Axon Enterprise Inc (AXON) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the TASER International third-quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference call may be recorded.

I would now like to introduce your host for today's conference, Mr. Luke Larson, President. Mr. Larson, you may begin.

Thank you, and good afternoon to everyone. Welcome to TASER International's third-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 will follow 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 are 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 risks are discussed in our press release we issued today and in greater detail in our annual reports on Form 10-K and in the quarterly reports on Form 10-Q under the caption risk factors. You may find these filings as well as our other SEC filings on our website at www.TASER.com. With that, I'll hand the call over to Rick Smith, our CEO and Founder.

Thank you, Dan, and good afternoon everyone. I have the distinct pleasure of once again being able to report great results that are the result of tremendous work by a fantastic team of people that I am blessed to work with.

We had a tremendous quarter with strong domestic and international revenue growth across our AXON network of connected devices, applications, and people -- a network which now connects over half of the major city police departments in the United States and dozens of the major prosecutor offices. Our results reflect the continued strong demand for our range of technology solutions and reinforce our belief that our vision and strategy continued to resonate with our customer base.

In the third quarter we expanded our major city presence with wins in Cincinnati and Atlanta, an agency which we won back from a competitor, ViView, where the agency had initially selected a competing body camera and yet ultimately saw this was much bigger than body cameras and they saw the value in joining the AXON network.

Since Q3 of last year, we have added 12 major new cities on our AXON platform and we now have an active presence in 35 of the 68 major US cities. Our pipeline remains stronger than ever and we are optimistic about our outlook for the rest of this year and into 2017.

Our customers value the advantages of our platform including cost savings, intuitive features, proven reliability, the ability to scale, and peace of mind. Most importantly, the value of our network of people, devices, and apps continues to grow in value as we add more people and technology into the ecosystem.

I am excited to report that we shipped over 30,000 cameras in the quarter, which to put it into perspective is approximately equal to the number of cameras we shipped in the first three quarters of 2015 combined. The strong camera shipments along with our push to realize contractual milestones and fulfill terms on held revenue led to a 51% sequential increase in annual recurring revenue from $21 million to $32 million.

In 2016, we executed on establishing a strong [beach head] presence in our focused Tier 1 international markets. We now have several major accounts in the UK including the three largest agencies in the UK in the National Rail Police. We have major accounts in Australia and several active trials in Canada. We are pushing deep into our current Tier 1 markets.

In the third quarter, international revenue was $11.3 million or 16% of our record $71.9 million of consolidated revenue. We are coming off another strong showing at the IACP, the International Association of Chiefs of Police, held in San Diego where we had over 3000 visitors to our booth. Our virtual reality experience gave officers a unique [360] degree immersive view of how the AXON network of people, devices, and apps enables them to go with confidence from the field to the courtroom.

We also announced our all new point of view AXON Flex 2, a camera with unmatched durability, best in class HD retina low light image quality, and enhanced wearability. The Flex 2 is the first wearable camera that has the polymer molded directly around the electronics, encasing them in a solid brick of protection from abusive weather. We know how tough cops are on equipment and the Flex 2 takes our durability up another notch.

We have also increased the retention strength by over 300% while improving the user interface of all of our mounting options. This is one of our critical differentiators for the Flex product line. And of course we have extended our industry-leading retina low light capability to full 1080p HD video, and yet we still remain -- retain the ability to buffer video for a full 12 hour shift even in 1080p. Customers love the new Flex 2 and initial shipments are expected in December with full production ramping in early 2017.

During IACP, we laid out our vision to reboot the entire enterprise software ecosystem of public safety built around video and multimedia at its core, phasing out the paperwork and labor intensive manual data input by automating data collection through our sensors and our apps. We see this as a breakthrough capability only possible with our network of devices, apps, and people.

We are uniquely positioned to extend the concept of body worn video. From today, it is something that protects an officer -- and individual officer in high-profile cases to a capability that automates the entire process of gathering, analyzing, and acting on information in every incident of every kind. We see an opportunity to expand our current offerings on the AXON platform with the addition of a next-generation records management system, or RMS.

RMS is the central technology hub of public safety including law enforcement, fire safety, and medical emergency response. RMS systems are typically -- they're just simple digitizations of the same paperwork driven workload of the last hundred years. We think multimedia information is far richer, far more compelling, and can actually be far more efficient to gather and analyze.

Just as smart phones with apps like Twitter, iMessage, Facebook, and Snapchat have changed the way that we all communicate in our personal lives, we believe wearable cameras with the AXON network can revolutionize the backbone of public safety information infrastructure. And we are well along on the hardest part, which is building the network, getting the nation's leading law enforcement agencies on the network platform, and they are now deploying over 100,000 of our camera notes.

Now we can leverage this unique network to replace the outdated manual information systems that are prevalent today. Now another key development that is moving us forward in this strategy around our creation of this rich hardware, software ecosystem was the addition of Todd Basche to our Management Team.

Todd has a long history of innovation both as an entrepreneur where he helped create the category for personal portable scanners and as an executive. While he was at Apple working directly with Steve Jobs, Todd proposed consolidating a number of different software products into the iLife suite, which included iTunes, iMovie, iPhoto, et cetera. Jobs approved the project and appointed Todd to lead the effort.

