Axon Enterprise Inc (AXON) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the TASER International Inc. Q2 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Rick Smith, Chief Executive Officer. You may begin.

Thank you, and good morning to everyone. Welcome to our Second Quarter 2013 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. Statements made on today's call will include forward-looking statements, including statements regarding our expectations, beliefs, intentions or strategies regarding the future. 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 of the date they are made and 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 risk 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 Report on Form 10-K for the year ended December 31, 2012 under the caption Risk Factors. You may find both of these filings, as well as our other SEC filings on our website at www.taser.com.

Great. Thanks, Dan. As a reminder, we're going to be accepting some questions today via Twitter during the Q&A portion of the call. And you can submit your questions using the hash tag TASR_Earnings. And to follow our updates on Twitter during the call in general, just follow our account at @TASER_IR, again that's @TASER_IR and we will be posting some graphics and commentary during the call.

So I'm proud to be kicking off another earnings call to discuss the results of the hard work the team here at TASER International has been doing. Sales for the second quarter were $32.2 million, which is the second highest quarter of sales in the Company's history on a consolidated basis. Even more impressive is the fact that this is the sixth quarter of consecutive growth year-over-year for topline and double-digit growth.

Our three growth pillars, the weapons upgrade cycle, the international expansion and the on-officer video opportunity continues to position us for strong growth moving forward. Specifically, our CEW segment, the Weapons segment, delivered revenues that were up 12.4% to $30.3 million year-over-year, and our Video segment grew 47.4% to $1.9 million, compared to last year's second quarter. In addition, our international business made up about 15% of sales in the quarter, and we do continue to invest in our efforts abroad, as Dan will touch on later in the call.

Now before going into more detail about the quarter's results, I'd like to spend a few minutes on a significant strategic move we announced this morning, the introduction of an industry-leading body camera, called AXON body, at a disruptive price point under $300.

We've identified three market segments for on-officer video. The first segment is focused on a high performance product that [offers us] a point of view from the officer's visual perspective. Well, I should be sending out over Twitter a graphic of the market segment. So this first market segment is the one that's up into the right, in purple, if you see that graphic. So our AXON flex product is perfect for this high-performance market segment for head cameras and we believe we're winning a significant majority of the market in this segment. In fact, since we introduced flex last year, I'm personally unaware of any orders that we've lost to a competitor in the United States in this segment. Of course, it's a large world out there and there may be competitive orders that we aren't aware of, but we're winning the ones on our radar screen in this segment domestically.

There is a second segment of the market that also requires a high-quality, rugged and weatherproof police camera. However, this segment favors convenience over performance. To put it bluntly, these are the officers who don't want to wear a camera on their head or have to run a wire from the camera to a battery pack each time they suit up. This market segment is willing to accept less performance, namely, the fact that the video is fixed from their chest and it doesn't follow the officer's point of view or head movement. They're willing to give up that performance in exchange for a more convenient and comfortable product that they just clip on their vest and go. This market segment would end up buying police-grade body cameras, typically in the same price range in which we sell our AXON flex in the $700 to $1,000 range. However, until now we have not had a body camera to compete in this segment.

There is a third segment of the market that is highly price sensitive. These are typically agencies that are new to on-officer video and they are trying it out for the first time. These customers will typically buy a consumer-grade camera, such as you might find in Sky Mall for around $100. When this segment -- I'm sorry, when the customers in this segment see higher prices of the ruggedized police cameras, they don't even evaluate them. Many agencies that buy consumer-grade cameras end up seeing the value of video, but having a poor experience with the equipment itself. Further, they lend a logistics cost of having officers sit at a computer to manually offload videos on to CDs or local hard drives. At about 20 minutes per officer per day, this lost productivity accounts for about $4,000 per officer per year. So net sum, buying a cheap camera, you spend a lot of money on lost productivity.

Now, some of the agencies that start in this third low-price segment, eventually shipped up into the professional grade equipment after experiencing the limitations of the consumer gear. A great example of this is the Albuquerque Police Department. Albuquerque previously purchased around 1,000 consumer-grade cameras. They were experiencing a high breakage rate, over 100% per year, and huge logistics cost. Albuquerque tested AXON flex and they've begun purchasing and transitioning over to flex and EVIDENCE.com. Chief Ray Schultz, recently talked at a police conference about the dramatic improvement in reliability and efficiency that they're seeing with AXON and EVIDENCE.com solutions when compared to the prior system they were using.

While we could take a position that we would focus solely on the high-end of the camera market and allow our customers to migrate toward us, like Albuquerque did, we don't believe this is the right strategy. The long-term value in this business will not be in the camera hardware. It is in the software and services that handle the tidal wave of digital information seamlessly and easily. Our goal here is not to have a profitable camera hardware segment in a portion of the market. Our goal is to build a software platform with EVIDENCE.com that creates long-term defensible and profitable value. This means we need to accelerate the market and focus on how do we get to 100% market share, not focus on building a profitable camera hardware product in a smaller subset of the market. We believe AXON body is a key element in our strategy to accelerate our market penetration.

