Axon Enterprise Inc (AXON) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to your TASER International second quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference call is being recorded. At this time, I would like to hand the conference over to Mr. Luke Larson, President. Sir, you may begin.

Thank you and good afternoon to everyone. Welcome to TASER International's second quarter 2016 earnings conference call. Before we get started, I'm going to turn the call over to Dan Behrendt, our CFO, to read the Safe Harbor statement.

Thank you. This call is being broadcast on the Internet and is available on the Investor Relations section of the TASER International website. Please note that the earnings press release, as well as supplemental materials, including our key operating metrics, are available on our website. Today, we will open the call with prepared remarks. We'll follow up the prepared remarks with our standard live question-and-answer session.

Statements made on today's call will include forward-looking statements including statements regarding our expectations, beliefs, intentions or strategies regarding the future, including statements around projected spending. We intend that such forward-looking statements be subject to the Safe Harbor provided by the Private Securities Litigation Reform Act of 1995.

The forward-looking information is based upon current information and expectations regarding TASER International Incorporated. These estimates and statements speak only as to the date in which they're made, are not guarantees of future performance, and involve certain risks, uncertainties and assumptions that are difficult to predict. All forward-looking statements that are made on today's call are subject to risks and uncertainties that could cause our actual results to differ materially. These results are discussed in our press release we issued today and in greater detail in our annual reports on Form 10-K and quarterly reports on Form 10-Q under the caption Risk Factors. You may find these filings as well as other SEC filings our website at www.taser.com.

With that, I'll hand the call over to Rick Smith, our CEO and Founder.

Thank you, Dan. Good afternoon, everyone. What an exciting time to be at this company. Second quarter results were yet another record for revenue and bookings. Our strong results reflect the demand for our range of technology solutions to meet the needs of law enforcement. Axon bookings reached a record $72 million for the period and right now our 2016 bookings for the first half of the year are approaching the full year bookings from 2015.

Axon segment revenues grew 49% year-over-year driven by a 65% increase in service revenue and a 41% increase in hardware revenue. Weapon segment revenue grew 20% year-over-year driven by an increase in both weapon and cartridge unit sales. These results reflect the positive return on significant investments that we've made previously we'll continue to make to extend TASER's leadership position in public safety technology. Specifically the Axon network lead the industry in bringing the power and truth to public safety by connecting people and technologies.

While we view both the segments as complimentary, it's important to note that for the second quarter in a row Axon bookings didn't simply surpassed weapons revenue, Axon bookings surpassed revenue by $13 million as Axon bookings grew over 135% versus last year.

We start investing in these connected devices and software in 2008 because we believe from the outset that the inherent benefits of video for law enforcement would be significant. Today these systems are seen as indispensable in helping to address societal challenges. We're proud to serve law enforcement and the communities they serve, as we offer the most sophisticated and scalable cloud and wearable camera solutions available anywhere in the world, as evidenced by an important milestone. More than half of the major cities of the United States now deploy our Axon network and cameras and more than 80% of the major cities that have wearable camera programs have selected Axon as their platform.

Law enforcement officers put their lives at risk everyday in the field. Therefore, our passion and mission here at TASER's to provide the best tools in technological solutions to ensure their effectiveness and their safety. We serve as a trusted partner and listen to our customers so that we can bring the most advanced solutions with the right capabilities to market.

Our mission to protect life and to protect crew is more relevant than ever. The need for technology in law enforcement will only increase and we will continue to leverage our scale and resources to maintain our leadership edge. We intend to further invest to build the infrastructure to support our record growth of revenue and bookings and to develop new features and solutions. We shipped approximately 13,350 body cameras in the second quarter; a 55% increase from the first quarter. And we are on pace to significantly exceed this number in Q3.

During the second quarter we added two more major cities to our Axon network; Philadelphia and San Jose. As a testament to the value agencies received from our platform, we also add two major agencies who are already users of our body cameras and TASER Weapons who place follow on orders to make both our body cameras, our TASER Weapons and our Axon and Evidence.com software platform a standard issue for all patrol officers.

It's been really encouraging to see how officers have responded to body cameras. Back in 2006 when we started down this journey, the conventional wisdom was that cops would never wear cameras. And just since our last conference call, I was at a conference where I had a chance to talk to one of the people who served on President Obama's commission on 21st Century policing, and this is a guy who is a head of one of the major police unions in this country.

