Axon Enterprise Inc (AXON) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to TASER International fourth quarter 2013 earnings release 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 be given at that time. (Operator Instructions). As a reminder this conference call may be recorded.

I would now like to hand the conference over to Mr. Rick Smith, Chief Executive Officer. Sir, you may begin.

Thank you, andgood morning to everyone. Welcome to TASER International's fourth quarter 2013 earnings conference call.

I'm joining the call remotely today, as I have an opportunity to address over 300 Chiefs of Police at the California Police Chiefs Conference. So as can happen when doing these things remotely there's some risk of technical issues, in which case Dan would deliver the entire call today; but let's hope that doesn't happen.

So before we get started I'm going to turn over to Dan Behrendt, our CFO, to read the Safe Harbor statement.

Thank you, Rick. Statements made on today's call will include forward-looking statements, including statements regarding our expectations, beliefs, intentions or strategies regarding the future, including statements around projected spending. We in extend that all 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 of the date at which they are made, are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. All forward-looking statements that are made on today's call are subject to risks and uncertainties that could cause our actual results to differ materially.

These risks are discussed in our press release we issued today and in greater detail in our annual 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.

Thank you, Dan. As a reminder, we are going to be accepting some questions via Twitter during the Q&A portion of the call, which can be submitted using the #TASR_EARNINGS. That's TASR_EARNINGS after the hash tag. To follow up on our updates on Twitter during the call you follow the account at TASER_IR. We'll be posting graphics and commentary during the call. For those of you without Twitter, all updates and graphics will stream directly to our Investor Relations website at investor.taser.com.

I'm eager to share with our investors the results of the hard work from the past year on today's call. First off, we hit a record in terms of revenues for the second quarter in a row, recognizing $40 million on a consolidated basis. This marks the eighth consecutive quarter of year-over-year top line double-digit growth, and 2013 was the second year in a row for record revenues, withnearly $138 million.

We've been working hard to execute our strategy to grow the top line and invest in the right opportunities. And I think the fourth quarter and 2013 as whole are evidence that our efforts are working. I will review the progress in each of TASER's three core strategies today. First, the CEW upgrades; second, international expansion; and third, gaining dominant market share in the cloud computing and wearable technology space for public safety.

To start I would like to share the traction in the EVIDENCE.com and video segment. So EVIDENCE.com and AXON bookings saw its second consecutive quarter of bookings in excess of $5 million. For the full year of 2013, bookings grew $10.7 million or 282% to $14.5 million.

EVIDENCE.com and video segment GAAP revenues in the fourth quarter grew 33.6% to $2.5 million compared to last year's fourth quarter. We think this is evidence of the staying power of our cloud-based and wearable electronics business, and while we don't expect this curve to always be consistently up and to the right during this early stage, we're very excited about the continued growth of bookings in the fourth quarter.

Within the quarter there were several notable deals such as the New Orleans Police Department, the Birmingham Police Department and Las Vegas Metropolitan Police Department all deploying our AXON cameras and EVIDENCE.com solutions. Larger agencies like these understand the intricacies of large scale digital evidence management and know that this is not just about buying a camera. And as a result they're choosing AXON and EVIDENCE.com as a complete end-to-end system. We're working hard to continue to demonstrate to law enforcement professionals that EVIDENCE.com is a technology that will make the administrative side of law enforcement significantly more user friendly, cost effective and efficient, as well as reducing litigation costs for taxpayers and providing accountability to the public.

As we mentioned on the last call, this year we branded our booth at our most important conference, the International Association of Chiefs of Police, or IACP. This year we branded it as the EVIDENCE.com booth to generate buzz and excitement about our newer brand. We believe this approach was highly successful in helping build brand awareness for EVIDENCE.com; again, our newer brand.

According to our surveys of IACP attendees before and after the conference, we lifted EVIDENCE.com brand awareness among these chiefs from 43% that were aware of EVIDENCE.com before the conference to 80% after the conference. So we nearly doubled market awareness.

We're hosting customer events each month where sales representatives and I invite the chiefs in a given geographical area for dinners to discuss trends in technology and how EVIDENCE.com can benefit their agencies. This also allows me a forum to personally address any concerns that agencies may have about cloud computing in general. Ensuring that the leaders in law up-to-date and relevant information about cloud computing and wearable technology is imperative to continuing the momentum and the excitement of EVIDENCE.com and AXON.

It's also important to establish TASER as the thought leader such that key decision makers see TASER as the right partner to bring best in class technology to their agencies. And we think our strategy is working, not only from the financial results, but from the invitations that we've received to present and speak at large scale law enforcement events.

I was recently invited to present in front of the IACP executive committee about these trends, and later this month -- or actually later today, I'm going to be speaking to the California Chiefs Association; right after this call in fact. In March we'll be hosting our technology summit here in Scottsdale, which we anticipate will be attended to capacity. In fact, we had to schedule a second event in April when the first event filled to capacity. It's just so clear that as we continue to move full speed ahead toward the tipping point where we believe video will become a required tool for law enforcement.

