 million discrete tax benefit associated with net windfalls related to stock-based compensation for RSUs and PSUs that vested, in addition to non-qualified stock options that were exercised during the three months ended September 30, 2024.

Provision for income taxes and effective tax rates were as follows (dollars in thousands):


	Three Months Ended September 30,
	2024			2023			Change
Provision for income taxes	$	12,544		$	10,420		$	2,124
Effective tax rate	15.8		%	14.5		%	1.3		%

Net Income

We recorded net income of $67.0 million for the three months ended September 30, 2024 compared to net income of $61.3 million for the same period in 2023. Net income per basic share was $0.89 for the three months ended September 30, 2024 compared to $0.82 net income per basic share for the same period in 2023. Net income per diluted share was $0.86 for the three months ended September 30, 2024 compared to $0.81 net income per diluted share for the comparable period in 2023.

Three Months Ended September 30, 2024 Compared to the Three Months Ended June 30, 2024

Net Sales

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


	Three Months Ended September 30, 2024				Three Months Ended June 30, 2024				Dollar Change		Percent Change
TASER segment:
TASER Devices (Professional)	$	130,515	24.0	%	$	104,624	20.8	%	$	25,891	24.7	%
Cartridges	60,179		11.1		65,415		13.0		(5,236)		(8.0)
Axon Evidence and Cloud Services	13,861		2.5		13,974		2.8		(113)		(0.8)
Extended Warranties	9,729		1.8		8,908		1.8		821		9.2
Other (1)	7,450		1.4		3,796		0.7		3,654		96.3
Total TASER segment	221,734		40.8		196,717		39.1		25,017		12.7
Software and Sensors segment:
Axon Body Cameras and Accessories	70,363		12.9		59,024		11.7		11,339		19.2
Axon Fleet Systems	23,239		4.3		27,083		5.4		(3,844)		(14.2)
Axon Evidence and Cloud Services	203,481		37.4		191,237		38.0		12,244		6.4
Extended Warranties	17,306		3.2		15,405		3.1		1,901		12.3
Other (2)	8,151		1.4		13,770		2.7		(5,619)		(40.8)
Software and Sensors segment	322,540		59.2		306,519		60.9		16,021		5.2
Total net sales	$	544,274	100.0	%	$	503,236	100.0	%	$	41,038	8.2	%

(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 $25.0 million, or 12.7%, during the three months ended September 30, 2024 compared to the prior quarter. The increase is primarily related to higher TASER 10 device volume. The $5.2 million decrease in Cartridge revenue is due to lower international volume of legacy cartridges. 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 $16.0 million, or 5.2%, during the three months ended September 30, 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 $12.2 million. Axon Body cameras and accessories revenue increased $11.3 million on higher unit sales. Partially offsetting the increases in the Software and Sensors segment was a decrease of $3.8 million in Axon Fleet revenue primarily reflecting lower unit volume.

Nine Months Ended September 30, 2024 Compared to the Nine Months Ended September 30, 2023


	Nine Months Ended September 30,
	2024				2023
Net sales from products	$	891,087	59.1	%	$	707,563	62.6	%
Net sales from services	616,294		40.9		422,760		37.4
Net sales	1,507,381		100.0		1,130,323		100.0
Cost of product sales	450,954		29.9		323,808		28.6
Cost of service sales	160,896		10.7		115,054		10.3
Cost of sales	611,850		40.6		438,862		38.8
Gross margin	895,531		59.4		691,461		61.2
Operating expenses:
Sales, general and administrative	514,228		34.1		357,611		31.6
Research and development	307,008		20.4		219,747		19.4
Total operating expenses	821,236		54.5		577,358		51.1
Income from operations	74,295		4.9		114,103		10.1
Interest income, net	31,134		2.1		29,787		2.6
Other income (loss), net	191,510		12.7		(42,569)		(3.7)
Income before provision for income taxes	296,939		19.7		101,321		9.0
Provision for (benefit from) income taxes	55,089		3.7		(17,401)		(1.5)
Net income	$	241,850	16.0	%	$	118,722	10.5	%

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


	Nine Months Ended September 30,
	2024				2023
United States	$	1,298,775	86	%	$	954,023	84	%
Other countries	208,606		14		176,300		16
Total	$	1,507,381	100	%	$	1,130,323	100	%

International revenue increased compared to the prior year comparable period. The increase was primarily attributable to large hardware orders during the period in our EMEA and Americas regions.