And he shared a story with me where he said, you know, Rick, years ago I used to hear our officers really resistant to the idea of wearing body cameras. And now to a person, when I talk to them, they tell me they don't want to go on patrol without this; not in the environment that's out there right now for sure. And not in the sort of modern world we're in where there's an expectation that there will be a video piece of evidence. So really, obviously, encouraging for me to hear that, especially coming, again, from a major union head.

The LAPD moved to full deployment for all 7,000 front line officers, resulting in the single largest booking in our company's history at over $20 million. Minneapolis PD selected our solution to be standard issue for all patrol officers. Again, including body worn cameras, weapons and our cloud-based digital evidence management capabilities. The Agency is excited to have another tool to help increase public trust and transparency.

The order was received in the first quarter and shipped in the second quarter. Both LAPD and Minneapolis feels we're on our officer's safety plan, which led to over 35% of our seats booked in the quarter on this plan. As a reminder, our officer's safety plan includes our higher tier software service as well as TASER weapons all purchased on a monthly subscription, including cameras as well and replacements of the TASERs and cameras overtime.

Internationally, we continue to make key hires in our tier one markets and expect to see continued traction in international bookings later this year in the Axon bookings. We're generating momentum and building advocacy in our target markets for both our TASER Weapon and our Axon network.

Building beachheads remains our number one priority in the coming months in order to capture market share, and frankly, to replicate the successful strategy we've seen in the US. Our recent deal in Australia is illustrative of the results we look forward to seeing from our investment in our tier one markets.

The Queensland police service, the third largest police agency in Australia, moved from a 500 camera trial to a 2,700 camera deployment and a subscription to our Axon cloud solution. The order is expected to ship in phases through the end of 2016. As a reminder, in Q1 we also shipped a single $6 million weapons order to a Tier 2 country. So we do continually look for incremental opportunities in our Tier 2 countries.

As of today, I have permanently relocated back to the United States; however, I will continue to contribute to the development of our international teams and markets. We now have an excellent team in place in Europe to manage the day-to-day operations; I am confident they will continue to build on the relationships and momentum that we've built in the key markets.

To conclude, I'm extremely pleased with the progress we've made in realizing the strong financial results from the investments we made in prior quarters. Both our Axon and TASER businesses continue to perform well and I want to thank the entire team here for their continued efforts to deliver the most advanced technology solutions, which are a benefit to both law enforcement and the communities they serve.

Now over to Luke for additional details on this quarter.

Thanks, Rick. We continued to execute in the second quarter of 2016, and I am proud to share the results of our continued focus. Revenues came in very strong at $58.8 million with international sales contributing $6.5 million to the total. Our other key metrics also showed continued strength within the quarter. Bookings on our Axon platform were $72 million in the second quarter; yet another record and an increase of 135% compared to the second quarter of 2015.

Annual recurring revenue in the second quarter was $21.1 million, an increase of 16.9% during the same period. In the second quarter, we booked approximately 20,200 incremental new seats on our Axon platform; that brings our cumulative total of book seats to 95,000 since inception, and represents a growth of 28% sequentially. As Dan will discuss, we did see an increase in the GAAP between booked and paid seats, however, we are increasing capacity to meet the demand.

Operating income in the TASER Weapons segment was 33.2% in the second quarter of 2016, which partially reflects higher international sales expenses and additional infrastructure and investments. Over the near-term, we reiterate our expectations that as we build out the international team and gain beachhead accounts, there could be some pressure on these margins.

We will continue to evaluate future investments to ensure continued operational efficiency. The ratio of lifetime value of a customer to the customer acquisition cost in the second quarter was 6.2, a continued increase over prior periods. Our focus investments continue to produce incremental bookings growth. We continue to expand our lineup of Axon solutions.

During the second quarter we shipped our first trials of Axon fleet, our in car camera solution, which is the only in car product offering that seamlessly links the devices to the cloud. Initial feedback has been very positive and I am proud of our team's execution in bringing the new product to market so quickly and effectively. Initially, demand for Axon [Interview] is also strong and we expect to complete installations in meaningful quantities in the coming months.

