TASER International Inc. (NASDAQ:TASR)
Analyst Day Conference Transcript
March 12, 2013 10:00 AM ET
Erin Curtis - Investor Relations
Rick Smith - Founder and CEO
Dan Behrendt - Chief Financial Officer
Doug Klint - President
Jeff Kukowski - Executive Vice President, Sales and CMO
Jason Droege - General Manager, EVIDENCE.COM
Mike Garnreiter - Chairman
Good morning, everybody. Welcome to TASER International’s first ever Analyst Day Event. We appreciate you taking the time to come today to listen to our team talk about the TASER strategy and long-term vision for the future.
My name is Erin Curtis, and I’m the Investor Relations present for TASER. And with me today I have Rick Smith, our CEO and the founder of TASER; Dan Behrendt, our Chief Financial Officer; Doug Klint, our President; Jeff Kukowski, our Chief Marketing Officer and Executive Vice President of Sales; and Jason Droege, the General Manager of EVIDENCE.COM.
Each of them will be presenting to you today based on their piece of business and also be participating in the question-and-answer session at the end. After the Q&A session wrapped up we will be doing some informal lunch for those of you who are able to stay, as well as product demonstration of our video products, cloud products and weapon products.
Since this is our very first Analyst Day, I will encourage you to provide us any feedback you have on how we could improve for future events, you can do that by talking to myself one as a team or emailing firstname.lastname@example.org.
With that, I’m going to move on to forward-looking statements disclosure. This presentation contains forward-looking statements within the meaning of Section 27A of Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended, including statements without limitation regarding our expectations, beliefs, intentions or strategies regarding the future. We intend that such forward-looking statements be subject to the Safe Harbor provided by the Private Securities Litigation Reform Act of 1995.
This forward-looking information is based upon current information and expectations regarding TASER International Incorporated. These estimates and statements speak only as of the date on which they are made and are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict.
Such forward-looking relates to expected revenue and earnings growth, estimations regarding the size of our target market, successful penetration of law enforcement market, expansion of product sales to the private security, military and consumer self defense market, growth expectations for new and exiting products and accounts, expansion of product capability, new product introduction, municipal budget environment -- municipal budget environment.
We caution that these statements are qualified by important factors that could cause actual results to differ materially from those reflected by the forward-looking statements herein.
Throughout the presentation ask or forecasted is use to indicate projected amounts, please see our Form 10-K and 10-Q fillings with the SEC for risks and uncertainties which could cause actual results to differ material from current expectations.
Thank you. With that, I would like to pass it on to Rick Smith to kick off the presentation. Thank you.
Okay. Thank you, Erin, and thanks everybody for giving us a few hours of your day. We’re pretty excited about things going on at TASER and we’ll share with you our vision for where we see the company going over the next five years.
Each of us will be come up. We are going to give a little bit of background. My background before TASER is purely academic. So I mainly graduated at Harvard then two graduate degrees, and when I was leaving at the University of Leuven doing an MBA two of my high school friends were shot and killed in the road rage incident, and I became very interested in the whole topic of self-defense, gun control, violence, maybe the same issues that are still at the forefront of American society today.
And I found a gentlemen who is former NASA scientist who live in Tucson, Arizona. I was 23 at the time, he was 73. He had been working on a device call the TASER since the 1960s and we decided to give him one more shot and we started doing in his garage in Tucson. And it’s been a 20 years ever since, including our IPO in May of 2001.
And we’ve got the opportunity to really transform the global law enforcement community frankly even more than original target the consumer space. We are currently used by almost 95% of law enforcement agencies in United States.
So let me talk little bit about what is that we do. Virtually, everybody knows us for our TASER weapons. In fact, the TASER brand name similar to Kleenex or Xerox. It’s synonymous in many times in many people’s minds with what the devices actually are.
We’ll introduce you today to some additional concepts where we see the company going and expanding in our future. So we think of this first sort of a problem and solution approach. Obviously, we got our start in high-risk incidents. We make weapons. They were not risk free. They do cause people to fall down. It’s actually the primary risk but today we can estimate what appear to be a statistical certainty, we’ve saved over a 100,000 people in dangerous situations where law enforcement would justify the using labor force.
So we can say with the high degree of confidence, we saved over 100,000 people from potential death or serious injury. And this is a significant issue in United States with 1.3 million die in the crimes every year. About 35,000 people dying in firearm related incidents and 600,000 officers being assaulted every year.