The progression towards cloud-computing and wearable technology in law enforcement is actually a little faster than we had previously anticipated, which of course is very exciting, but it underscores the need for us to move fast in 2014 to solidify our position in the space. We have received several inquiries from investors regarding the potential threat from Google Glass and whether or not they could be integrated into law enforcement.

We think that Google Glass is a great innovative product, and I even have one myself. The more that wearable devices like Glass gain traction, the faster that we believe law enforcement will move to wearable video. The more that wearable computing and wearable technology become mainstream within the public realm, the easier it will be to implement in law enforcement.

Further we strongly feel that the long-term play here for TASER is not with the cameras and the hardware, but rather with the cloud technology platform EVIDENCE.com. If an agency chooses to use Google Glass or other hardware to collect evidence, they're still going to need a digital evidence management system, and EVIDENCE.com is the most flexible and accommodating digital evidence management system to handle digital evidence from multiple sources.

As Glass becomes a commercial product, we intend to support EVIDENCE.com applications running on Glass the same way that we provide applications on iPhone and Android devices today. To paraphrase Bill Clinton, it's not the camera, stupid, it'sthe back end, and that's where we're focused.

We see 2014 as the year that things are going to be moving forward at full throttle. With EVIDENCE.com our goal is to solidify market share, and frankly, market dominance. We're out to own this space, and we're out to grow it fast. The recurring subscription revenue opportunities create a very high potential lifetime value for each customer.

Further, for every EVIDENCE.com customer, they become a natural customer for future cloud hosted services. The more services of ours that each customer is using, the more likely they are to adopt additional services from us in a virtuous cycle, where adding capabilities with one integrated platform gets easier and easier than going to outside vendors. In this virtuous cycle, the lifetime potential value of every customer is far more significant. Hence, we believe the biggest mistake we could make right now would be to under-invest in driving market share.

We've already begun to make some of these investments, which we did in 2013, in functions such as account management and field services. We deployed additional sales representatives for the EVIDENCE.com and video team in the second half of 2013, with more planned in 2014. We have more than doubled our manpower in each region in order to reach more customers at a faster rate.

In addition to the incremental spend in SG&A, for the additional sales representation, customer facing events and trades shows; we feel it is imperative to keep a strong investment in research and development for new products and services as well as enhancing the existing functionality of EVIDENCE.com. Technology is moving fast. We know that, and TASER is committed to being at the cutting-edge of technology continuously assessing how to make our products even better and how to create innovative new products to serve our customers.

We began our most recent product initiative with the acquisition of Familiar, Inc. in late 2013. The team has hit the ground running, and they've spent much of their time meeting with our customers to gain a deep understanding of the key customer pain points and to determine where we can create the most value for our customers next.

Customer reactions have been extremely positive. Customers are telling me that they have never seen a Company go to such great lengths to involve them in fielding the right solutions for their challenges. The team is coming up to speed very fast.

They're spending a lot of time in the field, on-site with key customers around the country. We've decided to keep this process going through the first quarter, as we firm up our product strategy with more and more customer input. It's most important that we get this right, not that we hurry to get it fast.

One result of this is that we expect we will see higher R&D charges in Q1 than previously expected, by about $500,000. This is because we have the team doing customer oriented research rather than active product development work. Accordingly, a higher proportion of the work will be expensed in Q1, versus development work, which could be capitalized, but we believe this is the right approach. We need run the business to get to the right answer for the long-term and take the time that it takes to get it right.

Breakeven for our EVIDENCE.com business is also another hot topic among some of our investors. At the front end of building a cloud-based or SaaS business there is a high level of investment required, and with revenues being deferred over the length of the contract, there's an inherent loss period until a critical mass of customers is achieved. Our philosophy on breakeven and investment is that so long as the business is growing and the signs that our product is going to work are evident, we need to continue to invest. If the growth of the business slows, then at that point we can pull back on our investments.

We're managing our EVIDENCE.com and video business with aggressive investment to drive top-line growth and seize maximum market share. Again, given the recurring revenue model, any inherent advantage we will have in selling adjacent services in the future to each of these customers, we believe the right strategy here is to focus on driving market adoption and garnering dominant market share.

Once it's scaled, we can pull back on the investment significantly and have a highly profitable business with long-term recurring revenues. It will actually cost less to run the business in steady state than its costing now to build it on the front end.

The next strategy I'm going to review is our CEW upgrade. The TASER Weapons business continues to execute and show very strong results, delivering revenues that were up 24.1% to $37.6 million year-over-year. The fourth quarter realized several large stocking orders as a results of a year long volume incentive program that added about $2.5 million to top line results in the fourth quarter.

It's also important to note that historically the first quarter for TASER has been weaker by anywhere from 10% to 30% than the preceding fourth quarter. The push for upgrades continues, but starting in 2014 we're introducing a new incentive program to promote the TASER assurance plan in conjunction with customer upgrades. The regular trading credit has continued to decline. It's now down to $85 trading credit for an upgrade, but if agencies sign up for TAP, the TASER insurance plan, they will receive an additional $100 credit per unit.