Our Weapons business delivered a very strong performance in the period and included a single $5 million order, the largest domestic weapons order in the Company's history; a state highway patrol agency upgraded all of their weapons and moved to standard issue with a 3,400 unit X-2 smart weapon order.

Additionally, we saw our first large TASER 60 order with Jacksonville deploying 2,500 smart weapons. Customer response from the TASER 60 installment payment program has been extremely positive and we believe the program will be helpful for agencies to move to a full deployment, and help them upgrade their weapons on a schedule without a significant outlay of capital upfront. In June, we launched our first ever Axon user conference; it was a great event. It brought together Axon law enforcement customers, industry consultants, partners and experts to share best practices and learn about emerging technology trends in law enforcement. We believe the user conference will help build out the [KIDSY] for our platform both within agencies and across agencies.

In the July 12 issue of Bloomberg Business Week, Axon was featured as the cover story. The Reporter astutely captured that Axon is not just about video, but about a larger connected network in public safety. We're seeing great success across our Axon brand and we're going to continue to invest in building that brand. A strong brand helps perpetuate our differentiation in the marketplace and also defines our value proposition. We've got some phenomenal momentum with the Axon brand, and we're excited to continue to invest in it.

In summary, the second quarter showcased continued execution of our 2016 strategic plan and also strengthened our position as a trusted partner and provider of technology solutions to law enforcement around the world. Our team is diligently working both internationally and domestically to capture market share in all segments and continue to build our outer infrastructure for future growth. We continue to innovate and invest in development of new products to lead the market and build our pipeline.

I'll now turn it over to Dan to review our financials.

Thanks, Luke. Revenues in the second quarter set yet another company record, increasing 26% from the prior year to $58.8 million. The increase was driven by a 49% increase in the Axon video segment revenues and a 20% increase in the weapons segment revenues. The increase in the weapons segment was entirely driven by domestic sales as we continue to upgrade older weapons and increase deployments within agencies. Bookings growth was also exceptionally strong, increasing 38.4% from the first quarter of this year to $72 million. The LAPD order represented $20.5 million of the second quarter bookings.

International revenues in the quarter were $6.5 million compared to $8 million in the prior year, as we've discussed previously, due to procurement patterns and typical size of international orders. We continue to expect to see lumpiness from quarter-to-quarter in the international part of the business. As we look to full-year consolidated results for 2016 and beyond, we continue to be comfortable with the annual consolidated revenue CAGR of 15% for the overall business.

It's fair to say that we are on pace to exceed this target in 2016, driven primarily by the single $6 million order and $5 million orders in Q1 and Q2, respectively, due primarily to the $5 million weapons deal in Q2, which made Q2 exceptionally strong. We do expect Q3 revenue to be relatively flat with the Q2 this year.

During the first quarter earnings call, we discussed our significant backlog of Axon Body 2 cameras going into the second quarter, which was a function of previously held shipments as we finalized quality checks. We worked through that backlog, shipping 13,350 cameras approximately in the quarter versus 8,600 in the first quarter. Even with the strong shipments in the quarter, we received more new orders for cameras than we shipped, leaving us again with a backlog at the end of the second quarter of approximately 14,000 cameras. We continue to increase production capacity of cameras and ramp our supply chain in order to be well positioned to fulfill this increasing demand. In July alone we shipped more than 10,000 cameras, which puts us on track for record unit shipments in the third quarter of this year.

Annual recurring revenue in the second quarter was $21.1 million, representing a 17% sequential growth from Q1. However, we booked more seats than we converted to active paid seats in the quarter, so the delta between our booked seats and active paid seats increased in the second quarter versus the first quarter of this year. Included in that delta, are cameras shipped in last month of the quarter plus seats relating to the cameras shipped before June where we have not started to recognize service revenue yet due to either implementation not being complete yet or contractual milestones, which have not yet been met.

Another component of the difference between booked seats and paid active seats are stage deployments. Some customers contract for the cameras to be delivered overtime; the full deployment the total shipments are include in the book seats, but the annual recurring revenue only reflects the seats we're currently recognizing in revenue. We expect strong growth in our annual recurring revenue as we continue to ship cameras on new orders and begin to recognize service revenue of prior shipments. We should see similarly consistent growth in our service revenue and annual recurring revenue overtime.