But in agencies, by deploying these TASER devices, we see pretty dramatic decreases in the injury to doctors, injuries to people in the community and in the number of police-involved shootings. But as we look at our future from where we’re at today, we’re going to talk about our three opportunities for growth. But first, we’ll talk about how we see the progression of the technologies that we’re investing in and bringing to the field.
So as we got involved in this TASER business and really got to know our customers, what we’ve learned is for law enforcement agency, the problem isn’t over when the incident is over. When they hit somebody with a TASER, they get them into custody, that’s really just beginning of the situation. Because any one of these incidents will frequently transition from a personal altercation to a legal altercation, whether that means that the agency is prosecuting some one in a criminal way or maybe that person is suing the agency.
And just to put some scope about how big this challenge is for our customers, according to a study from the APL little over a year ago, U.S. law enforcement agencies spend about $2.5 billion a year on settlements. This were just the checks that they write to claims go away. This does not include legal costs. This does not include investigator cost. This doesn’t include internal affairs cost or any of the logistics cost.
They are spending about 2.5 billion. Again these were just the payments against claims against these agencies. Well, TASER has been no stranger to some of the controversy that our customers face but as today in law enforcement agencies, they use TASER devices. It is the most used force option that they have by a significant margin.
According to one NIJ study, they showed TASERs were used more than all other force options combined because of its uniquely high effectiveness and it’s uniquely low injury rate. I have been hit with it seven times and everybody standing up here has been hit with TASER device.
So now as we come to understand that for our customers, while there is great benefit was helping them to build these critical incidents. We also would have an opportunity to help themselves in major fiscal challenge if we could help eliminate some of these claims against these agencies.
And now just from a fiscal perspective, what could we do to further improve the relationship between law enforcement and the communities they protect. We believe the answer there, it really comes down to transparency and on-officer video. Frequently, the controversy rises because the story that police tell is dramatically different than the stories that the families or the people that they arrest tell. And how do you reconcile these. In many times, it ends up with a protest you given out starts in some other civic leader coming out.
In the worst cases, we have cities like Cincinnati where these things deteriorated into riots due to racial tensions between the police and the community. While in Cincinnati, we were able to play a big part of the solution, when they brought TASER into Cincinnati, we saw them go years without a single police-involved shooting and a dramatic shift in relationship between law enforcement and the community.
We can take that to a new level with on-officer video where now we have an indisputable record of what happened. From the officer’s perspective, showing what they saw and what they’re reacting too. Now, we started putting cameras on TASERs back in 2006 with a TASER Cam. And today, we have over 60,000 TASER Cams in the field.
So we’re the market leader in on-officer video system, just with our TASER Cam alone. But we learnt that the TASER cam has a much more limited utility than it could otherwise have if we can move that video off the weapon and under the officer because the TASER gets used about once every two years.
So it’s helpful to have a video of that TASER incident, how much more helpful would it be, if that officer could record the incidents they’re dealing with every day either to defend that officer or in many cases, people have them faster things like DIY or other cases, we know that videos actually involve prosecutors are significantly more likely to prosecute those cases and people much more likely to plea bargain so the game changer in the law enforcement space video.
But as we go deeper with our customers, we uncovered yet another problem, that’s even larger in scale and in scope. And that is how our customers deal with technology and how they would deal with the logistics around the video. As about few years ago, the majority of U.S. law enforcement video that had video were using VHS tapes. And there’re still many agencies that actually have warehouses full of VHS tapes. So that’s how they record their entire video.
So if we actually look at our customers and their ability to move to digital video, we’re generating two hours per video per officer per day. And this is coming off of a device that’s meant really for digital data handling, that’s a significant technical challenge. And if we look at the scope of the opportunity here, our customers are spending $10 billion to $20 billion a year on technology.
It goes from a number of different sources. The prominent one are reported by IJIS, Integrated Justice Information Systems Institute, which is formed by the DOJ to help U.S. law enforcement with technology. So we’re spending a lot of money on software and hardware to go out and do their jobs.
Now, at the bottom there, I put an opportunity -- we've also uncovered an opportunity for $5 billion to $10 billion improvement in efficiency for these departments. And that’s by deploying on-officer video and helping them solve the backend with a cloud-base service called EVIDENCE.COM that Jason is going to talk more about shortly.
