Axon Enterprise Inc (AXON) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the TASER International, Incorporated, Q1 2014 earnings conference call. (Operator Instructions.) I would now like to turn the call over to your host for today's conference, Mr. Rick Smith, Chief Executive Officer. Sir, the floor is yours.

Thank you and good morning to everyone. Welcome to the TASER International first-quarter 2014 earnings conference call. Before we get started, I'm 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, or strategies regarding the future, including statements around projected spending. We intend that such forward-looking statements be subject to the Safe Harbor provided by the Private Securities Litigation Reform Act of 1995.

The forward-looking information is based on current information and expectations regarding TASER International, Incorporated. These estimates and statements speak only as to the date 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, 2013, under the caption Risk Factors. You may find both these filings, as well as our other SEC filings, on our website, www.taser.com.

With that, I'll turn it back over to Rick Smith.

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 hashtag TASR_Earnings. Again, that's #TASR_Earnings. To follow our updates on Twitter during the call, follow the account at TASER_IR, so this is at TASER_IR. We'll be posting graphics and commentary during the call. For those of you without Twitter, all updates and graphics stream directly to our Investor Relations website at investor.taser.com.

I'm eager to share with you, our investors, the results of our hard work from the first quarter on today's call. First off, we grew revenue 18.9% to $36.2 million compared to $30.4 million in the first quarter of 2014. This marks the ninth consecutive quarter of year-over-year top-line double-digit growth.

We also hit a historical record in international revenue, recognizing $10.6 million on a consolidated basis. Bookings in the EVIDENCE.com and video segments saw their third quarter in excess of $5 million. We continue to work hard to aggressively grow the top line, and we are excited to continue to share our progress and successes throughout 2014.

I will review the progress in each of TASER's three core strategies today, those strategies being, number one, international expansion; number two, CEW or weapons upgrades; and number three, gaining dominant market share in the cloud computing and wearable technology space for public safety.

I'll start by discussing the traction that we are seeing internationally. We're seeing the results of our investments start to pay off with smart weapon upgrades in our primary focus territories. Further, we are seeing growing interest internationally for AXON and EVIDENCE.com products.

The London Metropolitan Police, arguably the most influential law enforcement agency in the world and certainly outside of the United States, will be rolling out a 500-unit pilot program of our cameras and EVIDENCE.com, which TASER won after a competitive bid process. We're looking forward to working with the London Met, make sure the pilot goes well, and then we can expand the program with them. One thing to note is that this is basically an unpaid trial with no associated revenue.

These successes are the result of hard work as we're bringing the TASER experience to our international customers. One way of doing this is through what we call technology summits, which have been tremendously successful here domestically. Through these tech summits, we bring in technology leaders to speak about the rise of cloud and Internet technologies and wearables and how it is going to change the way that policing is done. It reiterates that we are here to be a thought partner for our customers as they enter this new technological age in policing.

Internationally, we have localized these tech summits, bringing in local experts and studies to continue the technology discussions. We think these are a very valuable tool in driving not only international success, but success in the EVIDENCE.com and video segment specifically.

We are continuing to invest in other ways as well. We're very excited to announce the hire of Ron Brandt as our new Vice President of International Products and Services. Ron was the former Chief Technology Officer on major projects at T-Systems. He brings a wealth of experience in deploying major cloud-hosted systems into large international organizations. We believe his skills and strategic insights will be key in winning large international agencies with EVIDENCE.com. We're excited to welcome Ron to the TASER team and look forward to sharing the successes of his team in the future.

Also a significant announcement is our plans to open a new European headquarters in the Netherlands. We'll be expanding our direct sales team abroad through this office and plan to have it up and running in the second half of this year.

In summary, the results internationally have been strong for two quarters in a row now, and while this market is still very dependent on large deals and it can be quite lumpy in nature, we have a strong outlook for the remainder of the year.

Traction in the EVIDENCE.com and video segment continues to accelerate as well, as we saw EVIDENCE.com and AXON bookings saw its third consecutive quarter of bookings over $5 million. EVIDENCE.com and video segment GAAP revenues in the first quarter grew 52.6% to $3.7 million compared to last year's first 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 group to always be consistently up and to the right, especially during this early stage, we are very excited about the continued strength of bookings in the recent quarters.