Net Sales

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


	Nine Months Ended September 30,								Dollar Change		Percent Change
	2024				2023
TASER segment:
TASER Devices (Professional)	$	333,815	22.1	%	$	239,165	21.2	%	$	94,650	39.6	%
Cartridges	181,792		12.1		149,504		13.2		32,288		21.6
Axon Evidence and Cloud Services	40,297		2.7		25,575		2.3		14,722		57.6
Extended Warranties	27,164		1.8		23,463		2.1		3,701		15.8
Other (1)	14,373		1.0		14,460		1.2		(87)		(0.6)
Total TASER segment	597,441		39.7		452,167		40.0		145,274		32.1
Software and Sensors segment:
Axon Body Cameras and Accessories	180,592		12.0		124,066		11.0		56,526		45.6
Axon Fleet Systems	79,620		5.3		99,015		8.8		(19,395)		(19.6)
Axon Evidence and Cloud Services	570,222		37.8		401,281		35.5		168,941		42.1
Extended Warranties	48,651		3.2		40,194		3.6		8,457		21.0
Other (2)	30,855		2.0		13,600		1.1		17,255		126.9
Total Software and Sensors segment	909,940		60.3		678,156		60.0		231,784		34.2
Total net sales	$	1,507,381	100.0	%	$	1,130,323	100.0	%	$	377,058	33.4	%

(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 and Axon Air.

Net sales for the TASER segment increased $145.3 million or 32.1% during the nine months ended September 30, 2024, primarily due to an increase of $94.7 million in TASER devices and $32.3 million in cartridge revenue. The increase is primarily related to increased TASER 10 device and cartridge volumes. The increase in revenue from Axon Evidence and cloud services of $14.7 million was driven by an increase in TASER software. An increase in TASER devices in the field drove the $3.7 million increase in extended warranties, as most of those devices are sold with extended warranties

Net sales for the Software and Sensors segment increased $231.8 million, or 34.2%, during the nine months ended September 30, 2024, as we continued to add users and associated devices to our network. The increase in the aggregate number of users and the growing adoption of our premium add-on features by existing customers drove the majority of the increase in Axon Evidence revenue, totaling $168.9 million, as well as increases in professional services revenue. Axon Body cameras and accessories revenue increased $56.5 million due to higher unit sales. Partially offsetting the increase was a $19.4 million decrease in Axon Fleet systems revenue primarily reflecting lower unit volumes on more normalized deployment timelines. An increase in cameras, docks and Fleet systems in the field drove the $8.5 million increase in extended warranties, as most of those devices are sold with extended warranties. The $17.3 million increase in “Other” revenue was primarily driven by demand for smaller product offerings within the Software and Sensors segment.

Gross Margin

As a percentage of net sales, gross margin for the TASER segment decreased to 57.7% from 61.8% for the nine months ended September 30, 2024 and 2023, respectively. The decrease was primarily due to increased stock-based compensation expense. Excluding the impacts of stock-based compensation expense, gross margin for the TASER segment is 62.6% for the nine months ended September 30, 2024, compared to 62.1% for the same period in 2023. The increase is primarily due to the investments in automation and cost reduction initiatives.

As a percentage of net sales, gross margin for the Software and Sensors segment decreased to 60.6% from 60.8% for the nine months ended September 30, 2024 and 2023, respectively. Within the Software and Sensors segment, hardware gross margin was 39.6% for the nine months ended September 30, 2024, compared to 45.4% for the same period in 2023. Excluding

the impacts of stock-based compensation expense and intangibles amortization, hardware gross margin decreased to 43.3% for the nine months ended September 30, 2024, compared to 45.7% for the same period in 2023 due to inventory reserve charges associated with legacy products in the second quarter of 2024. Service margin increased to 72.7% for the nine months ended September 30, 2024 compared to 71.7% for the same period in 2023. Excluding the impacts of stock-based compensation expense and intangibles amortization, service margin increased to 75.2% for the nine months ended September 30, 2024, compared to 72.8% for the same period in 2023, due to higher software mix and cloud cost efficiencies.