Now as we discussed our strategy with our customers, we sometimes use the analogy that we are building something very similar to the Apple ecosystem, only we are building it for public safety rather than the consumer market. What a wonderful advantage we now have to have one of the leaders of the Apple transformation bringing that DNA into our Executive Team and into our product development programs.

Todd has only been here for a few weeks, but I can tell you I am having a ball working with him. His creativity, imagination, and operational rigor are going to add tremendous value to our Company and I hope you as our shareholders can understand how excited I am to have him on board. We're going to do great things together. Todd, if you're listening, welcome aboard.

All right, as the next step in our evolution we started development of this cloud-based alternative to traditional RMS, which I talked about. Now the domestic addressable market for RMS includes all law enforcement, including both patrol and non-patrol officers, both sworn officers and civilians of all public safety including fire and emergency medical services. As a result, the RMS market is more than doubled the size of our current addressable market which is primarily patrol officers.

RMS represents an extension of our AXON platform and customers would also pay a monthly service fee for this new service. We believe the TAM, or the total addressable market, for RMS will more than double the TAM of this -- that we have today for our current [digitalized] management solutions. We have informed our customers that we will preview the AXON RMS solution at our user conference in June of 2017, and we had very strong interest from agencies interested in joining us as development partners as we develop this customer-driven technology platform. We look forward to updating you on our progress on this exciting program in 2017.

Now, we have gotten some questions about the long-term model that we published at our last analyst day. We remain very bullish on our model and our ability to build a large, sustainable, sticky, and profitable business in our AXON segment. With the addition of RMS, which more than doubles the total available market, we see even more growth opportunity to build our Business with higher margins and sustainable solutions.

Before turning the over to Luke Larson, our President, for additional details on the quarter, I'd like to say a few words on today's announcement that our CFO Dan Behrendt will be transitioning from TASER in the first half of 2017. Dan has been a tremendous contributor to the organization in his time with us. He has brought financial discipline and focus to the organization through several major inflection points in our development as a Company.

I want to thank Dan for the critical role he's played and the dedication he has demonstrated throughout. I also want to thank him for agreeing to stay on board through Q4 reporting and to filing the 10-K as we navigate this transition period and identify someone to fill the big shoes that Dan will be leaving behind. Dan, thanks for all you have done and for being a good friend to me and to the Company and a good steward for our shareholders over the last 12 years. And with that I'm going to turn it over to Luke.

Thanks, Rick. We had an exceptionally strong third-quarter in 2016 and I am proud to share the highlights of our accomplishments. Revenues came in at a record $71.9 million with international sales contributing $11.3 million to the total.

Our other key metrics also showed continued strength within the quarter. Bookings on our AXON platform were $57.5 million in the third quarter an increase of 56% compared to the third quarter of 2015 but down sequentially due to $20.5 million LAPD booking in the second quarter. Annual recurring revenue in the third quarter was $32 million, an increase of 51% from the second quarter as we converted over 22,000 book seats to paid seats.

Our active paid seat count increased as we shipped over 30,000 total cameras in the quarter and worked through our AXON Body 2 camera backlog. In the third quarter, we booked approximately 15,600 incremental new seats on our AXON platform. That brings our cumulative total of book seats to 110,600 since the inception, and represents growth of 16% sequentially.

Operating income in the TASER weapons segment was 38% in third quarter of 2016, up from 33.2% in the second quarter. The increase was driven by record revenues in the segment and manufacturing efficiency.

The ratio of the lifetime value of a customer to the customer acquisition cost in the third quarter was 4.9, which was up slightly year over year and is a reflection of strong bookings resulting from our investments. On a sequential basis, it was down from 2016 second quarter which benefited from higher book seats related to the LAPD award.

I am really excited about the momentum we have in all parts of our Business. For our TASER weapons, we are seeing broader adoption and deeper penetration both domestically and internationally.

Our TASER payment plan programs -- TASER 60, and the Officer's Safety Plan -- are helping accelerate sales domestically and increasing our warranty attachment rate. Our growing installed base of weapons is helping drive cartridge sales which is a source of recurring revenue for TASER though not reflected in our ARR metric.

In the AXON segment, customers continue to resonate with our current product offering and the vision of the future. As we expand into additional solutions for law enforcement and bring them onto our platform this create enormous value to our customer base.

Internationally, we continue to win major accounts on our AXON platform and our Tier 1 focused markets. In Australia for example we have won two key accounts with Queensland and the Northern Territory. We have several active trials in key accounts in Canada, Australia, and in the UK.

We continue to welcome new agencies to the AXON platform. During the period we announced major city wins in Cincinnati and Atlanta. Atlanta was an especially meaningful win for us because they had previously chosen one of our competitors. However, the city realized the need for a full end to end hardware, software ecosystem and have now decided to join the AXON network. Following the close of the quarter and earlier this week, we received notice that we were awarded that Seattle Police Department bodycam and digital evidence management contract.

There had been some noise in the market of late around less well-established competitors trying to blunt our momentum and gain market share with lower price offerings. The recent Seattle PD win is a great example of a strong customer acceptance of TASER and the demonstrated performance of our platform as a key differentiator.