Within the quarter, there were several notable deals, including the follow-on order from Fort Worth. These large follow-on orders were perhaps the most important indicator of success, showing that large agencies are seeing great value in the system. Fort Worth did an initial paid trial with 50 cameras. Then in this quarter, they subsequently expanded their deployment from 50 to 400 cameras.

By heavily testing and using the initial deployment of 50 cameras, Fort Worth saw the benefits of wearable technology and the ease of managing their digital evidence through EVIDENCE.com. These large agencies understand the intricacies of large-scale digital evidence management and know that it is not just about buying a camera. As a result, they're choosing the AXON and EVIDENCE.com as a complete 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 far more user friendly, cost effective and efficient, as well as reducing litigation costs for taxpayers and providing accountability to the public.

We've spoken about the technology-focused events that we have been hosting, and we're finding the large agencies from the major cities are attending in disproportionately high numbers. We find this to be incredibly encouraging, that the discussion of moving towards the cloud is really here to stay and is accelerating. The focus is to continue to invest in these initiatives to aggressively drive top-line growth and become the standout leader, as well as the thought leader in this field.

As an update to the progress of the next-generation products team, they've completed some really interesting research in the field with our customers to define what the next prospects should be for product development. The team has also established a real technology center of excellence within the Company. We have significantly expanded our software development talent. We expanded our Seattle office as a result. We've now more than 25 employees working on that team today. Seattle is a hotbed of talent, and we're looking forward to continuing to grow that team in 2014, accelerating our development efforts.

As I just mentioned, large agencies are moving faster than anticipated towards our solutions. Large agencies are highly intricate and require more sophistication and features than a small agency does. Our next-generation products team is working hand in hand with these larger agencies to develop the features necessary for them to get up and running on our systems smoothly and effectively. So while the team is prototyping options for new products, they're also very hard at work making sure the experience our customers get today ensures these customers are here for the long haul, and that we continue to provide a great experience when it comes to wearable technologies and cloud solutions. We'll continue to update on the team's accomplishments as we move through 2014.

We see 2014 as the year that things are going to move forward at full throttle, with EVIDENCE.com solidifying market share. We are out to own this space and to grow it fast. The recurring subscription revenue opportunities create a very high potential lifetime value for every customer. Further, every EVIDENCE.com customer becomes a natural customer for future cloud-hosted products. The more services 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, rather than going out to outside vendors.

In this virtuous circle, the lifetime potential of every customer is far more significant. At the front end of these fast businesses, there is a high level of investment required, 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 products are going to work are evident, we'll continue to invest. If the growth in the business slows, then we'll 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 now as the market is forming. We continue to believe the biggest mistake we could make would be to under-invest in creating market share now.

The TASER weapons business continues to execute and show strong results, delivering revenues that were up 16% to $32.5 million year over year. The push for upgrades continues, but starting in 2014, we're introducing an incentive to promote the TASER Assurance Plan in conjunction with customer upgrades. So the normal trading credit for the first quarter was $85, but if an agency signed up for TAP -- again, the TASER Assurance Plan -- they would receive an additional $100 credit per unit. In the second quarter, this is $75 per upgrade, but the additional $100 for signing up for TAP stays the same.

And to refresh your memory, the TASER Assurance Plan allows agencies to, after they purchase their initial weapon, to make equal installment payments over the period of a five-year contract. At the end of that contract period, the customer receives a new weapon. Along the way, the customer realizes other benefits as well, including a white-glove customer service plan and full warranty coverage and onsite spares.

We're passionate about helping our customers budget for their future CEWs and for their programs. TAP allows our customers to have a predictable and manageable expense that is now consistent during the contract period and results in an upgrade five years from now. So we sell a weapon today, lock in the upgrade in five years, and the customer receives both savings and budget predictability. It's a real win-win.

We still believe there lies a large opportunity ahead to upgrade aging weapons as well as to sell more into those agencies that don't have a CEW on every officer. In our North America weapons business, which is in a more mature phase than our cloud business, we're focused on operational excellence and in driving long-term, profitable growth. Income from operations in the weapon business increased to 29% of revenue in the first quarter compared to 24% in the prior year.

