# AXON ENTERPRISE, INC. (AXON) FY 2024 MD&A

Verbatim Item 7 Management's Discussion and Analysis from AXON ENTERPRISE, INC.'s 10-K for fiscal year 2024.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1069183/000106918325000019/axon-20241231.htm
Accession: 0001069183-25-000019
Filing date: 2025-02-28
Report date: 2024-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/AXON/
All MD&A years: /company/AXON/mda/
Previous year: /company/AXON/mda/fy2023/ (FY 2023)
Next year: /company/AXON/mda/fy2025/ (FY 2025)

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is designed to provide a reader of our consolidated financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A should be read in conjunction with the other sections of this Annual Report on Form 10-K, including “Part I, Item 1A - Risk Factors” and “Part II, Item 8 - Financial Statements and Supplementary Data.” The various sections of our MD&A contain a number of forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this filing. The tables in the MD&A sections below are derived from exact numbers and may have immaterial rounding differences.

Our MD&A discusses our results of operations for the year ended December 31, 2024 as compared to the year ended December 31, 2023. For a discussion and analysis of the year ended December 31, 2023 as compared to the year ended December 31, 2022, refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on February 27, 2024.

Overview

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 and safety 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, robotic security and training solutions. 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 year ended December 31, 2024 were $2.1 billion, an increase of $521.8 million, or 33.4%, from the comparable period in the prior year. We had income from operations of $58.5 million, compared to $156.9 million for the same period in the prior year. Gross margin dollars increased $285.9 million but decreased as a percentage of revenue to 59.6% from 61.2% compared to the same period in the prior year. The decrease was primarily driven by higher stock-based compensation expense and amortization of acquired intangibles. Excluding the impacts of stock-based compensation expense and intangibles amortization in costs of goods sold, adjusted gross margin increased to 63.2% for the year ended December 31, 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 $384.2 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 year ended December 31, 2024, we recorded net income of $377.0 million which included net realized and unrealized gains on fair value adjustments of strategic investments of $162.9 million, a net unrealized gain on marketable securities of $120.3 million, and interest income, net of $36.6 million. Net income of $175.8 million for the comparable period in the prior year reflected net unrealized losses of $80.5 million related to impairment and observable price changes for our existing investments and related warrants, interest income, net of $42.1 million, and a net unrealized gain of $38.7 million on marketable securities.

Certain prior period amounts previously reported on our consolidated financial statements have been revised to correct for immaterial errors, as described in Note 1, Note 23 and Note 24 included in Part II, Item 8 of this Annual Report on Form 10-K.

Additionally, in Q1 2025 we approved a plan to realign our business to better reflect our continued growth and expansion of product, software and service offerings. Previously reported within two reportable segments, TASER and Software and Sensors, we will prospectively reorganize our business in a manner that provides increased transparency and distinction between our hardware and software and services components. As a result of the reorganization, effective with the first quarter of fiscal year 2025, our financial results will be reported in two reportable segments, Connected Devices and Software & Services, which our CODM will use to regularly review information, allocate resources and assess performance. Connected Devices will include hardware products, such as CEDs, body cameras, and drones. Software & Services will include products that integrate with our suite of connected devices, such as Axon Evidence, RMS and other cloud services.

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We are currently assessing the impact of this change on our financial reporting and related segment disclosures. We intend to recast prior period segment information to conform to the new reporting structure, as necessary, to ensure consistency and comparability across reporting periods.

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 statements of operations (dollars in thousands):

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2024","","2023"],["Net sales from products","$","1,221,292","","","58.6","%","","$","964,002","","","61.8","%"],["Net sales from services","861,234","","","41.4","","","596,697","","","38.2"],["Net sales","2,082,526","","","100.0","","","1,560,699","","","100.0"],["Cost of product sales","618,136","","","29.7","","","447,708","","","28.7"],["Cost of service sales","223,010","","","10.7","","","157,538","","","10.1"],["Cost of sales","841,146","","","40.4","","","605,246","","","38.8"],["Gross margin","1,241,380","","","59.6","","","955,453","","","61.2"],["Selling, general and administrative","741,247","","","35.6","","","494,884","","","31.7"],["Research and development","441,593","","","21.2","","","303,719","","","19.5"],["Total operating expenses","1,182,840","","","56.8","","","798,603","","","51.2"],["Income from operations","58,540","","","2.8","","","156,850","","","10.0"],["Interest income, net","36,595","","","1.8","","","42,112","","","2.7"],["Other income (loss), net","286,369","","","13.8","","","(41,901)","","","(2.7)"],["Income before provision for income taxes","381,504","","","18.3","","","157,061","","","10.1"],["Provision for (benefit from) income taxes","4,470","","","0.2","","","(18,722)","","","(1.2)"],["Net income","$","377,034","","","18.1","%","","$","175,783","","","11.3","%"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2024","","2023"],["United States","$","1,775,194","","85","%","","$","1,335,516","","86","%"],["Other countries","307,332","","15","","","225,183","","14"],["Total","$","2,082,526","","100","%","","$","1,560,699","","100","%"]]
[[/GREPCENT_TABLE]]

