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, 2025, and results of operations for the three months ended March 31, 2025 and 2024, should be read in conjunction with the unaudited 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 amended 2024 Annual Report on Form 10-K/A for the year ended December 31, 2024, filed with the SEC on May 7, 2025. 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 in the United States in half by 2033. Axon is building the public safety operating system of the future by integrating a suite of hardware devices and cloud software solutions that not only revolutionize modern policing but also cater to federal agencies, corrections, justice and enterprise-level security needs. Axon’s suite includes cloud-hosted digital evidence management solutions, productivity and real-time operations software, body cameras, in-car cameras, TASER energy devices, drone and robotic security, and training solutions.

Effective in the first quarter of 2025, we realigned our business to better reflect our continued growth and expansion of product, software and service offerings (the “Segment Realignment”). Previously reported within two reportable segments, TASER and Software and Sensors, we prospectively realigned our business in a manner that provides increased transparency and distinction between our hardware and software and services components. As a result of the Segment Realignment and effective as of the three months ended March 31, 2025, our financial results are reported in two reportable segments, Connected Devices and Software & Services. As a result of the Segment Realignment, we have recast our segment disclosures for the three months ended March 31, 2024 to conform to the new presentation.

Our revenues for the three months ended March 31, 2025 were $603.6 million, an increase of $143.8 million, or 31.3%, from the comparable period in the prior year. We had loss from operations of $8.8 million, compared to income from operations of $16.5 million for the same period in the prior year. Gross margin dollars increased $107.1 million and increased as a percentage of revenue to 60.6% from 56.2% compared to the three months ended March 31, 2024. The increase was primarily driven by higher stock-based compensation expense in the comparable period. Excluding the impacts of stock-based compensation expense and intangibles amortization in cost of goods sold, adjusted gross margin increased to 63.6% for three months ended March 31, 2025 compared to 63.2% for the same period in the prior year, primarily due to higher software revenue mix. Operating expenses increased by $132.4 million, reflecting increased headcount and an increase in stock-based compensation expense. Net income of $88.0 million included net realized and unrealized gains of $167.3 million related to our strategic investments, offset by a noncash unrealized loss of $23.4 million related to our marketable securities and inducement expense of $28.7 million associated with the early repurchase of a portion of our 2027 Notes, as discussed further within Note 10. Net income of $133.4 million for the comparable period in the prior year 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 a noncash unrealized gain of $21.8 million on our investment in marketable securities.

Certain prior period amounts previously reported on our consolidated financial statements have been restated to correct for immaterial errors, as described in Note 1 and Note 18 to our consolidated financial statements included in Part 1, Item 1 of this Quarterly Report on Form 10-Q.

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Results of Operations

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

			Three Months Ended March 31,
			2025												2024
Net sales from products			$	340,896					56.5		%				$	270,424					58.8		%
Net sales from services			262,737						43.5						189,447						41.2
Net sales			603,633						100.0						459,871						100.0
Cost of product sales			170,181						28.2						152,160						33.1
Cost of services sales			67,713						11.2						49,083						10.7
Cost of sales			237,894						39.4						201,243						43.8
Gross margin			365,739						60.6						258,628						56.2
Operating expenses:
Selling, general and administrative			223,509						37.0						151,075						32.9
Research and development			151,023						25.0						91,097						19.8
Total operating expenses			374,532						62.0						242,172						52.7
(Loss) income from operations			(8,793)						(1.4)						16,456						3.5
Interest income			10,604						1.8						12,130						2.6
Interest expense			(7,821)						(1.3)						(1,756)						(0.4)
Other income, net			114,401						19.0						139,066						30.2
Income before provision for income taxes			108,391						18.1						165,896						35.9
Provision for income taxes			20,411						3.4						32,544						7.1
Net income			$	87,980					14.7		%				$	133,352					28.8		%

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

			Three Months Ended March 31,
			2025												2024
United States			$	529,383					88		%				$	391,541					85		%
Other countries			74,250						12						68,330						15
Total			$	603,633					100		%				$	459,871					100		%

International revenue increased compared to the prior year comparative period, primarily driven by increased sales in our Americas region (i.e., South America and Canada).