To wrap up before Dan goes over the financial results in greater depth, exciting things continue to happen here at TASER, and I'm really looking forward to sharing more of these successes in the coming quarters ahead. Dan?

Thank you. As Rick indicated, first quarter consolidated sales were $36.2 million, which represented an 18.9% increase from the first quarter of 2013. The increase in sales was primarily driven by the continuation of the upgrade cycle with agencies upgrading to the newer X26P smart weapon, which contributed $7.9 million in the first quarter. AXON cameras and EVIDENCE.com sales also grew by $0.8 million to $2 million in the first quarter.

Sales of the TASER XREP contributed $2.5 million in the first quarter, a result of a large international order that was shipped during the quarter. The X26 CEW declined $1.1 million as expected as agencies moved to the new smart weapon platform, but we still have some international and federal customers that continue to buy the legacy products while they get the newer X26 platform approved for purchase in their markets.

Gross margin for the first quarter was $22.2 million, or 61.4% of revenue, which is up from $18.5 million, or 60.6%, in the prior year. As sales have increased, we continue to benefit from higher operating leverage. Due to the price increase instituted at the beginning of 2014 and more sales being sold directly to the end user rather than through distribution channels, we've also realized higher average selling prices on our products, also improving gross margin.

Although service revenue has increased quarter over quarter, the cost of service delivered decreased $0.2 million in the quarter compared to the prior year due to the continued benefit from the completion of depreciation related to the capitalization of EVIDENCE.com software, which was running $300,000 a quarter previously.

In the EVIDENCE.com and video segment, revenues increased $1.3 million and $3.7 million for the first quarter of 2014. Loss from operations at the EVIDENCE.com and video segment actually worsened to $4.6 million from a loss of $1.5 million in the first quarter of 2013, largely due to the increased investment in research and development activities, as well as additional sales reps and additional market expenses for the AXON and EVIDENCE.com products. We expect the current levels of spend to continue to increase through 2014 as we work to gain market share and aggressively grow the top line as well as invest in new products and features.

Sales, general and administration expenses were $13.7 million in the first quarter of 2014 compared to $11.2 million in the first quarter last year. As a percentage of sales, SG&A expenses were 38% of net sales in the first quarter of 2014 compared to 36.7% of net sales in the first quarter of 2013.

Compared to the prior year, personnel expenses increased $0.5 million as the result of strategic hires that we made over the last year, primarily in customer-facing roles such as sales representatives, telesales, customer service and account management and field services, but also incremental administration functions. Commission expense also increased in the quarter due to the development of higher sales in the quarter, increased number of sales reps in the field, and a greater percentage of our sales being conducted directly through our sales folks versus through distribution.

Sales and marketing expenses increased year over year due to trade show expenses associated with the TASER-hosted technology summits, as Rick talked about earlier, as well as other customer-facing events in order to continue to contribute the benefits of our products to a wider number of customer.

In the first quarter we did settle the Turner case for $3.4 million, which is a $2.1 million savings from the $5.5 million judgment that was vacated on appeal. Insurance will pay $2.7 million, and TASER is responsible for the remaining $0.7 million. The $0.7 million is included in the first quarter's SG&A figure. We expect to see elevated spend in SG&A continue through 2014 as initiatives to grow top line internationally as well as the EVIDENCE.com and video segment are executed and further infrastructure is put in place.

Research and development expenses were $3.6 million for the first quarter of 2014, an increase of approximately $1.6 million compared to the first quarter of 2013. As forecasted last quarter, the increase is primarily due to additional personnel expenses related to the EVIDENCE.com and video segment development initiatives.

Further, as indicated on the last call, the team is finalizing its plans around new development, and so as a result of that we did not capitalize any of the expenses incurred during the quarter. As we begin development initiatives, expenses will be capitalized until the product launches. However, given the newness of these initiatives, the Company cannot be certain of the exact timing of capitalization, but we will be capitalizing some of the costs associated with the new product development.

With the addition of the Familiar team, as well as planned hires and other research investments in the EVIDENCE.com and video segment, we continue to expect R&D to increase from these levels. The investments are being made to accelerate development and sales of adjacent technologies as well as new products.