International revenue increased as a percentage of revenue compared to the prior year, primarily driven by increased sales in our Americas region (i.e., Central America, South America, and Canada).

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Net Sales

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

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Dollar Change","","Percent Change"],["","2024","","2023"],["TASER segment:"],["TASER Devices (Professional)","$","453,055","","","21.8","%","","$","333,923","","","21.4","%","","$","119,132","","","35.7","%"],["Cartridges","246,766","","","11.8","","","193,285","","","12.4","","","53,481","","","27.7"],["Axon Evidence and Cloud Services","54,913","","","2.6","","","35,680","","","2.3","","","19,233","","","53.9"],["Extended Warranties","37,515","","","1.8","","","31,689","","","2.0","","","5,826","","","18.4"],["Other (1)","26,424","","","1.3","","","18,933","","","1.2","","","7,491","","","39.6"],["TASER segment","818,673","","","39.3","","","613,510","","","39.3","","","205,163","","","33.4"],["Software and Sensors segment:"],["Axon Evidence and Cloud Services","808,256","","","38.8","","","566,003","","","36.3","","","242,253","","","42.8"],["Axon Body Cameras and Accessories","246,855","","","11.9","","","183,023","","","11.7","","","63,832","","","34.9"],["Axon Fleet Systems","104,890","","","5.0","","","121,842","","","7.8","","","(16,952)","","","(13.9)"],["Extended Warranties","66,141","","","3.2","","","55,154","","","3.5","","","10,987","","","19.9"],["Other (2)","37,711","","","1.8","","","21,167","","","1.4","","","16,544","","","78.2"],["Software and Sensors segment","1,263,853","","","60.7","","","947,189","","","60.7","","","316,664","","","33.4"],["Total net sales","$","2,082,526","","","100.0","%","","$","1,560,699","","","100.0","%","","$","521,827","","","33.4","%"]]
[[/GREPCENT_TABLE]]

(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, partners' contra-revenue and other sensors and equipment.

Net sales for the TASER segment for the year ended December 31, 2024 increased $205.2 million, or 33.4%, as compared to the prior year, primarily due to an increase of $119.1 million in TASER devices and an increase of $53.5 million in cartridge revenue. The increase is primarily related to continued adoption of our newest device, TASER 10. The increase in revenue from Axon Evidence and cloud services of $19.2 million was driven by an increase in the number of cloud-connected TASER devices in the field and software revenue tied to our VR solution. An increase in TASER devices in the field drove the $5.8 million increase in extended warranties, as most of those devices are sold with extended warranties. The $7.5 million increase in "Other" revenue is primarily driven by increased VR hardware volume.

Net sales for the Software and Sensors segment for the year ended December 31, 2024 increased $316.7 million, or 33.4%, as compared to the prior year, as we continued to add users and associated devices to our network. 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 in Axon Evidence and cloud services revenue of $242.3 million. Axon Body cameras and accessories revenue increased $63.8 million due to higher unit sales. Partially offsetting the increase was a $17.0 million decrease in Axon Fleet systems revenue reflecting lower unit volumes on more normalized deployment timelines. An increase in cameras and docks in the field drove the $11.0 million increase in extended warranties, as most of those devices are sold with extended warranties. The $16.5 million increase in “Other” revenue was primarily driven by demand for other product offerings within the Software and Sensors segment.

Gross Margin

As a percentage of net sales, gross margin for the TASER segment decreased to 58.6% from 60.6% for the years ended December 31, 2024 and 2023, respectively. The decrease was primarily due to increased stock-based compensation expense. Excluding the impacts of stock-based compensation expense, adjusted gross margin for the TASER segment is

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62.9% for the year ended December 31, 2024, compared to 60.9% for the same period in 2023. The increase is primarily due to investments in automation and cost reduction initiatives.

