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Axon, the company best known for TASERs and body cameras, just dropped its Q3 2025 numbers, and the market didn't exactly throw a ticker-tape parade. The stock tanked after hours, and it wasn’t just a minor dip; we’re talking a 20% plunge. The knee-jerk reaction? Missed earnings, plain and simple. But let's dig a little deeper than the headlines.

The company reported adjusted earnings per share of $1.17, which, yes, falls short of the $1.52 expectation. Revenue, however, tells a slightly different story. Axon reports Q3 2025 revenue of $711 million, up 31% year over year. They clocked in $711 million against an expected $704.8 million. So, revenue beat expectations, but earnings didn't. That’s the first discrepancy we need to unpack.

The 911 Gamble

Then there’s the Carbyne acquisition. Axon is dropping $625 million to acquire this emergency communications platform. The stated goal? To modernize 911 call handling. They're talking about cutting response times from seven to ten minutes down to as little as 120 seconds. That’s a bold claim, and it hinges on integrating Carbyne's cloud-native platform with Axon's existing ecosystem.

The company line is that this acquisition expands their total addressable market (TAM) by $5 billion, bringing it to a grand total of $74 billion across various product categories. But TAM numbers are always slippery. It’s not like they’re guaranteed to capture even a fraction of that market. It’s a potential, not a promise.

Software & Services revenue grew 41% year over year to $305 million. That’s a solid number, driven, they say, by premium software features and an expanding user base. Annual Recurring Revenue (ARR) also jumped 41% to $1.3 billion. Net revenue retention is sitting pretty at 124%. Those SaaS metrics look healthy, but are they masking weakness elsewhere?

Connected Devices revenue, which includes the TASERs and body cameras, only rose 24% year over year. That’s still growth, but it’s significantly slower than the software side. And that's where the problem lies. Are they becoming too reliant on software add-ons to prop up slowing hardware sales? I've looked at hundreds of these filings, and this particular revenue mix shift is what I find genuinely puzzling.

The gross margin picture isn’t exactly rosy either. Total company gross margin decreased by 70 basis points year over year, landing at 60.1%. Adjusted gross margin (excluding non-GAAP adjustments) also took a hit, dropping 50 basis points to 62.7%. They blame global tariffs and a shift in product mix. But tariffs are hardly a new phenomenon, and product mix is something they control.

Operating loss clocked in at $2 million, driven, they claim, by increased headcount and stock-based compensation. And here's where things get interesting. SG&A expense (selling, general, and administrative) was $253 million, which is 35.6% of revenue. A hefty chunk of that, $75 million, was stock-based compensation. R&D expense was even higher at $177 million (24.9% of revenue) and included $58 million in stock-based compensation. So, they're spending a lot on stock-based compensation. Is that sustainable?

They’re guiding for Q4 revenue between $750 million and $755 million, representing about 31% growth. Full-year revenue is now expected to be approximately $2.74 billion, an increase from their previous guidance. Adjusted EBITDA margin is projected to be around 25%. But that stock-based compensation expense is still looming large. They expect it to be between $580 million and $630 million for the full year.

One more point to consider: Axon's future contracted bookings grew 39% year over year to $11.4 billion. They expect to fulfill 20% to 25% of that balance over the next 12 months. That’s a good sign, but it’s also a reminder that a significant portion of their future revenue is already locked in. This reduces risk and volatility, but it also reduces upside potential.

Smoke and Mirrors?

So, what's the real story here? Axon is still growing, and their software business is booming. But they're also spending heavily on acquisitions and stock-based compensation. The market’s reaction suggests investors are starting to question whether that growth is sustainable, or if it's being artificially inflated. And that Carbyne acquisition? It's a big bet on the future of 911, but it's also a potential distraction from their core business. The numbers tell a story of growth, but the details suggest a more complex, and perhaps less rosy, picture.