In our press release on the Seattle award, we linked a preliminary and final scoring of our product versus our competitors, and the initial scoring based on a written evaluation, TASER was virtually tied with two other competitors. As with most large agencies, though, Seattle PD opted for a thorough product testing of the full hardware and software solution and also was made aware that certain competitor capabilities were not yet developed.

After a thorough testing and review, we received the highest score by a wide margin and were subsequently awarded the contract. This is very noteworthy and indicative of the real value of the platform. Time and time again agencies that undertake field tests recognize the superiority of our offering.

When our customers trial our products in the real-world situations, the difference between us and the competitors is clear between how our full solution stacks up to the commodity camera offerings of our competitors. This is a testament in part to the time we spend with our customers to best understand their needs and then innovate and expand the platform feature set to meet their requirements.

When field tests have been conducted as part of the process our win rate stands at nearly 100%. Price is often a consideration, and we work with our law enforcement partners to ensure that we are responsive and competitive, but time and time again field test provide agencies with the assurance that they will be purchasing a vastly superior experience with TASER and that others simply cannot deliver at scale regardless of how they price their body cameras.

I am really happy about the progress we have made in 2016 and we expect to close out the year strong with lots of momentum to carry us into 2017. And while it is too early to discuss any financial expectations for the coming year, I am excited about shipping full deployments of AXON fleet, continuing to consolidate the major cities on our AXON platform, adding new customers on our TASER payment plan, and growing international bookings and revenue, and developing our record management system on the AXON platform.

And now I'll turn the call over to our CFO, Dan Behrendt.

Thanks Luke, and thanks Rick for the very kind words. It has been a tremendous opportunity working with both of you along with everyone else at TASER over the last 12 years. When I joined TASER in 2004, we were focused solely on our weapons business with annual sales of just under $68 million.

Today we offer comprehensive cloud platform solutions along with our weapons products, and combined revenue for the recent quarter was nearly $72 million which surpasses our full-year revenue total in my first year. And on a trailing 12 month basis, revenue is now more than $242 million. That significant revenue growth and this diversification has required the buildout and scaling of our finance capabilities and processes.

I am proud to have led that effort as we have established a top-notch Finance Team with the capabilities and resources required to see TASER through its next phase of growth. I look forward to working with the Team over the next -- over the coming months to ensure a smooth transition. And now onto the results for the quarter.

As Luke said, revenues for the third quarter set another record, increasing 43% from the prior year to $71.9 million. The increase was driven by a 34% increase in the weapons segment revenues and a 75% increase in the AXON video segment revenues.

The increase in weapons segment was driven by growth in both domestic and international sales. Domestically we are seeing continued success of our TASER payment program such as TASER 60 and the Officer Safety Plan and the agencies of all sizes. In fact, the top three domestic deals -- weapons deals in Q3 were all TASER 60 deals.

The growth in the AXON segment was driven by the shipment of over 30,000 body worn cameras as we work through our AXON 2 backlog as previously anticipated. This drove up an increase of both our hardware revenue and the number of active paid seats which narrowed the gap between the book seats and the paid active seats.

Total international revenues in the third quarter increased 69% from the prior year to $11.3 million or nearly 16% of the total revenue for the period. We saw strong sales in several markets with no single country accounted for more than 25% of our international revenue. We continue to have strong momentum in both weapons segment and the AXON bookings in our target international markets.

However, as we discussed previously, due to the current patterns and typical size of our international orders, we expect to see some revenue lumpiness from quarter to quarter in the international part of our business. On our last call in August we mentioned that we shipped 10,000 cameras in July, and we're on track for record shipments in the third quarter.

We ended up shipping approximately 30,000 cameras in the quarter, more than doubling our previous record of 13,300 cameras set in the previous quarter. As anticipated, we do not see a commensurate increase in camera revenue due to additional discounting in initial camera purchases, but the gross margins on the underlying contracts continue to meet or exceed our expectations.

As a reminder, over 80% of our contracts include the TASER insurance plan feature under which customers pre-paid for their future camera upgrades. Future hardware upgrades under the program will have a lower applied discount than the initial camera purchase, and as such will flow through the P&L at a higher average selling price.

AXON segment service revenue grew 78% sequentially driven by the additional active paid seats to the AXON platform and a $1.7 million in catch-up service revenue. The catch-up revenue is due to the recognition of service revenue previously held due to the delay in meeting contractual terms and milestones on certain of our contracts. In recurring revenue in the third quarter which excludes the impact of the one-time catch-up revenue was $32 million representing a sequential growth of 51%.

During the quarter we were also able to reduce the delta between our booked seats and active paid seats by almost 7000 seats. As a reminder, there will always be a delta between the booked and paid seats due to the customer request for staged deployments and the lag of service revenue beginning the month following the shipment of cameras. Camera shipments on new orders remain strong and we expect continued growth in our annual recurring revenue.

As we look to our full-year 2016 results Q4 is typically the highest revenue quarter of the year, but given the strength of Q3 results, the $1.7 million catch-up in service revenue, and the shipment of the backlog cameras, we expect the Q4 revenue will be relatively flat with Q3, which we still view as very encouraging and indicative of the momentum in our business.