For the nine months ended September 30, 2024, we have seen an increase in stock-based compensation expense within our 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):


	Nine Months Ended September 30,						Dollar Change		Percent Change
	2024			2023
Total sales, general and administrative expenses	$	514,228		$	357,611		$	156,617	43.8	%
As a percentage of net sales	34.1		%	31.6		%

Stock-based compensation expense increased $73.8 million in comparison to the prior-year comparable period, which was primarily related to the 2024 Employee XSP and the 2024 CEO Performance Award that were approved by shareholders in the 2024 Annual Meeting of Shareholders and increased headcount.

Salaries, benefits, and bonus expense increased $25.0 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 expenses increased $18.9 million in comparison to the prior-year comparable period. The increase was partially attributable to an increase in travel expense of $7.4 million due to higher seasonal travel for company events compared to the prior-year comparable period. Commissions increased $7.9 million as a result of higher revenue.

Professional and consulting expenses increased $13.8 million in comparison to the prior-year comparable period, which was primarily attributable to transaction costs related to the acquisition of Fusus and expected acquisition of Dedrone.

Other SG&A expenses increased $21.7 million in comparison to the prior-year comparable period, which was attributable to an increase of $4.7 million in computer license expenses and an increase of $1.9 million for credit losses. Additionally, the prior-year comparable period had a $3.3 million gain related to insurance proceeds received as a result of storm damages, which did not recur in the current year.

Research and Development Expenses

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


	Nine Months Ended September 30,						Dollar Change		Percent Change
	2024			2023
Total research and development expenses	$	307,008		$	219,747		$	87,261	39.7	%
As a percentage of net sales	20.4		%	19.4		%

Salaries, benefits, and bonus expense increased $40.8 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 $38.0 million in comparison to the prior-year comparable period, which was primarily related to the 2024 Employee XSP that was approved by shareholders in the 2024 Annual Meeting of Shareholders and increased headcount.

Interest Income, Net

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


	Nine Months Ended September 30,
	2024		2023
Interest income	$	36,407	$	35,010
Interest expense	(5,273)		(5,223)
Total interest income, net	$	31,134	$	29,787

Other Income (Loss), Net

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


	Nine Months Ended September 30,
	2024		2023
Realized and unrealized gain (loss) on fair value adjustments of strategic investments, net	$	118,538	$	(71,916)
Unrealized gain on marketable securities, net	73,620		29,610
Loss on foreign currency transactions, net	(180)		(555)
Other, net	(468)		292
Other income (loss), net	$	191,510	$	(42,569)

Provision for Income Taxes

Our estimated annual effective income tax rate for 2024, before discrete period adjustments, is 23.3%, which differs from the federal statutory rate primarily due to the impact of state taxes net of federal benefit and executive compensation limitation under IRC Section 162(m) on projected pre-tax income for the year, partially offset by R&D tax credits and a net gain related to an investment transaction not recognized for tax. The effective tax rate was favorably impacted by a net $13.0 million discrete tax benefit associated with net windfalls related to stock-based compensation for RSUs and PSUs that vested, in addition to non-qualified stock options that were exercised during the nine months ended September 30, 2024.

Provision for (benefit from) income taxes and effective tax rates were as follows (dollars in thousands):


	Nine Months Ended September 30,
	2024			2023			Change
Provision for (benefit from) income taxes	$	55,089		$	(17,401)		$	72,490
Effective tax rate	18.6		%	(17.2)		%	35.8		%

Net Income

We recorded net income of $241.9 million for the nine months ended September 30, 2024 compared to net income of $118.7 million for the same period in 2023. Net income per basic share was $3.20 for the nine months ended September 30, 2024 compared to net income per basic share of $1.61 for the same period in 2023. Net income per diluted share was $3.12 for the nine months ended September 30, 2024 compared to net income per diluted share of $1.58 for the comparable period in 2023.