We see the same cloud phenomenon that is swapped through the consumer space but it’s clearly sweeping through enterprise business space. And it’s certainly calming the government but if you look at things like the federal government cloud first policy or again groups like IJIS, they are now accepting that this technology is calming the law enforcement, better place to come with the scalability of hosted file solution than in a new space like on-officer video that is going to require massive scalability beyond their existing infrastructure and systems.
So then we’ll take a moment here to play a quick video that’s going to give you a little idea of how all these systems fit together.
So let me go back. We had a question on the efficiency gains. Actually, the way we bring that, we get to that number. In United Kingdom, they started testing on-officer video in 2007. I think U.K. pioneered this concept. And what they found in the six month field trial was that officers were able to spend almost 10% more time on petrol, 9.2% with the number.
And the reason was they were out on petrol more because they didn’t have to fill out these long written reports. In the future, we see video becoming the center of police report. The whole reason of police report exists is because 100 years ago, it was the only way to create a record of what happened so that it could be reviewed in the judicial system.
But if you got a reporting, you can dramatically decrease, getting rid of the large long written multi page narratives, the officer just spills their names and insert in information more like metadata for search. And so we’re able to improve U.S. law enforcement by putting 10% more time out on the streets and also paper work that represents despite the $10 billion number there.
We will come to the competitive space in few moments. So I’m going to play out quick video here. Again, it gives you a little bit of idea of some of the new medical benefits that we’ve seen with TASER devices and how it fits in with what we’re doing with on-officer video & cloud. I’m not sure how -- what we need do is click, okay. Here we go.
So in a nutshell, the TASER devices actually helped drive the adoption of the cameras as you bring new technology in law enforcement and some of the controversy that comes around in that and the cameras actually drive the need for new back end data systems. And there is a number of disruptive forces of play right now in the technology space, including the cloud, the rise of mobile and high-speed data networks. We believe we are really well positioned to take advantage of those trends.
So when we touch briefly on, what we see of a unique sources of value for TASER. Number one, we have a strategic relationship with over 90% of U.S. law enforcement. When I say it’s strategic, we are typically dealing with the Chief of Police because the TASER has been the most disruptive technology in law enforcement in the past 10 to 20 years. So this is on the chief’s radar. It involves policy. It involves community relations et cetera.
There is no other company we are aware of that has that sort of market share. But even if we talk about some of the big tick names, like a Motorola that sells in this space, it’s far larger than TASER from an economic footprint but it is still operating in competitive spaces where they might have 30% or 40% market share. But because of our unique digital TASER ECDs, we have again 90%, 95% market share. And our core business is highly defensible for a number of reasons. Two of the big wins are, we have extensive patents. We created this space with green field opportunities. So we’ve got some very broad claim patents and a great legal team, and we have over 400 medical and field studies on our devices.
So when you see some of the controversy in the media or the press, obviously our customers are very sensitive when they are rolling out new technology to make sure it’s been well guarded and those medical studies read exactly on the types of electrical waveforms that are sitting in our patents. The news of TASER brand and experience, we have over 90% brand awareness of the TASER name in the U.S. The “Don't tase me, bro!" incident in 2007 was actually proclaimed by -- I think it’s the Yale dictionary folks as the most prominent quote of the year 2007.
But it’s not just the brand around TASER. It’s also this experience we have with our customers. Because of the high-touch intensive nature of our products, we are very much ingrain with their training, with their policy, with their legal development folks and we provide a level of customer service that if you call any police department and ask them, who gives them the best customer service in the industry there is a very good chance you are going to get TASER. And we believe that’s part of what makes our business so defensible.
And we also in the past few years have really developed a robust talent pipeline, whether it’s recruiting guys like Jason and some of his team out of companies like Microsoft and other great tech firms, or our leadership development program, where we are recruiting out of Harvard, Sanford and Caltech, and we are going up against the Facebooks and the Microsofts and Goldman Sachs that were recruiting those places and we are getting a -- in the last year we had a 100% acceptance rate of our candidate out of the school.
So we believe we are pretty unique in the law enforcement public safety space that we are bringing in same sort of talent that you are typically only seeing in some of the major investments banks of Silicon Valley firms. And then we’ve got this first mover advantage in this cloud space. EVIDENCE.COM, we’ve invested heavily in this over the past few years. We are actually convinced that we are getting close to a tipping point for both on-officer video in cloud in law enforcement. And we’ve got a several year head start. In fact, we have over 1,000 agencies using EVIDENCE.COM today.