Bookings were up 56% from the prior-year but down $14.5 million from the second quarter due to the $20.5 million LAPD booking in the second quarter which made for a tough sequential comparison. Excluding the LAPD contract, bookings were up sequentially. Our bookings pipeline remains strong, and we expect to see continued wins in both small and large agencies.

Future contracted revenues at September 30 were $302 million, an increase of 15% sequentially from the second quarter which was driven our strong bookings which were made up of both service and hardware components. Gross margins in the third quarter were 64.8% on a consolidated basis compared with 61.7% in the prior year period. The increase in gross margins was driven by manufacturing efficiencies in the weapons segment and the benefit of the $1.7 million of catch up service revenue and favorable mix impact with higher-margin service revenue taking up a larger proportion of our total sales.

Sales general and administrative expenses increased to $28.1 million compared to $17.8 million in the second -- or the third quarter of the prior year. This increase is primary duty to increased headcount, variable compensation, and consulting expenses. Additionally in the third quarter we had approximately $2 million of nonrecurring legal expenses and professional fees.

Research and development expenses of $7.4 million compared to $6.5 million in the prior year. The increase is almost entirely driven by increased headcount in our AXON segment.

As we mentioned on our last call we expect our operating expenses guidance to increase by 2% to 3% to end up in the range of $130 million to $132 million for the year. Our strong sales and bookings growth resulted in increased variable compensation but excluding our nonrecurring expenses in Q3 of approximately $2 million and Q4 severance expense we still expect to stay within our prior range.

We're pleased with the results of our investment growth initiatives and continue to opportunistically invest in initiatives that drive customer adoption, broader our customer reach, and expand the offerings on our platform. Our message -- the one area that Rick highlighted which complements the continued development of our AXON cloud platform solutions.

In the third quarter we had approximately $700,000 of other expense related to the exchange rate fluctuations between the British pound and the US dollar. Income tax expense for the quarter was $6.8 million for an effective tax rate of 63.9%. We were adversely affected by losses in foreign entities which we do not currently expect to receive a tax benefit from.

Additionally, we recognize the unfavorable provision tax returns relating to our 2015 tax return filed in September. The combined impact of the foreign entity losses which we do not currently expect to receive a tax benefit from and the return provision [were up] that's approximately $1.5 million or $0.03 per diluted share. We expect the fourth quarter effective tax rate to be in the 44% to 47% range.

Operating cash flow in third quarter of 2016 was $11.6 million, a decrease of $7.7 million compared to the third quarter of 2015. The decrease was primarily driven by an increase in inventory, long-term customer receivables, and prepaid commissions offset by an increase in accounts payable and net income.

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 the weapon over five years rather than the entire amount at sell in. For most TASER 60 customers, weapons revenue will be recognized at sell in and the warranty revenue will be recognized over the life of the contract.

We still believe this is a very attractive trade-off as it allows agencies to purchase weapons and upgrade their weapons at a schedule with lower upfront costs while also increasing the warranty attachment rate. One of the things we announced in the Q that we are filing today is we've canceled our rule 10-B5 share repurchase plan based on initial success of our TASER payment plan options in order to allow us to have flexibility as we run the business going forward.

And with that I'm going to turn the call back over to the Q&A section of the call.

Thank you.

(Operator Instructions)

Steve Dyer, Craig-Hallum.

Thank you. Dan, best of luck. You will be missed. Thanks for everything. Great quarter, guys. A couple of different questions. Weapons overall was very strong in the quarter, both handles as well as cartridges. Can you elaborate a little bit more on what drove that? Were there any large one-time orders, especially on the cartridge side? Any more color there, whether it was domestic or international, etc.?

This is Rick.

Really these subscription payment plans are really being well received. I think our three largest orders all came in on some sort of subscription plan, and in those we've bundled together for the customer. One thing they liked is that we are sort of taking a lot of the unpredictability out of the cost.

So we include things like warranty and service, but also five years' worth of cartridges in many cases, or at least in some of those plans. So that can also help drive the cartridge volume. So it is primarily domestic, I would say, is what was driving most of that volume.

Got it, but then just from an accounting standpoint, do you actually send out the cartridges right away? Or is that just you are recognizing the revenue for those and will send them out as the contract progresses?

This is Dan.

Typically we would be sending the cartridges out with the handles. They have a shelf life that is certainly the life of the weapon itself, so there is no issue with delivering them up front.

Okay. Great. And then on the AXON side, you obviously worked through a lot of the backlog. Did you still have some remaining AXON 2 backlog enter in Q4, or did you work through all of that?

This is Dan.

We always have a little bit of a backlog, just orders received in the last few days of the quarter. We certainly built up our camera backlog to the point where we are certainly able to meet the demand as it comes in. We don't have the significant backlog we finished Q2 with.

Okay. I guess just back on the weapons then. I am wondering, as you think about future growth rates, and it seems like you've always talked about 10% to 15%-ish on a CAGR basis. Does anything change there, or are you pulling some weapons demand from future years forward because of the offer and the terms right now? How should we think about overall growth?

