Axon Enterprise Inc (AXON) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Quarter 3 2013 TASER International, Inc. earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, with instructions to be given at that time. (Operator Instructions)

I'd now like to turn the conference over to your host for today, Mr. Rick Smith, Chief Executive Officer of TASER International. Sir, you may begin.

Thank you and good morning to everyone. Welcome to our third-quarter 2013 earnings conference call. Of course, before we get started, I am going to turn the call over to Dan Behrendt, our Chief Financial Officer, to read the Safe Harbor statement.

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

The forward-looking information is based upon current information and expectations regarding TASER International, Inc. These estimates and statements speak only as to the date on which they are made; are not guarantees of future performance; and involve certain risks, uncertainties, and assumptions that are difficult to predict. All forward-looking statements that are made on today's call are subject to the risks and uncertainties that could cause our actual results to differ materially.

These risks are discussed in our press release we issued today and in greater detail in our annual report on Form 10-K for the year ended December 31, 2012, under the caption Risk Factors. You may find both these filings, as well as our other SEC filings, on our website at www.taser.com.

I will now turn it back over to Rick Smith, our CEO.

Thanks, Dan. As a reminder, we are going to be accepting some questions via Twitter during the Q&A portion of the call, and you can submit those using the hashtag #TASR_earnings. So again, that is hashtag #TASR_earnings.

To follow our updates on Twitter during the call, follow the account @Taser_IR. So again, our account to follow is @Taser_IR. We will be posting graphics and commentary during the call. And for those of you without Twitter, all updates and graphics will stream directly to our Investor Relations website at investor.taser.com.

I am so excited to share with you, with our investors, the results of our hard work and many exciting new announcements from the past three months on today's call. First off, we hit a historical record in our revenues this quarter, recognizing $35.2 million on a consolidated basis. This marks the seventh consecutive quarter of year-over-year top-line double-digit growth.

I am truly proud of our team, and I think that we continue to be positioned for strong growth moving forward, due to the continued upgrade cycle and the exciting momentum in the EVIDENCE.com and Video segment. Specifically, our TASER weapons business delivered revenues that were up 16.8% to $31.6 million year over year; and our EVIDENCE.com and Video segment -- the revenues there grew 111.5% to $3.6 million compared to last year's third quarter. Our international business made up approximately 11% sales in the quarter.

Aside from phenomenal top-line growth, we have been very busy launching new several new initiatives that we had previously announced. These initiatives were all very customer-focused and in an effort to continue to grow the EVIDENCE.com and Video business.

First, we announced the AXON Body, which we went into great detail about in the Q2 2013 earnings call. We spoke about its purpose to address two market tiers that we felt that our AXON Flex did not adequately address.

The first of those tiers were those with a preference for body-worn cameras, and the second tier were those who were highly price-sensitive. We are hearing immensely positive feedback from customers who fit these market segments.

Perhaps even more impressive is that we were reentered into several bid processes that we had previously been shut out of when we offered only the Flex point-of-view camera. So while we still believe that the point of view is the best type of camera for law enforcement officers, we think that we now have the product suite to really sweep the overall market.

With this quarter being AXON Body's first quarter in the market, it sold almost 780 units, proving that by launching this product we are filling a much-desired market niche. We have been very busy shipping this product for revenue, and so we are actually backed up on getting some trial units out to customers. So it has been a pleasant surprise at how well-received AXON Body has been.

Second, we revamped our pricing entire structure for EVIDENCE.com to become more transparent, with varying tiers of service to drive adoption into every niche of the law enforcement market. As we went over on the pricing update call a few weeks ago, this was an aggressive move to change the sentiment that on-officer video will be on every officer in 5 to 10 years to on every officer within 2 to 3 years.

Our new pricing model was designed in extensive consultation with our customers over the past six months. We previously were using a fairly complex pricing model which required custom quotes and negotiation with every customer. This allowed us to experiment and iterate around pricing while we dialed in what we believed would be the optimal pricing model in order to scale the business.

We believe we have now refined our business model, and we have now published this new pricing model to enable faster market adoption. This new pricing model is designed to accelerate the sales process by, first, eliminating the perception that our products or our services are expensive; second, eliminating any sense of customer uncertainty about future costs; and third, creating tiers of service that fit different customer segments to maximize both penetration and profitability.

The new pricing brings Flex to an extremely affordable price of $499 per camera, in comparison to the previous price of $950 per camera. But we have also debundled the service from the initial purchase. The agency now has option of buying the service at varying levels, starting at $9.95 per month up to $49 per month. That is per license.

This lets the agency buy only the feature set that it wants. And simply put we believe that we now have the best product at the lowest prices, positioning us for even faster sales wins absent lengthy negotiations.

Third, we officially launched the EVIDENCE mobile app, with my.evidence.com sites for individuals. This allows individual officers to utilize the app before their agencies deploy EVIDENCE.com, which creates a low-friction way to introduce our services into the market.