As a percentage of net sales, gross margin for the Software and Sensors segment decreased to 60.2% from 61.6% for the years ended December 31, 2024 and 2023, respectively. Within the Software and Sensors segment, hardware gross margin was 37.7% for the year ended December 31, 2024, compared to 45.8% for the same period in 2023. Excluding the impacts of stock-based compensation expense and amortization of acquired intangible assets, hardware adjusted gross margin decreased to 41.4% for the year ended December 31, 2024, compared to 46.2% for the same period in 2023 primarily due to product mix and inventory reserve charges associated with legacy products. Service gross margin increased to 73.0% for the year ended December 31, 2024 compared to 72.6% for the same period in 2023. Excluding the impacts of stock-based compensation expense and intangibles amortization, service adjusted gross margin increased to 75.8% for the year ended December 31, 2024, compared to 73.6% for the same period in 2023, due to higher software revenue mix.

For the year ended December 31, 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 we could instead provide enhanced compensation opportunities to certain of our other employees.

Selling, General and Administrative Expenses

SG&A expenses (dollars in thousands):

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Dollar Change","","Percent Change"],["","2024","","2023"],["Salaries, benefits and bonus","$","251,139","","","$","215,100","","","$","36,039","","","16.8","%"],["Sales and marketing","108,954","","","91,868","","","17,086","","","18.6"],["Stock-based compensation","190,561","","","58,533","","","132,028","","","225.6"],["Other","190,593","","","129,383","","","61,210","","","47.3"],["Total selling, general and administrative expenses","$","741,247","","","$","494,884","","","$","246,363","","","49.8","%"],["SG&A expenses as a percentage of net sales","35.6","%","","31.7","%"]]
[[/GREPCENT_TABLE]]

Salaries, benefits and bonus expense increased $36.0 million in comparison to the prior year, which was primarily attributable to an increase in headcount and higher wages.

Sales and marketing expense increased $17.1 million in comparison to the prior year, which was primarily attributable to increased commissions of $12.4 million and an increase of $4.7 million related to in-person events.

Stock-based compensation expense increased $132.0 million in comparison to the prior year, 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.

Other SG&A expenses increased $61.2 million in comparison to the prior year, primarily driven by the following:

•Professional and consulting expenses increased $21.5 million, primarily driven by transaction costs related to business acquisitions and strategic investments for Fusus and Dedrone;

•Travel expenses increased $9.5 million, as a result of increased in-person meetings and lodging costs;

•Office and building expenses increased $7.1 million relating to building rent and property taxes;

•Supplies expenses increased $6.7 million primarily due to an increase in computer licenses.

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Research and Development Expenses

R&D expenses (dollars in thousands):

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Dollar Change","","Percent Change"],["","2024","","2023"],["Salaries, benefits and bonus","$","233,247","","$","178,658","","$","54,589","","","30.6","%"],["Stock-based compensation","131,954","","66,230","","65,724","","","99.2"],["Other","76,392","","58,831","","17,561","","","29.8"],["Total research and development expenses","$","441,593","","$","303,719","","$","137,874","","","45.4","%"],["R&D expenses as a percentage of net sales","21.2","%","","19.5","%"]]
[[/GREPCENT_TABLE]]

Salaries, benefits, and bonus expense increased $54.6 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 $65.7 million which was primarily related to the 2024 Employee XSP that was approved by shareholders in the 2024 Annual Meeting of Shareholders and increased headcount.

Other R&D expenses increased $17.6 million, primarily related to increased professional and consulting expenses related to the launch of new products of $6.6 million, and increased internal cloud storage and service costs related to software product development of $3.9 million.

Interest Income, Net

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

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2024","","2023"],["Interest income","$","43,693","","","$","49,107"],["Interest expense","(7,098)","","","(6,995)"],["Total interest income, net","$","36,595","","","$","42,112"]]
[[/GREPCENT_TABLE]]

The decrease in interest income for the year ended December 31, 2024 is primarily related to lower balances of available-for-sale securities during the year. There were no material changes in interest expense for the year ended December 31, 2024 when compared against the prior comparable period.