Adjusted EBITDA, which excludes certain items as detailed in our press release, was $7.2 million for the first quarter of 2014 compared to $7.7 million in the first quarter of 2013, with the decrease being driven by higher R&D and SG&A expenses in 2014.

Income from operations were $4.9 million in the first quarter of 2014 compared to $5.3 million in the first quarter of 2013. Net income for the first quarter was $3.4 million, or $0.06 per share, basic and diluted basis, which is basically in line with last year's results as well.

Income taxes were $1.5 million in the first quarter. The effective tax rate for this first quarter is 30.6%, which is unusually low. The Company's tax rate in Q1 was reduced by incentive stock option deductions for disqualifying dispositions of incentive stock option exercises in the quarter. Excluding those benefits, which are difficult to forecast, our effective tax rate would have been approximately 39%, and we continue to think that's a good number to use for the remainder of 2014.

Moving on to the balance sheet, in the first quarter of 2014, the Company generated $4.3 million of operating cash flow, which drove our cash balances up to $77.5 million for cash, cash equivalents, and investments. Accounts receivable of $20.5 million were down $2 million from the year-end balances due to timely collections. Inventory actually grew $2 million to $13.3 million for the prior-year balances due to the increased stock of raw materials in anticipation of 2014 sales.

Our investment in property, plant and equipment of $18.4 million is actually down $0.6 million from the year-end balances, basically driven by depreciation expense of $1 million, offset by new CapEx in the quarter of $0.4 million. CapEx is primarily for production equipment, as well as some computers and some other investments in technology around the expanding employee base. Accounts payable was $7 million, which is approximately up $0.8 million from the year-end balances, just driven mostly by that increase in inventory.

Total deferred revenue of $21.5 million has actually increased $1.3 million from year end, primarily due to the upgrade program which was X26P and X2, which includes an extended warranty. We also had the sales of AXON cameras and EVIDENCE.com solutions also contributed $0.4 million to that increase, as we deferred revenue related to those deals. We'll recognize it again over the service period.

Total liabilities were $41 million, and the Company finished the quarter with $123.8 million of stockholder's equity. The Company continues to have no long-term debt other than the capital lease and we continue to have funding liquidity and a strong cash flow engine in our core business to fund our sales, R&D efforts, and operations in the future.

As we move onto selective information for cash flows, the Company had cash provided by operations of $4.3 million during the first quarter of 2014. Net cash used in investment activities for the three months ended March 31, 2014, was $12.3 million compared to cash provided of $1.2 million in the same period last year. The net use of cash was driven by purchases and investments made during the first quarter.

Cash provided by financing activities was $10.9 million during the first quarter compared to cash used in financing activities of $3.3 million in the same period last year. The net cash generation was driven by proceeds from employee option exercises of $7.3 million, as well as excess tax benefits from stock-based compensation of $4.7 million.

As we stated last quarter, to leave more time for Q&A on the call, we started including the unit sales statistics in the press release. To wrap up, we're continuing to invest in the business because we're serious about executing on our strategies and providing top-line double-digit growth consistently. We feel these investments are necessary to continue to solidify our market position in the video business, to investigate and develop additional revenue-producing opportunities, and to continue to grow internationally so we can provide long-term value for our shareholders.

And with that, we'll take questions from the audience here. Operator, if you could go ahead and make the announcement for the questions, that would be great.

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

I think in the past you have given a metric just regarding the percentage of five-plus-year-old handles in the field that you had thought had been upgraded at that point. Do you have that updated?

Rick Smith: Steve, it's become difficult to track that. I think we still feel like there's the majority of weapons over five years still remain to be upgraded, and that number continues to grow, but we don't have that exact percentage. It's been tough to track because as we've reduced the trading price, we have a number of customers that are just going through with their upgrades without actually trading in their old weapons. So it's become difficult to track that. But we still think that a majority of the weapons in the field that are over five years old remain to be upgraded.

Okay. In the international business, obviously, it was great to see again this quarter, but I think if you back it out, it implies that the North American business was actually down year over year, which seems unusual at this point in the upgrade cycle. Anything kind of one-time there that we should look at, whether it was a big order that slid or was done last year -- I don't know -- if there was anything in particular last year that would have driven that?