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, noncash stock-based compensation expense, fair value adjustments to strategic investments and marketable securities, transaction costs related to acquisitions and strategic investments, costs related to antitrust litigation 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 noncash 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				Nine Months Ended
	September 30, 2024		September 30, 2023		September 30, 2024		September 30, 2023
Net income	$	67,025	$	61,309	$	241,850	$	118,722
Depreciation and amortization	14,762		8,418		39,326		22,587
Interest expense	1,646		1,762		5,273		5,223
Investment interest income	(12,624)		(12,220)		(36,407)		(35,010)
Provision for (benefit from) income taxes	12,544		10,420		55,089		(17,401)
EBITDA	$	83,353	$	69,689	$	305,131	$	94,121

Non-GAAP adjustments:
Stock-based compensation expense	101,780		29,987		251,716		96,228
Unrealized (gain) loss on strategic investments and marketable securities, net	(44,459)		(4,036)		(149,845)		42,306
Realized gain on remeasurement of previously held minority interest, net	—		—		(42,313)		—
Transaction costs related to strategic investments and acquisitions	2,652		495		13,145		1,793
Loss on disposal, abandonment, and impairment of property, equipment and intangible assets, net	—		137		—		317
Insurance recoveries	—		(2,615)		—		(3,404)
Costs related to antitrust litigation	—		71		224		72
Payroll taxes related to 2019 XSPP vesting and 2018 CEO Performance Award option exercises	1,727		201		1,727		8,961
Adjusted EBITDA	$	145,053	$	93,929	$	379,785	$	240,394

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


	Three Months Ended September 30, 2024						Three Months Ended September 30, 2023
	TASER		Software and Sensors		Total		TASER		Software and Sensors		Total
Gross margin	$	134,780	$	195,967	$	330,747	$	101,572	$	155,084	$	256,656
Stock-based compensation expense	4,808		5,315		10,123		579		1,108		1,687
Amortization of acquired intangible assets	44		2,976		3,020		—		955		955
Adjusted gross margin	$	139,632	$	204,258	$	343,890	$	102,151	$	157,147	$	259,298
Gross margin	60.8%		60.8%		60.8%		62.5%		61.9%		62.1%
Adjusted gross margin	63.0%		63.3%		63.2%		62.8%		62.7%		62.7%


	Nine Months Ended September 30, 2024									Nine Months Ended September 30, 2023
	TASER			Software and Sensors			Total			TASER			Software and Sensors			Total
Gross margin	$	344,478		$	551,053		$	895,531		$	279,353		$	412,108		$	691,461
Stock-based compensation expense	29,564			18,671			48,235			1,521			3,164			4,685
Amortization of acquired intangible assets	30			8,268			8,298			1			2,188			2,189
Adjusted gross margin	$	374,072		$	577,992		$	952,064		$	280,875		$	417,460		$	698,335
Gross margin	57.7		%	60.6		%	59.4		%	61.8		%	60.8		%	61.2		%
Adjusted gross margin	62.6		%	63.5		%	63.2		%	62.1		%	61.6		%	61.8		%

Liquidity and Capital Resources

Summary


	September 30, 2024		December 31, 2023		Dollar Change
Cash and cash equivalents	$	695,144	$	598,545	$	96,599
Available-for-sale investments	311,570		644,054		(332,484)
Total	$	1,006,714	$	1,242,599	$	(235,885)

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 Credit Agreement of $200.0 million revolving credit facility is available for additional working capital needs or investment opportunities.

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. Refer to Note 13 for additional details related to our Credit Agreement and outstanding letters of credit.