Now when we talk about, obviously we are kind of going deeper with our customers in public safety is our primary driving opportunity. So one of the questions we get is, well, how big is that opportunity, how big is the space. As I mentioned before, we estimate the market spend ever year on tax to be between $10 billion and $20 billion.
If you look a Motorola, one of the prominent firms in this space, $3.5 billion is their U.S. public safety government market spent of revenues. Then there is TASER in the U.S. where we are right around the $100 million today. So we’ve got a tremendous brand footprint, a tremendous relationship.
I think we’ve got the team to be ready to take advantages of some of this disruptive technology trends that are happening. And we have an opportunity to take a significant slice of that market share, and significantly grow our business by just going deeper with our customers and helping some solve this challenging technical challenge -- technology problems.
As I talk to you today, we see three major drivers from an investment perspective who were creating value in our business. First, if there is a $350 million weapon upgrade opportunity. This is just for TASR weapon. We’ve already sold in the field that now past the recommended useful life for five years. If we can upgrade all those weapons, it’s currently $350 million opportunity. Of course it grows every year as time progresses.
The second driver is the video & cloud services, and we are entering a multi-billion dollar law enforcement technology and IT market, with a breakthrough product, with video that really demand new infrastructure.
But now we also think to change our customers approach to that infrastructure rather than a 50-year 40% police department them to go buy and build and devolved complex IT systems, we can plug them in over the internet having live today.
And then the third area is largely untapped international market. So, internationally they tend to organize on a more nationwide basis. In U.S. we have 18,000 police departments. In the country of France, it’s largely dominated by two, the national police forces make up 85% to 90%, there are subsidiary PDs in France, but really there are two very large one, so those large rate is tend to move more slowly. We -- whereas we have significant penetration in the U.S. we only have 1% or 2% penetration internationally, so lot of room for us to grow.
So, with that, I’m going to hand out to each of our team to talk about each of these drivers in more detail and we’ll start with Doug Klint, our President. He is going to talk about the smart weapons upgrade.
Thanks, Rick. I’d like to start by giving you a brief overview of my background. I joined TASER little over 10 years ago as Vice President, General Counsel, and about three years ago, I became President and in that role, I'm responsible for the weapon business unit and which includes R&D both hardware for the video, as well as for the weapon business, operations, legal, medical, consumer sales and human resources.
Prior to joining TASER, I worked in Silicon Valley for over 10 years for two high-tech publicly traded companies. Zycad manufactured advanced supercomputer that were use for logic and fault simulation electronic circuits and Aspec Technology produce intellectual property for circuit designers for silicon foundries.
An important driver for our upgrade cycle is our smart weapons. Now our weapons are use in critical life-and-death situation. They have to work first time every time or someone can get killed or seriously injured. And this is why we focus on quality and reliability in our design manufacturing process.
But like any complex electronic product, our weapons do wear out over time. We have a five-year useful life for our weapons and after five years of use and sometimes of use in the field, our weapons are ready for replacement. And our customers understand that. They have replacement cycle for all their critical equipment, including radios, squad cars, body armor, TASER is no exception for that.
This slide represents a cumulative upgrade opportunity represented by those units that are more than five years in the field. In 2013, we have installed base going into year 327,000 units. At the end of 2012, we upgraded 29,500 of those, leaving at available opportunity in 2013 of 298,000 units that are over five years in the field.
That represents cumulative dollar opportunity over $357 million. During 2014 and 2015 that cumulative opportunity continues to grow. And in 2014 that represents a total of 368,000 units for $442 million opportunity. In 2015 over 400,000 units in the field they could be available for upgrade representing $530 million.
Now, what we do know is eventually these units are going to be replaced. We just aren't sure what the timing is going to be. In addition to the upgrade opportunity represented by units more than five years in the field our new smart weapon technology also representing compelling reason for our customers to upgrade.
Oh! Good idea. On your left is the X26. The X26 was launched in 2003 and it has become the standard conducted electrical weapon for law enforcement. There are more than 16,000 agencies that deploy the X26 in more than 107 countries, 90% of U.S. agencies use the X26.