Other Income (Loss), Net

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

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2024","","2023"],["Realized and unrealized gain (loss) on fair value adjustments of strategic investments, net","$","162,887","","","$","(80,485)"],["Unrealized gain on marketable securities, net","120,330","","","38,700"],["Gain (loss) on foreign currency transactions, net","3,463","","","(504)"],["Other, net","(311)","","","388"],["Other income (loss), net","$","286,369","","","$","(41,901)"]]
[[/GREPCENT_TABLE]]

In 2024, we recorded a realized gain of $93.9 million related to acquiring the remaining outstanding equity interests of two previously held strategic investments and an unrealized gain of $75.6 million related to an observable price change for an existing strategic investment and related warrants. The increase in unrealized gain on marketable securities for the year ended December 31, 2024 is driven by fair value changes for our existing marketable securities.

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In 2023, we recorded a net unrealized impairment loss of $71.9 million for an existing strategic investment and related warrants and an unrealized loss of $8.6 million related to observable price changes for our existing investments and related warrants.

Provision for Income Taxes

The effective tax rate was 1.2% for the year ended December 31, 2024, compared to (11.9)% for the year ended December 31, 2023. The increase in the effective tax rate is primarily driven by higher pre-tax income, which reduced the relative impact of favorable tax adjustments. The increase in current year rate is primarily driven by a lesser percentage of allowable stock based compensation adjustment in comparison to pre-tax book income. Additionally, the R&D credit was a lesser percentage of pretax income which was offset by the reversal of nontaxable gain on investments.

Provision for income taxes were as follows (dollars in thousands):

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2024","","2023","","Change"],["Pre-tax income","$","381,504","","$","157,061","","$","224,443"],["Provision for (benefit from) income taxes","4,470","","(18,722)","","23,192"],["Effective tax rate","1.2","%","","(11.9)","%","","13.1","%"]]
[[/GREPCENT_TABLE]]

Net Income

We recorded net income of $377.0 million for the year ended December 31, 2024 compared to a net income of $175.8 million in 2023. Net income per basic share was $4.98 and diluted net income per share was $4.80 for 2024, compared to net income per basic share of $2.37 and diluted net income per share of $2.33 for 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. To improve comparability, prior periods have been conformed to the current period presentation. We use 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 related to strategic investments and marketable securities; transaction and integration costs related to strategic investments and acquisitions including adjustments related to the foreign currency impact of acquired intercompany balances that were unsettled as of the reporting date and plan to be settled in the near term; 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.

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Although these non-GAAP financial measures are not consistent with GAAP, we believe 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 Annual Report on Form 10-K were prepared under a comprehensive set of rules or principles.

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

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2024","","2023"],["Net income","$","377,034","","","$","175,783"],["Depreciation and amortization","56,815","","","32,638"],["Interest expense","7,098","","","6,995"],["Investment interest income","(43,693)","","","(49,107)"],["Provision for (benefit from) income taxes","4,470","","","(18,722)"],["EBITDA","$","401,724","","","$","147,587"],["Non-GAAP adjustments:"],["Stock-based compensation expense","382,604","","","131,358"],["Unrealized (gain) loss on strategic investments and marketable securities, net","(192,067)","","","41,785"],["Realized gain on previously held minority interest, net","(91,150)","","","\u2014"],["Transaction and integration costs related to strategic investments and acquisitions","15,249","","","4,501"],["Loss on disposal, abandonment, and impairment of property, equipment and intangible assets, net","\u2014","","","317"],["Loss recoveries","\u2014","","","(3,404)"],["Inventory step-up amortization","609","","","\u2014"],["Litigation costs and related recoveries","1,761","","","241"],["Payroll taxes related to 2019 XSPP vesting and 2018 CEO Performance Award option exercises","2,645","","","9,011"],["Adjusted EBITDA","$","521,375","","","$","331,396"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["","For the year ended December 31, 2024","","For the year ended December 31, 2023"],["","TASER","","Software and Sensors","","Total","","TASER","","Software and Sensors","","Total"],["Gross margin","480,031","","761,349","","1,241,380","","371,533","","583,920","","955,453"],["Stock-based compensation expense","34,906","","25,183","","60,089","","2,234","","4,361","","6,595"],["Amortization of acquired intangible assets","31","","13,338","","13,369","","1","","3,143","","3,144"],["Inventory step-up amortization","\u2014","","609","","609","","\u2014","","\u2014","","\u2014"],["Adjusted gross margin","$","514,968","","$","800,479","","$","1,315,447","","$","373,768","","$","591,424","","$","965,192"],["Gross margin","58.6","%","","60.2","%","","59.6","%","","60.6","%","","61.6","%","","61.2","%"],["Adjusted gross margin","62.9","%","","63.3","%","","63.2","%","","60.9","%","","62.4","%","","61.8","%"]]
[[/GREPCENT_TABLE]]

