Axon (AXON) Q1 2025: Software and Services Surge 39%, Accelerating Cloud-Led Margin Expansion

May 7, 2025 | By EarningsIQ Research

Axon’s Q1 marked a pivotal acceleration in its cloud and AI-driven software business, with premium plan adoption and international momentum driving a robust pipeline for the remainder of 2025. As the company leans into product breadth—spanning Taser 10, Draft One, and vehicle intelligence—management raised full-year guidance, underscoring high visibility from a $9.9 billion contracted backlog. Investors now face a business increasingly defined by recurring revenue, software margin leverage, and a measured approach to tariff and supply chain risk.

Summary

  • Premium Software Upsell Expands Margins: Premium plan adoption and AI offerings deepen recurring revenue and drive margin tailwinds.
  • International and Enterprise Verticals Accelerate: Global demand and enterprise wins diversify growth beyond U.S. law enforcement.
  • Raised Guidance Reflects High Bookings Visibility: Strong pipeline and $9.9 billion in contracted bookings support higher full-year targets.

Performance Analysis

Axon delivered a 31% revenue increase in Q1, powered by both hardware and a rapidly scaling software and services segment. The company’s new reporting structure separates “Connected Devices,” which includes Taser 10 and sensor hardware, from “Software and Services,” which houses digital evidence management and premium software add-ons. Software and services revenue grew 39% year-over-year, outpacing hardware and now representing a substantial portion of overall growth.

Annual recurring revenue (ARR) climbed 34% year-over-year, reaching $1.1 billion, reflecting both expansion within existing customers and new premium plan adoption. Net revenue retention (NRR) remained at 123%, signaling strong upsell and minimal churn. Adjusted EBITDA margin expanded to 25.7%, aided by the mix shift to high-margin software, even as the company ramps R&D investment and absorbs tariff headwinds.

  • Recurring Revenue Model Strengthens: ARR and NRR metrics highlight the stickiness and expansion potential of Axon’s cloud ecosystem.
  • Hardware Adoption Remains Robust: Taser 10 orders run at 2x the pace of Taser 7, fueling device revenue and ecosystem pull-through.
  • Global and Vertical Diversification: International bookings and emerging verticals, including corrections and enterprise, posted record growth.

Margin leverage was partially offset by tariffs, but management expects only a modest 50 basis point impact for the year, with no near-term price increases planned. The company’s ability to flex supply chain and offset costs is a notable operational advantage.

Executive Commentary

"We are creating the power of that deterrence to create a safer society. Each quarter, we're putting Taser 10 in the hands of more people, helping them safely deescalate conflict without escalating to lethal force. We're giving them better training tools alongside while investing to improve efficacy in more and more situations. At the same time, our camera and sensor systems are becoming increasingly connected and exponentially more intelligent with the power of AI."

Rick Smith, Chief Executive Officer

"Software and services increased 39% year-over-year to $263 million, driven by continued strength across digital evidence management and premium add-ons, each contributing about half of our overall software growth. Our NRR, also a measure of our existing customers coming back and buying more, remained at 123% and supported annual recurring revenue of $1.1 billion, an increase of 34% year over year."

Brittany, Chief Financial Officer

Strategic Positioning

1. Cloud and AI Era Plan Drive Recurring Model

Axon’s business model is increasingly anchored in cloud-based subscriptions, with premium plans and AI-powered tools like Draft One and the AI Era Plan leading adoption. The AI Era Plan, a bundled offering of AI features, is just beginning to convert large agencies, with management signaling a stronger ramp in the back half of 2025. Draft One, Axon’s AI-powered report writing tool, reached nearly 30,000 active users in its first year—over 2x the adoption rate of any prior software launch.

2. Hardware Innovation Fuels Ecosystem Expansion

Taser 10 adoption continues at twice the rate of its predecessor, accelerating upgrade cycles and broadening Axon’s installed base. Upcoming innovations like the Apollo cartridge aim to further shift law enforcement from lethal to non-lethal force, especially in international and enterprise markets. The launch of fixed and mobile vehicle intelligence hardware, alongside integrations with Ring and Citizen, signals a push into real-time situational awareness and public-private safety collaboration.

3. International and Vertical Growth Diversify Revenue Base

International bookings posted record Q1 results, with contributions from Australia, Latin America, Canada, Asia, the UK, and Europe. Enterprise verticals, including logistics and retail security, are gaining traction, with recent large customer wins serving as blueprints for future expansion. Corrections and justice verticals posted triple-digit growth, while federal opportunities remain a long-term upside as budget clarity emerges.