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Net Sales

As a result of the Segment Realignment, we have updated and recast our disaggregated revenue categories. Net sales by product line were as follows (dollars in thousands):

			Three Months Ended March 31,																								Dollar Change						Percent Change
			2025												2024
Connected Devices segment:
TASER (1)			$	195,495					32.4		%				$	164,599					35.8		%				$	30,896					18.8		%
Personal Sensors (2)			88,405						14.7						68,000						14.8						20,405						30.0
Platform Solutions (3)			56,996						9.4						37,825						8.2						19,171						50.7
Total Connected Devices segment			340,896						56.5						270,424						58.8						70,472						26.1
Total Software and Services segment			262,737						43.5						189,447						41.2						73,290						38.7
Total net sales			$	603,633					100.0		%				$	459,871					100.0		%				$	143,762					31.3		%

(1)'TASER' includes TASER handles, cartridges and related extended warranties.

(2)'Personal Sensors' primarily includes body cameras and accessories, signal sidearm, and related extended warranties.

(3)'Platform Solutions' primarily includes interview room, fleet in-car video, fixed cameras, drones and counter-drone equipment, virtual reality training hardware, and related extended warranties.

Net sales for the Connected Devices segment increased 26.1% for the three months ended March 31, 2025 as compared to the prior-year quarter. The increase of $30.9 million in TASER is primarily driven by higher TASER 10 handle and cartridge volume. Personal Sensors increased $20.4 million on continued adoption of our newest body camera, AB4, and higher warranty revenue from more devices in the field. The $19.2 million increase in Platform Solutions is primarily driven by higher volume for virtual reality training and counter-drone equipment.

Net sales for the Software and Services segment increased 38.7% for the three months ended March 31, 2025 as compared to the prior-year quarter. The increase in the aggregate number of users and growing adoption of our premium add-on features by existing customers drove the majority of the increase of $73.3 million.

Gross Margin

As a percentage of net sales, gross margin for the Connected Devices segment increased to 50.1% from 43.7% for the three months ended March 31, 2025 and 2024, respectively. The increase was primarily due to higher stock-based compensation in the comparable period. Adjusted gross margin for the Connected Devices segment, which excludes stock-based compensation expense and intangibles amortization, was 52.8% for the three months ended March 31, 2025, compared to 54.1% for the same period in 2024. The decrease is primarily driven by higher mix of Personal Sensors and Platform Solutions which generally have a lower gross margin than TASER devices.

As a percentage of net sales, gross margin for the Software and Services segment increased to 74.2% from 74.1% for the three months ended March 31, 2025 and 2024, respectively. The increase was primarily due to higher stock-based compensation expense in the comparable period. Adjusted gross margin for Software and Services segment, which excludes stock-based compensation expense and intangibles amortization, increased to 77.7% for the three months ended March 31, 2025, compared to 76.1% for the same period in 2024 due to higher software mix.

Selling, General and Administrative Expenses

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

			Three Months Ended March 31,												Dollar Change						Percent Change
			2025						2024
Total selling, general and administrative expenses			$	223,509					$	151,075					$	72,434					47.9		%
As a percentage of net sales			37.0%						32.9%

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Stock-based compensation expense increased $48.2 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 March 31, 2025, 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 $12.7 million in comparison to the prior-year comparable period, which was primarily attributable to an increase in headcount and higher wages.

Sales and marketing expense increased $3.1 million in comparison to the prior-year comparable period, which was primarily attributable to increased commissions and in-person events.