To refresh your memory, the TASER assurance plan allows agencies -- after the purchase of their initial CEW unit, they can make equal installments payments over the period of a contract. At the end of the contract period the customer receives a new up --- a new CEW. So along the way the customer realizes other benefits as well.

We're passionate about helping our customers budget for CEWs, and TAP allows our customers to have a predictable and manageable expense that's consistent during the contract period and results in an upgrade five years from now. We still believe that there lies a large opportunity ahead in upgrading aging weapons as well as to sell more into those agencies that don't have a CEW on every officer today. In our North American Weapons business, which is obviously in a more mature phase, we're focused here more on operational excellence and driving long-term profitable growth.

One more update for the TASER Weapons business is in regards to our product offering. Now that we have the X26P and the X2, which are getting very well accepted in law enforcement markets, we've made a decision to discontinue new product sales of the legacy X26 CEW, which we introduced in 2003. We will be discontinuing new product sales at the end of 2014. We're now entering the end of life phase for that product. We will be migrating customers over to the new 2013 model, X26P.

Internationally we're making focused investments to drive growth. Our international businesses made up about 26% of total sales in the quarter, with over $10 million in revenue. Although we've been admittedly disappointed in the full year performance of the international segment, we see signs that our investments are beginning to bear fruit. We've recently hired a head of international services and expect higher international sales as a result in 2014.

We also had more countries open up for us to sell into, which is a positive indication that the understanding of CEWs and their corresponding benefits, and that the political climate is changing in our favor. We will be continuing to invest internationally in 2014 with initiatives that will generate effective tax savings in 2015 for the Company.

I would also take a minute to discuss the current state of the business in regards to the defence of product and commercial litigation. As some of you remember, in September of 2009 we issued a comprehensive new set of warnings and training guidelines around our TASER weapons. The large majority of the litigation that is filed against us has been on the premise that we have failed to properly warn of risks associated with the operation and use of our products.

Since the rollout of these newer warnings and the associated training, the rate of new cases presented to the Company has significantly declined. Three years ago we had 52 pending cases. Today we have 18. In the second half of 2013 we only had one new case that was presented to us. Again, that's in the course of two quarters we only had one new case.

We've had nine consecutive quarters where dismissals have out numbered new cases served. We think this is a testament to the strength of our defense and legal teams, and training and risk management. In the fourth quarter we had a few other significant events in regard to our litigation and defense.

Number one, in the Turner versus TASER case we were awarded a new trial on damages only. This resulted in the reversal of $1.1 million in litigation reserve in the fourth quarter. Due to this reversal, additional insurance coverage became available, and SG&A realized a $0.6 million benefit to litigation related activities in the fourth quarter in addition to the $1.1 million reversal.

Secondly, we did settle two cases for a combined $2.3 million as previously announced in [NAK] on November 27. These cases will now be paid through insurance coverage due to the reversal of the Turner versus TASER case as well, and therefore there's no reserve on the balance sleet at this time and no expense was necessary.

Third, we were awarded a permanent injunction against Karbon Arms for patent infringement on our CEWs. We were awarded damages in the case, but at this time there's nothing on the books, as collectability is unassured. We're happy that this case is resolved and our CEWs can continue to be the market leader in safety and effectiveness, and we'll continue to aggressively defend our intellectual property.

In addition, the Company is currently in a jury trial in the commercial litigation lawsuit entitled AA & Saba versus TASER International. This lawsuit is seeking monetary damages and attorneys' fees for an alleged breech of a distributor agreement. The outcome of any litigation is uncertain, and it is possible the Company could lose at trial with an adverse judgment.

That being said, we do have some cases still pending that are from the pre-2009 era. We're aggressively litigating these cases, but this comes at a financial cost to us. We've implemented measures to mitigate this cost through in-house attorneys and defense, and we have always maintained defense is not something we take lightly.

We're in the final stages of litigating the pre-2009 cases over the next one to two quarters. Accordingly, we do expect our litigation expenses to remain in the elevated range they're at now for another one to two quarters. On the bright side, we're happy to share we continue to expect these expenses to trend downward in the second half of 2014 as we bring the pre-2009 case load to conclusion, although litigation always remains inherently unpredictable. The Company does plan to invest the legal saves into new customer facing initiatives to accelerate further sales gains.

To wrap-up before Dan goes over the financial results in greater detail, exciting things continue to happen here at TASER, and I am looking forward to sharing more success in the coming quarter. And with that, let me hand it over to Dan to review our financials.

Thanks, Rick. As Rick said, in the fourth quarter consolidated sales were $40 million, a 24.6% increase from the fourth quarter of 2012. The increase in sales was primarily driven by the continuation of the upgrade cycle, with agencies upgrading to the new X26P and X2 Smart Weapons. Combined, these contributed $15.9 million in the fourth quarter.