I think we are still really confident in that 15% growth target. I think the service plans -- we are seeing a lot of traction with TASER 60 and OSP. We currently don't disclose what percentage of the deals are on those service plans. That is something, as it becomes a bigger part of our Business, we will think through how we communicate that to investors.

The other item I would say internationally, we still have a lot of opportunity. The need for a nonlethal alternative is a universal problem, and we feel really good about the teams that we are building out in those markets.

If I can add in there as well, Luke, this is Rick, obviously.

We have seen some of the larger agencies this year start to expand towards full deployment, with LAPD now moving towards putting TASERs out for every officer. The mayor of Chicago has made comments that they are going to make TASERs available to all their frontline officers. We are hearing rumblings from some of the other largest agencies in the country that that idea is really gaining traction in the world that we live in now.

Frankly with cameras everywhere, including the ones the cops are wearing, everything that they can do to avoid using lethal force is becoming an imperative. So we see the expansion in the larger accounts, and then the subscription plans are helping agencies accelerate their deployment. We also feel pretty confident that that is also going to accelerate the upgrade cycle. If we can take the upgrade cycle from like an 8- to 10-year proposition which, if you include people who have not upgraded, that's maybe about where we are sitting today.

If we can accelerate that down to a five-year upgrade cycle that basically doubles the size of the business over a five-year time horizon in terms of the replacement cycle. We think between that and the international segments, there is still so much white space that we're feeling really good about the growth opportunities in the core.

Great. That is very helpful. Then the last question for me and I'll pass it along. I know you don't want to talk probably too much about next year. As we think about OpEx, it has been a little bit of a moving target, and now we sort of seem to be zeroed in on a level. Is next year the year you can find some leverage on that? Do you feel like you are at a point where you are well staffed and spending to still grow? Or are there still a lot of things to spend on and a lot of growth in the expenses as well?

Steve, great question. 2016 has been a fantastic year for us year to date, with revenue up over 30%. We expect to have some tailwind going into 2017, with a lot of our paid seats coming back.

We are actually still working through our budgeting process for next year. I think our philosophy here is as long as we continue to see the opportunity that aligns with our investors, we will continue to build out the core teams that we need to gain the dominant market share.

I would add in a little bit there too. I would say that especially with things like RMS, we're going to continue to see some growth in R&D to support something that doubles the total available market.

I think given our position, where we are at now with this unique position of having the majority of the market now on our platform, that our ability to develop and deploy, frankly, a business that can match the size of our current AXON business. It should be a lot more cost-effective than it was to build that first business over the past either seven or eight years. We are going to continue to see some investment in R&D and then in the SG&A with international opportunities. We are really starting to see some fruit there.

You look at what is happening in the UK, Australia, and in Canada. And then we've got some of the non-English speaking countries that some of the formative work we did last year I think we will start to see next year.

We are continuing to watch things to make sure that the overall revenue growth trajectory of the Business is heading in the right direction, such that the investments we are making are all being looked at on an ROI-type basis. We will be getting back to you guys, obviously, as we get into 2017. We are still fleshing out our model.

Frankly, part of what happened this year the bookings growth and revenue growth really exceeded our internal expectations. So as the year went along we were sort of recalibrating spend to sustain and augment the growth. So we are now going through really analyzing 2017 so we can give you some good numbers in the first part of the year.

Got it. Thanks again and congratulations.

Thank you.

Mark Strouse, JPMorgan.

Yes, hi, guys. Thanks for taking our questions. Congrats on the strong Q3 here. Dan, I would also like to say best of luck and thank you very much for all your help over the years.

Luke, I know you don't want to get into details, but I just wanted to press you a little bit more on Seattle. I can appreciate your commentary around quality versus the price space competition. But from our side of the house here, is it fair to say generally that the Seattle contract will be similar to pricing to your other contracts that you have already secured, despite the NYPD noise?

Yes, I think Seattle would be a good proxy for how we would handle the majority of major cities. I would like to add a little bit of color just on how we think about NYPD. We think that is kind of an anomaly in terms of how they play into the market. It is drastically larger.

With that deal, we think there is still an opportunity for us to come back and win that over the long term with one of the solutions that we bring to market. Fundamentally, we think the landscape has not changed. Our head of sales likes to say an informed customer is our competitor's worst nightmare.

We really believe that when they do these trials they see the value of the system that we've created, specifically around the value of the workflow. When you start to add in the cost that it takes for them to do these processes manually, as well as the exposure that they'd have if they were to have a security breach. In Charlotte, they had a major high-profile video where they had several groups calling for the release of the video.

We worked with Charlotte PD to handle that situation. I think that is something that none of our competitors could do is provide that level of security.

We put our security operations team hand in hand, so we were working with the customer threat monitoring, monitoring network traffic, and taking very proactive infosect capabilities to help our customers out.

So just to answer your question, Mark, we do think Seattle is a good proxy for the rest of the major cities. A final point for me on this is when agencies field trial, we feel very confident in our solution. Then the last item I would say is this is part of our strategy, is to get that onto our platform. Then we can expand the platform with future capabilities, like RMS, which Rick talked about in his section.