Liquidity and Capital Resources

Summary

[[GREPCENT_TABLE]]
[["","December 31, 2024","","December 31, 2023","","Dollar Change"],["Cash and cash equivalents","$","454,844","","","$","598,545","","","$","(143,701)"],["Available-for-sale investments","333,235","","","644,054","","","(310,819)"],["Total","$","788,079","","","$","1,242,599","","","$","(454,520)"]]
[[/GREPCENT_TABLE]]

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 December 31, 2024, we had $454.8 million of cash and cash equivalents, a decrease of $143.7 million from December 31, 2023. Refer below for further discussions related to the change in cash and cash equivalents. As of December 31, 2024, we had $333.2 million of available-for-sale investments, a decrease of $310.8 million from December 31, 2023 primarily as a result of the natural maturity of short term investments reinvested into cash and cash equivalents until utilized for our acquisition activity in the period.

In addition, our revolving credit facility (the "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 $200.0 million, $30.0 million of which is available for the issuance of letters of credit. As of December 31, 2024, and 2023, 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 December 31, 2024, we had letters of credit outstanding of approximately $7.8 million under the facility and available borrowing of $192.2 million. Refer to Note 12 in Part II, Item 8 of this Annual Report on Form 10‑K for additional details related to our Credit Agreement and outstanding letters of credit.

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.

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 (including our 2027 Notes) 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.

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Cash Flows

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

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Dollar Change"],["","2024","","2023"],["Operating activities","$","408,312","","","$","189,263","","","$","219,049"],["Investing activities","(490,573)","","","12,476","","","(503,049)"],["Financing activities","(45,437)","","","41,314","","","(86,751)"],["Effect of exchange rate changes on cash and cash equivalents","(6,209)","","","2,065","","","(8,274)"],["Net increase (decrease) in cash and cash equivalents and restricted cash","$","(133,907)","","","$","245,118","","","$","(379,025)"]]
[[/GREPCENT_TABLE]]

Operating activities

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Dollar Change"],["","2024","","2023"],["Net income","$","377,034","","","$","175,783","","","$","201,251"],["Stock-based compensation","382,604","","","131,358","","","251,246"],["Fair value adjustments on strategic investments and marketable securities, net","(283,217)","","","41,785","","","(325,002)"],["Deferred income taxes","(85,096)","","","(72,497)","","","(12,599)"],["Inventory and accounts payable","55,126","","","(12,297)","","","67,423"],["Receivables and contract assets","(245,842)","","","(178,989)","","","(66,853)"],["Deferred revenue","155,641","","","146,819","","","8,822"],["Other, net","52,062","","","(42,699)","","","94,761"],["Net cash provided by (used in) operating activities","$","408,312","","","$","189,263","","","$","219,049"]]
[[/GREPCENT_TABLE]]

Net cash provided by operating activities in 2024 of $408.3 million consisted of $377.0 million in net income, a net add-back of non-cash income statement items totaling $104.0 million and a $72.7 million net change in operating assets and liabilities. Included in the non-cash items were $382.6 million in stock-based compensation expense, $283.2 million in fair value adjustments for the realized and unrealized gains (losses) on our strategic investments and marketable securities, $48.4 million in depreciation and amortization expense and $85.1 million in deferred income taxes. The change in fair value adjustments on strategic investments and marketable securities was primarily driven by the realized gains on the acquisition of two previously held strategic investments, an observable price change for an existing strategic investment and related warrants, and fair value gains for our marketable securities. The change in receivables and contract assets was largely attributable to increased sales in 2024, particularly for sales made under subscription plans. 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 R&D capitalization and additional GAAP expense for unvested stock-based compensation, partially offset by non-taxable unrealized net investment gains.

Investing activities

Net cash used in investing activities was $490.6 million for the year ended December 31, 2024 compared to cash provided by investing activities of $12.5 million for the comparable period in the prior year. The net investing cash outflow is driven by $621.8 million related to acquiring two previously held strategic investments, $113.4 million for strategic investments, and $78.8 million for purchases of property and equipment, net of proceeds, partially offset by $1.0 billion of proceeds from calls, maturities and sales of available-for-sale investments, less purchases of $680.0 million. This net cash outflow is primarily driven by greater acquisition and strategic investment activities in the current period, when contrasted with the prior comparable period.