AXON cameras and EVIDENCE.com sales also grew by $0.5 million to $1.4 million in the fourth quarter of 2013, and sales of our cartridges increased to $1.5 million in the fourth quarter as a result of several year end distributor stocking orders that occurred. X26 CEW declined by $0.6 million in the fourth quarter, a result of agencies embracing the new Smart Weapons platform.

There are still some international and federal customers who are continuing to purchase the X26 because it's the only CEWs that's been approved for their market or application. We're working with these customers to get them to review and approve the new Smart Weapon platform. Historically we've been announcing the percent of the install bases upgraded to their legacy weapons to the new Smart Weapon platform each quarter. However, we feel that the trade-in credit, as it has declined over the last year, more customers are choosing to upgrade weapons outside our formal program and therefore not making it into our metric.

Due to this we will no longer be tracking this metric publicly, but we still feel that the upgrades are still a large opportunity for us as evidenced by the fact that we continue to see very strong sales in North America and in the new weapons. But it's becoming a less meaningful measure, as that upgrade credit is dropped and agencies just choose to upgrade outside our program.

Gross margin for the third quarter is $25.6 million or 63.8% of revenue, which is up from $19.2 million or 59.7% in the prior year. As sales have increased, we have continued to benefit from higher operating leverage. And due to price increases instituted at the beginning of 2013 and more sales being sold directly to the end user rather than through distribution channels, we have realized higher average selling prices of our products, also improving gross margin.

Further with the trade-in credit stepping down each quarter over the last year, gross margins has been positively affected because we've given less back to the customers in those trade-in credits. And although service revenue has increased quarter over quarter, the cost of service delivered decreased $0.3 million in the fourth quarter compared to the prior year due to the continued benefit from the completion of the depreciation of the capitalized costs related to EVIDENCE.com software development, which is running at $300,000 a quarter previously.

In the EVIDENCE.com and video segment, revenues increased $0.6 million to $2.5 million for the fourth quarter of 2013. The loss from operations at EVIDENCE.com and video segment worsened to $3.9 million from a loss of $1.8 million in the fourth quarter of 2012. This is largely due to the increased investment in research and development activities as well as additional sales representatives for that part of the business.

Sequentially the loss for operations [of the] EVIDENCE.com and video segment also worsened $2.3 million from $1.5 million in the third quarter of 2013 to $3.9 million in the fourth quarter, as previously stated. This is due to the decision to increase the spend on research and development as well as the acquisition of the Familiar team to accelerate our move into new products, aswell as we've added a number of new sales reps -- as Rick said, we basically doubled our sales reps in the field in the second half of the year, so that's starting to have a bigger impact in the fourth quarter -- as well as we saw some lower revenue in the quarter from the TASER [CAM] business that also runs through that business. But we do expect the current levels of spend to continue to increase from this place through 2014 as we continue to gain market share and add in more customer facing roles.

Sales, general and administrative expenses were $11.7 million in the fourth quarter of 2013, compared to $12.4 million in the fourth quarter of 2012. As a percentage of sales, SG&A was 29.1% of net sales in the fourth quarter of 2013, compared to 38.8% of net sales in the fourth quarter of 2012.

Compared to the prior year, litigation related activities were down $1.2 million due to more activity taking place in the fourth quarter of 2012. Additionally, as a result of the reversal of damages in the Turner case, the Company recognized a $0.5 million benefit in the quarter because previous legal expenses that have run through the P&L were able to now be reimbursed by the insurance company, so we saw a $0.5 million benefit in the fourth quarter for that.

This is partially offset by increased personnel expenses of $0.7 million as a result of strategic hires that we made over the last year, primarily in customer facing roles such sales representatives, telesales reps, customer service, account management and field services, as well as some incremental and administrative functions. Sales and marketing expenses increased year-over-year due to higher commissions of approximately $0.5 million, as well as increases in account promotions and trades show expense due to the timing of the International Association of Chiefs of Police trade show, which was held in the third quarter of 2012 but in the fourth quarter of 2013.

On a normalized basis, when we back out the one-time benefit for the insurance reimbursement for previously recognized legal expenses, SG&A expenses would have been $12.2 million in the fourth quarter of 2013. Given the traction the Company has experienced in the EVIDENCE.com and video segment, the Company will continue to invest incrementally in customer facing roles and infrastructure to support the growth, and therefore, expect the total SG&A expenses to increase from this quarter's level about 5% to 10% before the benefit of litigation reversal.

Research and development expenses were $3.4 million in the fourth quarter of 2013. This is an increase of approximately $1.5 million compared to the fourth quarter of 2012. As we predicted and forecasted last quarter, this increase is really primarily due to the additional personnel expense related to the EVIDENCE.com and video segment. Our team is continuing to do researching and [voice to customer] work on what markets are prime for entry, and their expenses will be completely charged to R&D operating expense during that time.