Research and Development Expenses

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

			Three Months Ended March 31,												Dollar Change						Percent Change
			2025						2024
Total research and development expenses			$	151,023					$	91,097					$	59,926					65.8		%
As a percentage of net sales			25.0		%				19.8		%

Stock-based compensation expense increased $33.6 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. As of March 31, 2025, we consider the vesting of 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 $16.7 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 (in thousands):

			Three Months Ended March 31,
			2025						2024
Interest income			$	10,604					$	12,130
Interest expense (1)			(7,821)						(1,756)
Total interest income, net			$	2,783					$	10,374

(1)Interest expense increased in comparison to the prior-year comparable period primarily as a result of the issuance of the Senior Notes in March 2025, as discussed further within Note 10.

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Other Income, Net

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

			Three Months Ended March 31,
			2025						2024
Realized and unrealized gain on fair value adjustments of strategic investments, net			$	167,321					$	117,931
Unrealized gain (loss) on marketable securities, net			(23,400)						21,780
Gain (loss) on foreign currency transactions, net			(803)						88
Induced conversion of convertible debt (1)			(28,666)						—
Other, net			(51)						(733)
Other income, net			$	114,401					$	139,066

(1)Reflects the inducement expense associated with the early repurchase of a portion of our 2027 Notes, as discussed further within Note 10.

Provision for Income Taxes

The effective tax rate is 18.8% for the three months ended March 31, 2025, compared to 19.6% for the three months ended March 31, 2024. The decrease was primarily attributable to higher R&D tax credits and discrete benefit for excess tax benefits from stock-based compensation. These were partially offset by higher tax expense related to the executive compensation limitation under IRC Section 162(m), increased unrecognized tax benefits, state income taxes, a partially non-deductible expense related to the induced conversion of our 2027 Notes, and the absence of a prior-year gain related to an investment transaction not recognized for tax. The overall change in the effective tax rate also reflects the impact of a lower pre-tax book income base in the current period, which magnifies the relative effect of permanent and discrete items.

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

			Three Months Ended March 31,
			2025						2024						Change
Income before provision for income taxes			$	108,391					$	165,896					$	(57,505)
Provision for income taxes			$	20,411					$	32,544					$	(12,133)
Effective tax rate			18.8		%				19.6		%				(0.8)		%

Net Income

We recorded net income of $88.0 million for the three months ended March 31, 2025 compared to net income of $133.4 million for the same period in 2024. Net income per basic share was $1.14 for the three months ended March 31, 2025 compared to $1.77 net income per basic share for the same period in 2024. Net income per diluted share was $1.08 for the three months ended March 31, 2025 compared to $1.73 net income per diluted share for the comparable period in 2024.

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. 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.

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• 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 related to strategic investments and marketable securities; debt inducement expense associated with the early repurchase of a portion of our 2027 Notes; transaction and integration costs related to strategic investments and acquisitions; inventory step-up amortization related to acquisitions; certain litigation costs and recoveries related to (1) antitrust cases we consider to be non-recurring and outside of our core operating results and (2) litigation matters for acquired companies that were unresolved at the date of the acquisition; and other unusual, non-recurring pre-tax items that are not considered representative of our underlying operating performance (listed in the tables below).

• Adjusted gross margin (most comparable GAAP measure: Gross margin) – Gross margin before noncash stock-based compensation expense, amortization of acquired intangible assets, and inventory step-up amortization related to acquisitions.

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.