This is Rick. I'm think in general, the first quarter tends to be a little bit seasonally weak compared to the fourth quarter, and the second quarter is just based on budget cycles. So I don't know if there was anything particularly that stands out aside from just typical seasonality.

I think, it's just, as you know, the business is subject to a little bit of lumpiness driven by larger deals, and that deal flow quarter to quarter can certainly have an impact. But we still feel like the North American business has been driven a lot by the upgrades, and we continue to see plenty of room to continue to see that contribute.

Okay. Moving over to the video business, I noticed that the actual video service revenue was flat quarter over quarter and actually declined from Q3. And maybe, I guess, what I would assume is in that is a lot of the cloud service revenue, which I would expect to be modestly growing as you get more people on the network. Is there something else in there? Is there a reason why that number wouldn't be more linear?

Yes, this is Rick. In the first quarter, we spent a lot of the quarter just squaring up to the basket, as you'd say, getting our feet under us, getting a lot of the agencies from last year really scaling up and running. And because we don't really recognize the service revenue until these agencies are live, a lot of the larger, more recent orders either didn't get live until late in the quarter or during the Q2. So it was mostly just around execution and making sure that our existing customers were having a lot of success as we continue to build out our capabilities to bring these larger agencies online.

But why would that have been down, call it from two quarters ago? I mean, just regardless, you'd think you'd have more agencies on the system and up and running now than you did in Q3.

This can also include some of the professional services that we billed for bringing agencies life. So a net decline there was most likely that we had some larger professional services in the prior quarter.

That's right.

Okay. I noticed you broke out XREP, and I don't recall, in all the time I've covered the company, you guys breaking that out, and it was a very sizable number. Any color around why that was the case this quarter?

Yes. Actually, that represented a single large international order for the XREP product. So it's a -- as you correctly point out, it's not a product we talk about a lot, but it's a product we continue to sell internationally, and we had a large international order that was shipped in Q1. It's certainly one of the contributors to that record sales for international this quarter, and just because it was such a large amount, we didn't want to jam into other to make other look unusually large. So we did break it out.

Yes, okay. And then the last question for me and I'll hop back in the queue. SG&A, it sounds like $700,000 or so of legal settlement in there, as well as some trade show stuff that maybe sounds like it won't be recurring. So I know it's going to be an elevated level of spend. But would you expect the spend in SG&A to be kind of lower than that $13.7 million number on a quarterly basis going forward by some amount?

Yes, there's certainly, the $0.7 million in legal is certainly. On a normalized basis, we would have been closer to $13 million. But from that level, we'll continue to make investments to grow both the international business as well as the video business. So in some respect, I think the unusual items will be replaced by just normal spend as we increase our customer-facing roles for both video and international.

Okay. Thanks, guys.

Thank you.

Paul Coster, JPMorgan.

This is actually Mark Strauss on for Paul. Going back to, and just following up on Craig's question on the international sales, we were kind of bumping along in the lower single to mid-single-digit millions. In the last couple quarters, we've been north of $10 million here, and obviously understanding there's a lot of lumpiness in the business quarter to quarter. Do you think this is a more sustainable level now, or do you think it's -- that's obviously the target, but there were some one-time things in the last couple of quarters and more sustainable is in mid-single-digit millions?

Yes, it's a good question. I think, certainly, that's one of the attractive things with international sales is they tend to be larger deals in general. Our average ticket size with international is about 10 times as big as our average domestic order. So it tends to be lumpy as a result, but at the same time, I think we've certainly been investing heavily, as you know, over the last couple of years to grow the international business. I think we're seeing some of that pay off with these higher levels.

You're right. Some of this is -- whether we're going to have $10 million a quarter consistently, if that's the new normal, it remains to be seen. But certainly, as Rick said earlier on the call, we feel good about the international business in general. We've got a good pipeline there, and we expect to grow that part of the business year over year.

Okay, thanks. And then it's been about a year and half since you had your Analyst Day and you provided the 2017 targets. Just wanted to see if there's any update to that, or at least on the video business? Just there's a wide range for that 2017 target, and what you are tracking versus your upside--your downside?