Future contracted revenues at June 30 was $262.8 million, an increase of 30% sequentially from the first quarter, which was driven by the increased bookings which were made up of both service and hardware components. Gross margins in the second quarter were 63.5% on a consolidated basis compared to 65.8% in the prior year period. The decrease in gross margin was primarily driven by the mixed shift to lower margin video hardware and discounting at some of the initial hardware purchases and multi-year contracts.

Sales, general and administrative expenses of $24.4 million in the quarter compared to $15.4 million in the second quarter of last year. The increase is primarily due to increased headcount, variable compensation, increased international travel and consulting expenses. Research and development expenses increased to $6.7 million compared to $5.9 million in the prior year. The increase is driven almost entirely by increased headcount in our Axon segment.

As expected, both SG&A and R&D declined sequentially due to some non-recurring expenses in the first quarter. However, a strong sales and bookings growth resulted increase in variable compensation for the year, as mentioned on the Q1 call. We'll continue to invest in our infrastructure to support the growth and expect to see OpEx growth accelerating in the second half of 2016.

As a result, we'll likely exceed the upper end of our prior operating expense guidance for the year of $123 million to $128 million by 2% to 3%. We continue to expect full-year 2016 bookings to growth to actually exceed our full-year operating expense growth, as was the case in the first half of this year. Year-to-date bookings grew 132% compared to 55% increase in operating expenses which included significant one-time expenses in the first quarter.

Our ratio of lifetime value of the customer to the customer acquisition cost in the second quarter increased to 6.2, giving us confidence our investments continue to be well placed. Income tax expense for the quarter was $2.4 million, yet leaving the Company with a 40% tax rate for Q2, although we expect our effective tax rate for the year to still be in the 37% to 39% range.

Operating cash flow in the second quarter was $3.2 million, an increase of $5.3 million compared to the second quarter of 2015. This is driven primarily by a change in excess tax benefit from a stock-based compensation, increase in cash from working capital, and increased deferred revenue. As a reminder, as the number of TASER 60 deals increase we will see an adverse near-term effect on cash from operations because customers will pay for weapon over five years rather than the entire amount of sell-in.

For most TASER 60 customers, weapons revenue will be recognized on selling, and warranty revenue would be recognized over the life of the contract. We believe this is a very attractive tradeoff as it allows agencies to purchase additional weapons and upgrade their weapons on schedule with lower upfront cost while also increasing the warranty attach rate.

On February 26, 2016, our Board of Directors approved the $50 million share repurchase program during the three months that ended June 30, 2016 the Company purchased approximately 1.3 million common shares under the program for a total cost of approximately $24.8 million for a weighted average cost of $18.92 per share. As of June 30, 2016, $16.2 million remains available under the plan for future purchases, and the Company will continue to opportunistically repurchase shares under the program.

We're now going to move on to the Q&A portion of the call.

(Operator Instructions) George Godfrey from CL King.

Two questions; the first one is looking at the weapons now, two quarters where you've had really large single deals; $6 million last quarter $5 million this quarter. I'm just wondering, are you seeing a renewed emphasis on the TASER weapons - we're all aware of recent events, but is the TASER weapon itself becoming a greater focal point both internationally here and domestically perhaps relative to what it's been over the last couple of year?

I would say that we are seeing renewed interest and I would say even a more generalized acceptance of TASER weapons. With LAPD moving to standard issue, I think that was a pretty important event for these larger agencies. In the city of Chicago, [Ronda Manual] is engaged on this issue and basically said, if I remember correctly, they're going to make TASERs at least available to every patrol car that's going out on shift.

We believe this is moving towards standard issue. I might be a little bit bias, but it seems a little crazy to me to send somebody up in 2016 with a gun and without the best non-lethal alternative to prevent them from having to use it. We are also seeing more acceptance in Canada; a few years ago I think there was a lot controversy in Canada. More recently the controversy has been around police shootings where they didn't have TASERs available. So I think the core technologies has been sort of through the public vetting process. So where it's now accepted as sort of standard policing equipment, and obviously, that's a trend we hope to see continue to expand.

And then my follow-up question is just looking at the Axon service revenue, and I know you touched on this a little bit. Sequential growth 4% in Q1, 1% here, and the seat count is exploding at 27%-plus growth on a sequential basis. How quickly do you think you can get those to converge? And does that mean you need to hire more implementation consulting person, or outsource that function?