Just to be super clear, the Seattle pricing is consistent with prior contracts.

The one other thing I would add is it's not just about -- your question talked about quality. This is not just about quality. It is really about capabilities.

I think fundamentally what we are competing with are camera vendors selling cameras. The majority of our investment has been around the integrated hardware/software experience. Unfortunately, we had New York, and frankly Phoenix PD, both just kind of tested cameras and priced out cameras and liked the price of cheap cameras.

We're doing everything we can, and frankly I don't think those are fully baked yet where some of the people are asking questions. Given the complexity of deploying thousands of cameras, maybe a field trial is in order.

It is not just, again, the quality of the camera. It is the full ecosystem of information management and sharing. There's a pretty rich enterprise software program on the back end of this. Once we get agencies looking at that, there is no one else in the market that can deliver on it.

Now, of course everybody can put together a PowerPoint that says we are in the cloud and we'll do this. Sure, we'll have docs that connect to the cloud by sometime in the middle of next year if you give us the deal. It is a whole lot different when people have to deliver on it.

One of the things that our customers will tell you and we take great pride in, our customers do not fail. We do not allow them to fail. That's a combination of the investments we've made in technology, but also customer service and support and field engineers and sales engineers and training staff. All that has to come together for a large-scale program to roll out effectively.

Got it. And then just one more and I'll hop back in queue here. It is my understanding that the deployments under the London Met program have begun. Are you able to quantify how much of an impact that was, at all, to 3Q bookings? And then how we should we think about those deployments and the impact on bookings over time?

So the London Met was included in bookings. There was a little bit of a small true-up in the quarter. They are a very strategic customer for us, as we've talked about some of the dynamics in first mover agencies, beach head accounts, and international agencies, maybe on a more different or aggressive pricing model. But we are not going to shine a lot of visibility on it, frankly, for strategic reasons.

Right. Okay. Thank you very much.

Jeff Kessler, Imperial Capital.

Thank you for taking my question. Dan, for the short time we have known each other, congratulations.

First quickly at IACP, did you demo enough video, multimedia integration to show that somehow you could get the end user to believe that that upgrade cycle because of greater technology, greater integration that was needed, that you got feedback saying that their upgrade cycle might be shortened on the services side?

We are talking about the service plan decreasing the length of the upgrade cycle. That is primarily on the weapons side. The upgrade cycle on the camera side is actually kind of built in because the majority of our customers on the AXON side actually choose service plans that include automatic upgrades that happen every two and a half to three years. That is baked into the service plan.

It is something like 80% are choosing those plans. So it is really that same dynamic we're trying to replicate over in the weapons side of the house. Now, we don't have a lot of data because those agencies really are just maybe in the next year starting to come up -- the first agencies that went on these service plans five years ago.

I would say as long as we've got compelling new products for them, cops really like weapons. It is an important part of what they do. We are pretty confident that what we have identified is that the budget cycles are the main impediment. If we are bringing out compelling new product offerings and they've already got a budget line item assigned to it, we think that really should help accelerate it. It is still too early for us to have specifically relevant data on that.

On a real-life basis in discussion, how are you getting -- how does sales or -- how do you get your clients to upgrade to RMS? What is the pitch, and what is the mechanism by which they're doing that?

Jeff, that's a great question. We've really started these discussions at this year's IACP about the capability of the ecosystem. We've got a great user conference lined up for next year, where we are really inviting a lot of our existing AXON and evidence.com customers -- actual users of the system -- to come to that user conference where we will talk to them about the RMS capabilities.

The real benefit that we have is that just the TASER brand strength and the customer experience that they provide. The vast majority of our customers really value the TASER experience that we have created. I talked with probably over 300 customers at IACP. The general response, which was very high, was customers were interested in expanding to more capabilities on our platform.

Really what we are setting up here is our record management system is the core ERP of a law enforcement agency. So these things have very long sales cycles and long implementation timelines historically.

So we are beginning the process now of discussions with our customers and, frankly, giving them the opportunity to be participants in how we are developing and how we are prioritizing the features of this. Ultimately if you think about it, today records in police work are primarily text-based. It's the cops sitting at a computer typing about stuff. That is sort of the world of 50 years ago, right?

We used to get our news and information reading the newspaper. Now that's totally transitioned to where we are consuming multimedia information: photos, videos, whether it's Snapchat or frankly watching a game on TV as opposed to reading a newspaper about a sports game. Similarly, a law enforcement activity or report, when you can show people a video it is 1,000 times more informative and more credible and more transparent than anything you could ever achieve with all the time police spend creating paperwork.

So what we've basically have announced is a vision that says we are going to use these videos to be your reports. We will extract from those videos the information that needs to be searchable and shareable and redefining what a police report is for the 21st Century.

I would say that vision absolutely struck a nerve where customers were like yes. I had one guy, I think from Minnesota, a chief came up to me -- he was emotional. He was like, I've been talking about this for 10 years. It seems like it is finally happening.

We are early in the process, where we have the June conference where we are going to be showing sort of the initial product and having customers help us iterate on it. Don't expect this to be a revenue product in the short term, but it can be a very large one in the long term.