I think we're tracking pretty well, certainly on the top line we're tracking well. I think we feel still very comfortable, sort of the top line projections for the video business and certainly the base case as we -- certainly is looking pretty solid, and we're tracking well to that base case now. And I think the pessimistic case is looking even more pessimistic with the last three quarters of results. But as far as the top line, I think we still feel pretty comfortable with the top line from that presentation.

Mark Strauss: Okay, that's it for us. Thank you very much.

Thank you.

Greg McKinley, Dougherty.

Yes, thank you. The TASER Assurance Plan -- can you give us a sense for how significantly that has been used by customers to date, how many devices have been sold under that program?

Greg, this is Dan. It's pretty -- that tends to be a little bit lumpy, but it's certainly an area that we really have a focus on at TASER. The ability to make the purchases at TASER technology be more of line item in the budget and pretty consistent every year is certainly something that's beneficial for our customers, and long term, would be beneficial for us as well. The ability to also lock in the next upgrade is attractive for us and for the customers. It takes away the challenge of finding the budget dollars for another capital purchase in five years.

So as Rick mentioned earlier, we actually are offering an incentive of $100 per handle right now for people to, when they upgrade their current, their last generations CEW to the new platform, which is a $100 incentive for them to upgrade and join TAP at the same time. Any given quarter, we've had quarters where we've had 1,000 units to TAP or a little north of 1,000. So it's still less than 5% of our purchases include TAP, but that's certainly something we'd like to see over time increase.

It's really a bit of a new thought process for some of our customers. I'd also add that we're seeing more success, frankly, with TAP right now in the smaller agencies than in some of the larger agencies, just from a market dynamics perspective. But that's obviously an area of focus for both our marketing and our sales team, to continue to increase the attach rate.

Okay, thank you. And then just getting back to the North American upgrade cycle, I was looking back over the last couple of years and just adding up the units of electronic control devices that have been sold --this is to the whole company, not just North America. But going back to 2011, there were 64,000; in 2012, there were 78,000; and 2013, you guys did 92,000. And I think you said you still think the majority of those five-year devices are still out there and haven't been upgraded.

Given what you are sensing from the market, are we still in a rapid growth phase for North America on electronic control devices, with budgets may be loosening up a little bit plus the upgrades? Or are we more steady states -- even though upgrades will occur, it may not necessarily generate significant year-over-year growth like it has the last few years? I wonder if you can just give us some thoughts on that?

That's a good question. I think there is certainly room for it to continue to grow, although we've seen, as you know, really strong growth two years in a row in the North American part of the business. So part of the challenge is continuing to stay at those elevated levels and then grow from there. And certainly that we see the opportunity, as you mentioned -- budgets are opening up a little bit.

That installed base continues to age. So a five-year-old product two years ago is now seven years old, and certainly, I think our customers appreciate the fact that this is a key piece of lifesaving technology, and it not only protects life of the officers, but it also saves lives for the people they're interacting with. So they want to make sure that when it's time to use that product, that it's going to work. And proactively replacing the product is the best way to ensure that. I think it's -- we certainly see there's still room. It's still a ready market for upgrades, and we continue to press that message with our customers.

Okay, thank you. Just getting back to operating expenses for a moment. So what I think I heard from you is we had a $700,000 legal settlement that's non-recurring. So maybe on an adjusted basis, G&A was more in that $13 million range. But it will likely gravitate back toward that full upper $13 million dollar range as the year progresses. So please correct me if I'm wrong on that. And then, from an R&D standpoint, would $3.6 million also represent a level from which we will likely be growing, or is that more of a run rate basis?

I think on the first one, SG&A, that's exactly right. We expect that the $13 million is kind of normalized, and we'll continue to grow from that level. And R&D, I think, will also grow from the $3.6 million this quarter, although there will be some offsets from capitalization of new product development costs. But I think overall, we do expect that number to also grow from these levels throughout 2014.

Okay, all right. Thank you.

Thanks.

Glenn Mattson.

A question in North America. We saw a smaller percentage of very large deals in the quarter. How's the pipeline for large deals, generally speaking? Is there still a lot there to work on?

Yes, I think we still have a good pipeline, both -- really, across all three focus areas for the business -- international, the North American upgrade as well as the video business. So I think it's certainly, lots of large cities that made purchases in the past that remain to be upgraded. So that's something we continue to focus on with our customers.