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

			Three Months Ended
			March 31, 2025						December 31, 2024						March 31, 2024
Net income			$	87,980					$	135,184					$	133,352
Depreciation and amortization			19,195						17,489						11,564
Interest expense			7,821						1,825						1,756
Investment interest income			(10,604)						(7,286)						(12,130)
Provision for (benefit from) income taxes			20,411						(50,619)						32,544
EBITDA			$	124,803					$	96,593					$	167,086
Non-GAAP adjustments:
Stock-based compensation expense			140,239						130,888						75,115
Unrealized and realized gains on strategic investments and marketable securities, net			(143,921)						(39,432)						(97,419)
Realized gains on previously held minority interests acquired in business combinations, net			—						(51,627)						(42,292)
Debt inducement expense			28,666						—						—
Transaction costs related to strategic investments and acquisitions			2,727						2,104						6,357
Loss on disposal, abandonment, and impairment of property, equipment and intangible assets, net			—						—						—
Loss recoveries			—						—						—
Inventory step-up amortization			607						609						—
Litigation costs and related recoveries			2,049						1,537						224
Payroll taxes related to 2018 CEO Performance Award option exercises			—						918						—
Adjusted EBITDA			$	155,170					$	141,590					$	109,071

As a result of the Segment Realignment, we have recast adjusted gross margin for the three months ended March 31, 2024 to conform to the new presentation. Adjusted gross margin reconciles to gross margin as follows (in thousands):

			Three Months Ended
			March 31, 2025																		March 31, 2024
			Connected Devices						Software and Services						Total						Connected Devices						Software and Services						Total
Gross margin			$	170,715					$	195,024					$	365,739					$	118,264					$	140,364					$	258,628
Stock-based compensation expense			7,476						5,411						12,887						27,827						1,768						29,595
Amortization of acquired intangible assets			1,337						3,626						4,963						325						1,963						2,288
Inventory step-up amortization			607						—						607						—						—						—
Adjusted gross margin			$	180,135					$	204,061					$	384,196					$	146,416					$	144,095					$	290,511
Gross margin %			50.1		%				74.2		%				60.6		%				43.7		%				74.1		%				56.2		%
Adjusted gross margin %			52.8		%				77.7		%				63.6		%				54.1		%				76.1		%				63.2		%

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Liquidity and Capital Resources

Summary

			March 31, 2025						December 31, 2024						Dollar Change
Cash and cash equivalents			$	1,092,938					$	454,844					$	638,094
Available-for-sale investments			1,099,230						333,235						765,995
Total			$	2,192,168					$	788,079					$	1,404,089

Our most significant source of liquidity continues to be funds generated by operating activities and available cash and cash equivalents and short-term investments. As of March 31, 2025, we had $1.1 billion of cash and cash equivalents, an increase of $638.1 million from December 31, 2024. Refer below for further discussions related to the change in cash and cash equivalents. As of March 31, 2025, we had $1.1 billion of available-for-sale investments, an increase of $766.0 million from December 31, 2024 primarily as a result of investment activity following the issuance of the Senior Notes. Refer to Note 10 in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional details on the issuance.

In addition, our Credit Agreement is available for additional working capital needs or investment opportunities. The Credit Agreement provides for a senior unsecured multi-currency revolving credit facility in an aggregate principal amount of up to $300.0 million, $50.0 million of which is available for the issuance of letters of credit. As of March 31, 2025, and December 31, 2024, respectively, no amounts were drawn under the Credit Agreement. Under the terms of the line of credit, available borrowings are reduced by outstanding letters of credit. As of March 31, 2025, we had letters of credit outstanding of approximately $8.7 million under the facility and available borrowing of $291.3 million. Refer to Note 13 in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional details related to our Credit Agreement and outstanding letters of credit.

We also have an aggregate of $1.75 billion of Senior Notes outstanding. As of March 31, 2025, none of our subsidiaries guarantee the Senior Notes. Our non-guarantor subsidiaries accounted for approximately 12% of our total revenue for the three months ended March 31, 2025, and approximately 18% and 6% of our total consolidated assets and liabilities (excluding the effect of intercompany transactions), respectively, as of March 31, 2025. Refer to Note 10 in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional details related to our Senior Notes.

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.

Going forward, we expect to continue to be an opportunistic issuer of debt securities and may issue new debt securities from time to time to fund our growth or refinance future debt maturities, among other things. In addition, from time to time, we may acquire our debt securities through open market purchases, redemptions, privately negotiated transactions, tender offers, exchange offers or otherwise, upon such terms and at such prices as we may from time to time determine, for cash or other consideration.