Yes, I'd say there is really a couple of things. One is we did ship a lot of the cameras we shipped in Q2 pretty late in the quarter. So that definitely had an impact on the number of seats we are actually recognizing in revenue. So we expect it just normal sort of flow of recognizing those in the subsequent quarter will happen for those cameras shipped late. We do have a number of larger scale deals that typically attach implementation services to it.

We continue to ramp up our implementation folks to keep up with that demand, and sometimes it's the city itself that is - we'll work on their schedule. We are trying to make sure we've got enough people here and we feel like we are well positioned. I think, again, some of this is just the backlog as well as shipping 10,000 cameras in July should certainly help that count as well. So we do expect that the seats there included in that ARR to come up pretty sharply in Q3.

I would add operationally we do use both internal employees and consultants, and we are expanding that network to make sure we've got the right infrastructure team to be able to support it and not rely entirely on employees.

Mark Strouse from JP Morgan.

Can you just talk about the sales process on the video side? Is that shortening at all? I am just kind of curious if all of the recent events and all the really free advertising that you guys have got if that's helping educate your customers before you even knocking the door and making the process a bit shorter?

We've certainly seen an increased demand and the awareness is at an all-time high. However, we have not seen an acceleration in the sales cycle. We still, I would say, anywhere from 6 to 18 months they have to go get the funding and move it through. So we are seeing very strong demand, but even with the increase we don't see that accelerating the sales cycle.

And then just a quick one; the latest you are hearing on NYPD and if you think the transition and the commissioner will have any impact on that contract?

So at this point, New York City has really specific guidelines for vendors participating in bids which prevent us from giving any commentary or color on the status. So we really can't say anything.

Steve Dyer from Craig Hallum.

I think you said about $20 million sort of bookings was LA, how many seats was that then?

I'm not entirely sure to be honest with you, Steve. We'll have to take a look at that. With that booking, it's really takes them to sort of full deployment.

It should have been around 6,000 cameras and the seats associated with those, and we've even some additional non-camera user seats.

Yes, I think right around - I'd say between 5,500 and 6,000, roughly.

And how many of those were shipped? I mean, roughly in the quarter. I'm trying to get a sense for how many of the 13,000 actually went to LA.

Yes. So we've started just some initial rollouts, but the bulk of that is going to happen over time.

Staying on the body cam side, the video side, have you seen any changes in terms of competition? I know there has been a couple of cities where a competitor has tried throw up a road block here or there. Are you seeing any changes in who you're seeing in the bake offs and the success?

We're certainly seeing a lot of increased competition on the camera side. Our end-to-end solution has really met the market needs. And so with the major cities, we're still very confident that we've got the only product that really meets the market need.

And then just lastly, I know you don't give bookings guidance, but given that you had LA in the second quarter I'm assuming we shouldn't necessarily expect that number to be up again sequentially in Q3.

I think clearly LA is one of those sort of bluebird orders; there is only agency, or a couple of agencies of that size in the country. So I would say that makes for a tough sequential comp. Although I'd say the overall demand remained strong, but I think it's - be tough to increase, at least in the subsequent quarter from this quarter.

(Operator Instructions) Jeremy Hamblin from Dougherty & Company.

Wanted to just see if I could get an active Evidence.com license number for the second quarter?

We're actually not disclosing that anymore; we've kind of moved to the ARR number on a go forward basis.

Is there a time waiting associated with that active licenses number, how we should be thinking about this? It sounds like a lot of stuff kind of transpired at the very end of the quarter.

Yes. I think the only I could give is that a pretty significant number of seats that are in that book seats that aren't in the license count yet or the sort of ARR, and we expect a lot of those to come on in the - [they'll really] start coming on and it will better magnitude in Q3.

And just as a follow-up to that. In terms of that ramp time from winning contract to an active user on or seat on Evidence.com; is that starting to compress? Are you guys - the business kind of exploding higher? Are you starting to see efficiencies and compression of the time, or is it some of these contracts are so big, and it's coming fast and furious that you are not getting that efficiency yet?