In 2014, likely starting in Q2 as we starts development initiatives, expenses will be partially capitalized until we launch those new products or services. However, given the newest of these initiatives, the Company cannot be certain of the exact timing of capitalization or the completion of development projects. With the addition the Familiar team as well as planned hires and other research investments in EVIDENCE.com and the video segment, we continue to expect to see some increases in R&D from these levels. The investments [are being] made to accelerate our development and the sale of adjacent technologies and new products.

Adjusted EBITDA, which is -- excludes certain items as detailed in our press release, was $13.4 million for the fourth of 2014, compared to $7.7 million in the fourth quarter of 2012. The improvement is mostly driven by just the higher sales and gross margins in 2013.

Income from operations was $11.6 million in the fourth quarter of 2012. This compares to $4.7 million in the fourth quarter of 2012. So -- I'm sorry,$11.6 million in the fourth quarter of 2013.

This quarter's income from operations benefited from the reversal of the $1.1 million litigation reserve related to the Turner versus TASER International case and the resulting reimbursement of $0.5 million of previously expensed legal fees. Also related to litigation, in the quarter we announced we receive a permanent injunction against Karbon Arms and were awarded damages. We have not recorded this benefit, as collectability of that award is not reasonably assured at this point.

The net income for the fourth quarter was $6.9 million or $0.13 per share on both a basic and diluted basis, compared to net income of $3.8 million or $0.07 per share on a basic and diluted share basis for 2012.

Income taxes were $4.6 million in the fourth quarter. The effective tax rate for the whole year was about 35.3%. The Company's tax rate was reduced in 2013 by a set of stock option deductions, research and development credits, and favorable return to provision adjustments. Excluded these positive benefits, which are difficult to forecast, our effective tax rate would have been approximately 39%, which we think is a good number to use for the full year 2014 modeling purposes.

As we move on to the balance sheet, in the fourth quarter the Company generated $9.3 million of operating cash flow, andwe finished the quarter with $63.4 million of cash, cash equivalents and investments. Accounts receivable of $22.5 million were actually up $4.4 million from the prior [year-end] balances due to increased sales, and inventory of $11.1 million is essentially flat with the prior year balances.

The investment in property, plant and equipment of $19.1 million is down $2.9 million from the year-end balances. The decrease includes approximately $5.1 million of depreciation expense, partially offset by $1.8 million of capital expenditures during 2013. The capital expenditures in 2013 were primarily driven by investments in production and computer equipment.

Accounts payable of $6.2 million is also flat with the prior year, and total deferred revenue of $20.2 million is actually increased $8.1 million from the last year's prior balances, primarily to -- due to two things. It's the upgrade program for the X26P and X2, which includes an extended warranty. And we are also saw sales of the AXON camera and EVIDENCE.com solution resulted in additional $2.7 million of deferred revenue related to service revenue that they recognized over the life of the contracts.

We continue to defer revenue related to EVIDENCE.com and service from the time of the purchase, and again we will recognize that revenue, depending on the -- how much the customer has paid upfront, from anywhere from one to five years depending on the individual contract. Total liability is $37.5 million, and the Company finished the year with $109.9 million instockholders equity.

Continue to have to long-term debt other than a capital lease, and we continue to have a plenty of liquidity and strong cash flow engine in our core business to fund our sales, R&D efforts and operations in the future. As we move into the [selected] information provided for cash flows, the Company did have cash provided from operations of $9.3 million in the fourth quarter of 2013, and for the 12 months ended December 31, 2013, we had cash from operations of $32.4 million.

We did have cash used from investing activities for 12 months of $23.1 million, compared to cash provided of $1.7 million in the same period of prior year. The net use of cash is really driven by purchases of investments during that time period, as we invest our excess cash into both short and long-term investments. Cash used in financing activities was $3.2 million for the 12 months ended December 31, 2013, compared to $13.4 million used in the same period of the prior year.

To refresh everybody's memory, during the 12 months ended December 31, 2013, we did repurchase [3.048966] million at an average price of $8.17 per share. So that's netted a total purchases in that buy back of $25 million completed during 2013, and this was partially offset by $6.8 million of tax benefit for employee option exercises as well as $15.4 million of cash provided by employee stock option exercises. So really we offset most of the buy back with option activity during the year.

As we stated last quarter, we'll leave more time for Q&A portion of the call. We also will include unit sales statistics. That's included in the press release for your reference so we don't have to cover that in the Q&A here. So just refer to the press release, you'll see the unit sales.

At this point I would like to take a minute to address the incremental investments we've started that we have talked about making over the next year and beyond to grow the business. Last year at this time we also messaged that we would be investing to grow the business.

I think that today's results for the full year of 2013 have shown that we're serious about executing on our strategy and providing tomorrow line double-digit growth consistently. We feel that these investments are necessary to continue to solidify our market position in the video business, investigate and develop adjacent revenue-producing opportunities, and continue to grow internationally so we can provide greater long-term value for our shareholders.

And with that I will -- we'll take calls from the queue. Sajid, if you want to queue that up, that would be great.

Thank you. (Operator Instructions). Our first question comes from Steve Dyer from Craig-Hallum. Your line is now open. Please go ahead.

