Axon deepens its drone push with a US$1.2 billion Skydio investment

Axon Enterprise, Inc. (NASDAQ:AXON) is putting US$1.2 billion behind the idea that public-safety drones will become as central as body cameras, even as delayed federal deployments force a reset to its 2026 growth outlook. The company said its additional investment in Skydio will lift its fully diluted ownership to 37% and make Axon the exclusive public-safety distributor for Skydio in the US and Canada, subject to closing conditions and other uncertainties.

Record revenue meets a lower 2026 growth forecast

The strategic move arrived alongside a strong quarter. Revenue rose 28% year on year to US$908.6 million, with Software and Services accelerating 43% to US$437.0 million. GAAP net income was US$57.0 million, or US$0.68 a diluted share, compared with a US$2.2 million loss in the prior-year quarter. Adjusted EBITDA, a non-GAAP measure, increased 33% to US$235.7 million.

Yet the headline growth rate does not tell the whole story. Axon now expects full-year 2026 revenue of approximately US$3.61 billion to US$3.63 billion, implying growth of about 30%, down from its previous 32% to 34% forecast. Management attributed the change to three federal Dedrone deployments worth about US$130 million that it no longer expects to recognise in 2026, including a US$30 million deployment previously expected in the third quarter and two more worth US$100 million slated for the fourth quarter.

Skydio expands Axon’s drone distribution strategy

Axon described the Skydio investment as the largest single investment in its history. Skydio expects about US$1 billion of bookings in its current fiscal year, according to Axon, while deployed Skydio docks through Axon Air have more than doubled year on year. Axon said revenue from the distribution relationship will be recognised on a net basis within Software and Services, meaning the headline investment and the eventual revenue contribution should not be viewed as equivalent measures of scale.

The transaction also gives Axon a wider public-safety technology stack spanning emergency response, real-time operations, digital evidence and counter-drone security. That strategic logic is visible in the company’s newer revenue streams: AI, real-time operations, Axon Records, Axon 911 and Dedrone software together reached an annual revenue run rate of nearly US$500 million, more than double last year’s level, while AI annual recurring revenue passed US$100 million.

Hardware mix and inventory spending pressure cash flow

Platform Solutions revenue more than doubled to US$125.0 million, helped by Dedrone and other newer products, but Connected Devices gross margin fell to 43.0% from 49.9% a year earlier. Axon attributed the decline primarily to a greater mix of counter-drone equipment and higher memory costs. Group gross margin also declined to 56.7% from 60.1%.

Cash conversion was weaker during the quarter. Operating cash flow was US$19.7 million, down from US$60.0 million, while free cash flow was negative US$18.9 million. Axon said approximately US$100 million went into strategic inventory investment during the quarter, with the full-year inventory commitment expected to total US$225 million. That spending prompted the company to lower its 2026 free cash flow target to US$350 million to US$400 million from US$450 million, although it expects the inventory build to moderate after the first quarter of 2027.

Bookings and recurring revenue support the expansion case

The recurring-revenue indicators remained constructive. Annual recurring revenue grew 40% year on year to US$1.75 billion, net revenue retention held at 126%, and future contracted bookings increased 39% to US$15.8 billion. New five-year bookings were up 25% year to date, with disclosed wins including US$258 million and US$115 million agreements with state departments of corrections.

Axon expects fourth-quarter revenue of US$990 million to US$1.01 billion and adjusted EBITDA of US$245 million to US$250 million. The tension is straightforward: software adoption, bookings and recurring revenue are moving rapidly higher, but the business is also taking on a larger hardware mix, heavier inventory needs and more debt. As of 30 September, Axon reported US$1.7 billion in cash, cash equivalents and short-term investments against US$2.9 billion of convertible and senior notes, leaving a net debt position of US$1.2 billion.