So let's return to our three market segments. AXON flex is well suited to the first segment for high-performance point-of-view video. AXON body now gives us a product that outperforms every product in the second market segment for ruggedized police-grade body cameras. No other product in that segment offers a full work shift battery with pre-event buffer, fantastic low-light capability and automatic data uploads and integration with a service like EVIDENCE.com.

And we're selling it under half the price of our typical competitor. In fact, we're selling the hardware at a price down near our cost level, something that would not make sense for a hardware-only vendor to do. But because of the EVIDENCE.com service business and the long-term value for customer, we believe it makes sense to follow a disruptive pricing strategy to gain dominant market share and fast. We believe customers will love our camera and they will also love the EVIDENCE.com service that handles all the technology challenges seamlessly. We believe that AXON body should have a dominant position in this second premium market segment. And AXON body also gives us a good shot at the third, very price-sensitive segment. So while there is still much cheaper consumer cameras out there, at $299, we believe we're close enough in price to win a significant share in this third market segment.

Now leading up to the call today, we actually received a question by email as to -- now that we've introduced AXON body at $299, why would agencies continue to pay $950 for the AXON flex? And the answer is simple. The AXON flex still comes with a bundled full-year of the EVIDENCE.com service and it offers the ability to mount up on the head in about a dozen different mounting locations. So for the premium buyer who is looking for the top-tier capability and during that first year they don't want to have to worry about configuration settings [out on EVIDENCE.com] et cetera, they get an unlimited EVIDENCE.com package. So apples-to-apples, we believe both products have a place in the marketplace. But we did feel it was important with AXON body, what we're really trying to do is make our technology accessible to the low-end price segment of the market, who otherwise aren't paying attention to the high-end segment. So their de-bundling EVIDENCE.com from AXON body gets us into those accounts and it's obviously much easier to upgrade an existing customer on to EVIDENCE.com, because AXON body can be used with or without EVIDENCE.com. We believe it's in our interest to have our cameras in those agencies, not some consumer camera that we have to later displace.

So now that we have both AXON flex and AXON body, coupled with the aggressiveness of our pricing strategy, we're focused on consolidating the market and avoiding fragmentation among numerous hardware vendors. In the past few months, I've been talking with many chiefs from some of the largest agencies in North America and they're now consistently saying that within five to ten years every officer will be wearing a camera. Obviously, we find this very encouraging, but it let us ask ourselves, how do we turn five to ten years into one or two years, and part of the answer is AXON body. Put out a camera that gives us the ability to serve all three major market segments and price them so aggressively, we removed the cost barrier for new agencies to adapt this new technology. We're very excited to see how the next few quarters develop with both AXON flex and AXON body, as well as EVIDENCE.com.

Now returning to the quarter, last quarter I talked about the launch of the X26P Smart Weapon, which integrated many of the new features of the X2, but kept the same training requirements and form factors of legacy X26. We saw strong interest in the first quarter and that trend has continued this quarter, with sales of the product continuing to grow. The X26P has seamlessly integrated itself into our suite of products and the feedback continues to be very positive. The upgrade cycle has clearly benefited from our strong product platform. As of June 30, we've upgraded a total of 12% of our installed base of units that are over five years old. And this base of opportunity grows each quarter as the old units continue to age out.

Our sales team are also hearing extremely positive feedback in response to our TASER Protection Plan and the TASER Assurance Plan programs. These are programs, which help our customers smooth out budgetary requirements for capital purchases, such as TASER products. We think we'll continue to see these programs grow, as our customers get more exposure to them and realize how much easier they can make the whole procurement process.

For example, I recently heard a story from one of our sales team members about a visit in a major city to discuss their future TASER needs. At this meeting, there were law enforcement officers and City Finance and procurement employees. Sensing an opportunity with all the players in the room, our sales team simply asked what the biggest pain points were in their procurement process. The City personnel went on to describe a scenario that is easily resolved by our TAP program, the TASER Assurance Plan. The response on learning more about our new purchase programs was overwhelmingly positive and the City Finance officials stated to the agency, you better plan this in your budget, because it's fantastic. It's moments like this in a budgetary environment that continues to be on edge to show that a partnership approach and dedication of our team is paying off.

Moving onto international business, in the second quarter we had approximately $4.9 million in sales, which is about 15% of total revenue. This is up from 10% of revenue last quarter. On a dollar basis, international sales increased $1.8 million or 58.5%. We're happy to see the sequential progress, but international revenues are still progressing a little bit slower than we would like.

In the past, we've cautioned that international deals tend to be larger in size and more intermittent in nature due to the varying profile of customers and the political processes. For example, we've used France as an example. While there is some local agencies, the majority of the market comes from two very large national agencies, the Police Nationale and Gendarmerie. And working with agencies of that size generally comes to more stakeholders in the decision process, which inevitably takes longer.