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):


	Nine Months Ended September 30, 2024				Dollar Change
	2024		2023
Operating activities	$	158,146	$	49,225	$	108,921
Investing activities	(48,834)		(40,697)		(8,137)
Financing activities	(12,608)		45,132		(57,740)
Effect of exchange rate changes on cash and cash equivalents	75		(1,201)		1,276
Net increase (decrease) in cash and cash equivalents and restricted cash	$	96,779	$	52,459	$	44,320

Operating activities

Net cash provided by operating activities was $158.1 million for the first nine months of 2024, compared to $49.2 million in the comparable period in the prior year. The $108.9 million increase is due to changes in the following (in thousands): 


	Nine Months Ended September 30, 2024				Dollar Change
	2024		2023
Net income	$	241,850	$	118,722	$	123,128
Stock-based compensation	251,716		96,228		155,488
Fair value adjustments on strategic investments and marketable securities, net	(192,158)		42,306		(234,464)
Deferred income taxes	(27,061)		(52,955)		25,894
Inventory and accounts payable	(1,386)		(51,729)		50,343
Receivables and contract assets	(226,759)		(186,614)		(40,145)
Deferred revenue	56,720		103,386		(46,666)
Other, net	55,224		(20,119)		75,343
Net cash provided by (used in) operating activities	$	158,146	$	49,225	$	108,921

Net cash provided by operating activities was $158.1 million for the first nine months ended September 30, 2024 compared to cash provided by operating activities of $49.2 million for the comparable period in the prior year. The net operating cash inflow in the current period was driven by net income of $241.9 million, noncash income statement items totaling $90.2 million, and a decrease of $174.0 million for the net change in operating assets and liabilities. Included in noncash items was $251.7 million in stock-based compensation, an increase of $155.5 million for the comparable period in the prior year. The increase was primarily related to the impacts of the 2024 Employee XSP and the 2024 CEO Performance Award grants along with the enhanced equity compensation opportunities provided to employees with income below a certain threshold. Offsetting the increase in noncash items was $192.2 million in fair value adjustments for the realized and unrealized gains (losses) on our strategic investments and marketable securities. The change in accounts and notes receivable was largely due to increased cash collection efficiency. This was partly offset by the change in deferred revenue due to the timing of billing events. The change in inventory and accounts payable was largely due to advanced raw material purchases for Axon Body 4 and TASER 10 CEDs to support future sales. The change in deferred income taxes was primarily driven by the Flock mark-to-market gain in the first three months ended March 31, 2024 as well as additional tax amortization of intangibles and R&D capitalization, partially offset by additional GAAP expense related to unvested stock compensation.

Investing activities

Net cash used in investing activities was $48.8 million for the nine months ended September 30, 2024 compared to cash used by investing activities of $40.7 million for the comparable period in the prior year. The net investing cash outflow is driven by $237.8 million for our business acquisition, $101.0 million for strategic investments, and $54.0 million for purchases of property and equipment, net of proceeds, partially offset by $858.3 million of proceeds from calls, maturities and sales of available-for-sale investments, less purchases of $514.4 million. This net cash outflow is primarily driven by greater business acquisition and strategic investment activities in the current period, when contrasted with the prior comparable period.

Financing activities

Net cash used in financing activities was $12.6 million for the nine months ended September 30, 2024 compared to cash provided by financing activities of $45.1 million for the comparable period in the prior year. The net financing cash outflow in the current period is driven by the payment of income and payroll taxes on behalf of employees who net-settled stock awards during the period, whereas the net financing cash inflow in the prior comparable period was primarily driven by net proceeds from our ATM offering and cash received from the exercise of stock options where shares were sold to cover the exercise price, partially offset by the payment of income and payroll taxes on behalf of employees who net-settled stock awards during the period.

Off-Balance Sheet Arrangements

The discussion under the heading off-balance sheet arrangements in Note 14 to our condensed consolidated financial statements included in Part 1, Item 1 of 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 nine months ended September 30, 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.

Stock-Based Compensation

Accounting for our stock-based compensation program requires us to make significant estimates and assumptions, notably those related to our 2024 Employee XSP and 2024 CEO Performance Award. Refer to Note 12 for further discussion.

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