And as good as the X26 is our new smart weapons are even better. On the right, on the very top is our X2, which is our new two shots smart weapon. We launched that in 2011. And the weapon to the right is our new X26P, which is the single shot smart weapon which we just launched in first quarter of 2013, excuse me, 2013.
These smart weapons represent and incorporate advanced technologies that our customers have been requesting which includes enhanced safety. These weapons have charge metering which delivers a constant charge which is electrical charge which is about half of electrical charge of the X26 for improved safety.
In addition, we have auto shut-off feature. With the X26 if you hold the trigger down, it’s going to continuously discharge into the suspect. What our customers told us is that when they are under stress in a rest related situation, they often will hold the trigger down not knowing they are doing it.
So we developed the auto shut-off feature that after 5 seconds the device will shut-off and you actually have to reactivate the trigger to turn it on again after 4 seconds there is an alert warning to officer that advises about the shut-off, that has also improved safety.
In addition, we have advanced data and analytics in our smart weapon. We have self-calibration which reports to the customer whether or not the device is operating within factory respects. We also have the electrical output charts that show the electrical output of the device. And we also have diagnostic analytics built into the weapon, which actually is tied to over 196 error codes that aid our engineers in servicing these weapons.
In addition, we have advanced reliability and usability. We have waterproofing. We have advanced ergonomics with the trigger in the grip. And for the X2 and this is a very important feature. We have a dual-shot which provides the customer with the backup shot in case he misses on the first shot or if he has two assailants he can in capacity two people one time.
In addition, we have a dual laser, which shows the location in both the top and bottom dart and a warning arc, which allows them to warn a suspect by arching across the front of the weapon even while its loaded that he is about to get hit with the TASER unless he complies, some of the agencies are reporting a 75% success rate with warning arc.
This video explains the technology involved in our smart weapons. I’m not exactly sure how to turn this on, Rick, do have any success with it?
So the key drivers for growth in our weapon business are the compelling new smart TASER weapons, our new financing plans. We offer five-year financing program for our customers that’s represented greater than 10% of our Q4 sales.
We have declining phased trade-in programs to offer financial incentive for our customers to trade-in their aging units for new units. Five-year useful life messaging we drive this plan whole with our customers at every opportunity and finally becoming a funded priority. And keeping TASER funded priority is really critical for us because there are competing demands for law enforcement budgets.
This next slide really shows why TASER is a funded priority. The NIJ, National Institute of Justice funded their report by the police executive research firm which included that those agencies that deploy TASER had 76% fewer officer injuries and 40% fewer suspect injuries. When you have reduced officer injuries, you have less time off work for officers. You have significantly lower workers comp costs.
In addition, when you have fewer suspect injuries, you have fewer complaints, you’ve got fewer excessive use of force claims, you’ve got reduced litigation and more importantly, there are over 100,000 lives that have been saved from death or serious injury because the TASER was used on them instead of lethal force.
Several years ago we moved from engineering focused product development process to one that’s driven by customer needs and requirements. And the first step was to understand the customer needs and problems. We do that through surveys, through focus groups, through customer visits.
In our engineering group we have an engage process where a significant amount of time is spent by our engineers in the field, doing right along with police department to better understand how our products are being used in the field and what their needs and requirements are. We then take that customer information to build solutions to problems that are urgent pervasive that the customers will pay result.
In addition, Rick, mentioned that our mission is to save lives and quality is critically important to their mission and we started a quality centric design process several years ago, where we focused now on design characterization before we even the build the product, failure analysis, design for test, design for manufacturability and as a result we’ve dramatically increase the quality of our products.
Sure. There is a process called iterative design where you build a prototype, you test that and then you see it works or not, if it doesn’t work, you go back and iterate for another design and you keep doing that until you get a design that finally works. It can be fairly time consuming and because you're iterating design you don't always understand what the quality problems are.
What we are doing now is even before we built the design we characterize the design before and we tested to make sure that it performs as it’s designed even before we build it.
And then as we build it, we design failure analysis into the product where we test the design and see where the failure modes are and then we corrected before we even build the design. And finally, as we build the design we design it for testability, for manufacturability and it’s made a dramatic improvement in our quality.
In addition we use platform design concept, meaning that for the X2 and the X26P we have common components for both those products. We actually are using the same electronic engine in both.