Now shifting gears a bit, let's discuss our Video segment, where we are really seeing promising momentum and trends. As I mentioned previously, the Video segment grew over 47% year-over-year to $1.9 million in revenue during the second quarter of 2013 on a GAAP basis. Now, revenues were down sequentially, largely due to a higher percentage of sales bookings for multiyear service contracts. Bookings for the Video segment grew over 350% to $2.0 million, albeit from a small base last year. So we continue to view bookings as a solid measure of traction in this business, given the deferral of revenues related to EVIDENCE.com service. In fact, I viewed it's a very positive thing we are seeing the EVIDENCE.com portion of bookings continuing to rise. We are seeing a lot of people that bought last year now coming in and renewing the service, which is probably the most important trend you want to keep your eye on.

Global interest in the AXON and EVIDENCE.com solutions is also increasing with trials now incurring in the UK, France, Australia, New Zealand, Brazil, Canada and other countries. New Zealand renewed their EVIDENCE.com subscription in the second quarter, based on strong favorable internal feedback they have received since its implementation. In addition, one prominent agency, (inaudible) made the Brazilian national news as a key technology needed for law enforcement in the region. We strongly feel our investments to grow the international part of the business will pay off, but the ROI will likely not be seen for a period of 12 to 18 months from the time of our initial investments.

Currently the majority of Flex sales include one for a year of EVIDENCE.com. Given that we are one year past the first quarter of shipping flex, we are going to hopefully be seeing an increasing number of customers renewing the data management service. As a result, as we move forward, we think the renewal rates of EVIDENCE.com service will be a meaningful way for investors to track our progress.

The on-officer video is still a technology that is relatively new to the market and as such research is meaningful to show acceptance and reactions. A few months ago, we mentioned a groundbreaking Rialto study that detailed the dramatic reduction in complaints, which fell by 87.5% and use of force which fell by almost 60% upon the introduction of on-officer video to that agency. Chief Farrar, who offered that study, just within the past few weeks was actually awarded a major award from the Evidence-Based Policing Society in the United Kingdom and it's getting a lot of attention. In fact, that has spurred much interest in UK Police agencies to try to replicate that study in the United Kingdom.

And since that time PoliceOne, which is a major law enforcement online community, has come out with a study that found over 90% of law enforcement officers that have responded to a survey saw a need for on-officer video and nearly 50% of the respondents saw TASER as being the market leader in this space. I think this speaks volumes of our efforts and future potential in on-officer video and data management.

We are often asked how the budget climate is progressing across our customer base, which is obviously something we monitor closely and when needed, adjust our sales efforts accordingly. The aforementioned TPP and TAP programs are great examples of ways of us finding ways to become better partners with our customers and work around the budget climate of the last few years. Today we are finding that agencies are spending money, maybe not in droves, but the budget is recovering.

Our Chief Operating Officer, Jeff Kukowski has done a great job working with our sales team to find new ways to become a funded priority. We feel that if we are in the top two or three priorities for a chief, then there is a good chance that the deal will happen. Accordingly, we focus on [such] places where we will be a top priority.

Another way we proactively address the sluggish budgetary environment is through our telesales function. This group has already proven to be a cost-effective way of reaching agencies that have historically been underserved by our outside sales team and the distribution network. This quarter, yet again they provided immense value and booked $4.7 million in sales bookings. We are continuing to invest in this team and continue to see ROI on each incremental investment. As of today, we have 12 individuals in this function.

Finally, I want to discuss a new offering in the consumer segment, the StrikeLight. We announced the TASER StrikeLight earlier this month as a low price stun gun, combining a flashlight, offering to supplement our suite of consumer products. Unlike our conductive electrical weapons, the StrikeLight does not cause incapacitation, rather causes temporary pain and discomfort. We developed it because we see rather consistent feedback from the market that there was a desire for a low profile device that was less aggressive. There are no darts to shoot, it has rechargeable battery and it is at a much lower price point and it can basically do double duty. It functions as a flashlight. The initial feedback from customers and distributors has been phenomenal on this product, so we expect this to be incrementally beneficial to our business.

The Consumer segment has historically been a tough nut to crack, but we now have a wide variety of products to hopefully move that forward over the longer term. We also recently introduced a consumer version of our flagship X2, so we now have an X2 multi-shot, home defender. At the high end of the range, we have our C2 affordable single-shot TASER in the $400 price point range and we now have the StrikeLight at $129 and those are all available at taser.com. You can go check them out.

With that I am going to pass over to Dan to go over the financials in more detail.

Thank you, Rick. As we mentioned earlier, in the second quarter, consolidated sales were $32.2 million, a 14% increase from the second quarter of 2012. The increase in sales was primarily driven by the continued adoption of the X26P Smart Weapon, which contributed $4.6 million in sales respectively in the second quarter.

Cartridge sales also saw a significant increase year-over-year, due to the increase in the conducted electrical weapons business, as well as several distributor stocking orders received during the quarter.

Sales of our legacy X26 declined $1.7 million for the second quarter of 2013 when compared to the prior year, as customers are embracing the new Smart Weapon platform.

As Rick mentioned, as of June 30, 2013, we have upgraded approximately 12% of our installed base of units over five years old and we still feel we have a large opportunity in front of us. In fact, our current calculation is roughly $400 million potential upgrades still to be had in the market.