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Financing activities

Net cash used in financing activities was $45.4 million for the year ended December 31, 2024, compared to cash provided by financing activities of $41.3 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.

Contractual Obligations

The following table outlines our future contractual financial obligations by period in which payment is expected, as of December 31, 2024 (in thousands):

[[GREPCENT_TABLE]]
[["","Total","","Short Term","","Long Term"],["Operating lease obligations","$","69,466","","","$","13,791","","","$","55,675"],["Purchase obligations","909,675","","","504,270","","","405,405"],["Principal and interest payable on our convertible senior notes","699,996","","","3,383","","","696,613"],["Total contractual obligations","$","1,679,137","","","$","521,444","","","$","1,157,693"]]
[[/GREPCENT_TABLE]]

Operating lease obligations include operating leases for office space, manufacturing and logistical functions, discussed further within Note 18 in Part II, Item 8 of this Annual Report on Form 10-K. We regularly evaluate our real estate needs to identify opportunities to reduce long-term cash requirements where practicable.

Purchase obligations include both open purchase orders and other purchase commitments, discussed further within Note 13 in Part II, Item 8 of this Annual Report on Form 10-K. The open purchase orders represent both cancellable and non-cancellable purchase orders with key vendors, which are included in this table due to our strategic relationships with these vendors.

In December 2022, we issued $690.0 million aggregate principal amount of our 2027 Notes (the "Notes") in a private offering, which aggregate principal amount included the exercise in full of the initial purchasers’ option to purchase up to an additional $90.0 million principal amount of the Notes. The Notes mature on December 15, 2027 and bear interest at a fixed rate of 0.50% per annum, payable semiannually in arrears on June 15 and December 15 of each year, beginning on June 15, 2023. On or after December 22, 2025, we may redeem for cash all or any portion of the notes in accordance with the optional redemption terms of the convertible debt agreement. For additional details, refer to Note 12 in Part II, Item 8 of this Annual Report on Form 10-K.

Obligations related to our uncertain tax positions have been excluded from the table above because of the uncertainty surrounding the timing and final amounts of any settlement. For additional details, refer to Note 14 in Part II, Item 8 of this Annual Report on Form 10-K.

Critical Accounting Estimates

We have identified the following accounting estimates as critical to our business operations and the understanding of our results of operations. The preparation of this Annual Report on Form 10-K requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. While we do not believe that a significant change in these estimates is reasonably likely, there can be no assurance that our actual results will not differ from these estimates.

Inventory

Inventories are stated at lower of cost and net realizable value, using a standard cost method which approximates the first-in, first-out method. Additional provisions are made to reduce excess, obsolete or slow-moving inventories to their net realizable value. These provisions are based on our best estimate after considering historical demand, projected future

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demand, inventory purchase commitments, industry and market trends, and a variety of other factors. Changes in these underlying assumptions can materially affect our provisions and the resulting net realizable value of our inventories. For additional discussion, refer to Note 1 in Part II, Item 8 of this Annual Report on Form 10-K.

Revenue Recognition

We derive revenue from two primary sources: (1) the sale of physical products, including CEDs, Axon cameras, Axon Signal-enabled devices, corresponding hardware extended warranties, and related accessories such as Axon docks, cartridges and batteries, among others, and (2) subscriptions to our Axon Evidence digital evidence management SaaS offering (including data storage fees and other ancillary services), which includes varying levels of support. To a lesser extent, we also recognize revenue from training, professional services and other software and SaaS services. We apply the five-step model outlined in ASC 606, as discussed further in Note 1 in Part II, Item 8 of this Annual Report on Form 10-K.

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in ASC 606. For contracts with multiple performance obligations, we allocate the contract transaction price to each performance obligation using our estimate of the standalone selling price (“SSP”) of each distinct good or service in the contract. Revenues are recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. Revenue is recognized net of allowances for returns. For additional discussion, refer to Note 2 in Part II, Item 8 of this Annual Report on Form 10-K.

We determine the term of our arrangements based on identifying the contract with the customer. In certain of our arrangements, the customer may have termination rights. In these instances, we determine if there is a substantive penalty. For contracts with a substantive penalty, the accounting term will be the legal contract term, inclusive of the periods for which the customer termination rights exist. In these contracts with no substantive penalty, we also consider if the option for our customer to purchase additional goods or services represents an additional performance obligation in the form of a material right.