Good morning, guys. Very nice quarter.

Thank you, Steve.

On the Weapons side of the business, we'll start there, and I know you're not going to give out kind of the percentage upgraded any more, but I don't know whether to use the baseball analogy or what, but how you, I guess, characterize anecdotally how the upgrade cycle is progressing?

Yes. Steve, this is Dan. I think we're really happy with where we are right now. I think we've -- I think a lot of the strong results we've seen, especially in our North American business, are a direct result of that upgrade cycle, so I would say from a baseball perspective we're still in the early innings.

It's just that -- I think what we've discovered is that as we've reduce in addition trade-in cred, I think the good news is we're seeing lots of trade-in activity, but it's -- we're seeing less of our customers actually choosing to upgrade through our formal program. They're adjust going ahead and buying new units, because at this point the bundle we're selling, they've kind of worked the economics. In some cases they've decide that they would rather just buy the TASER without the warranty and not get the trade-in credit.

So -- but we still see that as a growth engine for 2014. We still see it there's a good part of the market -- I would say a majority of the install base is still to be upgraded, so I think we still think that's going to continue to provide plenty of growth for the Company.

As you look at the number of handles in the field that are over five years old, is that number still growing by the day, or has the upgrade kind of gotten to the point where the average age so to speak is now starting to shrink?

I think we're probably still -- I would say we're -- probably still seeing some growth in the total number of units over five years old, justbecause we're getting into some strong sales years five years ago. But it's -- I think even at a steady state there's still a large opportunity for us where if we can upgrade anywhere from say 12% to 15% of that install base over 15 years -- or over five years old each year, that that's going to provide a very strong base for the North American business.

And then lastly, on the video business it sounds like you're going end of life the X26. Are you also going to end of life the cartridges at that point in time, or will there be a tail there as well as for a while?

Yes, so for the X26 -- the legacy X26 product [that was] introduced in 2003, yes,we'll not sell that commercially after 2014, but we will continue to support that program from a warranty perspective through the end of the decade. The cartridges for the X26 legacy product, the X26P uses that same cartridge, so we will continue to sell that legacy cartridge for the foreseeable future, because the new platform takes the same cartridge.

Okay. Jumping to the video business, it looks to me at least from what I can tell that almost anybody that announces a vendor, you're winning the vast majority of those deals. Do you have any kind of a win rate that you're willing or able to share that you're using in your marketing and sales process?

Probably not anything we can share. I think we're very satisfied, and I think we're -- we [get into these] competitive situations, we think that customers are really appreciating the end solution and the key things we can differentiate, like the evidence transfer machine, which makes the [ingest the] video significantly more efficient than anything -- any product we're competing against. And then the robust backend with EVIDENCE.com, I think customers, especially larger agencies, we see that they really are getting that message well, and our sales people are doing a good job of delivering that message.

And I guess anecdotally it seems like 2013 was the year that the video solution moves from a bunch of small agencies using it to at least getting on the radar of the larger agencies. Do you view 2014 as kind efforts year that you start to see some real meaningful deployments with the large agencies, or are we not there yet?

Hey, Rick, do you want to take that one? I know you have been meeting a lot with the customers out in the field?

Yes, they're -- we do expect this year to see larger deployments than we have seen historically. There are a number of RFPs on the street right now for the 1,000 to 2,500 units sort of ranges. We've been actively engaged with those accounts, and we think we've got very good shot at them.

And we're also hearing a lot of rumbling and activity internationally on cameras. There's a number of RFP deals that are coming out there as well that we think we've got a very good slot at. So coming into this year we see several deals that are larger than anything we have sold to date that are in the pipeline.

Now, as you know, insert all the disclaimer language here about the inherent riskiness of those, and they're not in the bag until we get them. But we certainly do see -- the opportunities are getting larger, and I think that's a function of -- some of these agencies are moving from the, hey, let's test this out to, okay, we're going to make this part of our standard operations. And we hope see that continue through the end of the year.

In the internationally it was always my understanding that having a data center or the data itself housed in-country was a big deal for a lot of countries. Is that receding a little bit, or -- because I have seen a lot of the stuff internationally as well and was not sure how much you guys think you can play there.

Yes, we certainly think we can play. We have instances running in Amazon's data centers in Brazil and in Europe, and I believe we've either have one up and running or we're close in Australia. One advantage of working with AWS is that they do have data centers around the world, and we can at very low cost bring up additional instances.

Those are mostly being used right now to support field trials. There -- we're certainly in discussions with some of the larger international agencies that may want to see the data in their country and may not -- and there maybe frankly some discomfort even around using an American vendor, just given all of the PR about what's been happening with the NSA.

So the good news for us is there are -- Amazon is getting enough market share clout that there are a number of competitors that are arising that are making it a goal of theirs to make it easy for Amazon customers to deploy on the competing clouds that are local companies in some of these different countries. So we haven't done that yet, but we do have plans in place. We're not going to be losing business or shut out of these countries by the fact that we're going to require they store data in the US.

