Third-quarter 2026 earnings call, Thursday, November 5, 2026
Axon Enterprise reported third-quarter revenue of $909 million, up 28% year-over-year, but the quarter's most consequential disclosures concerned capital allocation and forecast risk rather than the headline. The company committed $1.2 billion to Skydio, its largest investment ever, lifting its fully diluted stake to 37% and securing exclusive U.S. and Canadian public safety distribution rights. It also acknowledged that three large Federal Dedrone deployments, worth roughly $130 million of revenue and $200 million of bookings, will not land as planned. One $30 million project slipped out of Q3 and two projects totaling about $100 million were removed from the Q4 outlook. Management also cut its 2026 free cash flow target on a deliberate inventory build.
Skydio: A Minority Stake and an Exclusive Channel, Not an Acquisition
CEO Patrick Smith framed the transaction as a bet on a broader platform shift: "In the coming decade, we believe there will be millions, maybe tens of millions, of autonomous drones in American skies." The $1.2 billion will be funded roughly 60% in cash and 40% in stock, and Axon raised $1.15 billion of convertible debt this quarter to add cash to the balance sheet and fund part of the investment. Because Axon has neither control nor significant influence, the stake will not be consolidated or accounted for under the equity method. Revenue from the partnership will appear in Software and Services at Axon's channel margin.
Asked by JPMorgan's Joseph Cardoso whether this is a path to full ownership, management pointedly avoided saying yes. Smith said the structure is "what we think is best for both of us," adding that Axon has "real ownership in them and the future they're building without holding them back." CFO Brittany Bagley and President Josh Isner supplied the practical logic. Isner noted that Skydio faces a large investment cycle to onshore its supply chain and reduce dependence on China, and that doing so as an independent company is easier. He also pointed to Axon's own integration workload from four or five recent acquisitions, including Fusus, Dedrone and the 911 assets. In plain terms, Axon chose not to absorb another large integration while it still has plenty to prove on the last several.
Goldman Sachs' Michael Ng pressed on the economics, citing Skydio's expected $1 billion of bookings this year and asking about the channel take rate. Management did not provide one. Isner said Skydio "generally doesn't lose" a deal it is in, and that the losses come from opportunities outside its line of sight, which Axon's channel should reduce. He also said large enterprises are in the joint pipeline, with drone-as-first-responder use cases still viable outside public safety. Investors are left with a sizable capital commitment, undisclosed distribution economics and a minority position with no governance leverage.
Federal Dedrone Slippage Exposes a New Source of Lumpiness
The $130 million of deferred revenue represents nearly 500 basis points of 2026 growth, and Bagley said the third-quarter result would have exceeded 30% growth had the $30 million deal landed. Even without these programs, she said the midpoint of full-year growth remains above 30% for the fifth straight year. Q4 revenue guidance is $990 million to $1.01 billion, and adjusted EBITDA is guided to $245 million to $250 million, implying $924 million to $929 million for the year, or about a 25.6% margin.
Isner was candid that this is a structural change in the business. Counter-drone deployments involve site preparation, installation, Federal procurement rules, ITAR and export permitting, and acceptance testing. "Now a single Dedrone deployment can move our reported growth rate by hundreds of basis points between quarters. That's a new dynamic for us," he said. Axon will now include such deals in guidance only once it is confident they will ship in the quarter, treating them as upside. In response to Piper Sandler's Ryan Abbott, Isner attributed the delays mainly to contract timing, citing the election cycle and the Federal fiscal year ending September 30, and secondarily to assembling hardware from multiple suppliers. Bagley said the elevated inventory reflects preparation for these deals and that management sees no underlying demand risk. That claim cannot yet be verified, and the company said it cannot be sure the projects close this year.
Platform Solutions revenue rose 106% to $125 million, driven mainly by Dedrone even without the large Federal deal, in what Bagley called Dedrone's second-largest quarter despite large World Cup shipments in Q2. Dedrone is also slightly dilutive to Connected Devices gross margin, and the loss of large-ticket revenue reduces operating leverage. TD Cowen's Andrew Sherman asked about Q4 bookings. Isner said losing the roughly $200 million of Dedrone bookings makes the target "a little more challenging" but expressed confidence in the pipeline.
Inventory Build Cuts Free Cash Flow Guidance
Full-year free cash flow is now expected at $350 million to $400 million, down from a prior target of about $450 million, implying roughly 40% conversion of adjusted EBITDA at the midpoint. Q3 inventory rose by more than $100 million. Isner defended the strategy at length, arguing that Axon's core hardware does not become obsolete and noting that the company still sells tens of thousands of X2 TASERs and Axon Body 3 cameras, products that are 15 and 6 years old, respectively. He also said internal planning puts the risk of a geopolitical event, such as a China-Taiwan conflict, disrupting access to batteries and chips at roughly 10% to 25% depending on the component, and that Axon would have little purchasing clout against large consumer electronics brands in that case.