The timing of revenue recognition may differ from the timing of invoicing to customers. We generally have an unconditional right to consideration when we invoice our customers and record a receivable. We record a contract asset when revenue is recognized prior to invoicing, or a contract liability (deferred revenue) when revenue will be recognized subsequent to invoicing. For additional discussion, refer to Note 1 in Part II, Item 8 of this Annual Report on Form 10-K.

Valuation of Goodwill, Intangible and Long-lived Assets

We evaluate whether events and circumstances have occurred that indicate the remaining estimated useful life of long-lived assets and identifiable intangible assets, excluding goodwill and intangible assets with indefinite useful lives, may warrant revision or that the remaining balance of these assets may not be recoverable. Such circumstances could include a change in the product mix, a change in the way products are created, produced or delivered, or a significant change in the way products are branded and marketed. In performing the review for recoverability, we estimate the future undiscounted cash flows expected to result from the use of the assets and their eventual disposition. The amount of the impairment loss, if impairment exists, is calculated based on the excess of the carrying amounts of the assets over their estimated fair values computed using discounted cash flows. As such, the key inputs into this analysis are inherently subject to uncertainty and require significant judgments to be made.

Finite-lived intangible assets and other long-lived assets are amortized over their estimated useful lives. We do not amortize goodwill and intangible assets with indefinite useful lives; rather such assets are tested for impairment at least annually or sooner whenever events or changes in circumstances indicate that the assets may be impaired. In performing our annual impairment assessments for goodwill and indefinite-lived intangible assets, we consider a variety of factors including (1) events impacting the carrying value or composition of a reporting unit or asset group, respectively, (2) changes in the macroeconomic environment, (3) adverse changes in our financial performance, (4) industry and market conditions, among others. Any significant changes in these underlying assumptions may significantly affect our impairment conclusions and net book value of corresponding assets in our consolidated financial statements. Based on our annual impairment assessments in the fourth quarter of 2024, no goodwill or indefinite-lived intangible asset impairment was indicated. For additional details, refer to Note 1 in Part II, Item 8 of this Annual Report on Form 10-K.

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Income Taxes

We recognize federal, state and foreign current tax liabilities or assets based on our estimate of taxes payable or refundable in the current fiscal year by tax jurisdiction. We also recognize federal, state and foreign deferred tax assets or liabilities, as appropriate, for our estimate of future tax effects attributable to temporary differences and carry forwards.

Our calculation of current and deferred tax assets and liabilities is based on certain estimates and judgments and involves dealing with uncertainties in the application of complex tax laws. Our estimates of current and deferred tax assets and liabilities may change based, in part, on added certainty or finality to an anticipated outcome, changes in accounting or tax laws domestically and internationally, or changes in other facts or circumstances.

Deferred tax assets are required to be reduced by a valuation allowance if it is more likely than not that some portion or all of the net deferred tax assets will not be realized. In evaluating our ability to recover our deferred income tax assets, we consider all available positive and negative evidence, including our operating results, the future reversals of deferred tax liabilities, forecast of future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets. Failure to achieve forecasted taxable income can affect the realization of net deferred tax assets. We exercise significant judgment in determining our provision for income taxes, our deferred income tax assets and liabilities, and our future taxable income for purposes of assessing our ability to utilize any future tax benefit from our deferred income tax assets.

We operate in multiple tax jurisdictions and are subject to audit in these jurisdictions, generally years after our returns are filed. These returns could be subject to material adjustments or differing interpretations of the tax laws. We record uncertain tax positions when it has been determined that it is more-likely-than-not that a tax position will not be sustained upon examination by taxing authorities based on the technical merits of the position. We use the criteria established in the accounting guidance to determine whether an item meets the definition of more-likely-than-not. The Company’s policy is to recognize these uncertain tax positions when the more-likely than-not threshold is met, when the statute of limitations has expired or upon settlement. Changes in assessments may result in income tax benefit or additional expense in our consolidated financial statements. For additional details, refer to Note 14 in Part II, Item 8 of this Annual Report on Form 10-K.

