Axon (AXON) Q3 2025 Earnings Preview

Shares of Axon Enterprise (AXON) experienced a sharp decline, plummeting 9% in recent trading, after the company’s third-quarter earnings fell short of Wall Street expectations. The disappointment stems primarily from headwinds related to tariffs, impacting profitability despite robust revenue growth.

The company reported adjusted earnings of $1.17 per share, significantly below the consensus estimate of $1.52 per share compiled by LSEG. A key factor contributing to this miss was a 50-basis point decline in adjusted gross margins, which landed at 62.7%. Axon management explicitly attributed this contraction to the unfavorable impact of tariffs on imported components and finished goods.

Axon’s connected devices segment, encompassing its flagship Taser products and counter-drone technology, bore the brunt of the tariff pressures during the quarter. While this division still delivered impressive revenue of over $405 million, representing a 24% year-over-year increase, the margin squeeze raises concerns about the long-term sustainability of profitability in this core business area.

According to finance chief Brittany Bagley, the company views the tariff impact as a “one-time adjustment” now factored into gross margins. However, the duration and potential escalation of these tariffs remain a point of uncertainty for investors.

In an attempt to mitigate the margin erosion caused by tariffs, Axon is banking on the continued expansion of its software business. The company’s software and services revenue surged 41% year-over-year to $305 million, buoyed by increased adoption of its cloud-based evidence management and law enforcement solutions. The strategic pivot towards software is intended to create a higher-margin revenue stream that can eventually offset the negative effects of tariffs on hardware sales.

Despite the earnings miss, Axon reported strong overall revenue growth. Total revenue reached $711 million, exceeding the $704 million anticipated by analysts surveyed by LSEG, representing a noteworthy 31% increase compared to the same period last year. The United States, a key strategic market, accounted for 84% of total sales.

However, the company posted a net loss of $2.2 million, translating to a loss of 3 cents per share, a stark contrast to the net income of $67 million, or 86 cents per share, reported in the year-ago period. This swing to a net loss underscores the magnitude of the challenges arising from tariff pressures and increased operating expenses.

Looking ahead, Axon revised its full-year revenue guidance upward, projecting a range of $2.74 billion, compared to the previous forecast of $2.65 billion to $2.73 billion. This updated outlook suggests continued confidence in the underlying demand for Axon’s suite of products and services. Notably, FactSet analysts had projected a midpoint of $2.72 billion for the full year.

For the fourth quarter, Axon anticipates revenue to fall between $750 million and $755 million, exceeding the LSEG analyst consensus of $746 million. This positive guidance provides some reassurance to investors, signaling that the company expects to maintain strong revenue momentum despite the ongoing headwinds.

In a significant strategic move, Axon concurrently announced its acquisition of Carbyne, a provider of cloud-based emergency communications platforms, for $625 million. This acquisition is anticipated to close in the first quarter of next year. The acquisition of Carbyne underscores Axon’s strategic ambition to integrate cloud infrastructure and AI to transform emergency response systems.

Prior to today’s pullback, Axon shares had enjoyed a substantial run-up, climbing more than 40% over the past year, fueled by rising demand for its security technology solutions. The stock more than doubled in value during 2024 and analysts generally attribute this impressive performance to increasing investment in law enforcement technology and a growing awareness of the critical role of body-worn cameras and related technologies in promoting transparency and accountability.

During the earnings call, Axon’s president, Josh Isner, expressed optimism about the company’s long-term prospects, stating that “We are building an elite business that is still nowhere near its ultimate potential, and we are doing it with a team that is rapidly bought into the mission.” However, the near-term performance will largely depend on Axon’s ability to manage tariffs and accelerate the growth of higher-margin segments.