Targeted inventory is about one year of supply for core products, to be reached in Q1 or early Q2 2027. Bagley guided to 2027 conversion above this year's 40% but below the 60% target, which she expects to regain by 2028. She said excluding the inventory investment, conversion would have exceeded 60% this year. The reasoning is credible given the product lifecycle, but it does tie up cash and shifts risk onto the balance sheet.
Margins Face a Multi-Year Memory Headwind
Adjusted gross margin was 59.2%, reflecting mix, Dedrone and higher memory costs. Memory is a headwind of about 50 basis points to margins this year, concentrated in Q4 because earlier inventory was bought at lower prices. Responding to UBS's Andrew Spinola, Bagley said next year's hit will be "more than a 4x impact on that 50 basis points roughly," and that elevated costs will persist through 2027 and 2028, with planning assuming prices stay flat at today's levels. Mitigants include pricing, software mix and operating expense leverage, which she said must carry more of the burden of EBITDA margin expansion. Q3 adjusted EBITDA rose more than 33% to $236 million, a 25.9% margin.
The memory problem has already shaped product strategy. Smith said Axon Body 5 was hit hard by memory and high-end processor costs, so the company chose to "bifurcate" its offering between AI-forward customers and price-sensitive ones. Body 5 launches next spring, and Bagley warned of a possible pause in Body camera purchasing in Q1 as customers wait for it. Body 4 grew 25% sequentially in Q3.
Software Accelerates, and AI Passes $100 Million in ARR
Software and Services revenue grew 43%, almost 700 basis points faster than in Q2, to a record $437 million, approaching half of total revenue. ARR rose 40% to $1.8 billion and net revenue retention was 126%. Real-time operations, records, AI, Dedrone software and 911 together reached a run rate near $500 million, more than double last year. Smith said AI products have passed $100 million in ARR in under two years. Isner said bookings from Dedrone, 911, Fusus and AI have more than doubled and already exceed $1 billion year-to-date, possibly doubling again in Q4. Future contracted bookings stand at $15.8 billion. Year-to-date total and five-year normalized bookings are up over 20%.
Axon 911, built from Prepared and Carbyne, doubled ARR since year-end and has won "dozens" of 911 centers in a business Axon barely participated in last year. Isner said the immediate goal is displacing existing spend, with cross-selling a later benefit. Guardian, which listens for escalating situations and alerts a real-time operations center, is now generally available. Smith said that, unlike Draft One, it does not require prosecutor sign-off, and that unions have been supportive. Isner said Body 5's processing power removes the cap on edge AI, a differentiator he believes competitors are far from matching.
TASER, Segments and the Long-Term Growth Question
TASER revenue fell modestly to $233 million on lower TASER 7 sales, and Bagley attributed this partly to seasonality and to a very large TASER 10 deal in Q2. She expects growth in Q4 and described TASER as a "double-digit grower" going forward without specifying how high. Baird's William Power asked whether the 30% five-year revenue CAGR still holds, and management declined to update long-term guidance, though Bagley said nothing has changed in the underlying business. Smith disclosed that the Apollo dart, designed to penetrate heavy clothing and announced about 18 months ago, will miss the targeted winter release: "That has been a difficult problem." He sees it as a step change for international adoption and expects the international TASER market to eventually exceed the domestic one. TASER Ion, targeting undercover, protection and international users, has launched.
Segment commentary was mostly positive. Corrections landed three large ecosystem deals with state departments of corrections, one eight-figure and two nine-figure. International bookings are up more than 30% year-to-date, and Federal bookings are up more than 5x, though procurement is moving more slowly. Enterprise remains early, with a customer that bought Fusus across roughly 300,000 video streams now negotiating a larger deal including body cameras and AI.
License Plate Reader Controversy Is a Manageable Headwind
Responding to Needham's Joshua Reilly on the fallout from a competitor's ALPR controversy and the pending Los Angeles city council decision, management said deals are not derailing. Isner said that where communities do not want ALPR, Axon removes it from the deal and revisits it later, leaving the rest of the contract intact. Smith said nearly 500 agencies are in the pipeline or have switched to Axon for ALPR, and that several hundred have come from competitors citing trust. He flagged political uncertainty after the election, with a new party taking control of Congress, but expects constructive legislation. Smith closed by warning against excessive predictability: "I will fight the forces of mediocrity that would say, no, we should just build a business that's very predictable." Investors should expect more quarterly volatility as a result.