And what that does, it allows us to shorten the development time. We get faster time in the market. We have lower development costs, lower build material costs and we have higher-quality. And as I said, X2 and X26P are great examples of that.
Now, TASER is world-class when it comes to designing weapons. We do that better than anybody. However, for video products there are other people that are world-class in building video products.
And as part of our ODM or Original Design Manufacture design process, we go to those companies. We select the best-in-class technology and we use their technology in our products. We do the industrial design and we do the customer specific design for our products.
As a result, we’re getting the best technology, allows us to get to market faster and we have lower costs. And we have higher quality because we’re using a design that has been proven over and over again, and the Flex is the great example of that.
The focus of our operations are in operational excellence, continuous improvement and execution. This graphs shows the improvements we've made in the gross margin since 2011, we know at about 64% gross margin. The key drivers for that are, number one, the Six Sigma and lean training that we’re doing.
Over the last two years we've had 74 lean projects that resulted in savings of approximately $2.4 million. We have increase yield. We have reduced our scrap rework. Boeing is considered the world-class leader in rework and scrap, and their scrap rate is 3%.
Over the last two years TASER’s average less than 2.5% scrap. So we are making great improvements there. In addition, we have better labor efficiencies. Over 2012 we reduced the labor component in our products by 10%.
As a weapon manufacturer, litigation is inevitable risk that we have. But we have great strides in reducing our litigation risk profile. We currently have 180 lawsuits dismissed. We actually had another dismissal yesterday. So we have 180 right now.
We’ve got two lawsuits during that period of time. Heston which result in a verdict of $153,000, it was fully covered by insurance and the Turner case which is currently on appeal.
In addition, we won two trails in Q4 of 2012 and since Q4 of 2011 we've had a net reduction of 27 lawsuits. We have approximately half of the pending litigation today that we had in 2011, so we are making great strides there.
The reason we are able to do that is we have very aggressive defense. We issued new warnings over two years ago that makes it very difficult for criminal suspect to sue us because it’s typically the claim they make is we provided lack of warnings and we are teaching smart use training to law enforcement officers, we’ve given them guidelines in terms of how they can use our product to avoid excessive use of force claims.
In addition, we have no settlement policy criminal suspect cases. We have settled a few officer injury cases where the cost to defense, justified as doing that, and we will continue to do that. We have about five officer injury cases left. We aren't afraid to take those cases to trail if we need to.
In addition, we have moved to an in-house law firm model and our rationale for that was rather than outsourcer our critical litigation expertise that we’ve gained through the years. We decide that we are going to retain that in-house and we are going to be using outside counsel less and less for critical roles going forward. And as a result, we have seen some reduction in litigation costs going forward.
This next slide really shows fairly dramatically the reduction in litigation that we’d experienced over the last two years. The red line represents the new lawsuits that are filed each quarter. The blue line represents the number of dismissals.
And you can see the number of dismissals are far greater the number of new lawsuits. And this is an important trend for us prior to 2011. It was typical for us to get anywhere from seven to nine new lawsuits a quarter.
We are down in the two and three range now and we hope that and fully expect that is going to be a trend going forward. So we have made significant gains in reducing the rate of litigation against the company.
One other concern and this is something we really focus on is the costs of litigation. This slide shows for 2012 the gains that we have made in reducing the costs of litigation. If you look at the green boxes those represents the savings that we’ve had over the prior years. It total just over $1 million and that is a trend that we expect to see going forward.
The red box under other operating expenses are going $6 million, $5 million, really represent one-time charges for an officer injury settlement we did in 2012, as well as for the cost of abandoning and the write-down of some of our patents that were no longer relevant in our business. So we feel that we are trending in reducing litigation cost going forward.
At this time, I’m going to ask Jason to come up and he is going to give you a presentation on video and [E.com] business.
Thanks, Doug. Actually go back. So, good morning. I’m Jason Droege. I’m the General Manager of EVIDENCE.COM. I’m responsible for the video cloud -- video & cloud business unit for TASER International. Little bit of background on myself.
Prior to TASER, I founded three companies in the technology space. The first was the company called Scour. It was audio/video image search engine, back in 1997, before Google was even around. So audio and video have been in my veins for long time.
The second was an ecommerce sporting goods business and then the third was actually a company called Gizmo5 which was the leading voice-over-IP competitor to Skype 2005, 2006 timeframe and that was eventually bought by Google and included into Google Voice.