This free app provides another means of evidence capture, including still pictures, notes, videos, and voice recordings. This app then pairs seamlessly with the agency's EVIDENCE.com account to store all relevant data in one place regarding a case.

During the International Association of Chiefs of Police Conference, we had several hundred officers sign up for the app. And based on early customer reactions, we believe law enforcement is realizing the importance and benefits of mobility in their field. Agencies are further seeing that they can cut a lot of costs out of the process if they have integrated evidence management systems such as EVIDENCE.com and EVIDENCE mobile.

And finally, we announced the acquisition of the Familiar, Inc. team. We felt that this team's experience with developing beautiful digital video and photo interfaces for multiple devices fits seamlessly with TASER's vision for the future of our EVIDENCE.com and Video business.

Many of our customers have asked why it is that consumer applications are so much more user-friendly than enterprise software. In fact, there is a broad trend toward the consumerization of IT, where professional users in many industries are demanding consumer-type ease of use in enterprise solutions.

And this is exactly why we acquired Familiar -- because this team knows how to make great, easy-to-use apps in the consumer space. And we want to bring these great user experiences to our law enforcement customers. The Familiar team will be spending the next quarter researching the various adjacent technologies in law enforcement before diving into development.

One of the advantages of our acquiring a functioning team is that we can immediately put them on the project that will create new revenue streams down the road. I want to be clear that we are not deploying the Familiar team simply to augment our existing engineering resources on our existing EVIDENCE.com product. We are assigning them to develop our next-generation mobile and cloud service offerings -- the first extension into our platform strategy.

We look forward to updating you on our next-generation products in the coming quarters. And again, welcome to the Familiar team.

To top off all those exciting announcements in the third quarter, we just wrapped up the International Association of Chiefs of Police Conference in Philadelphia, where we were actually presenting our booth as the EVIDENCE.com booth rather than the TASER booth. And this has generated a tremendous amount of buzz regarding our revolutionary cloud offerings.

There were a lot of themes discussed in IACP sessions that mirror the overall macro environment we have been seeing over the past six months to a year. There was a noticeable shift in momentum around both on-officer video and cloud computing.

At previous years' conferences, there was considerable skepticism about whether officers would wear cameras and whether law-enforcement agencies would adopt cloud-based systems. This year that skepticism was largely gone, replaced by a general sentiment that on-officer video is something that most agencies are now planning for in their future. And cloud-based solutions like EVIDENCE.com will solve these Big Data storage and analytics problems better than agencies could do using older on-premise solutions.

Last year it was noteworthy when an agency indicated they were moving to on-officer video. This year it was the common reaction. In my opinion, it is no longer a question of if agencies will deploy on-officer video and cloud-hosted solutions, but rather when, and how rapidly they will adopt them, and which technology providers will win in the marketplace.

The world is seeing that video is inevitably coming to law enforcement, and it is coming fast. The New York City judge ruling is just one example of that. We are seeing and hearing increasingly more conversations around this, and policymakers are working hard to make sure that they are prepared for this momentous change in policing.

The Police Executive Research Forum, one of the most respected thought leaders in public safety, held its session last month dedicated entirely to the topic of officer-worn video. In this session, leading chiefs indicated that they plan to implement body-worn video in the near future.

The IACP also reported over half of police chiefs surveyed indicate that they are deploying or actively considering cloud solutions in the near future. The United States CIA recently awarded a cloud-based contract to Amazon Web services to build their next-generation data center, and obviously, that has been an incredibly good development as far as for state and local law-enforcement agencies, seeing an agency such as the CIA selecting Amazon as their data provider.

All these macro trends help our customers get used to this paradigm shift to cloud-based evidence management and storage. We're really seeing some of the larger agencies in the US embrace this technology wholeheartedly.

We have talked about Albuquerque in the past, but it is truly a great example, as they are now the world's largest on-officer video camera -- I am sorry; the world's largest officer-worn camera deployment, to our knowledge. This is a large city that is under a lot of scrutiny from the public. They initially launched with a competitor's body camera, and then transitioned their entire agency to the AXON product line.

We are seeing agencies utilize crowdfunding to purchase cameras, and we are seeing city councils lead the charge in some cases. We are seeing agencies remove in-car systems in preference for body-worn cameras, a seismic change, in our opinion.

The large agencies understand the intricacies of large-scale data digital evidence management and know it is not just about buying a camera anymore. And subsequently they are choosing AXON and EVIDENCE.com.

All these factors give us confidence that we are on the edge of something big, something that our bookings figure of $5.8 million in bookings this quarter soundly reflects. All these internal and external events are indicators that we are on the edge of a tipping point with the entire EVIDENCE.com and Video business. We see 2014 as the year that things are going to be moving at light speed. And TASER and, frankly, our competitors are going to be defining and solidifying their relative market share.

In light of these market dynamics, we feel that now is the time to invest to make this happen and happen in a big way for the Company and for our shareholders. We are out to own this space and to grow it fast.