Cash Flows

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

			Three Months Ended March 31,												Dollar Change
			2025						2024
Operating activities			$	25,794					$	(15,938)					$	41,732
Investing activities			(702,217)						(174,044)						(528,173)
Financing activities			1,313,226						(2,710)						1,315,936
Effect of exchange rate changes on cash and cash equivalents			1,192						(1,978)						3,170
Net increase (decrease) in cash and cash equivalents and restricted cash			$	637,995					$	(194,670)					$	832,665

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Operating activities

Net cash provided by operating activities was $25.8 million for the first three months of 2025, compared to $(15.9) million in the comparable period in the prior year. The $41.7 million increase is due to changes in the following (in thousands): 

			Three Months Ended March 31,												Dollar Change
			2025						2024
Net income			$	87,980					$	133,352					$	(45,372)
Stock-based compensation			140,239						75,115						65,124
Fair value adjustments on strategic investments and marketable securities, net			(143,921)						(139,711)						(4,210)
Deferred income taxes			(48,768)						20,670						(69,438)
Debt inducement expense			28,666						—						28,666
Inventory and accounts payable			(8,375)						(87,914)						79,539
Receivables and contract assets			(73,565)						(56,737)						(16,828)
Deferred revenue			33,505						19,121						14,384
Other, net			10,033						20,166						(10,133)
Net cash provided by (used in) operating activities			$	25,794					$	(15,938)					$	41,732

Net cash provided by operating activities consisted of net income of $88.0 million, a net add-back of non-cash income statement items of $9.0 million and a $71.2 million net change in operating assets and liabilities. Primary drivers of the non-cash items include stock-based compensation expense for employee equity programs, debt inducement expense related to the induced conversion for our 2027 Notes, fair value adjustments for the net realized and unrealized gains on our strategic investments and marketable securities, and deferred income taxes. The realized and unrealized gains on our strategic investments and related warrants were primarily related to an observable price change and subsequent sale of one of our strategic investments. The change in accounts and notes receivable was largely due to increased sales. 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 non-taxable unrealized net investment gain and additional GAAP expense for unvested stock-based compensation.

Investing activities

Net cash used in investing activities was $702.2 million for the three months ended March 31, 2025 compared to cash used in investing activities of $174.0 million for the comparable period in the prior year. The net investing cash outflow is driven by $1.1 billion of investment purchases, including $203.4 million related to our strategic investments, and $24.9 million for purchases of property and equipment, net of proceeds. Cash outflow was partially offset by $110.9 million of proceeds from calls, maturities and sales of available-for-sale investments and $290.9 million of proceeds from the sale of strategic investments. The net cash outflow is primarily driven by greater available-for-sale and strategic investment activity in the current period, when contrasted with the prior comparable period.

Financing activities

Net cash provided by financing activities was $1.3 billion for the three months ended March 31, 2025 compared to cash used by financing activities of $2.7 million for the comparable period in the prior year. Financing cash inflow was driven by gross proceeds of $1.8 billion from the Senior Notes issuance. Gross proceeds from the issuance were partially offset by $407.5 million of principal payments related to the induced conversion for our 2027 Notes, $24.2 million of transaction costs related to the induced conversion, debt issuance, and revolver modifications, and payments totaling $5.0 million for income and payroll taxes on behalf of employees who net-settled stock awards during the period.

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Critical Accounting Estimates

Our management’s discussion and analysis of our financial condition and results of operation is based on our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these 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 critical accounting estimates are discussed in our amended 2024 Annual Report on Form 10-K/A for the fiscal year ended December 31, 2024. There have been no significant changes to these critical accounting estimates for the three months ended March 31, 2025. Refer to Note 1 in Part I, Item 1 of this Quarterly Report on Form 10-Q for any additional details regarding our significant accounting policies.

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