So long history of starting companies. Joined TASER to start a company really within a company, we started the video & cloud business back in 2008 and so that’s little bit background on me.
So as Rick said earlier, there is a $2.5 billion liability that law enforcement currently has when it comes to lawsuit settlement. It’s a big problem for the agencies. It’s a big problem for tax payers. These are dollars that are spent on claims rather than dollar spent on productivity, equipment, more officers, et cetera.
A lot of this is because, it’s one persons word against somebody else word. So with the rise of smartphones and the rise of cheap electronic devices, we can help change this through on-officer video.
So we cover these stat a little bit before. But I wanted to talk about a couple of these agents, a couple of these third-party providers to help change the picture. So ICT is sort of the trusted body that law enforcement looks to for recommendations on all kinds of things, the policy, technology, et cetera.
Maybe this study years back for about six months that showed that litigation was reduced by 93% with on-officer video, so simple point-of-view of an officer have huge impact on litigation and help to fact that $2.5 billion.
Complaints and efficiency gains, that was the study done by the Home Office in the U.K. Also as Rick mentioned, reduced complaints by 100%, now this is in the time of the study and then efficiency gains is 9% on the street. So when you compared that to the cost of your staff, right. We work for private entities. These are public employees but we make dollars. So we mostly add 9.2% times the actual cost of a labor force. It’s a huge difference especially entire budget every time.
Another study that was done in conjunction with one of our customers using our devices, using EVIDENCE.COM in higher systems that we’re selling today, which was done in Rialto, that’s down in California. It’s east of Los Angeles. Rialto and Cambridge University did a study together.
I believe, it was over the course of about a year and what they found was 87% reduction in citizen complaints and 59% reduction use of force. So citizens were complaining about officers, sometimes they are telling the truth, sometimes they aren’t. But when you have videos, there is no question.
I mean, you talk about use of force, look at this data another way. With on-officer video, you get 59% less uses of force, so less hand-to-hand combat or less TASER exposures or less gun shots et cetera. Without on-officer video, you have twice as many uses of force, which if I look at it the other way, it’s almost more impossible to me like -- when I saw the study.
And then the chief actually gave us a nice quote here that it was completely attributed to the camera, to the scientific study done over the course of a long period of time. And we’ve actually seen these results directionally with all of our other customers as well. Obviously, the difference between 100% and 87%, it’s directional, right, for either studies.
Well, I think it’s a little bit of both. When people know they’re being recorded, they’re probably less likely to do something irrational because they know that they can’t lie about it later to be candid. So I think it’s a little bit of both. When you know that something could go to core, you can get a trouble for some thing on either side, people are just held more accountable.
So we have a video here to show you guys what our customers are saying about our products. We did a tech summit last week where we’ve added a bunch of chiefs and IT people from various agencies to scout sales, service sales event but also like an industry event too. Really bringing the cloud and one of the best technology solutions going forward for our customer base and to discuss things like that. So I can get my edits.
So when I started here in 2008, I, kind of, had a dream in the back of my head that we’d eventually see the industry start to move this direction. So just watching that, my heart is like the world is moving -- the public sector is moving to adopt new technology. It’s moving to adopt the solutions we’ve spent so much time building.
AXON is the name of all of our on-officer camera system and Flex is a specific camera. So Flex because it’s a flexible solution for the fact that it can be mounted on the head via head band. It can be mounted on glasses. It can be mounted on a collar. We have lots of different places because anytime you put computing on person and officers, especially on officer because they are in such a tactical environment. You get to give them option because they have different outsets to something like that.
So I’m going to show you guys a video of -- video from an actual incident taken with our cameras. So good illustration of the kind of content that our agencies are getting and using.
So we also had uses of TASER in that as well. So what you saw there was a different perspective than what anyone would have gotten before. As you wouldn’t have got that with smartphone because you had to hold it with one hand. You wouldn’t have got that from a car because the camera in the car is just pointing straight out.
So this is information that they’ve never gotten before. So the course for training for their own review et cetera. So there are reasons to go. There are other studies that show that ways to go there. You saw our customers say that they want to go there. What about the rest of the market. What about the people that didn’t come to our tech summit.