We see the opportunity to create the central cloud-hosted technology ecosystem for the public safety sector, including both our current EVIDENCE.com offering and future products and services, such as will we building with the Familiar team. The recurrent subscription revenue opportunities create a very high potential lifetime value for every customer. Hence, we believe the biggest mistake we could make would be to underinvest in driving market share right now, when the market is forming.

We have already begun to make some of these investments through 2013 in functions such as account management and field services. This quarter we deployed additional sales representatives for the EVIDENCE.com and Video team, effectively doubling our manpower in each region in order to reach mid-tier customers at a deeper rate.

Telesales continue to be one of our most successful programs with the small agencies, and our senior sales representatives are laser-focused on the big-name agencies in the US. We hope to be able to share this team's successes again in the fourth quarter with you.

Last year we began breaking out reporting by segment for both the TASER and the EVIDENCE.com business. This is a useful tool, both for investors and for our management team. Since these two business units are at different levels of maturity and market development, we are managing our EVIDENCE.com and Video business with an aggressive investment to drive top-line growth and seize maximum market share.

Again, given the recurring revenue model and inherent advantage we will have in selling adjacent services in the future to every customer, we believe the right strategy here is to focus on driving market adoption and garnering a dominant market share. With the addition of the Familiar team, as well as planned hires and other research investments in the EVIDENCE.com and Video segment, we expect R&D expenses will increase over Q3 2013 levels by approximately $750,000 to $1.25 million per quarter, starting in the fourth quarter of 2013.

In our TASER Weapons business, which is in a more mature phase, there we are focused on operational excellence and driving long-term, profitable growth. This segment reporting will allow our investors to track our progress and our execution discipline in both segments more clearly.

In regards to our core TASER Weapons business, the upgrade cycle continues to expand for us. As of September 30, 2013, we have upgraded approximately 14% of our installed base. In the third quarter we upgraded over 8,000 units, which is the highest number of units in any quarter to date.

We also believe that there are some agencies who are proactively upgrading their units outside of our trading credit program, and thereby they are not making it into our metric. The Houston Police Department order was actually an upgrade. They have committed to upgrading their entire fleet of weapons, and in the quarter we realized about half of that -- 2,200 units.

We think the upgrade program continues to be successful in encouraging agencies to move to the Smart Weapon platform, and the declining trade-in credit has been a valuable experiment for us. In Q4 that credit steps down again to $100. We have not yet announced a program for 2014, but we think we will continue to have some form of a program, given the success of the current one.

I would also like to take a minute to discuss the current state of the business in regards to defensive product and commercial litigation. As some of you may remember, in September 2009 we issued a comprehensive set of new warnings around our TASER weapon. The large majority of our litigation has been on the premise that we had failed to properly warn of the risks associated with the operation and use of our products.

Since the rollout of those new warnings in 2009, the rate of new cases presented to the Company has significantly declined. Two years ago we had 55 pending cases. Today we are down to just 23. In the third quarter, we did not have a single new case filed against us.

We have had 8 consecutive quarters where dismissals have outnumbered new cases served. We think this is a testament to the strength of our defense and legal teams.

That being said, we do have some cases still pending that are from the pre-2009 era. We are aggressively litigating these cases, but this comes at a financial cost to us. This quarter, for example, had expenses related to the cost of defense of commercial and product litigation $2.2 million higher compared to the same period in the prior year.

We implemented measures to mitigate this cost through in-house attorneys and defense, but simply put, defense is not something that we take lightly. The good news -- we are in the final stages of litigating the remaining pre-2009 cases over the next 2 to 3 quarters. Accordingly, we expect our litigation expenses to remain in this elevated range for another 2 to 3 quarters.

On the bright side, we are very happy to share that we expect these expenses to trend downward in the second half of 2014 as we bring the pre-2009 caseload to conclusion. We expect to see significant reductions in legal and litigation expenses from the second half of 2014 going forward. This has the opportunity to significantly further improve profitability in our TASER Weapons business unit going forward from the middle of next year.

To wrap up before Dan goes over the financial results in greater depth, I would say exciting things are happening here at TASER, and we think this is just the beginning. Dan?

Thank you. So in the third quarter, consolidated sales were $35.2 million, or a 22.3% increase from the third quarter of 2012. The increase was primarily driven by the continuation of the upgrade cycle with agencies upgrading to the new X26P Smart Weapons. Combined, these contributed $13.2 million in the third quarter.

TASER CAM also had a strong quarter, growing $1 million over the same period last year. And the AXON cameras and EVIDENCE.com sales also grew by $0.8 million to $1.7 million in the third quarter of 2013. Sales of our cartridges declined $1.5 million in the third quarter, resulting in some sales promotions this year versus last year. And X26, the legacy X26 unit, declined approximately $0.2 million in the third quarter, representing agencies moving to the Smart Weapon platform versus the legacy products.

We still have some international and federal customers that continue to buy the legacy X26 product, because it is the only conduct electrical weapon that they have approved in their market or application. But we are working with these customers to get them on the new Smart Weapon platform by having them review and approve the new weapons for their purchases.