Gross margins for the second quarter of $19.7 million or 61.4% of revenue, which is up from 58.5% in the prior year, as sales have increased with continued benefit from higher operating leverage. Within the cost of goods sold, as well as the cost of service delivered lines, there are number of fixed costs in both segments of the business. So as we generate higher sales, we do leverage those fixed costs and increased gross margin.

We've also seen a $532,000 decrease in the cost of service delivered due to lower cost structure of a public file, versus in the prior year we are still operating out of our own data center. We are also seeing the benefit from higher selling prices in this quarter versus the same quarter of last quarter, which is improving gross margins.

In the Video segment, revenues increased $0.6 million year-over-year or 47.4% to $1.9 million in the second quarter of 2013. The loss from operations in the Video segment [grew] from $2.5 million in the second quarter of '12 to $2.7 million in the second quarter of '13. The reduction in the cost of service delivered that we saw in this quarter was offset by higher investments and personnel and support cost in the business, as well as some incremental cost relating to the redesign of our EVIDENCE transfer machine. There is cost associated with accelerating depreciation of that equipment, as well as some write-offs of inventory of the first-generation product.

Sequentially, the loss from operations in the Video segment grew $1.2 million from $1.5 million in the first quarter of 2013. Again, the decline was partially influenced by the lower product sales in the second quarter of about $0.5 million, compared to the first quarter. One of the big drivers is we had a large sale in the first quarter that was for a customer that was not going to use the EVIDENCE.com. So net-net, we were able to recognize the entire sale at the time of shipping, versus the normal traditional sale, where we allocate roughly half of the sale to EVIDENCE.com recognized over the service period. So, that sale allowed us to sort of accelerate the sale and that delivered higher gross margin for the Video segment in the first quarter versus the second.

We also are seeing sequential cost increases for SG&A, due to expenses for account management, sales operations, implementation, services, as well as the hiring of a Vice President of Information Security. Those costs are driving up the cost in the Video segment, but we do feel that those will pay off over time and help to grow the business.

We did see, on the R&D side, R&D was relatively flat for the quarter. We had about a $300,000 benefit in the quarter for a use tax refund that ran through the Video R&D. Obviously, we expect that in the second half of the year the R&D expense will go up with that item not repeating itself, as well as the additional investments we'll make in the Video segment. With that being said, we do expect the operating income to improve from these levels in the Video business, as the revenues in the segment grow.

The sales, general and administrative expenses were $10.9 million in the second quarter of 2013 compared to $8.3 million in the second quarter of 2012. As a percentage of sales, SG&A was 34% of net sales in the second quarter of '13 versus 29.4% in the second quarter of 2012. The primary driver for the increase was personnel expenses, which increased approximately $1.3 million, due to incremental strategic hires we made over the last year in our efforts to grow the business and expand our customer facing team.

We also (inaudible) our teams are broad, as we work through and grow the international part of the business. The international expenses were up about $400,000 versus the same quarter last year. We also saw higher litigation expenses, about $700,000 higher in the second quarter of 2013 versus 2012, due to the timing of litigation that tend to -- we do have a number of cases come to trial. So they typically end up being higher spend in anticipation of that.

Sales and marketing expenses increased year-over-year as a result of the higher commissions due to the higher sales value, it's about $200,000, as well as a $200,000 increase in some of our e-marketing activities that took place in this year versus the prior year.

The R&D expenses of $2 million in the second quarter of '13 is pretty much flat with the same period last year. Again, we did benefit from the Arizona use tax refund of about $300,000. Otherwise R&D would have been up about $300,000. So, again, expect to see R&D tick up in the second half of the year.

Adjusted EBITDA, which excludes certain items, as detailed in our press release, was $9.5 million for the second quarter of 2013 compared to $8.5 million for the second quarter of 2012, with improvement being driven by the leverage on the higher sales.

Income from operations was $6.8 million in the second quarter. This compares to $6.1 million in the second quarter of 2012. For the quarter, we had net income of $4.5 million or $0.09 per share basic and $0.08 per share on a diluted basis, compared to net income of $3.4 million or $0.06 per share on a basic and diluted basis in the second quarter of 2012.

Moving on to the balance sheet, as of June 30, the Company has generated $7.7 million of operating cash flow. This has led to the Company having $31.8 million of cash, cash equivalents and investments on the balance sheet. So it's a decrease of $6.1 million from the levels we ended 2012 due to the $25 million share repurchase program being completed in the first six months of 2013.

Accounts receivables of $16.9 million were down $1.2 million due to timing differences. Inventory grew to $0.2 million from the year-end balances to $13.2 million, really just more generally attributed to the build-up in our Weapons segment inventory in anticipation of future sales.

Investment in property, plant, equipment of $20 million is down roughly $1.9 million, basically is the result of depreciation expense offset by roughly $800,000 of CapEx taken place so far this year in 2013.

The total deferred revenue on the balance sheet of $15.6 million has actually increased $3.5 million from year end, primarily due to the upgrade program of the X26 and X2, which includes the extended warranty. Also, the sales of AXON flex and EVIDENCE.com solution have also increased deferred revenue. The deferred revenue relating to the Video segment of the business actually grew $1.2 million from the 12/31/12 balances.