I would say that it's really more of a factor of how quickly agencies can roll it out. I don't know if that's really sort of an efficiency-driven more than just that these large deployments might take two, three months from the time we shipped a camera to the time they are deployed and up and running and we start counting those seats. So I think that we're very good at getting people up and running, but depending on how big the agency is, how many precincts there are, how much training they need, what level of support - there maybe a little bit of time from when we ship the camera to when we start recognizing those seats.

And thinking as a follow-up to that point, am I right in thinking that you're not really starting to accrue that revenue associated with that camera, or I should say, on the service side of it until they're actually an active user?

That's correct, yes. So it wouldn't be in the revenue for the quarter nor would it be in the ARR until that become an active seat.

So as we look at kind of it's thinking about it in a straight line sense as these contracts, I know they're all individual contracts; that's not really the right way to be thinking about it, you're capturing a lot of this revenue on the backend as you've got all the licenses associated with that up and running.

Let me kind of clarify. So if we add an agency that said, hey, they want to take 200 cameras every six months for the next two years. Once that first 200 cameras implemented, we would start recognizing those at that point. And then we'd add each additional ship and once they became active. So we wouldn't delay the all 800 cameras in that case until the end; we sort of recognize and readably as they came online and were implemented.

No, I guess maybe I was asking more on the service revenue side of it rather than the Camera itself.

Yes, service would be the same thing. So if an agency said, hey, we want to rollout over two years, we would start recognizing the service on the cameras are actually active throughout that rollout period as they became active.

(Operator Instructions) Glenn Mattson from Ladenburg Thalmann.

Perhaps I missed it; could you explain a little bit better, Dan, on maybe why the backlog grew this quarter? Is it production issue, or just trying to figure out why that number expanded.

We work through a significant part of the backlog that we had in Q1, but the demand has continued to be extremely strong.

So it's going to be ramp up in production, is there plan for that, I guess, is there a capacity for that?

So during the period we will continue to ramp capacity, and I think our Q3 shipments will definitely exceed Q2.

And then, Dan, would you comment - or maybe Luke also about how to begin to think about expenses for 2017 with the LTV to cap ratio still being so high if it remains at this levels, would you continue to invest aggressively in operating expenses?

I would say there's sort of two things. One, I think is that as we add people throughout 2016, 2017 will naturally be higher because you'll have the full-year of expense for the people you added this year. So I think that 2017 will definitely be up regardless. As far as looking at investments we're making to grow the business, we'll continue to look at that if the business has continued to expand faster than expectations; we'll continue to add resources to make sure we're meeting that demand and capturing as much market share as possible.

George Godfrey from CL King.

Just one follow-up on Scotland Yard; can you give us any update there on when we would expect to hear any further updates?

At this point I don't think we're going to be issuing further comments on the London Met program. Although we're excited about it, but I think we've released all the details we might have released at this point.

Jeremy Hamblin from Dougherty & Company.

Just a follow-up on thinking about the operating expenses. I think you noted based on the updated guidance that we'd be looking kind of in that $130 million to $132 million range for 2016. As we look forward into 2017, do you think that you're kind of in a position now where you're starting to harvest a little more of that spend? Or is the name of the game still we've got to win contracts and we need to be as aggressive as possible to win those first contracts internationally in particular, but certainly in the remaining large agencies in the US?

I mean, today I don't think we're going to get into any specific guidance for next year. But I would say this is an issue we're constantly looking at. It really just comes down to identifying where we believe investments are going to have a significant net positive net present value. And while we're in the - most of the - to be blunt, I mean, the growth we've seen here in the US has consistently exceeded our financial plans over the last couple of years. And so we've been ramping - we feel it's more important that we're agile, that we're matching the investments just given the size of what's developing in the market opportunity.

We're seeing similar opportunities now happen internationally. So I would say in terms of direction, there is likely to be international ramping as we're starting to see some of the same things that we've done in the US now paying off internationally first in the UK, now in Australia; and we certainly are putting people in additional markets. So again, we're not really prepared to give more color at this point in terms of next year's spending; that's something that we're managing in real time just given the growth slope of the Company.

One last question, actually, coming back to the licensing for a second. What's the approximate churn rate that you're seeing?

I would say that most of the deals that we're booking at this point are multi-year deals; three, four, five year deals. So we haven't seen a significant number of contracts come up for renewal, if you will. As a result, I would say the churn rate so far has not then meaningful.