As of September 30, 2013, we have upgraded approximately 14% of our installed base of units over five years old. And we have clearly -- we still have a large opportunity in front of us, with roughly $400 million of future upgrades still to be gone after from the Company's perspective.

Gross margin for the third quarter was $22.1 million or 62.8% of revenue, which is up from $16.8 million or 58.4% in the prior year. As sales have increased, we have also continued to benefit from higher operating leverage from our fixed manufacturing costs. And also, due to price increases that we put in place at the beginning of 2013, as well as more sales being sold directly to the end user rather than through distribution channels, we have realized higher average selling prices on our products, which also improved gross margin. Further, with trade-in credits stepping down each quarter over the last year, gross margin has been positively affected, as trade-in credits have a smaller impact on our gross margins.

Although service revenue has increased quarter over quarter, cost of service delivered decreased $0.8 million in the third quarter compared to the prior year for two reasons. First, we continue to benefit from the lower cost structure of public cloud-based Web services versus using our own data center in the prior year. And secondly, we realized the benefit from the completion of the depreciation related to the capitalization of EVIDENCE.com software development, which was running $300,000 per quarter previously.

In the newly renamed EVIDENCE.com and Video segment, revenues increased $1.9 million to $3.6 million for the third quarter of 2013. And the loss from operations of this segment improved to a $1.5 million loss from a loss of $2.5 million in the third quarter of 2012, partially due to the reduction in cost of services delivered as well as higher gross margin on the higher product sales.

Increased revenue and related gross margins in this segment were partially offset by increases in personnel and support expenses made in the current quarter to grow the EVIDENCE.com and Video business. Sequentially, a loss from operations for the EVIDENCE.com and Video segment also improved by $1.1 million, from $2.7 million in the second quarter of 2013 to $1.5 million this quarter.

The improvement was partially influenced by the higher product sales in the third quarter of approximately $1.5 million, as well as the lower cost of service delivered sequentially of $0.4 million relating to the completion of the depreciation of EVIDENCE.com software development. These were partially offset by increases in R&D. As well, in the second quarter of 2013, we did have a one-time benefit from a use tax refund for Arizona of $0.3 million that ran through the EVIDENCE.com R&D line.

Sales, general, and administration expenses of $12.8 million in the third quarter of 2013 compared to $9.5 million in the third quarter of 2012. As a percentage of sales, SG&A was 36.3% of net sales in the third quarter of 2013 compared to 33.2% of net sales in the third quarter of 2012.

Compared to the third quarter of 2012, personnel expenses increased $0.6 million as a result of the strategic hires we made over the last year, primarily in customer-facing roles such as telesales, customer service, and account management as well as field services, and also some incremental administrative functions. Our professional, accounting, legal fees and litigation-related expenses increased $2.2 million compared to the prior year, primarily due to expenses related to the defense of product and commercial litigation. As Rick said earlier, the Company expects expenses related to the defense product commercial litigation to stay at these elevated levels for two or three more quarters before trending downwards in the second half of 2014, as we work through the remainder of litigation related to the pre-2009 warning cases.

Sales and marketing expenses increased year over year due to higher commissions of approximately $0.4 million, as well as increases in account promotion activities, e-commerce marketing, and market development as we look to expand our initiatives internationally as well as in the Video and EVIDENCE.com segment. These increases were partially offset by a decrease in tradeshow expenses due to the timing of the International Association of Chiefs of Police tradeshow, which was held in the third quarter of 2012; but in this year, 2013, it was actually held just this last month -- or this month, in October. So it would be a fourth quarter expense for the 2013. Given the traction the Company has experienced in our EVIDENCE.com business unit, the Company will continue to invest incrementally in customer-facing roles and infrastructure to support the growth, and therefore expects SG&A to remain or increase from this quarter's level until litigation expenses start to decrease in the second half of 2014.

Research and development expenses were $2.4 million in the third quarter of 2013. This is an increase of approximately $0.5 million compared to the third quarter of 2012. The increase is primarily due to additional personnel expenses related to EVIDENCE.com's Video segment development initiatives. With the acquisition of the Familiar team and the corresponding push to move in adjacent technology in law enforcement, we do expect incremental R&D expense starting in the fourth quarter.

As our team is researching, doing the customer work on what will be the next markets that are primed for entry, their expenses will be completely charged to R&D operating expense. In 2014, as we start to develop the initiatives, we do expect that some of these expenses will be partially capitalized until the products are launched.

With the addition of the Familiar team as well as planned hires and other research investments in the EVIDENCE.com and Video segment, we do expect R&D expenses will increase over the Q3 2013 levels -- approximately $750,000 to $1.25 million per quarter, starting with the fourth quarter of 2013. Specific to the fourth quarter, our expectation is R&D expenses will grow sequentially by approximately $1 million, due to the expenses around the Familiar acquisition as well as some of the increases I mentioned earlier.

These investments are being made to accelerate our development and sale of adjacent technologies in new products into our markets here for the Video segment. Our adjusted EBITDA, which includes -- which excludes certain items detailed our press release, was $9 million for the third quarter of 2013 compared to $8 million in the third quarter of 2012, with improvement being driven by higher sales in 2013.

Income from operations was $6.9 million in the third quarter compared to $5.3 million in the prior year's third quarter. And net income for the third quarter of 2013 was $5.1 million, or $0.10 per share on both the basic and diluted share basis, compared to $3.7 million or $0.07 per basic and diluted share in the prior year.

Income taxes were $1.8 million in the quarter. Income taxes expenses for the quarter are actually exceptionally low in the quarter of 2013 for several reasons. First of all, we benefited from disqualifying dispositions of incentive stock options in the quarter, which reduces our taxable income. We also started applying for a credit for the Domestic Production Activities Deduction, which has a federal -- which actually reduces our effective tax rate.

And then we also had a favorable returns provision adjustment, which was recorded in Q3 of 2013. We do expect our full-year effective tax rate before discrete items to be approximately 38.2%.

Moving to the balance sheet, in the third quarter of 2013 the Company generated $10.9 million of operating cash flow. And we finished the quarter with $48.3 million of cash, cash equivalents, and investments, which is really impressive, considering the fact that we bought back $25 million worth of stock this year.

Accounts receivable of $20.1 million are up $2 million from the year-end balances due to increased sales as well as the timing of collections. Inventory of $12.3 million is up $1.3 million from year-end. Again, this is attributed to the general buildup of inventories in anticipation of future sales.

Our investment of property and plant equipment of $19.3 million is actually down $2.6 million. This is really driven by $3.8 million of depreciation expense, partially offset by $1.2 million of capital expenditures in 2013. The capital expenditures were primarily in production equipment as well as some computer equipment.

Accounts payable of $5.1 million is down approximately $1.1 million for the year-end, due to the timing of processing invoices and check runs. And then we had total deferred revenue of $18.6 million. This is up sharply -- up $6.5 million from year-end -- primarily due to two reasons. One is the upgrade program, with the sales of X26 and X2, which includes an extended warranty, which increases our deferred revenue for warranties; as well as the sales of our AXON cameras and EVIDENCE.com contributed another $2.5 million to the increase, due to the deferred revenue on the sales of the future services we will be recognizing over time.

Total liabilities of $36.3 million. And the Company finished the quarter with $92.1 million of stockholders' equity. Continue to have no long-term debt, other than the capital lease; and continue to have plenty of liquidity and strong cash flow, the engine of core business, to fund our sales, R&D efforts, and operations in the future.

So we move on to the information on the cash flow. The Company had cash provided from operations of $10.9 million during the third quarter. For the nine months ended September 30, 2013, cash provided by operations was $23.1 million.

We did have cash used for investing activities of the nine months ended September 30, 2013, of $13.2 million compared to cash provided of $0.7 million in the same year -- in the prior year. The net use of cash is really driven by the purchases and investments during the time period.

Cash used from financing activities was $11 million for the nine months ended September 30, 2013, compared to $19.3 million in the same period for last year. During the nine months ended September 30, the Company did repurchased 3,048,166 shares at an average price of $8.17 per share on the open market, for a total share repurchase this year of $25 million.

That outflow is partially offset by $4.1 million of tax benefit from employee stock option exercises, as well as $10.2 million of cash provided by the exercise of stock options, as the employees buy the shares at their strike price.

As we stated last quarter, to leave more time for the Q&A portion of the call, we have started including some unit sales statistics in the press release for your reference. And with that, we will take questions from people in the queue.

(Operator Instructions) Steve Dyer, Craig-Hallum Capital.

Congratulations on the good quarter. Just wondering if we could dig into the Video business a little bit. It certainly seems to have kind of blossomed here a lot quicker than anybody expected. Could you give us a little bit of the lay of the land, just in terms of your competitive position? How do you see yourselves?

Have you lost any particularly meaningful deals? And if so, why would you lose that sort of thing? I think it is -- investors are now sort of to a point of believing, and now it is just a question of how much of that can you capture?

This is Rick. So the first thing I would say is, actually, the long-term view of this is it is really not a video business. It is a cloud services business that is being driven, with our first major application being on-officer video.

So I would say where we -- this past quarter we actually picked up a lot of deals that we were at risk of losing previously. And the major thing there was that there was just a segment of the market that wants an inexpensive camera -- very price-sensitive; or they want something to just clip on their uniform and go -- they don't want to have to run a wire somewhere or wear a camera up on their glasses.

It has also been quite interesting, actually, that by introducing the Body camera, we were able to pull several deals back that, actually, one of them -- a fairly good-sized one -- had already gone to bid and specified a competing camera in the bid. And that bid was then kind of pulled back and reworked once they knew that there was now our camera on the market that had the same advantages, frankly, at a much lower price and would give them the ability to integrate with our back end over the long term.