One thing that, obviously, you just pointed out, is we've seen a lot of our growth being generated in the bottom 80% of the market with our telesales effort that we launched, what, about two years ago now. That's just continued to be a real growth driver for us.

Again, the first quarters, I think, tend to be a little weaker on the larger deals because they send out more budget cycles ahead in the fourth or second quarters. And now I was trying to think back on the question. Really, I think last year we may have had one or two larger deals in the first quarter than we had this year. So the good news is that telesales is really adding some more consistency to our growth, and it's obviously a little more predictable because you don't get the large -- I'm sorry-- the loss large numbers kicks in with that telesales effort. But we do feel very good about the pipeline for large deals for the balance of the year.

And then on the investment in Familiar, have you -- now that that's been absorbed and you've been working with the team, is there any timeframe as to when you expect some products out of them? Is it later this year or more in 2015?

At this point we don't have firm dates. We just really come out of the research base. We're prototyping a number of different options to continue to iterate and receive customer feedback.

One thing I would tell you, the Familiar acquisition has been just phenomenal for the organization. It's created a real center of mass in the Seattle market, and just through the Familiar guys' networks we've hired, I think, another five to seven really solid people that have come in and really helped build out our team. So it's not only affected our ability to generate new products, but it's really improved our overall engineering talent base in our core EVIDENCE.com business as well. So we couldn't be happier with the acquisition, and we're very excited to see it move from the research phase. We're now in the prototyping phase and then into full-blown product development on some great new stuff.

Okay, great. Thanks, guys.

Thank you.

Greg McKinley.

Just a numbers question I had at the segment level. It looked to me like within video, the cost of product -- not the cost of service, but the cost of product relative to revenues -- had gone up quite a bit. Is that -- what's driven that? Is that more Body versus Flex or -- ?

That's exactly right. As you see in the quarter, we had a large number of Body cameras, which are great. I mean, we sold -- that continues to be a strong driver for video and certainly reinforces that that was a good decision to launch that product. But that does -- the gross margins on Body are going to be lower than Flex just because the average selling price is about half as much on average. And as a result, it's got a lower -- it's got a higher cost of sales with the percentage of the total sales. So I'd say it's kind of a mix issue.

Thanks. And then can you give us some more color on the London relationships? It sounded to me like it was a competitive bit, but you also said it was on unpaid trial. So maybe just walk through with us how you end up getting in there, and what are the prospects for this actually to turn into a paying customer?

Yes, this is Rick. The fact that it's basically an unpaid trial, don't let that fool you that this is not a super-competitive situation. Body cameras, really, sort of the concept, the early concept, a lot of the work was done in the United Kingdom. There are some local companies there that have been supporting a lot of the body cam market in the UK over the past several years. And obviously, the London Met is the most influential and the largest major agency, a real thought leader that's looked to around the world, especially with all the former influence of Great Britain across the former empire.

So it was, I would say, very competitive as far as people working with the Met and the Met looking at the different solutions. So the fact that we were chosen, I think, just speaks to the fact that they saw the value of the overall solution, whereas I would say in general, most of our competitors are primarily hardware vendors. And I think that we're uniquely able to come in and deliver a solution that does not require a lot of technical lift from our customers to go and solve difficult IT problems.

So we're very excited about it, and we do believe there's a major revenue opportunity. What we're hearing from the London Met qualitatively is that, if this trial goes well, that there could be a major expansion of body cameras within the London Met. And we think it has the opportunity to be a very significant financial account for us, as well as being an important thought leadership account.

What is the intended or expected duration of the test before a commercialized decision would be made?

We believe it's going to be about a year, is what it's scheduled for.

Okay, all right. Thank you.

Thank you.

Thank you. And with that, I am not showing any further questions in the queue. I would like to turn the call back over to Rick Smith for any closing remarks.

Great. Well, thank you, everyone, for your time. Obviously, we're excited to continue to report traction in EVIDENCE.com, as well as growth and profitability in the core business. And we look forward to seeing many of you at our shareholder meeting, which is going to be here in May, just a few weeks out. And if you can't make it to the shareholders' meeting, then certainly we hope to hear your voices on the next call when we announce our second-quarter results. Thanks, everyone, and have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect