Axon Enterprise Inc (AXON) 2012 Q4 法說會逐字稿

Welcome to the TASER International, Inc. Fourth Quarter 2012 Conference Call. At this time, all participants are in a listen-only mode. Later, we will open up the question and answer session and instructions will follow at that time. (Operator Instructions). As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Rick Smith, Chief Executive Officer. Sir, you may begin.

Hello, and thank you all for joining us for our 2012 TASER International Annual Results Conference Call. Before we get started, I'm going to hand off to Dan Behrendt, our CFO, for the Safe Harbor Statement.

Sure. The Safe Harbor Statement. This press release contains forward-looking within the meaning of Section 27A of the Securities Act of 1933 as amended, and Section 21E of the Securities Act and Exchange -- Securities in Exchange Act of 1934 as amended. The Exchange Act, including statements regarding our expectations, beliefs, intentions or strategies regarding the future that will continue to make investments through increased SG&A in 2013, that we anticipate agencies will take advantage of our upgrade program and that we are well positioned to execute our strategy.

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 on current information and expectations regarding TASER International, Incorporated. These estimates and statements speak only as of the date in which they are made.

They are not guarantees of future performance and involve certain risks and uncertainties and assumptions that are difficult to predict. Be cautioned these statements are qualified by important factors that could cause actual results to differ materially from those reflected by the forward-looking statements that are herein. TASER International assumes no obligation to update this information contained in -- in this conference call. Other factors are identified in documents filed by us with the Securities and Exchange Commission including those set forth in our form 10-K for the year ended December 31, 2011 under the caption risk factors. And with that, I would like to turn it back over to Rick Smith.

Excuse me. Thanks, Dan. We are appreciative of the opportunity to report some great results for 2012, and a strong fourth quarter in particular. As you no doubt have seen in the press release by now, Q4 revenues were up 51% to $32.1 million, and annual revenues rose 27.5% from $90 million in 2011to $114.8 million in 2012.

If we look at this by segment, in the Conductive Electrical Weapons segment revenues grew $9.6 million or 46.6% over the same quarter last year. In the Video Cloud and Software segment revenues grew 122% or $1.1 million over last year.

Now, although video revenues grew from a small base, we are seeing consistent growth in evidence of continued traction in the market place. In fact, we are including some new information in our earnings release. We are now releasing the AXON and Evidence bookings by quarter.

Given that Evidence.com is a service with revenue that will be recognized over the service delivery, we feel it's an important metric to share the total sales bookings each quarter to enable investors to see the overall traction of the business, which can be harder to discern on a GAAP basis as revenues, again, are recognized over extended time periods. We define bookings as the sales prices associated with orders placed in the relevant time period including hardware, software licenses, maintenance, warranties and other items, which may be paid for and/or recognized as revenue in future time periods.

Bookings for AXON and Evidence.com have grown from $352,000 in the first quarter of 2012 to $1.67 million in the fourth quarter. Across the business gross margins were strong in the quarter, as well, coming in at 59.7% compared to 32.7% last year.

Of course, the number last year included some significant one-time items. In the weapons segment margins were a healthy 62.7%. Now SG&A also increased significantly over last year by 23% or $2.4 million.

There are two primary reasons for this. First we've increased our investment in customer basing roles to help grow sales. For example, we created a new telesales group function, which did not exist in 2011. In a little over a half year, starting in May, the telesales group brought well over $5 million in incremental revenue.

This group accounts for roughly eight additional headcounts, and we anticipate growing it to 12 people in 2013. We believe the return on investment on these positions is significant in driving additional revenue. Another example is our account management function, which also did not exist a year ago.

In order to ensure that customers who purchased the AXON Flex cameras have a great experience and become long-term customers for Evidence.com, we havecreated a team of account managers, which currently includes around four team members. This team does proactive post-sales support to ensure the customers who purchase our systems are able to effectively deploy and begin using our Evidence.com service, which we believe is critical growing the service over time.

The second reason for the SG&A increase were increases in legal expenses in the quarter. For strategic litigation reasons, we will offered a $750,000 settlement in a commercial litigation case involving the termination of a contract with an international distributor. The offer protects us against legal fee damages in the event that an award is made during litigation for any amount less than our offer,because we do have an outstanding offer, we reserve the full $750,000.

There were other legal expenses related to two cases that went to trial in the fourth quarter, which is a particularly heavy legal case load for the quarter, both of which cases we won. We have seen, overall, a decrease in our total legal caseload in recent quarters, a trend which we hope will continue due to our strong record of successful defense. Which, again, we -- we hope to see that trend continue going forward, which over the long haul should see declines in legal expenses. At this point, I will pass over to Dan to go over the financial results in more detail.

Thank you, Rick. As Rick said, revenue for the fourth quarter was $32.1 million, which is up approximately $10.8 million or 50.6% from the prior year.

The increase in sales versus the prior year was driven by the continued option of the X2 conducted at electrical weapon CW. The North American law enforcement business continues to be strong, mostly driven by the upgrade cycle to the new X2. The TASER Protection Plan, our municipal leasing program, contributed approximately 10% of our revenue in the fourth quarter, which shows continued positive reception the program has by our customers.

North American law enforcement sales are up 33% over the fourth quarter of 2011 and the total year increase for the North American law enforcement sales is $15.6 million or 28.7% year-over-year. The upgrade opportunity in North America remains one of our growth drivers as we go into 2013. Total year sales of $114.8 million set a new record for TASER surpassing the previous record of $104.3 million that we set in 2009.

So we are up about 10% over that previous high water mark. Gross margin for Q4 was $19.2 million, or 59.7% of revenue, which is up significantly from the 32.7% of the prior yearAs Rick said, earlier in the fourth quarter of 2001, the Company did have a number of one-time items including a $3.7 million charge for access inventory ran [us] through margin.

Gross margin before the excess inventory charges in the fourth quarter of 2011 were $10.7 million or 50.3% of revenue. But the remaining improvement, about 9.4%, is due to the higher operating leverage in the business.

We also had a higher percentage of drop shipments in other direct sales to customers in the quarter, which increases our average selling price but has a partial offset and increased variable selling expenses due to paying distributors their margin on those drop shipped products. Cost of service delivered decreased by $738,000 versus the prior year due to the move to our own data center into a public cloud provider.

And in Q4 we are finally starting to realize the lower cost structure that moving to a public cloud provider provide on an ongoing going basis, so we are encouraged by that. SG&A expenses were $12.5 million for the fourth quarter of 2012 compared to $10.1 million in the fourth quarter of 2011.

On a percentage of sales basis, SG&A was 38.8% of sales in Q4 of 2012 versus 47.4% in 2011. There were several unusual items in the fourth quarter totaling roughly $1.6 million. These include the $0.8 million of litigation settlement offer that Rick mentioned earlier in the commercial case with the distributor.

There is also a stock compensation (inaudible) in the fourth quarter that contributed to a year-over-year increase of about $0.6 million. As a result, performance-based stock divesting sooner than previously anticipated, and we also had variable selling expenses of about $0.8 millionthis quarter per comparative prior quarters. But, again, we are partially offset by higher selling prices due to more sales being direct, which increases our average selling price in gross margin.

Personnel costs increased due to some of the additional strategic hires we have been making. SG&A expenses in the video segment increased about hundred and $149,000, sequentially, in the fourth quarter as a result of some of the investment we are making in these customer facing roles like account management. The Company continues to invest in SG&A expenses to grow our international and video product sales.

We are encouraged by the results of these investments, and we will continue to reinvest in the business, and therefore expect to see approximately 10% increase in full-year SG&A expenses in 2013, as compared to the full-year of 2012. Research and development expenses of $2 million in the fourth quarter, which were flat compared to 2011. We continue to see efficiencies in our professional and consulting fees, partially offset by some stock compensation and some employee costs as we continue to make some strategic hires in the R&D area, especially in the video area.

We expect R&D will pick up slightly in 2013 as we continue to make those investments for our R&D development headcount. Adjusted EBITDA, which includes the impact of stock compensation charges, the loss and the write down disposal of property plan equipment and intangibles, and the provision for excess and obsolete inventory losses on impairment, interest and other income, as well as the litigation judgment expenses were $7.7 millionin the fourth quarter of 2012 compared to $1.2 millionin the fourth quarter of 2011 with improvement being driven by the higher sales in 2012.

The income for operations for the fourth quarter of 2012 were $4.7 million compared to loss of operations of $7.2 million in the fourth quarter of 2011. And net income in the fourth quarter 2012 was $3.8 million or $0.07 per share on both a basic and diluted basis compared to the net loss of $5.9 million or $0.11 per share on a basic and diluted basis in the fourth quarter of 2011.

Income taxes for the quarter were $1 million for the fourth quarter. We -- we -- the income tax expense in the order was favorably impacted by the reversal of an impairment reserve for deferred tax assets. Strong operating results in 2012, coupled with a favorable forecast led the Company to conclude that it is more likely than not that deferred tax are [revisable] and no impairment reserves are needed.

So a $1 million benefit we took in the quarter for that reversal. Moving on to the balance sheet, in the fourth quarter of 2012, the Company generated $3.4 million in operating cash flow, which helped us to finish the year with $37.8 million of cash, cash equivalents and short-term investments, which is an increase of $11.4 million over the level we ended fiscal 2011 with.

The increase is due to the higher sales which generated $26.5 million of operating cash flow in 2012. There is an additional cash flow of $4.7 million generated by tax -- the tax benefit created by employee stock option exercises, which provided a tax shield which lowered our cash taxes in the quarter.

But that is included in the cash flow from financing activities, not in operating activities. These were offset by the $20 million of stock buyback we executed in 2012 with the Company purchasing 3.8 million shares during the year.

Accounts receivable at $18.1 million are up $6.3 million for the prior year-end due to increased sales in Q4 of 2012 versus the same quarter of Q4 2011. Inventory $11 million is actually down $0.5 million for the prior year-end balance. The decrease is attributed to the reductions in finished goods due to the strong sales we had during 2012.

We also saw the reserve for excess and obsolete inventory reduced from $4.4 million to $2.3 million during the year as a result of the disposal of some of the previously reserved for inventory. The investment of property and equipment [$22] million is down $4.9 million when compared to the prior year-end. The net decrease is driven mostly by the depreciation of $6.3 million four the year offset by a $1.5 million of CapEx during 2012.

Most of the CapEx was focused on production equipment and some computer and office equipment. Obviously, the CapEx this year was relatively low. It contributed to part of the cash flow. Total assets at December 31, 2012 were $116.2 million.

Accounts payable $6.2 million are actually up $1.7 million for the prior year-end due to the increased purchases of materials to support the higher sales levels compared to last year. Accrued liabilities of $7.1 million decreased by $0.6 million, primarily due to the reversal of the portion of the Turner litigation judgment recorded last year, largely offset by accrued salaries and benefits.

Total deferred revenue of $12.1 million actually increased $4.2 million during 2011, primarily due to the new increased sales of the X2 trade-in program, which includes an extended warranty. When we sell extended warranties, we actually defer part of that revenue recognized off the warranty period, so that is part of the driver.

The other part of it is deferred revenue related to deferral of Evidence.com service group, $1 million during 2012. As Rick mentioned, we -- we allocate a portion of the sales to the service part of Evidence.com. We also have customers that will purchase in advance between three and five years of the service, so we defer those revenues and we'll recognize those over their requisite service period. The total liabilities are $29 million and the Company finished the quarter with $87 million in stockholders' equity.

Again, we had no long-term debt on the balance sheet other than a small amount of capital leases and continue to have liquidity in the strong cash flow engine and our core business to fund our R&D efforts and operations as we move into the future. Speaking of cash flow, the Company did have cash provided from operations of $3.3 million during the fourth quarter and $26.5 million for the year.

We are pleased with that. Cash provided by investing activities for the 12-month ended December 31, 2012 $1.7 million compared to a cash used up $7.6 million in the same period for 2011.

Mostly driven by the fact we had some of our short-term investments mature during 2012, which actually provided some cash and that cash has ended up back up on the cash line of the balance sheet. Cash used in financing activities was $3.4 million for the 12-month ended December 31, 2012, compared to $31.1 million used in the same period of 2011.

Again, that is driven mostly by the $20 million stock buyback in 2012 offset by the $, 4.7 million of tax benefit from deployed stock option exercises that flows through cash provided from financing activities. The Company ended the quarter with $36.1 million of cash and $1.7 million in short-term investments for a total of $37.8 million of cash, cash equivalents and short-term investments.

Again, the -- the sales statistics for the folks that like to track this, in Q4 of 2012 we sold 10,389 X26 units. X2 was 11,259. That's actually a new record for X2 in a quarter. [N26] had 513 units. X3, we sold 181. We actually have been selling X3 units into the consumer space, and have been moving some of that inventory through those channels. C2 sold 3,209 units in the quarter.

TASER CAMs were 2413, and we sold 373,585 cartridges. Down a little from Q3, but as you remember, we had a cartridge promotion in Q3 for our distribution, which drove some of that volume in Q3. So, we saw that come down a little bit in Q4, but still real strong results in cartridges for the fourth quarter and for the year. We are -- one thing I want to talk about this morning is we are excited to announce our first Analyst Day. It's going to be held at the NASDAQ market site in New York City on March 12, 2013.

Our entire executive team will be in attendance to discuss our business strategies and the vision for the future at TASER. We will also have demonstrations over our X2 and X26 smart weapons and, as well as our AXON Flex recording systems. Space is limited, but if you are interested in attending, please reach out to Erin Curtis who works in our Investor Relations department. The easiest way is to e-mail her at IR at TASER.com. And with that, I would like to turn the call back over to Rick Smith, our CEO.

Thank you, Dan. So as Dan mentioned we continue to see traction with the new X2 smart weapon in the fourth quarterWe had major deployments in Phoenix, Tempe, Knox County, Cleveland and other agencies. We are continuing to see a trend of agencies moving toward what we call our smart platforms. I will talk about that more in a minute.

However, we still have a lot of upside and room to grow in upgrading our customer base of installed weapons in the field. At the end of the year, we have only upgraded 9% of the TASER weapons that are more than five years old. This number includes not only X2 upgrades, but also some standard X26 purchases where agencies bought new X26's to replace aging X26's.

In 2013 we believe we have the opportunity to accelerate the upgrade of our install base at the introduction of the new X26P TASER smart weapon. While a little over half of our sales last quarter were for the new X2, the other half continued to be for the legacy X26. So working with our customers, we've identified that some customers wanted to retain the smaller size and the familiar form factor of the X26.

One of the primary reasons for this has to do with expensive logistics of retraining officers on a new weapon platform. Some agencies will spend as much or more of their budget on retraining officers as they spend on the equipment. For this reason many agencies have told us they want to stay with the familiar X26.

However, they have also expressed interest in some of the new features and the technologies in our X2. For this reason, we introduced in 2013 just within the last month or so the new X26P TASER smart weapon. The X26P requires no new training of officers who have been trained in X26, yet it does include the enhanced safety features of a smarter device. It's more connected with enhanced durability and data collection.

The X26P includes the advanced data logging, charge metering, which ensures more precise control of the electric charge, and the weather proofing features that we have in the X2. It is basically a significant face-lift or upgrade of the X26 platform. So for agencies with older X26's that are past their useful life, we believe the X26 provides a much more compelling reason to upgrade to this new technology stack, rather than just buying a new weapon to replace one they've got with fundamentally the same device by just buying a new X26.

Buying an X26P is much more compelling. We believe the X26P will provide an even more compelling reason for the agencies that do want to stay on a single shot device, and yet gives them an opportunity to upgrade their capabilities. However, in the short-term, the X26P does introduce a new weapon, and that means some agencies who want to evaluate it.

That may delay some of the deals from Q1 until later in the year as agencies test the newly introduced weapon platform. It may cause softening of revenues in the first quarter, which already tends to be seasonally weaker than Q4. We do expect that on the annual basis it should accelerate upgrades in sales over the course of 2013. In the video and cloud software business segment, bookings grew 172% over the course of just two quarters from 614,000 in the second quarter two approximately 1.7 million in the fourth quarter of 2012.

Now those are bookings particular for our AXON Flex wearable cameras and Evidence.com. We did not include TASER cam bookings in those numbers. It has to do with the TASER cams do not see the heavy usage that the officer worn Flex camera does, and, therefore, the TASER cam doesn't really drive the use of Evidence.com and the services the same way that the on-officer cameras do.

When you look at our financial statements you will see in the video segment, on a GAAP basis, that includes TASER cam and the Flex cameras and Evidence.com. In this bookings number so we can give more transparency to our shareholders on the Flex and Evidence.com we've in restricted that booking number there and so makes it easier to analyze that on a sequential basis.

These deployments included Marquis deployments such as the Salt Lake Valley Please Alliance, which deployed Evidence.com across 14 agencies. We think this is a very important deployment because it showcases how these events connectivity and sharing features of a cloud-based solution like Evidence.com can enable clusters of agencies to work more effectively together and share information.

The increasing sales bookings of our video cloud business are a bit reminiscent to the early adoption rates of TASER weapons we saw in the early 2000s, a trend we hope to see continue. As we look forward to 2013, we continue to have three primary foci in growing our business. First is upgrading our install business of TASER weapons.

And as I mentioned, while the X2 has driven an upgrade about 9% of the install base that is over five years old, we believe the examine X26P will now help the X2 in further accelerating this upgrade cycle by allowing agencies that wish to stay on the same platform and avoid retraining, we just fix in costs, yet the same features of a TASER smart weapon, they now have an option with the X26P.

By the way, when I mention TASER smart weapon, I am referring to both the X2 and X26P, which are built on our new all-digital architecture, which includes things like onboard diagnostics and calibration, charge metering and advanced data management features. Our second area of focus is, of course, driving international growth. We have teams in Europe, India and Brazil focusing on driving weapons sales and the new video and cloud initiatives.

We see significant opportunities in these and other markets in the year ahead. Third is driving the driving adoption of our Axon and Evidence.com products and services. I think I should make it clear this initiative is actually much larger than selling our cameras and video management software.

We see a convergence of new technologies occurring including cloud services, smart mobile devices, high-speed data networks and digital video converging on law enforcement the same way these technologies are already revolutionizing other industries. Our new smart TASERs, Axon and Evidence.com, are the first offerings of new public safety platform strategy. Where we believe TASER can become the primary technology stack that allows agencies to get more connected with smarter devices and more agile cloud service applications.

As we look at our poor competencies and how to leverage these competencies to create unique, sustainable, long-term value for our stakeholders, TASER has the unique benefit of greater than 90% market share with the U.S. law enforcement agencies meaning more than 90% of agencies in the United States are customers deploying our TASER devices. We also have unique competencies around design and manufacturing with advanced electronic devices coupled with best-in-class training and support services.

Over the past four years, we have augmented those core capabilities by investing heavily in building a world-class software applications capability,now including teams both in Santa Barbara and our new office in Bellevue, Washington. We believe we can leverage these core competencies to position TASER to benefit from the wave of new mobile and cloud technologies, which, again, have already revolutionized consumer and business enterprises, positioningTASER as the leading provider to bring these solutions to the public safety market.

We see the opportunity here to disrupt a $15 billion to $20 billion market in North America,and a much larger international market. We have attracted world-class talent including our new Vice President of Engineering who joined us in the fourth quarter, Danny Dalal from Microsoft Research, and our new Vice President of Information Security, Jenner, Holden, who joins us from LifeLock.

To enable TASER to develop a series of disruptive technologies over the next decade, we believe we now have the potential to dramatically accelerate our customers' capabilities, while simultaneously increasing revenue and, of course, our shareholder value. Axon and Evidence.com are just the beginning of a broader platform strategy to create an ecosystem of capabilities for our customers.

If you would like to learn more about this new public safety platform strategy, please join the webcast of our Analyst Day on March 12th from NASDAQ. We will share details about this strategy, and we will a model of what the business could look like over the next three to five years. If you are interested in attending this event, please email Erin Curtis at IR, as in the initials for Investor Relations, IR at TASER.com for more info.

These are really exciting times at TASER. In 2012 we began to see the results of our investments in growing the business, resulting again in 27.5% topline growth with significant cash generation and profitability. We believe this is just the beginning, and we're looking forward to an exciting 2013 and beyond. And with that we would be happy to take a few questions as we wrap up the call.

Thank you. (Operator Instructions). Our first question is from Steve Dyer of Craig-Hallum. You may begin.

Thank you. Good morning, guys.

Hi, Steve.

If I heard the numbers correctly, this is the first quarter the X2 outsold the X26. Is that right?

That is correct. The X2 for the quarter -- this is Dan Beherndt -- four 11,259, and the X26 was 10,389. You are right. That's an important milestone, as well. They have been kind of neck and neck throughout 2012 for this quarter, mostly driven -- or partially driven by the Phoenix deal that we had in the fourth quarter, which is an X2 deal , pretty significant x2 deal, and Q4 that was closed through the TPP program, the municipal lease program helped us to actually have the X2 be higher than the X26.

Okay. So is that necessarily -- is a trend we -- you would expect to see going forward, or it might be neck and neck here for awhile? I am just wondering. I remember back when the X crossed over the M. It never turned back, and it is obviously a nicer sale. What do you expect going forward maybe for 2013 on the break out of those two?

You know, it's interesting. With the X26P, I think that's a -- we didn't introduce the P, that's probably -- it may have continued. We certainly got, as Rick indicated earlier, we got a lot of feedback from customers who like the new technology, like the move to the digital technology and all the features that comes with that, but were a little bit hamstrung on the cost and complexity of pulling the officers out of the field to retrain them on a platform.

The X26P really allows them to do a running change without that training. I expect that over time the X26 -- the sort of what we call the X26E, which is the 2003 vintage x26 will slowly, slowly get reduced over time and replaced by the X26P and X2. The X26P is also a good product. It has a slightly higher price point than the X26, so it is alsoa product that we think that will be accretive to sales and earnings in 2013 and beyond.

Okay. And then with respect to the X2 sales that you have been having, do you have a great sense as to what percentage of that are replacement sales versus new sales?

I would say it is probably greater than 75% are upgrades. We have had a number of agencies go right to the X2. It is interesting. I think it's just sort of taking a fresh look at the [CEW] technologyin general and X2 help and to do that. And they say, "Hey if we are looking at CW's, we might as well buy the latest and greatest. So we exchanged some of that, butI would say the majority of our sales in 2012 have been upgrades from existing customers.

Okay. And then with respect to kind of the Body Cam and the growth there do you expect from a unit standpoint thatthat is going to follow a similar trajectory the X26 did back in the day in terms of adoption from a unit standpoint, or would you expect that will be slower to roll out just in general?

Well, with the Flex binding cams, obviously, we would love to see it follow the unit trajectory the X26 did. The X26 though, had a bit of an advantage in that it was just sort of a more convenient, smaller form factor of the M26 which, had done the groundwork of laying the fundamental market demand. It may be the Flex looks like the M26, which was a new concept, really, in the late '90s -- '99 through 2003. So it is hard to say. There were different dynamics in the sale process, as well. You know we've got -- it's a bit of a more complex sale. There are more stakeholders because it involved IT,as well as the trainers, and in some cases City Councils and other folks in risk management. We tend to see the time to close orders take a little longer for the Flex cameras than they do for the TASERS of either iteration. We are seeing a lot of evidence that the general concept of on-officer video is really being well accepted in the marketplace. I think on our last conference call we talked about a survey that Police One did. They found like 82 % to 84% of respondents now felt that officers want to wear on-officer video.

And we see that once it's in an agency for about 60-days, officers will begin to have those incidents where they record where somebody they are interacting with is very rude to the officer and then files a complaint. The officer is then gets cleared. One or two of those experiences and all of a sudden the whole [tone] becomes really supportive of on-officer cameras. In fact, Lake Havasu, which we talk about Lake Havasu now has gone full deployment with both the X2 and the AXON Flex, and they signed a five-year Evidence.com deal.

They started down this road about 18 months, maybe two years ago , so it took some time to adapt it into their culture,but once they did, they actually have implemented a category for complaints called Cleared By Axon, which basically means they never even bring the officer in from the field. They watch the video, and they see what the officer did, and it is pretty unilaterally clearing officers.

We are seeing a lot of the right dynamics. The question is to how fast it accelerates. It is one that -- we look in our crystal ball as well to try to figure out. I believe we know enough now to say long-term, our confidence is there's is a very real market there. How fast it develops is a little hard to predict.

Yes. Would you expect to see some cannibalization of the cam, the TASER cam, as that happens?

Yes, although, I would say that in the on-officers space there is -- we are not the only game in town, either. This is a competitive space where there's different companies with wearable camera options. We are winning the significant majority of deals where we are being compared with the competition. In the case of TASER cam, I know I actually just talked to our sales people, recently, who successfully transitioned some new orders from the TASER over cam to the Flex camera, which we believe is a greater value for our customer. It gets used much more often. A TASER, on average, gets used once every two years on the street.

So you are getting one video of an incident roughly every two years. The wearable cameras likeAXON Flex is worn every day and records all sorts of incidents, so a much higher utility. We are actually very comfortable, and we have put programs in place with our sales staff to help with agencies that are buying TASER cam, because maybe that is a historical practice since the cameras have been around since 2006 and helping them migrate over to the on-body cameras.

Okay. And then the last question and then I will hop back in the queue, Dan I think you -- the SG&A, it sounds like half of the incremental dollars and 3 million, quarter-over-quarter, and there was sort of what you categorize as one-time things. Is that a fair sort of a split ? The new run rate is probably half of that delta?

Yes. There is definitely some sort of one -- unusual events. Although some of that was sort of the variable selling expenses, but, again, those get offset in gross margins, so if we had not had some of those variable selling expenses, gross margins -- SG&A would have been down and gross margin would have also been down, so that's probably is a fair approximation.

Okay. All right. Thank you.

Thanks, Steve.

Thank you. Our next question is from Greg McKinley of Dougherty. You may begin.

Thank you. Can you just remind us of the economics in terms of margins and ASP's as you would compare the X2 to the X26, and then maybe even the X26P to the x26?

Yes. So the X26 sells for about $835. The new X26P will be roughly $900 with the battery. And there are some holstering options, as well, for that product. It will be additional sales and then the X2 is about $1050. So we are definitely -- as we introduce the new technologies, we are moving the price up but providing some pretty valuable new capabilities, as well.

There is trade in programs for the X26P, in the Q1 as well as the X2, and we think that those have been successful in driving that upgrade. We will continue those in 2013, sothat reduces the realized price. Although, it also helps us to drive the warranty sales as I mentioned in my earlier comments. These upgrade packages include a warranty, so we've seen a fair amount of deferred revenue get put on the balance sheet in 2012, and expect that trend to continue in 2013. What it allows is some very profitable warranty revenue that just gets deferred into the future.

Okay. And on the handle sales, themselves, or I guess maybe it is appropriate to look at it bundled with the deferred warranty, do these end up generating similar margin rates on those ASP's that you would have gotten on an old X26, or when you are bundling a warranty even with the rebate do you end up getting a higher margin rate overall?

The higher margin over the life of the product is probably comparable at the sell in. The X26P will be slightly lower at selling than X26 because of the trade in. But over the life of the product it will be slightly higher. The X2 is slightly higher at sell in and also higher over the life, so it's a little mixed. I mean, the good thing with TASER is we are talking about -- we are still in sort of the mid to upper 70s as a percent of on a variable bases in all cases here. It is a pretty lucrative sale even if it is lower than X26 by itself. I think, as Rick mentioned, I think driving an upgrade is so important for our growth here in North America with such a heavy install base.

So having new technologies that people can upgrade to, I think is a big part of what will help drive growth in the N. American part of the business. Even if it is a slightly less profitable sale, it will still be really accretive, and it will drive a overall increase in sales, which I think at the end of the day will add the profitability.

On account basis it is certainly more profitable (inaudible) the warranties are paid up front.

That's right.

Yes. Okay. Can you just remind us a little bit of your telesales efforts? I think you said you have -- what do you have, eight people in your telesales group going to 13 -- or 12 people here in 2013?Can you remind us when that initiative started? I want to say it was early Q2, and then of the revenues generated by that group the last couple quarters?

Yes, the telesales effort began in May. I think it started to hit traction in July. So the team wasn't fully staffed until September. The total sales, depending on how you look at it, between $5 million and $7.5 million,really in about the half year. And the reason I give a range there is there's direct sales that the telesales team generates in direct orders, and then there's also orders that are passed from the telesales team to a distributor that is already working those accounts. It is well over $5 million of incremental direct order business, and then there is $2 million to $3 million of additional business that's generated that we find out that the customer is working with the distributor, so then the distributor fulfills that order.

Can you remind us what were your comments that you made on the North American Law Enforcement market? ,I think you said Q4 revenues up 33% or so? I just want to make sure I understood that.

North America Q4 was up 33%, and for the total year we were actually up $15.6 million or 28.7% for the total year. So really strong results in North America. Really almost -- the majority is driven by the X2, and the upgrade programs that we had in place in 2012. And, as Rick said, with only 9% of the install base over five years upgrading there is still, I think, a lot of room to continue that.

Okay. So the $15.6 million growth, that was 28% growth off the 11 base?

That's correct.

And then may be just two housekeeping questions. Your share count, I don't know, as maybe with the performance of the stock that has brought more options into the share count calculation, can you help us understand? What do you think share count should look like in 2013?

That is definitely between -- we have some [R] issues invested Q4, as well as with -- as you point out, with a strong stock performance, we had some employee stock option exercises in the fourth quarter. Just as people who have been on the sidelines for awhile with the options, some of which are getting towards tail end of their life, exercise in Q4 and as a result that drove up the share count. I think it will be -- we have our issues that will also vest in 2013.

And depending on the stock reforms in 2013, I think we will continue to see deployed stock option exercises, as well. We feel -- I think that the buy back -- one of the advantages is it really took a lot of that potential dilution from where we started out of the stock count. So even now as the employees exercise, we'll end up with a share count sort of less than where we started which is I think favorable.

Okay. Prior to [your] buy. Okay. And then lastly, you talked about the X26P and that is bringing some smart technology to market. You feel that your customers might trial that product initially before -- if that wasn't in the market they may just go ahead and replace with an X26 or a new X2. How should we think about that in terms of the financial impact of some of these delayed purchase decisions?

I think any time we introduce a new weapon platform there is people want to get it in their hands and take a look at it. With the X26P we were pretty careful in timing the release, and doing it early in the quarter. We've built thousands of devices on the shelf ready to go prior to the announcement. We have been able to fulfill all of the requests out there for testing evaluation weapons. I would say we may see some impact in the first quarter. I really wouldn't expect much impact beyond that. There might be some agencies that they just don't get their evaluation done between late January and the end of March.

But as I think you all know we tend to do half of our business in the last month of the quarter with a lot of that -- the majority of that the preponderance being in the last two weeks of the last month. Like in a lot of enterprise businesses, that's when people's are budgets are aligned frequently to quarter end. We don't have any evidence per se at this point that it would push any orders out, but as we look at it we thought it was something that intellectually made sense. It is something we should make the investment community aware of. But I would say that shouldn't be an impact we would see beyond the first quarter.

And as Rick mentioned in his earlier chents, we expect it won't have an impact on the total year. It is really just pushing some business out from Q1 later into the year, but the total year won't be impacted by that.

But not in a negative way. We see a very positive impact on an annualized basis.

Thank you.

Thanks, Rick.

Thank you. Our next question is from Glen Mattson of Sidoti & Company. You may begin.

Hi, Rick, Dan. How's it going?

Good. Good.

Thanks for some of the clarification on the SG&A. I think that number kind of jumped out at people to start off the press release, but onequestion I have is what did you say for 2013 SG&A? Did you guide to that?

Yes, so in 2013 we are actually encouraged by the investments we made. We've had a really strong sales year in 2012, and part of that is driven by some of these investments we have made in customer facing roles, and some of the sort of the targeted investments in SG&A. We expect that to continue in 2013. We expect 10%, approximately 10% increase in 2013 total year spent versus 2012 total year spent.

Okay. Thanks. That helps. I guess moving on to international market, can you give a little more color on what gives you so much enthusiasm as Rick kind of talked about earlier?

Yes, I mean I think it's the -- if you look at the N. American business, it's roughly, depending on how look at it, there is close to two out of three officers carry a TASER at the patrol level. Internationally it is less than one in 50. There is lots of white space internationally. We do feel that by putting people in country we can help drive these countries that have been buying the product, albeit slowly, and accelerate some of the sales by in some cases assisting the distributions there, and in some cases taking more of that business ourselves and just being focused on it and putting sales and marketing resources in those countries.

The technology, obviously, is widely adopted in the US,and we think that the international market is still ripe for new sales opportunities. And we expect that -- we had, actually, pretty strong results in 2012 and we expect that there is a lot of white space there that will allow us to grow that part of the business in 2013. I don't know if you have anything to add to that.

The only thing I think I would add is we see a lot of new opportunities with what we are doing with video and Evidence.com in the international markets, as well. One of the things that has made for slower adoptions, I think, of the weapons, internationally, is most countries organize their police into much larger agencies. Like France is one we talked about regularly that a Gendarmery and Police Nationale. These are each like 150,000-person organizations, and the decision-making happens up at the minister levelSo it becomes much more political in nature.

Certainly, there are groups, like Amnesty International, that my take a position that's very conservative towards police and TASER devices, but even those groups we see it being generally supportive of on-officer video. We think there is less risk in adopting, from a political perspective, in adopting the cameras. We may actually see the international market start to adopt even at a faster pace than they have with the weapons over the coming years.

Yes. That sounds good. I guess kind of related to that either -- we can talk about either international or domestic, but you had some big orders in Q4, particularly the Arizona one. I guess it, you know, gets tougher to lap those. Do you have any foresight into big orders in the pipeline ? And anything on that?

We do have a number of orders, some of which are even larger than the Arizona order in our pipeline for 2013. Of course, we can't count those chickens until they hatch. There is plenty of pipeline of large orders in 2013, relative to 2012, for us to be able to continue to grow the business this year.

Okay. Thanks. And also, I guess, lastly the cash generation is pretty impressive and it should continue. What are the plans going forward? Do you want to talk about another buyback or anything like that?

We will continue to evaluate as we accumulate cash on the balance sheet, and we kind of took a pause at the end of the year. Obviously, we are happy with the results of the buyback, but we will continue to evaluate that. With over $37 million cash on a balance sheet, and really, as you point out, strong cash generation in the business, we will have to evaluate what the best way to deploy that cash as we move forward. But, you know, I guess stay tuned. Nothing to announce on that yet.

Okay. Thanks.

Thanks. Thanks Glenn

Thank you. I'm showing no further questions at this time. I would like to turn the conference back over to Rick Smith for closing remarks.

Great. Well, thanks everyone for joining us this morning. Obviously, as we look back at 2012, it was a record year for us in a lot of ways. We were very happy to see the growth in the core business, as well as the trends. We think in 2013, we should be able to see some significant improvements at both top and bottom line in the video business, which is now showing a lot of the signs of gaining traction.

We look forward to also seeing you all , the analysts, certainly on our Analyst Day and investors are welcome to tune in on the web. And I think that will be very helpful as we have been putting a lot of helping folks model what the business can look like, including the video and software business, over the next three to five years. I think you will see that why we are so excited about the opportunity that presents for us in addition to our core business. So thanks for your time today. We will see you all in March.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day.