Total liabilities were $33.3 million and the Company finished the quarter with $79.7 million of stockholders' equity.

Moving on to the select information on cash flows, the Company had cash provided from operations of $7.7 million during the second quarter of 2013. In the six months ended June 30, the Company had cash provided by operations of $12.2 million. Net cash used in investment activities for the six months ended June 30 was $12 million. That's really driven by the purchases of investments during the quarter. Cash used in financing activities was $17.3 million for the six months ended June 30 of 2013 compared to $15.7 million used in the same period last year.

Again, during the six months ended June 30 this year, the Company has repurchased 3,048,000 shares at an average price of $8.17 a share, so that's really been an outflow in our financing area of the cash flow of $25 million. Again, this is partially offset by $3.9 million of tax benefit from employee stock option exercises, as well as $4 million of cash provided by employees exercising stock options. So the Company gets the cash on the strike price of those options. That provided $4 million of cash so far this year.

In order to leave out more time for the Q&A portion, we have included the unit sales statistics in our press release, so please refer to the release for that. With that we'll turn it back over to Rick Smith to take some questions.

Great. Thanks, Dan. With that let's -- Dan, do you want to start first with the questions from the line or you'd like to start with -- Okay, let's start on the line and then we'll go to the Twitter questions.

(Operator Instructions) Paul Coster, JPMorgan.

Good morning. This is Mark Strauss on for Paul. Thanks for taking our question. I guess it still might be a bit too early to really have any really useful data. But of the EVIDENCE.com users that have passed -- the free EVIDENCE.com users that have passed their one year anniversary, do you have any churn metrics that you are able to share here?

Yeah. Mark it's a good question. I would say that it is pretty early in the game. I think the one thing that we can -- what we have seen so far is the people -- we do monitor usage on the system, people who are actively using the system throughout their first year of free products are renewing. So we're encouraged by that. So we'll continue to watch that closely. We just don't have that big a universe yet. But I think, so far the people who are using the system are renewing it. So that's it. I think that also sort of supports the strategy the account management we put in place this year, where we want our people here making sure customers have good experiences during that first year in order to drive the renewal. That's really one of the key metrics for those people, for their customers they are assigned to, making sure they have a great experience. So when that free year is up, they renew.

Okay, perfect. And then on the Video gross margin, Dan you kind of talked about a write-off of the first generation flex. How significant was that and what you have spent above breakeven, stripping out that kind of one-time item?

Yeah, we would have been above breakeven, that was about $250,000 in the quarter, so it's pretty significant. The other thing is the lower gross margin due to the product sales mix, because of the sale of a standalone product in Q1 versus this quarter that was about $190,000. So with those two items removed, we would have had positive gross margin in the quarter.

Okay. And just a couple more, sorry. I understand over time the rationale for the body video product and that will spur EVIDENCE.com and higher margins eventually with that. But just how should we think about near-term margins, maybe without giving guidance within the back half for the year, should we expect the Video gross margin to be above zero?

Yes, it's a good question. Obviously, as Rick said, the new body camera is priced close to our cost, so really there is not going to be an awful lot of contribution coming from that product. I mean, the good news is we will cover our cost, and because it does not include the free year of EVIDENCE.com, the expectations, we'll see the service revenue from those sale and those will be profitable sales. We just have to -- it won't be at the time of selling, you will see that over the very use of the products. So I don't expect a large negative impact in the near term, although obviously it's not going to be as big a contributor out of the gate, but we do expect it over time. The model is really built on driving people to EVIDENCE.com. We think this is a very solid strategy to do that.

Perfect. And then last one real simply, I apologize if I missed this, but how many shares did you buy back during the quarter and what's the status of the buyback program?

Yes. So we completed the buyback program. We bought back a little over 3 million shares year to date for the total year. And I think it's about a little over $2 million in the quarter, about $2.3 million of those in the quarter. But total for the year is 3,048,000 shares, and we have completed the buyback at this point.

Okay, great. Congrats on the quarter. That's it for us. Thank you very much.

All right. Thank you.

Greg Palm, Craig-Hallum Capital.

Hey, guys. Congrats on the good quarter. This is Greg on for Steve.

Thank you.

Can you maybe just quantify the size of each of the three on-officer video markets you talked about, maybe in terms of number of officers, monetary opportunity, maybe kind of characterize the difference in adoption rates, expectations between the three markets?

Yes, it's hard for us to really give a great idea of the scale of the market. We really identify those three market segments through surveys. And I would say, based on survey results, which isn't really normalized based on agencies, which is based on number of respondents, it seemed to be about a third, a third, a third that about a third of the market was going for the head cams, about a third was going for body cameras in the premium segment and about a third were just the price-based buyers. But I can't really tell you how that would translate into volume per se. The way I think about volume is, I sat at the Major City Chiefs with a number of chiefs that do not have on-officer video programs right now. So guys like -- Chiefs like Chris Burbank in Salt Lake and Ray Schultz in Albuquerque, these guys that have on-officer video, they're definitely saying, they see on-officer video being standard equipment in five to ten years. What was really exciting for me was talking to other chiefs that do not have any on-officer video program, and two or three of them say, we see it coming as well. We're not there yet, but within the next five to 10 years we know we're going to have to get on-officer getting up and going.

So there has been a real shift in the way the market is thinking about it. A year ago those sorts of chiefs that didn't have programs were saying things like, well I am not really sure video is for me and I don't know if it hurts or helps, that is really shifting. And there's two things I think that are doing that. One was data, like what's coming out of Rialto, chief for our Rialtos begetting a lot of exposure in the law enforcement community with the results really showing in a well-controlled study, dramatic reductions in complaints. And the other thing is just the rise of smartphones. Officers are now, I think, on the PoliceOne study showed that 90% of officers are now saying, hey, we see a need for cameras, because they know they are being recorded. Any time something controversial happens, consumers are taking their cameras out. So, those two dynamics, we need to believe the potential market for on-officer video is every cop wearing uniform in the U.S.

How you divide that market between the three segments, and I think the three segments we discussed, really are the three segments that matter across that market. High performance head cams, high performance body cams and low-price entry points.

Okay, that's helpful. Sorry if I missed this, but did you give any kind of order expectations for the rest of 2013 for the new body cam product that you just introduced?

We haven't really provided that.

Okay. Kind of moving to the AXON flex, the unit sales you provided are helpful. Can you talk about general order rates; we're just trying to get an idea of how many of those units sales are from maybe pilot programs versus full rollouts, follow-on orders etcetera?

This is Dan. So it's fairly long sales cycle, we're still seeing a lot of what we consider to be opening orders, as people evaluate our on-officer camera solution. There is a thought that as we move into the second half of this year and into 2014, those trials become potential for now -- further adoption of the technology, but there's still a fair amount of trial activity out there versus people who are rolling out deep in their organization.

Yeah. I would say that we have had some of these just go full deployment, whether buying it for all their guys, but those so far have been 100 to 200 [mad] agencies like Havasu, we've got Modesto and [Bard] and then we've got a couple other agencies go full rollout, but take the largest are in that 100 to 200 range.

We've added a fair number of paids, what they call paid trials, where we have larger agencies buying maybe 50, maybe 100 of them. The good news is that some of those agencies are coming back and they are continuing to buy in additional increments and we are expecting to see some of those agencies come back with more significant purchase increments in the second half of this year.

Okay. Just a couple more quick ones. Kind of moving on to international results, can you talk about maybe what markets you still feel like there is a good opportunity and kind of maybe what it takes to help accelerate the growth there?

Yeah. I think it's really the same markets we've talked about historically. Obviously, we're making investments in countries like France, India, Brazil. So, I think they have good opportunity. As Rick mentioned, it takes a fair amount of patience, because the time from when we start making those investments till we start seeing those pay off is typically 12 to 18 months or maybe even beyond 18 months. So you have to do a fair amount of pick and shovel work in the beginning in order to get the benefit later. We still see significant opportunities in the countries where they've gone beyond procurement cycle in -- or the evaluation and procurements in places like Singapore, South Korea, Australia, New Zealand and the UK are all areas where they've kind of gone beyond that sort of the initial trial phase into the procurement phase. So, those continue to be attractive markets for us as well.

I think we'll also start to see that really enter into more of the upgrade cycle, did spend more predominantly in the U.S. now that France's weapons, their stock of inventory is now all over the five year mark and we're having some discussion there about timing for when those weapons can get upgraded. Similarly in the United Kingdom, a big bulk of the weapons there are getting that five to seven year time frame. So, we see upgrade opportunities in addition to new expansions in the international markets.

Okay. And then last one just kind of a housekeeping item. Tax rate for the second half, I mean, should we expect kind of the similar rate to the first half or --?

Yeah. The tax rate, we benefited, it's actually kind of interesting. We benefited from incentive stock option exercises during the quarter. Incentive stock options aren't deductible by the Company as they vest. Non-qualified options are deductible as they vest. Incentive stock options, you can't deduct that until the employee actually has a taxable event. So, because of the fairly large amount of stock option exercises during the quarter, and the good news is they brought in $4 million of cash. That also helped to offset some taxable income, because now you can do that to those stock options. That brought our tax rate down to about 35%. We do expect that the effective tax rate in the second half of the year would probably be back in that 38% to 39% range.

Okay. All right. Thanks for all the help, guys and keep up the good work.

Thank you.

Peter Mahon, Dougherty.

Good morning, guys. Just had a couple of follow-up questions. How many units, how many users are on the EVIDENCE.com system?

We've got over 1,000 agencies that are active users, meaning they've used it in the past, I think, 30 to 60 days and that's the metric we tend to watch internally. I think it's over 2,000 agencies that have accounts in total. Now many of them are using the free version of EVIDENCE.com for managing their TASER weapons, where they do handling the TASER uploads, updating the firmware etcetera. Some of them are more sporadic users, may or may not upload their weapons more than once a year or do firmware updates.

So we're actually looking at some features in EVIDENCE.com we can use to help make EVIDENCE.com a more frequent sort of usable system for the people around the free version. So we find actually once they're using it more, it's easier for us to upsell them to the paid services.

And then in terms of active numbers of users, I'd say it's in the 3,000 to 5,000 range that are uploading data on a regular basis in terms of individual users.

Got it. So just to kind of recap, about 1,000 active agencies and about 3,000 to 5,000 active users. How many of those 3,000 to 5,000 active users are those 1,000 agencies are actually paying for the service currently?

So in that case we would say it's about half of the active agencies and it would be the majority of the active users, because the active -- the users tend to be a lot more active when they have got cameras. And when I say paid I am including people that might be in their first year of EVIDENCE.com, because they've basically paid for that with the deferred revenues bundled in at the time of purchase. But the majority of the 3,000 to 5,000 are camera users, because in agencies that are using EVIDENCE.com like the free version, you might have an agency with 100 officers, you are probably going to have just one admin who is logging in and doing the weapons administration.

So for somebody who is downloading their TASER device, they don't do that themselves typically, they'll bring it in, they will hand it to the TASER program administrator, that person will log in, plug in the TASER device, upload the firmware, download the data and give it back to the officer. So the free using agencies tend to have just administrative users. The paid using agencies, anybody with a camera effectively is a user that's probably at least plugging into a dock and uploading, but then also will tend to log in to the system and be doing some work for around their videos.

Got it. Okay. Great. Thank you for that clarification. I just wanted to talk about gross margins briefly. You guys did increase those nicely year-over-year and you attributed that largely to using the third-party cloud services in your Video segment. How high do you think that we can get that gross margin rate? Is there still kind of room to run with the use of the third-party cloud services? Are we kind of reaching a point now where those kind of topped out?

Yeah, that's a good question. This is Dan. I think there is obviously still room for leverage in the model. We could -- obviously as our sales continue to increase, you still have the ability to leverage the fixed cost, which gives us the ability to improve that. I would say that as Rick has mentioned earlier, we had -- telesales had a tremendous quarter. That also helps gross margin, because those sales tend to be direct and as a result we see our full MSRP versus getting a distributor pricing out, now it's not that intent of that telesales function to take that business direct, because we just want to serve that underserved part of the market, but that does improve our margin, because we see a higher average selling price and that looks, to be honest with you, a bigger component of the improvements in margin this quarter, our average selling prices were up close to 4% from the same quarter last year, which is a 4% improvement in margin. But that easily could move the other way depending on either product mix or more business falling through distribution, versus the direct business.

So we are certainly sort of comfortable in this range. I would say that I think the further improvements from these levels are going to require higher sales and a similar product mix as far as number of direct sales versus distribution sales.

Sure. Okay, got it. And then kind of transitioning to the Video segment, how do you guys evaluate these investments that you are making? I mean it seems like you are consistently adding people and capabilities and things like that, yet it seems like your capacity is really being underutilized, based on the kind of the revenue that's flowing through the system right now. Do you really see that there is this massive pent-up demand or massive opportunity that's going to -- right on the cusp of being realized to kind of ramping up for that or how do you think about that, because it would be nice to see those Video segment losses kind of shrink rather than grow?

Yeah. So this is Rick Smith. Absolutely, we see a big opportunity in the near to mid-term, but the question is what -- the market sentiment has definitely shifted in a very favorable way. I think the market leaders are pretty universally saying on-officer video is coming. The question is how fast. And a bigger question for us, the reasons that we are being -- doing some pretty aggressive things like we are with AXON body is we think our primary challenge is to make sure that market doesn't fragment. If it fragments into seven to ten hardware vendors, each with a relatively small market share, that for us would not be good. The value of EVIDENCE.com can be massive if we get massive adoption in the marketplace.

It's all about being -- right now it's about grabbing as much market share as possible. Once we are in with EVIDENCE.com, we already have agencies asking us to develop advanced features, frankly even new software products that we could deliver to them could [grow] with EVIDENCE.com. Once we are in an agency is administrating their users, have their security setting set up, administrating their evidence on EVIDENCE.com, not only is EVIDENCE.com itself a very valuable property, but we now have a sales channel. Very similar to what you see with Salesforce.com, we are a sales force customer. We are now starting to buy several of the other related products from Salesforce. In addition to their sales force management, we are doing our customer service, our HR, we are doing a lot of our marketing. In fact, we are evaluating some of their other systems as well, because we are finding as a Salesforce customer, hey, wow, we are already set up on it, we can expand and start thinking other systems, so our IT group doesn't have to be running more systems on-site.

So as a customer, we are seeing the beauty of that business model and how wonderful it is when you have a good customer experience. Our customers are now seeing that as well, but it's a relatively small portion of the market that we have using it today. But to me the most encouraging thing is that people that are using EVIDENCE.com are renewing. We had a good number of renewals this last quarter. To my awareness, I am not aware of an agency that was a significant user of EVIDENCE.com that has decided to go off the system and try and handle the data themselves. What we are hearing is, wow, this works great, we like it.