Stock-Based Compensation

We have historically utilized stock-based compensation for key employees and non-employee directors as a means of attracting and retaining talented personnel. We recognize compensation expense for our stock-based compensation program, which includes grants of service-based restricted stock units (“RSUs”), performance-based restricted stock units (“PSUs”), and performance-based stock options (“stock options”).

Vesting of performance stock units is contingent upon the achievement of certain performance criteria including, successful and timely development and market acceptance of future product introductions and ongoing market performance, among others. Compensation expense for performance awards is recognized based on our best estimate of the probability of the performance criteria being satisfied using the most currently available projections, adjusted at each balance sheet date.

Our performance-based restricted stock units include eXponential stock units (“XSUs”) granted under the Axon Enterprise, Inc. 2024 Employee eXponential Stock Plan (the “2024 Employee XSP”) and the 2024 CEO Performance Award discussed further in Note 1 in Part II, Item 8 of this Annual Report. Stock-based compensation expense associated with the 2024 XSU awards is recognized over the requisite service period, which is considered the longest explicit, implicit or derived service period for each respective tranche. We utilized Monte Carlo simulations to evaluate a range of possible future stock price goals over the term of the awards at each of the respective grant dates, the median of which was used as the basis for the derived service period for each tranche. Furthermore, we measured the grant date fair value of each tranche utilizing a Monte Carlo simulation which considered various assumptions, including expected volatility and an illiquidity discount. This simulation is based on a subjective assessment of our forward-looking financial projections, taking into consideration statistical analysis. There is significant judgment required to determine the requisite service period, grant date fair value, and probability of the performance criteria being satisfied. Changes in the subjective and probability-based assumptions can materially affect the estimates of the fair value of the awards and timing of recognition of stock-based compensation and consequently, the related amount recognized in our consolidated statements of operations and comprehensive income. For additional details, refer to Note 1 and Note 16 in Part II, Item 8 of this Annual Report on Form 10-K.

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Contingencies and Accrued Litigation Expense

We are subject to the possibility of various loss contingencies arising in the ordinary course of business, including product-related and other litigation. We consider the likelihood of loss or impairment of an asset or the incurrence of a liability, as well as our ability to reasonably estimate the amount of loss in determining loss contingencies. An estimated loss contingency is accrued when it is probable that an asset has been impaired or a liability has been incurred and the amount of loss can be reasonably estimated. We regularly evaluate current information available to us to determine whether such accruals should be adjusted and whether new accruals are required. We do not believe any currently identified claims or litigation will materially affect our financial condition, results of operations or cash flows. However, litigation is subject to inherent uncertainties. If an unfavorable ruling were to occur, it may cause a material adverse impact on the financial condition, results of operations or cash flows for the period in which the ruling occurs, or future periods. For additional details, refer to Note 13 in Part II, Item 8 of this Annual Report on Form 10-K.

Strategic Investments

We have strategic investments which include equity and debt investments in a number of non-public technology driven companies. The strategic investments are generally accounted for under the ASC 321 measurement alternative for equity securities without readily determinable fair values, as there are no quoted market prices for the equity investments. Accordingly, the equity investments will be carried at cost less impairment. These investments will be subsequently remeasured to fair value upon observable price changes in an orderly transaction for the identical or similar investments. Additionally, if a qualitative assessment identifies impairment indicators, then the equity investments must be evaluated for impairment and written down to fair value in the event carrying value exceeds fair value. The debt strategic investment and the associated embedded derivatives are accounted for utilizing the fair value option and remeasured through earnings on a periodic basis. For additional details relating to our valuation techniques, refer to Note 1 and Note 8 in Part II, Item 8 of this Annual Report on Form 10-K.

Business Combinations

When we acquire a business, we allocate the purchase consideration to the liabilities assumed, intangible assets and other assets acquired based on their estimated respective fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. Additionally, in step acquisitions in which we acquire incremental equity interests that provide us control of a business, the previously held equity interest is remeasured to fair value at the date the controlling interest is acquired.

Critical estimates used in valuing certain acquired intangible assets include, but are not limited to, significant assumptions with respect to time and resources required to recreate the assets acquired, actual and forecasted cash flows, long-term growth rates, market royalty rates, and discount rates associated, amongst other factors. The values and estimated useful lives assigned to intangible assets acquired in business combinations impact the amount and timing of future amortization expense. Remeasurement of previously held equity interests to fair value is also dependent on these estimates. Our estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may vary. For additional details, refer to Note 21 in Part II, Item 8 of this Annual Report on Form 10-K.

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