But the other thing that has been interesting is of the agencies that were looking at the AXON Flex previously, the vast majority of them stayed with the Flex with the perspective view. So it seems like once the customer understands the advantages of the officer perspective, they stick with it. It seems more like agencies that are sort of newer to the concept of video are likely to be more sensitive around cost or convenience, and a little less performance-sensitive.

Of the deals we know of -- I am not aware of any large deals since we put the Body cam out that have gone away from us. But again, it has only been there for a little while. So there haven't been that many big deals that have closed during that time period.

In terms of the competitive landscape, I would say we are competing primarily with hardware vendors, both that sell the camera and they might give away an app to help with some of the data management. I think we are unique in having integrated the cloud services offering. Although this year at IACP, there was a palpable shift. There was none of this, like, fear of the cloud sentiment there was a year ago.

So we do believe that competitors, over the coming year or so, are going to look to move more in the direction of having a robust cloud offering. So that is one of the reasons that we think we have a unique advantage today. And we have got to press our advantage now.

We are finding customers are -- this is a very sticky business. Once we get people on the system, they love it. And we just got to make sure we win as many deals as fast as we can during this next year, when we think we will continue to have a real advantage. Obviously, we intend to maintain that advantage over time, but it would be imprudent for us to assume that we are going to be able to maintain the advantage we have today indefinitely.

Okay. Great. That's helpful. You mentioned the stickiness of the business. What can you give us in terms of metrics now? It has been a period of time since some of the early adopters have been on the network. Any metrics you can share with us as to the stickiness of it?

This is Dan. I think probably similar to sort of our comments last quarter. I think we are satisfied with the renewals we are seeing. Customers that are heavy users of the system are renewing in rates that we are very satisfied with.

The tough thing is a lot of the sales that we have made over the last year are sort of paid trials. Some of those customers have bought just a handful of units and they may not be ready to deploy video. So I don't want to overly read into just the renewal rates at an agency level.

So we are trying to develop the right metrics to sort of share with the market. It is also pretty early. I think as we get into next year, I think it's probably more appropriate for us to share that, because we will have a little bit more data.

But we are satisfied with where we sit today. The people who are utilizing the system regularly are renewing. I think they see the value. I think people that bought a couple of cameras and really aren't utilizing the system much are probably less likely to renew, but they just may not be quite ready to move to video. But I think we are seeing even some of those customers come back into the fold, just due to the momentum in the video market in general.

Sure. I am wondering if you can draw any parallels with the Video business with your early ECD business, which was obviously a pretty controversial idea at the time. And then it sort of started to hit a tipping point. Any parallels you can draw that can help us sort of see how this plays out?

This is a very insightful question. We were actually talking in the booth at IACP this year -- it was very reminiscent of the 2002 IACP, which was the year that TASER, the weapons business, hit the tipping point. Prior to that, early on, there was a lot of skepticism about, you know, we can't use electricity to incapacitate people. And these weapons are controversial; not sure this is for us.

And then in 2002 was when -- I remember just standing in the booth, talking to people. It went from sort of explaining why they should even consider TASER devices to all of a sudden, every conversation was about, oh, yes, we are doing this; we are planning on this; it is coming next year.

We felt a very similar sentiment shift around both on-officer video and cloud, whereas for the last several years we have been proselytizing it in the booth -- basically talking to skeptics, talking them through their concerns. Last year, having an agency come up and say they were considering buying a couple hundred cameras would have been something that was very noteworthy. We would have been -- everybody in the booth would have been talking about that one customer at the end of the day.

This year we had probably dozens of conversations with agencies talking about hundreds of cameras within the next year. So obviously, there is still a lot of work to be done. And I would caution that with -- a big order like Albuquerque made a big difference last quarter. So I don't know that we are going to see a smooth and continuous upward slope in the adoption curve. There will probably be some fits and starts along the way.

But I think we have now passed -- we are now past the point of no return, that on-officer video has been accepted. It is coming. There's very few holdouts saying it is not coming. I mean, the way we look at it now is it's who is going to win; what business model will prevail, and how fast is this going to happen? That's why, as we talked about our strategy, it is about accelerating both the market and accelerating our market share.

Got it. And last question. I'll hop back in the queue. Some of the other cloud services -- I think it would be helpful if you could kind of paint a picture of what those may look like. Police departments, I think, are not often thought of as cutting edge technologically. So help us kind of think of, without giving away too much competitive information, how we should we think about other offerings there, and how that might look in a couple of years.

Well, your average police department in the United States has about 50 officers. They may or may not have an IT department. They may be subject to working with an IT department that is over -- that reports within city somewhere else, so that there is very little direct relationship or control between the agency and their IT department.

What we have generally seen is the systems that our customers are deploying tend to be fairly outdated in terms of the user experience, in terms of the efficiency. I was at a conference in -- at the IACP, where Chief Tom Streicher from Cincinnati talked about a program that they spent over $10 million deploying a digital record management system in Cincinnati, and it ended up being 15 years, approximately, late in its deployment. They spent well over their budget, so they were well between $10 million and $20 million before the thing ever went live.