4. Supply Chain and Tariff Management Mitigate Cost Risks

Proactive supply chain diversification and inventory management have insulated Axon from more severe tariff impacts. The company manufactures Taser devices in Arizona, reducing exposure, and has offset some cost increases through operational efficiencies. Management expects only a modest margin impact for 2025 and is not planning customer price hikes in the near term.

5. Responsible AI and Open Ecosystem Commitments

Axon emphasizes ethical AI development and open ecosystem partnerships, balancing powerful surveillance and deterrence tools with privacy safeguards. The company’s approach—integrating best-in-class partners and maintaining open APIs—addresses customer concerns about vendor lock-in and technology sprawl, supporting long-term stickiness while mitigating concentration risk.

Key Considerations

This quarter marked a strategic inflection as Axon’s software and AI platforms became the central engine of growth and margin expansion, while hardware innovation and international momentum diversified its opportunity set. The company’s ability to execute across multiple product lines, verticals, and geographies is now a defining advantage.

Key Considerations:

  • Premium Upsell Opportunity Remains Large: With 70% of domestic users still on basic plans, Axon has significant headroom to drive premium conversion.
  • Federal Pipeline is a Call Option: Federal bookings remain modest due to budget uncertainty, but represent upside if new funding flows or regulatory milestones (like FedRAMP for FUSIS) are achieved.
  • Enterprise and Retail Security Emerging as Growth Vectors: Recent wins in logistics and retail provide playbooks for expansion beyond public safety.
  • AI Adoption Accelerates in Back Half: Management expects meaningful Draft One and AI Era Plan bookings to convert primarily in Q3 and Q4.
  • Tariff and Supply Chain Agility is a Competitive Moat: Axon’s proactive inventory and supplier management positions it to absorb shocks better than peers.

Risks

Tariff escalation and supply chain volatility remain ongoing risks, though Axon’s geographic manufacturing footprint offers some insulation. Federal budget delays could slow large deal conversion, and increased regulatory scrutiny of surveillance and AI could impact adoption in certain jurisdictions. Competitive intensity in fixed and mobile video intelligence also poses margin and win-rate risk as Axon expands its hardware stack.

Forward Outlook

For Q2 2025, Axon guided to:

  • Continued strong bookings and ARR growth, driven by software and premium plan adoption
  • Incremental margin pressure from tariffs, offset by operational efficiencies

For full-year 2025, management raised guidance:

  • Revenue of $2.6 to $2.7 billion (27% annual growth at midpoint)
  • Adjusted EBITDA of $650 to $675 million (maintaining 25% margin target)

Management cited a robust pipeline, $9.9 billion in future contracted bookings, and accelerating international and enterprise momentum as drivers of confidence in the raised outlook.

  • AI Era Plan and Draft One bookings expected to ramp in H2
  • Tariff impact of ~50 basis points to EBITDA margin factored into guidance

Takeaways

Axon’s Q1 2025 results reinforce a business model transition toward high-margin, recurring software and services, with premium upsell and AI adoption set to accelerate in the back half of the year. Hardware innovation remains a vital ecosystem pull, while international and enterprise verticals add diversification and optionality.

  • Recurring Revenue and Margin Expansion: Cloud software and premium plan adoption are driving both top-line growth and sustainable margin leverage, with ARR and NRR metrics supporting long-term durability.
  • Product and Geographic Diversification: Taser 10, vehicle intelligence, and international verticals open new markets and reduce reliance on U.S. law enforcement cycles.
  • Watch for H2 AI Ramp: The conversion of AI Era Plan and Draft One opportunities will be a key determinant of whether Axon’s software-led growth inflects further.

Conclusion

Axon’s Q1 showcased the advantages of a cloud-first, ecosystem-centric model, with robust execution across product, geography, and verticals. Raised guidance and a deep pipeline set the stage for continued outperformance, but investors should monitor tariff, regulatory, and competitive dynamics as the company scales its ambitions.

Industry Read-Through

Axon’s results highlight a broader industry migration toward recurring revenue and cloud-enabled public safety solutions, with premium SaaS adoption and AI integration increasingly central to value creation. The company’s ability to offset supply chain and tariff pressures through operational agility sets a benchmark for peers. As regulatory scrutiny of surveillance and AI grows, Axon’s emphasis on responsible innovation and open ecosystems provides a playbook for balancing growth with public trust. Competitors in law enforcement technology, security SaaS, and adjacent enterprise verticals will need to accelerate their own cloud and AI roadmaps to remain competitive in an environment where integrated, real-time intelligence is becoming table stakes.

AXON Technology Public Safety Cloud Software Recurring Revenue AI Hardware Tariffs