We do have a very strong preference to -- and work with our customers not to try to have a them house the data on-site. There's just a whole bunch of challenges in doing that, and we're seeing that most customers are getting comfortable that, if we get it in-country, that we would be able to use a reputable local cloud provider. But again, those deals are -- we haven't announced any of those because we haven't closed any of the substantial dealings. I would say we're more test mode. So there are some challenges, but I think we've got a number of ways we can work through them.

Thank you. I will hop back in the queue.

Thanks, Steve.

Thank you. Our next question comes from Greg McKinley from Dougherty. Your line is now open. Please go ahead.

Gross margin. So those have been continuing to improve. Can you just remind us where you were with trade-in credits, where you are now, where you see the Company migrating to over the course of this year? And then maybe comment as well the degree to which your direct sales efforts are expanding those margins and where we are in the process of that playing out?

Yes, so we started the year with about $130 or so in trade-in credits. We've kind of worked that down throughout the year. So we've been having an incremental reduction to each quarter in order to created urgency for our customers to upgrade.

I think one of the things we announced earlier -- on one of the earlier calls is the fact that we're going to continue to test the technologies the market to understand what that proper upgrade credit amount is. We felt it was important to have some kind of upgrade credit available for our customers to encourage them to take weapons that are over five years old but still in working order and make -- give them the -- some value for those weapons.

So we continue to think that's important. I think with the new program, if they go to the TAP program, they can actually get $185. The advantage for us is we're selling in the upgrade today, but we're also pre-selling the next upgrade in five years. And I think [it's good] for our customers to take this capital expense and turn it into operating expense, and it's good for us in order to have that predictability of knowing that you're going to get that customer to upgrade in five years versus having to try to resell them on that upgrade opportunity.

So I think it certainly helps. I think that we're -- the Company also increased prices again in 2014. We're taking inflationary-size price increases to our products across-the-board each year, and I think our customers understand that, and that certainly we will continue to help maintain these margins.

I think the one thing we'll see a little bit on a consolidated margin business -- basis is that as the video business scales up, we will have a little bit of a mix pressure in that -- the video products. We did -- when we lowered the prices for the hardware, we think that's helping to drive adoption, which is great, but as you know there's not a high margin on the camera sale itself. The real margin for us has been long-term service opportunity. So we may -- as the video business scales up we play see a little bit of a mix shift as the video becomes more -- a bigger part of the total, but we certainly feel like we can stay at this -- at or above 60% on a go forward basis.

Okay. And just I didn't catch it. So you started the year at $130. Why did you and the year at?

$85.

$85. And then -- but if they purchase a TASER assurance plan, they're getting and $85 credit for the new TASER plus $100 credit for when that TASER is replaced from five years from now? Is that what you said?

No, it's actually -- what they get is they get -- this is starting in the first quarter. They get $85, and if they choose to also sign up for the TASER insurance plan, they also get a $100 off their first payment towards their next TASER. So its $85 immediate, and then -- say the payments are $200 a year for five years, that first payment is $100 instead of $200 towards that next TASER.

Oh, okay.

This is Rick. Just to clarify on that, the net sale, like, if we for rounding purposes say it's a $1,000 sale, if they just take the trade-in credit, they're going to be paying $1,000 less 835, so they would be at, what is that, $915. If they take the additional $100 by signing up for TAP, then there's going to be -- the $200 initial payment to gets on the TAP plan, and they get the $185 off of that, but the cash at time of purchase goes up from $915 to $1,200 less $185 gets you to basically $1,015

Okay. Okay. Okay, that's helpful. Now, the -- can you give us a sense for -- maybe the number -- I guess I could probably go back and compute it, but the number of licenses that you've booked now with EVIDENCE.com?And maybe -- because I know you give is your booking rates. I think that also includes the AXON hardware sale. Can you give us a sense for maybe how many licenses have been booked for EVIDENCE.com and what the aggregate booking value of that software sale has been, so we gets a sense for future revenue recognition off of the base as it exists today?

Yes, we probably can't go to that level of granularity. I can tell you right now on the balance sleet there's -- we've seen the deferred revenue associated with the video business actually increase from last year by about $2.7 million. The bookings number includes future invoiced amounts as well, so its not -- when we book $5 million in a quarter, we don't always invoice that full $5 million.

Some of that may be future -- if somebody signs a three year deal, we may bill that customer initially and then on the anniversary of year one and year two for that three year deal. So some of those bookings will be invoiced in the future.

But as far as the total license count, we are providing the unit sales each quarter. I think this as this business continues to evolve, what we have to -- we're going to continue to look for what the metrics are that we're using to manage the business, and we will share those as appropriate in the future.

This is Rick. I would just add a little more color to that. We just switched to a per user seat model in the fourth quarter. Prior it that we were doing a per camera model, and -- so it's a little hard for us to blend those two together. So as we get people off of the per camera model and onto the per user model, we will have a little more clarity around how to best characterize the number of seats.