And the day it went live, their assessment was that their technology was already at least a decade out of date. We hear stories like that all the time.

So our customers, they do a number of different things. There's electronic ticketing systems. There is automated license plate reader systems. There is record management systems for their tech-based records. There is jail intake systems. There is booking photos, interview rooms, in-car video systems -- the associated backends, which we are already going after with EVIDENCE.com.

There's computer-aided dispatch systems, where you have got to be able to locate the vehicles, match it to the calls that are coming in. So there's a lot of different systems that our customers buy. And we believe that there will be enormous opportunities.

And we are looking at this from a buy, build, or partner perspective -- that in some cases, it is going to make sense for us to partner; in some cases it's going to make sense for us to just build extensions from EVIDENCE.com. But once our customers are managing their users on EVIDENCE.com, and once we are managing their digital evidence, those are their most precious and core records that you have. Because the digital evidence is not workflow; this is stuff you collect at the scene. You've got to make sure you protect it in such a way that it meets the Federal Rules of Evidence and to be able to show that it has not been altered in any way.

We believe that becomes really a core system. And by analogy, if you look at what salesforce.com has done, they entered corporate America through sales force automation, but they have since had adjacent offerings like -- we are a Salesforce customer. We love it. It makes our life easy. We don't have to think about managing a big sales -- customer relationship management system on-site. And we now use their service cloud offering for customer service. We've gone to work.com, which is their HR module, et cetera. So we see a similar opportunity for us to extend from just the digital evidence into several of the other core systems that it takes to run a police agency.

Paul Coster, JPMorgan.

This is Mark Strouse on for Paul Coster. Congratulations on the quarter.

So, obviously, the investments on the EVIDENCE.com site are starting to bear fruit. I just wanted to go, though, earlier this year, when you were talking about -- I think it was a 10% OPEX improvement or increase, you kind of broke that down into different buckets. I think there was telesales and building out the international footprint of it.

Can you just give an update as far as the payoff on some of those investments, and how we should think about that spend going forward? Or is there a reason to invest more in those areas, or should we think about you kind of pulling back on some of those things in favor of the increased EVIDENCE.com spend?

Yes, Mark. This is Dan. Yes, absolutely. We are seeing -- certain investments, we are definitely seeing an immediate return for. I think telesales is one of those areas where those are self-funding positions. We continue to see our telesales each quarter increase, and we haven't hit the point of diminishing returns at this point.

So we have added significant of those resources, and it's paying off. Some of the other things we are investing in have longer-term payoffs. Things like the investments in international -- we are definitely making those investments, as we indicated. We haven't seen that translate into sales yet, but we knew going in it is probably an 18-month to 24-month cycle before those investments start paying off.

So we will continue to make those investments. The investments we are making on customer-facing roles in the Video segment -- things like account management, as well as additional outside sales resources, as well as implementation services -- those are investments we have made. In fact, we are accelerating some of those investments.

As Rick said, we basically doubled our outside sales headcount for the Video segment. And we will continue to make those investments to grow that business. As Rick said, it is -- and it is a bit of a land grab right now. We want to make sure that we don't under-resource our investments, especially those customer-facing roles.

We want to make sure we are in front of every customer that has got an interest in purchasing video products or digital evidence management solutions. And we want to make sure that our ability to win or lose -- we don't want that to be dependent on under-resourcing that. So we do expect we will continue to increase our investments in those areas.

I would say the one thing that has been higher than maybe originally planned is some of the costs around litigation. But as we indicated, I think we're going to sort of stay at these high levels for a few more quarters, and then we expect those to tail off. Some of this is just due to the timing of cases. It is tough to predict exactly when cases are going to come to trial and when -- there is just a lot of workflow around that.

But I think so far we are satisfied with our ROI in those incremental investments. And I think we will continue to increase them over time to make sure that we can grow that video business as quickly as possible.

Okay. And then, lastly, we completely understand and agree with the investment on the EVIDENCE.com side. But just for simple modeling purposes, is there a certain revenue run rate or a date and time that you are expecting that to flip profitable on an operating margin, anyway?

You know, I think our focus right now is really in growing the top line more than just sort of the near-term profitability. One of the great things about sort of a cloud business is that recurring revenue stream, so that for us, the focus is to get as many people on that system right now, and profitability will come with scale. But we don't want to run it for the near-term profits. It's really more of a long-term play at this point.

Peter Mahon, Dougherty.

Just wanted to touch on a topic that we really haven't hit on yet, and that is the core handle business. That definitely outperformed our expectations. Can you attribute that to a larger volume of smaller sales, or have you seen a healthy stream of those mid- to large-scale orders?

Yes. This is Dan again. I think we are seeing across all segments -- strata of the market -- we are seeing the smaller agencies that are served by -- that continues to grow. I think that has been an underserved part of the market. So I think that has certainly helped to grow the sales to serve that part of the market better than what they were served before, either through us or distribution.