And so, as we look at the market, I can't tell you if it's this quarter, next quarter or next year, but we are making these investments because we see that there is a huge opportunity here and it's ours to lose at this point. We have got a several year head start in the sort of digital evidence management services and law enforcement and we're going after it pretty aggressively.

Great. Thanks for that color. And then finally from me is, you guys, I assume, are still kind of running a trade in program on your X26 and X3 unit. Could you kind of remind us where that stands today?

Yes. It's at a $115 for this quarter, going down to $100 in the fourth quarter. So we are continuing to sort of try to create urgency with customers to upgrade sooner by having sort of that amount on the trade and shrink over time, but it'll be down at that $100 level by the end of this year.

Great. Thanks a lot guys.

Sure. Thank you.

Glenn Mattson, Sidoti & Company.

Hi, guys. Interesting new announcement on the AXON body. Quick on that note, do you expect to see any cannibalization of the upper segment? I know you do a lot of customer feedback type work, so maybe you have some feedback into that? But also, have you kind of run this through your long-term model and does it change what you've kind of presented at the Analyst Day or is this just kind of part of the price erosion that you expected over time?

So, this is Rick. Let me first talk about cannibalization. Absolutely, we expect we're going to see some cannibalization of agencies that would have stayed with just purchasing flex because of the EVIDENCE.com and convenience piece, they would not have bought a body cam, but at least a portion of their officers. (inaudible) hey, this great, because they do have some officers that -- they sort of complain about having to wear something up on their head, they don't like that portion. So the chief can now say look, I'll give you guys a different option, so those guys they can wear the body cam, so it will cannibalize some of it. I don't think that that matters a whole lot in the financial models, in that the fact we don't bundle in EVIDENCE.com, we really sell the flexes at 950, we end up deferring say about half the revenue.

That's right. And our average selling price of flex, sort of the realized price is probably close to $725 and roughly half of that gets deferred. So as we look at, yes we brought out AXON body in order to add a low price to drive adoption and capture a bigger portion of video market. So although there won't be a lot of gross margin from the seller, we do think having more users in the system will drive the user count up and therefore, yes, we remain comfortable in sort of the long term that 2017 targets that we presented at the Analyst Day, we'll just sort of get there a different way, with just more higher user count and obviously the service part of this, this is highly profitable. So that's really the long-term goal here, is to get as many people into the system as possible.

Yeah. Okay, sounds good. And then in the Weapons business, can you give us any color on the visibility into the second half? I mean I think last quarter you said that you had some deals that got pushed out or whatever, so do you have a good feel for the pipeline heading into the back part of the year?

Yeah. We still feel good about that part of the business. There's still, as we mentioned earlier, there's 88% of that installed base that's over five years old that's not upgraded yet. So that continues to provide a solid pipeline and certainly a large number of customers to talk to about the new platforms or weapons. So the results have been very good so far and we feel good about to see the opportunity in front of us there.

Okay, thanks.

Thank you.

Okay with that we'll take a question from Twitter. This (inaudible) said, will you look at Big Box retailers for your consumer products rather than just e-tailing?

So taking a rearward looking view, with our -- the TASER weapons, what we found was Big Box retailers, A) were, sort of scared of the idea of taking the TASERs that fired the dart. And then, B) those that did take the C2, for example, we were in one of the major sporting goods retailers and frankly it didn't do very well with it and our belief is that's because consumers they come in and said, new enough product concept, consumers need a fair amount of hand holding. So what we found our traditional C2 and those other, again, the dart throwing weapons do well in things like gun stores, small specialty retailers where you've got people they are pretty well trained that are kind of product experts, as well as online, where people come to our website and do the research and learn about the devices.

The Flashlight is a game changer in that respect, in that the fact that it is not -- people don't look at it as a weapon, it doesn't fire darts. in our consumer testing that led to the development of that product, we found a lot of people that particularly, thankfully, in the female segment they've got squeamish at the idea of carrying something in their purse that would fire out projectiles, were much more comfortable with the idea of a flashlight that just has an electric arc, it's a very bright loud electric arc as a deterrent, but they were going to say, well, I can't really screw this up frankly. It's not like I can shoot some darts out and hit somebody by accident, so they might carry it on a walk or in their car, in their purse more comfortably and more frequently.

We've also seeing that same dynamic with some of the larger retailers, where they're looking at this very differently, as more sort of a high end security flashlight, not a weapon. So we are getting more interest from Big Box retailers than we did historically and we do think that the lower price point at $129, and the simplified nature of the product that it can be successful in Big Box, it's not going to require all the questions and answers and the handholding that selling one of the weapons does. So obviously, it's a new product. We haven't announced anything with Big Box retailers, but I would say it does look much more promising than with our traditional weapons.

And so with that let`s go ahead and wrap up the call for today. You can continue to send questions and our IR department will respond over Twitter or by email, to ir@taser.com. And we appreciate you all tuning in. You obviously look pretty proud and excited, just had a good first half and we're really looking forward to the second half this year and see how the market continues to develop for on-officer video and continue to drive upgrades. All right, thanks everyone, have a great day.

Ladies and gentlemen, that concludes today's program. You may now disconnect. Good day.