One thing I would add to your last question is we do want to assure you that our goal here is to build a very profitable, sustainable business in the Axon segment over the long-term. While we are in the steep growth curve, we are making the right investments, but we're fully committed that that (inaudible) can be very profitable at scale. Right now our goal is making that scale as large as possible.

Andrew Uerkwitz from Oppenheimer.

I'm trying to understand the bookings conversion to paid seats a little bit better. It's my understanding that most of the time you book revenue for EBITDA comp a month after the camera ships except in cases where they're larger deals. If that is the case, could you kind of talk about the camera sales between the large agencies and smaller agencies?

I would say that even some small agencies will take advantage of implementation services; it's a pretty good value for them because this is, again, a lot of lessons learned from prior customers. So a lot of even small and mid-sized agencies will take advantage of implementation services because it really gets them off on a right foot. So it's not necessarily just the large agency we'll contract for implementation services.

You're right; any deal that we just ship the camera without implementation we recognize a month later. But deals with implementations - those can definitely get delayed a little bit. There is also some of the bigger customers may have some milestones that could cause that to slow up a little bit if there are some specific things they're looking for on our end. But we do expect it will hopefully we'll narrow that gap between the contracted sheets and the sheets we're actually recognizing in Q3 with, I think, two things will help; one is we'll have - we'll catch up on that backlog hopefully this quarter. Secondly, with ramping production and supply chain, we'll be able to ship cameras earlier in the quarter versus in Q2 we ship cameras late in the quarter, which really led to a lot of the camera ship not being in that recognized revenue yet on the service side.

So is it fair to say at this point majority or more than half are taking the services or have milestone payments?

I don't know if I can make a specific comment to that. Let me take a look at that; as you preload out, the bigger deals almost always do it, but we also have a lot of smaller size to medium size cities. So I'd have to take a look at those as well. Let us do a little research and we'll put something out on that.

And then one last question on the camera backlog. Included in that number, do you include cameras that you know will ship in later quarters? For example, like in LA that's on a schedule. Are those later quarters in that backlog numbers, so we should always expect a camera backlog, or is that backlog just cameras that need to be shipped out next quarter; you're just trying to ramp up production?

Andrew, it's the really the ones that we actually could ship right now and could contractually ship at the end of June that we had not shipped yet.

Steve Dyer from Craig-Hallum.

I know you started a shipping a little bit of the fleet in the quarter. When should we sort of expect that revenue to become a little bit more material? Is that still a 2016 event, or is this still very much trialing?

We expect to ship our Axon fleet in the coming months; we've got couple of early shipments already, but we expect to see some revenue in Q4 on that.

And then kind of a little talked about area; the pulse and the bolt, I mean, you've redesigned that a little bit. How are you thinking about that? I mean, what are sort of the expectations going forward for those programs?

My expectations are certainly optimistic. I think it's a good refresh for - an important part of our long-term vision. I'm not sure from the perspective of financial modeling that it's going to be material at this point. So we're in the long game in the consumer space. And it's interesting, I read Elon Musk's blog poster earlier this week where he talked about Tesla and how they think about autopilot given the controversy over the one case in Florida where they had a death. He made an interesting statement that they felt a moral obligation to continue to push autopilot out there because it's already improving safety when used properly.

And I would say that the way I think about the consumer business in some ways it's a bit of a moral obligation that we keep that business alive. It is small, it's still profitable, it's a small team we've done on it, but we started this business because we are in a country where 35,000 people die of bullet wounds every year. Our goal is to make the bullet obsolete. In order to do that I think we need to not only service the business sector and law enforcement where our primary business is today, but we need to keep the option available for consumers to have a viable alternative to a firearm, and I would say that alterative is going to get better and better over the next decade. We've got really exciting things in our product technology pipeline, but in the interest of conservatism, the purpose financial modeling - it's not something that we should be moving the needle on at this point.

Thank you. I would like to hand the conference back over to management closing remarks at this time.

Well, again, thank you everybody for joining us today. 2016 continues to be incredibly strong in all fronts. We're focused on ensuring the remainder of the year is successful as we strengthen our position as the trusted technology solutions provider to the public safety market domestically and internationally. We look forward to updating you on our progress during third quarter earnings call little later this year. So thanks so much, have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program, you may all disconnect.