The large agencies -- you have a deal, like Houston this quarter, for 2,200 units. That is a big order for us, and I think the fact that they went to the City Council and requested to upgrade their entire installed base over the next several years with that first purchase being made this quarter, I think it is just indicative of the fact that agencies understand the need to upgrade to the new platform. And I think it is -- we certainly see a big opportunity there, but we are really seeing it across all segments of the market. And that upgrade remains a big opportunity.

I'd say the other thing is we are continuing to see further penetration in the market, as well, where we have agencies that maybe didn't have Tasers before or only had a small part of their police force carrying the Tasers are now carrying -- either buying for the first time or going to the full deployment from partial deployment.

So I think we still have some white space in North America, as well as -- even though the international business was disappointing this quarter, that remains to be an opportunity that is 10 times bigger than the US market. So it is one we continue to invest to grow.

Yes. I would add one other thing to that. Just standing in the booth at IACP talking to chiefs, the one other dynamic that is happening is the financial environment is improving. And I talked to a lot of chiefs who basically said, we spent the last three or four years going through cut after cut after cut, and they are now coming out of that. They are saying, our patrol cars are worn out -- basically, they are coming into a situation where they realize they are going to have to upgrade a lot of their capital equipment, to include Tasers.

So I think this market tends to lag much of the economy. So while things have recovered the last couple of years, I think they are finally starting to come out. We are seeing just some strength there, that they are able -- they have got the budget availability now to go in and upgrade some -- those units that are getting older. So hopefully that will continue and maybe even accelerate into next year.

Sure. And what were telesales in the quarter?

I haven't disclosed, but it was over 10% of our sales again this quarter.

Okay. Got it. And then, Dan, I know you talked about a couple of items that impacted taxes on the quarter. Would you mind relisting those and maybe quantifying how much of an impact those did have?

Yes. The two main items were the return provision. We estimate our taxes each year. And then when you file a return, the return can differ from the estimate.

We actually had about a $425,000 benefit this quarter, where our actual tax return had lower taxes than what we had accrued for in the results last year. According to the Domestic Production Activities Deduction, which is a mouthful -- by starting to take that, that is going to lower our effective tax rate roughly by 1%. So because we just put that in place, there is sort of short of a year-to-date catch-up. So that was worth about $200,000 in the quarter.

And then the last thing is with disqualifying dispositions of incentive stock options, the Company can't deduct incentive stock option expense for tax purposes until the employee has taxable income. So unlike nonqualified stock options, which we deduct over the service period, incentive stock options -- you don't deduct the expense around that until the employee actually has a disqualifying disposition and pays taxes. So we had some tax relief from that this quarter as well.

Okay. Now let's go and take a question that came in from Twitter. The question was, how much of a threat does Google Glass pose in the short-term and long-term future to TASER's AXON Flex and the Body cameras?

That's a great question. I have got a Google Glass. We're one of the early explorers. It is a great product. I really enjoy it. And we see -- really, our strategy is to enable these consumer devices to be deployed by law enforcement through our cloud infrastructure. So Google Glass will be a great option for our customers down the road.

I would say that I have shown Glass to a number of law-enforcement officers. The current iteration of Glass is probably not going to really fit the needs of patrol police officers, for a couple of reasons. Probably the biggest one is officers really are very particular about keeping their visual field distraction-free. If they are going into an environment, they want to keep their peripheral vision; they want to keep their hearing free on both sides and really be able to focus on the threat environment around them.

And again, Google Glass is a fantastic product, but having the screen in your visual field can be quite distracting. And the vast majority of officers I showed it to said, you know, for patrol use or for tactical use, they wouldn't wear that while doing a tactical job. They would prefer to have a camera that is unobtrusive, that doesn't really come into their visual field. Frankly, they don't want to think about the camera or their computer screens when they are actually in an incident.

I would say we are also keeping an eye what is happening in the smart watch space, the wearable computing. Based on early customer feedback, we think that for alerting purposes, something on the wrist is probably more amenable to law enforcement use case. That way they can choose to look at it or not with a vibration type of alert, but not have things popping up in their visual field that can be distracting at critical moments.

So we remain excited to see what happens in the consumer space. And again, that is really part of the EVIDENCE.com plan, is to enable our customers to use these great consumer technologies seamlessly, without having to buy and to build a bunch of IT infrastructure on-site.

So on that, we want to wrap up and thank everyone for participating in today's call. Thanks to our shareholders for your continued support. We know it has been a long road to get here. Obviously, we're really excited at what is happening, and we are hopeful this is going to continue upward and to the right.

We think we are in a great position. We saw these trends coming early. We invested well ahead of the market, and that has positioned us now with, I think, the best camera out there. And we have had years to really refine and stabilize our EVIDENCE.com product offering.

So we are ready for the growth to occur. We look forward to updating on our fourth-quarter progress on our next call in February.

And for those of you who are interested, I will be appearing on CNBC's Fast Money tonight at 530 p.m. Eastern. So tune in, and I'll get a chance to talk to you more about the great things happening with TASER and EVIDENCE.com. So everyone have a great day.

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