Last question about that, and that is the feedback you are getting from customers on this, are you beginning to develop analytics that are going to create the type of user experience that they want? That's an obvious question. You are going to say yes to it. The real question is, is the value proposition that you present, how is that going to be reflected in the suggestions they are giving you to put into this new product?

If you think about it, all the information that we would ever need for a police report is based on what an officer sees, hears and thinks during an incident. Our cameras can capture what he sees and hears. And with a little bit of dictation, we can capture what he thinks about and what the perceptions were.

So really this is about our sensors doing the information gathering into the backend. Now, where we need a lot of customer input is what are the most important features early on? What should the user experience feel like? What do they want to dictate versus what do they want to type? Where do we want to use selections and drop-down menus?

This is not going to happen overnight, where we have this incredible artificial intelligence robot agent that is able to watch the videos and write the reports for us. There is sort of an element of crawl, walk, run as we move into the end state where ultimately we do want to get to where the AI tools that are so rapidly evolving are machine learning and natural language transcription, big data, use your buzzword of the day. All these technologies that are rapidly advancing into sort of the core tech industries -- for us it is the sort of magic here.

We are not going to develop all those groundbreaking tools. It is us mapping them on top of the right user experience that is appropriate, given the maturity of the technology today, and developing the user interface that just works for a street cop with minimal training. So just one quick example -- one of the first things we launched is transcription. Our customers can now mark any video, or any segment of video, and say, I want this transcribed.

Now, in the future, we would love to have a computer do that transcription. The fact is, today computers are not that great at transcription, particularly with messy audio like you would get in a police recorder. So we have taken that business process and we have managed that through a partnership with a partner that has lots of people that are court-certified transcriptionists. In many states actually if you're going to submit a video to court you have to have transcription.

Well, now for our customer, that's as simple as clicking a button. You have to pay for it. We handle all the backend of transporting that to a court-certified transcriptionist, and it will the next day or so magically show up in evidence.com.

So again, this is sort of mapping at what level of things can we do with technology versus people services, and then taking that into the future and having a good strategy and good understanding of where the right technologies meet the right customer need at the right point of maturity.

Great. Thank you very much.

Thank you. Great questions.

Glenn Mattson, Ladenburg Thalmann.

Hi. Congrats on the results for the quarter, guys. Dan, congrats on moving on, and a great job at TASER.

I just want to highlight on the weapons out-performance again this quarter. In the subscription plans and how it is recognized, so you said you're going to recognize five years' worth of cartridges up front, but the weapon, the handle itself, that gets recognized over time. Is that right?

So typically, we will recognize the handle and the cartridge delivered up front. There are a couple different TASER 60 plans, one that includes just a few cartridges, one that includes more cartridges. Depending on which plan people pick, we will record the handle and the cartridges with the sell in and then record a long-term receivable. The piece we recognize over time is the warranty.

I wonder if the cartridge number is going to be inflated for a couple quarters and then drop off? I guess unless there's a big pickup in overall handles, is that kind of how that would smooth out?

Yes, and a lot of that will depend on how many of the TASER 60 programs we sell. I think one things we are seeing at least early on is that people are buying more weapons up front. So instead of buying, say, one-fifth of their arsenal each year for five years, they buy them all up front because the cash flow impact is the same. They can sort of upgrade their entire installed base at the same time. As a result, we sell more cartridges at that point as well. So I think, certainly, we will see how it fleshes out. We see this as being a big net positive for just the weapons segment in total.

Okay. Other than that, you said the three largest deals were in the subscription plan. I wonder, it feels like those plans would take some time to hammer out. Coming into the quarter, I think you guys were guiding to flattish or down after a big front half of the year in weapons. Did the demand kind of surprise you in the quarter, I guess?

It was definitely stronger than we expected; and, again, I think that these subscription plans are making a difference. I think that are helping to drive business and helping to make the overall deal size just a little bit bigger.

So again, somebody is potentially buying. You know, our cash flows maybe aren't going to be as reflective as the deal size just because people are paying over time. On a revenue perspective, we are seeing larger revenues because people are gravitating towards these plans and buying more product.

Okay. Great. Then with the comment you made on the flat -- I think you said typically Q4 is a lot higher, but you think it's going to be closer to flat to Q3. Was that regarding the total revenue, or was that one segment? I didn't quite catch that.

That's the total revenue.

Total revenue. Okay. But that's minus the one-time catch up payment, right? Excluding that, I mean.

Well, I think the one-time catch up is one of the reasons why we expect it to be relatively flat because we had some items that certainly helped Q3. So we think Q4 will be in line with Q3.

Okay. All right great. Thanks, guys.

Thank you.

(Operator Instructions)

Jeremy Hamblin, Dougherty & Company.

Hi there. This is David Burdick on for Jeremy. Thanks for taking my question and great quarter, guys.

Thank you.

I just wanted to touch on the AXON service revenue growth. It looks like it had quite a big jump -- about 80% sequentially. Hopefully you can provide some more color on that. As well as I wasn't sure if I caught it or not, but did you tell us the active users growth in Q3 by chance?

I will start with the last part. We did not say the exact growth. We did narrow the spread between the book seats, which we disclosed, and the active paid seats. We don't disclose the exact number for the active paid seats.

Q3 benefited from a few things. One was the catch-up service revenue, the $1.7 million, so that certainly helped. Then the fact that we had a lot of the cameras that we shipped in Q2 were shipped in June, so you saw a lot of those cameras come in through the service revenue in the third quarter along with the 30,000 cameras we shipped in the quarter. So I think that really led to roughly a 50% increase in the ARR. As a result we're seeing that in the quarterly service revenue.

Then just on the SG&A on the AXON side. It grew, I think, 98%, while the sales on that side grew about 75%. I was wondering why there was such -- usually those are maybe a little more connected?

We are certainly continuing to add salespeople, both domestically and internationally. We are sort of paying attention more to the bookings growth versus the GAAP revenue sales, just because GAAP tends to be a trailing indicator.

The other thing I would say is that with the much higher bookings, we are seeing higher commission and variable sale expense as well, which is part of what's driving that. Then we've got some additional marketing expenses.

Okay. Great. And then just on the TASER 60. I know you guys mentioned a few benefits and offers, as well as it seems like it's finding some success.

I am hoping to get a little more color on that. As well as maybe just when looking at the cost for your customer, what kind of incremental benefit do they gain by choosing the plan over just maybe a one-time purchase?

They get a few benefits. One is the warranty is sort of bundled in. They have the ability to spread out their cash flows, which I think is important to them. Because of that, they have the ability to upgrade a larger proportion of their installed base at once without having to outlay more cash. So I think that sort of certainty comes with that, and I think has really resonated well with customers.

The other thing I would say is anytime you are doing a big purchase, there is a certain amount of bureaucracy that they have to navigate. One thing that we are finding resonates well with them is if you're going to navigate that bureaucracy to go get special one-time dollars, you could spend that same amount of effort to get budgetary approval to put it in your budget. Now you're not going to have to go fight that fight every time you want to upgrade your equipment.

That's a real benefit to these guys. They're like, great. They can see this can be a future pain point that's eliminated because they've sort of planned for this as an ongoing program, not something you just buy once and then have to deal with it again at down the road. (Inaudible.)

Okay. All right. Great, guys. Thanks and good luck in Q4.

Thank you. I think we have time for maybe one more set of questions.

George Godfrey, CL King.

Thank you. Just made it in under the wire. Congratulations on a great quarter. Two quick questions.

The customers that chose the TASER 60 program, can you segment what percentage were [Greenfield] new customer buys versus upgrades of existing weapons?

I would say the majority. We are in 95% of agencies across the country, so I would say the vast majority, nearly all of them, would have been existing customers.

What we do see, especially in the smaller deals, is that when they buy in one of these payment programs, we are seeing a great indicator that they are actually buying more unit handles than they would have if they just bought with a one-time expenditure.

So we could have been selling the weapons to an existing customer, but now they are rolling it out to a larger percentage. So, I'm making this up, but 50% for existing officers who had weapons and 50% are all new officers?

Correct, that's right, or they are upgrading their entire installed base all at once versus doing it over time.

Which also really helps the upgrade program because a lot of these guys are like well -- for somebody who is upgrading -- oh, I've got 500 TASERs. Now I want to upgrade them, but I can only afford to do 100 this year.

We say great, guess what? If you can just put us in your budget, we will give you the 500 now. Then that unsticks the deal because otherwise they are thinking well, geez, now we have got to support two different weapons in the field, two different types of training.

Here we can say look, you've got a clean program cutoff. Let's upgrade all your officers and pay for it over time. So that deal otherwise might not have happened at all because of the sort of complexity of having a mixed fleet of devices.

Understood. And then the second question. On the records management system, which sounds very exciting, two pieces.

One is after you show it in the June User Conference next year, would you expect GA to be in the second half of 2017? Then the second part of that is the pricing. Would you price that as a standalone recurring monthly model?

Do you augment existing contracts? How does the accounting work on how you roll it out to a customer that has evidence.com and now wants to go with an RMS?

I hate to say this. I think it is premature for us to comment on either of those. At this point I don't know that we would have -- part of it depends on how wide and complex the initial version of the product has to be to meet customer requirements.

If it turns out that a fairly narrow product that covers the 80% of interactions they have is sufficient, then that's going to be launched sooner than if what we learn with customers is no, no, no, we need to even have these edge cases covered before we could upgrade to it. Then in terms of pricing, those are decisions we're going to refine based on how the product evolves.

So we know it will be a significant incremental -- there are budgets for this today. Of course, it's from law enforcement. Our ultimate pricing I think is going to depend on strategically how we can determine to best make that work for our customers.

Understood. Great. Thank you very much for taking my questions.

Thanks a lot.

Thanks, everybody. Obviously, an exciting day for us here. Appreciate -- I saw some comments online back and forth.

We've had some shareholders who have been with us for awhile sort of exuberant in today's result. Delighted we could surprise you with some great results here. It surprised us as well, as our customers continue to just really find value in what we are doing together.

So everybody have a fantastic holiday season, happy Thanksgiving. I look forward to talking to you all in 2017.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone have a great day.