And so, Rick, by that do you mean for example there might three shifts occurring during a day that would use that individual camera for eight hours per. In the past you're selling one license for that camera, but now you're selling three for the individual users of it?

Correct. Correct. And before we had a model where we included the first year free in the price of the camera. We've now bifurcated that, and so we've been able to lower the net per license cost to the customer, but we have moved it a per officer for exactly the reason you just talked about.

Okay. And then I know you just made reference to your Brazil distributor --I don't know -- disagreement. Is that -- how important is that in terms of you tapping the opportunities in that market? I know one of the things that people are focused on is obviously some big emerging events, world stage events in Brazil over the next couple of years. How do you feel about your opportunities in Brazil and resolving any distributor issues there?

So I will take that one. So the issue with the former distributor, we terminated the agreement because we didn't believe that frankly he was going to be able to get the job done. And we believe there were breaches of the agreement. He obviously doesn't see is it that way. So the risk with this trial is pretty much just that we get hit for some damages.

We don't see it impacting our presence in Brazil. We see that we're in a much stronger position with the team that we have addressing the Brazilian market than we were with our former distributor. So I wouldn't think of it in terms of impeding our ability to operate in Brazil. It's just a risk that you never know what a jury is going to do, and we're in trial right now.

In terms of the opportunities in Brazil, we see -- there's obviously a lot of opportunity. We've had a lot of interest around the cameras. We have not yet been able to get the government to approve our plan to bring a local manufacturing partner so that we can re-enter with the weapons.

There's been a tremendous amount of pressure from our customers. The police agencies down there are clamoring to get the TASER devices back in-country. They're not happy with the local competitor, which once that sprung up, that's what led to the block for us to be able to get import licenses.

So there as lot of customer pressure. We've been aggressively working the market. It really just comes down do politically when we can get the approvals to start reselling in a market we think there is a lot of demand. But asanything that requires a regulatory approval or an approval at a high government level, it's not really predictable if and when we're going to get that approval, but we're working pretty hard.

Thank you.

Thank you. Our comes from Glenn Mattson with Sidoti. Your line is now open. Please go ahead.

Yes, hi. Good morning, everybodyJust a question about the TASER CAM. That's kind of the older legacy product. We did see that go down this quarter, which probably was pretty impactful on the video product sales. Are we starting to see kind of a natural cannibalization of that product, and is that something you expect to continue throughout 2014 or to accelerate at all?

Yes, this is Dan. I think, yes, the TASER CAM -- I think a lot of TASER CAM sales are driven by agencies or even countries that have mandated that when they buy a TASER they also buy the TASER CAM with it. We certainly see the AXON Flex and AXON Body having a higher utility and really being a better value for our customers, because it gives them the ability to capture every event from the beginning to the end versus only the events that involve the TASER.

And certainly one of the things that we see of the video product is the value is having the officer's perspective of the whole event. TASER CAM doesn't do as good a job of doing that, because you only capture the event from when the TASER comes out. Lots of things happen before that.

So we think longer-term we would certainly like too see our customers migrate to the AXON Body and Flex just because we think it provides a higher utility and better value for them. And we wouldn't be surprised to see over time the market shift over to the newer products.

Okay. Is there any way you can explain [though]? It seems like there was way bit of a surge in that in Q3, and then even though Q4 was down, it was still a decent quarter for TASER CAM. Is this a way to explain what happened there, or was it just series of orders came in?

Yes, actually Q3 was driven by one significant order -- international order, where they do mandate the TASER CAM for the -- any of the TASER purchases for that market. So we saw that in Q3, and it'sjust the international business, as you know, is a little bit lumpier. So that's -- it's one large order that drove most of that change.

We do see, again, a number of customers that continue to buy the TASER CAM. It's a good product. We redid that product over the last year in order to create some new features and functions for that, but again I think it's really just very customer specific. Again, in lots of places what we're trying to do is, in places where they have those rules in place that they have to buy a TASER camera, we're trying to get them to loosen that to say they just need to buy and on-officer video camera with the TASER, because we think that's a better utility and better value for them.

Okay. And then last thing. On the investments in international, is it still kind of the big three markets that you have historically been going after -- UK, France and Brazil -- or is there any other new areas that you're also investing in?

We're continuing -- those are the primary investments, they're in Europe and Brazil, but we're investing really around the world as far as capabilities, websites, marketing, collateral, trade show type expenses, and really just working hand to hand with the distributors too make sure that we support them and send people as appropriate to help them to grow their businesses as well.

Okay. Great. Thanks.

Thank you.

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

Thank you, everybody, for your time this morning. Obviously, we're very proud of the hard work our team did. It's not every day you get to turn in results like this.

But as we look forward to 2014, we see lots of indicators again that the -- there is an opportunity for the EVIDENCE.com and AXON to really go mainstream. We're seeing a lot of opportunity internationally on both side of the business. We're very excited to be looking forward to a great call a year from now.

And thanks for everyone who stuck with us over the years as we made the investments that have made 2013 possible, and everybody have a great day.

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