So PoliceOne which is an industry publication put out a survey and they said new fielders are needed for on-officer one cameras. And these are actual social responder officers responding to these surveys on a public website wasn’t filtered, 82% said yes. And the reason why they’re so interested in getting this technology is because of this over here which is you’ve got everybody in the world almost, everyone in the United States for sure and everyone in this room has a digital camera, a video camera and an audio recorder in their pocket. You might even have two, you have a corporate phone and personal phone.
So everyone is out there recording the police whenever there is an incident. So when something escalates, what happens everybody looks out at their smartphones, turns them on. The problem is that only tells two to three minutes of the story because they just want to show the actual conflict. Nothing is shown leading up to it and the officers know that they felt this pain for a long time of what their part of the story. What about the 20 minutes where crowd was throwing rocks at them and then they got like TASER. You only see the one minute on YouTube or Facebook or any of these side of things to be officer use excessive force which in fact, usually the officers are using appropriate force.
All right. So on-officer video, we’ve covered that. But what happens, right. So what happens to all that data. They go out in the field. They report four, five videos a day. That adds up over time because this isn’t stuff you can just delete a week later, right.
Like this stuff is evidence. There are statutes around how long they have to retain it. So and it’s not picture, right. So this is high-quality video. So over the course of three years, 250 officers will produce about 2.3 million videos. That’s a prick that they are doing it every single day on every single call and 156 terabytes or 155,000 gigabytes of actual data.
What this effectively does is it turns every police agency into their own data center, their own IT company. We’re not talking about managing email here. We’re not talking about documents. We’re not talking about database which has got text in it. We’re talking about huge storage arrays that need to be redundant. They need to be backed up.
There is lots and lots of cost to that and there is lots of expertise to build those systems that every law enforcement agency in the world can necessarily apply it. It’s a huge data problem.
Before we go into details of how we fix that problem, we’ve already alluded to it at EVIDENCE.COM. But I want to discuss general momentum of technology in the world. So we went -- we're going from a world where there is on-time of software, on-time of systems and on-time of teams managing a technology, that’s what existed in the 70s, 80s, 90s.
With cloud computing, that’s all going outside of the corporation or the agency. This is a movement that has already happened in the private sector. It definitely already happened in the consumer world with drop off in other services. So this is an important moment coming at public sector and everybody agrees that it’s coming.
The second is the rise of digital video recorders. As I mentioned earlier, everyone got one here. But what this does is it’s actually changing the way that agencies report. So whenever an officer goes out on scene as you get pulled over for speeding, let’s say, it did ever happen to you, the officer comes over, collects all the information, goes back to his car, writes a report and what is he writing, he is writing what he saw. He is writing like what happened. Why not just use a video for that.
So rather than writing what happened from memory, just use video for that. So agencies are finding, some of those productivity gains they saw in U.K. were a result of rather than writing a fold personnel’s first and second half, see video. Right, it takes a lot less time and lot less energy and it’s a lot more accurate.
Mobile technology, another big trend. Again, these are things that are working their way into the public sector. And we’ve already seen the gains in the private sector. What mobile technology really does, it gives you access to your applications. It gives you access to your data wherever you are.
So if you are a police officer that access to all the systems that you might have internally, right. They have a system called RMS system which is record management which is essentially running and installing all of the data for the agency. Mobile technology allows you to access that wherever you are. It’s got a nice rich screen. So that’s a big movement here.
Agencies are finding it upper hand. Open standards, this is important because this is how you easily connect systems together. Normally, rewind the clock 10 or 15 years maybe more like 10 but an agency had a problem. They -- they wanted to put cameras in cars or they wanted to track report digitally rather than making carbon copies of that.
So they bought a system to solve that problem. They deployed the application onto the system. They built the infrastructure around it, problem solved. Well, couple of years later, some one had another idea. They wanted to fix surveillance cameras, put in five locations throughout the city, okay. So that’s tracking data. What do we do with that. Let’s build a system, put all the data on that system, problem solved.
So now we get two systems to go to whenever something happens. So that’s happened in five, 10, 15 times over the course of these -- over the course of the years. And as a result, digital data and software is becoming so important to these agencies. They are running their agencies on it that they need those systems to talk because one system has a video of a case that’s described in text in another system. And if those don’t talk, there is so much data flowing in that something can get missed.
So they want to be able to connect all of those systems together. And with EVIDENCE.COM, that’s what we’ve done. We’ve built an easy to integrate with and provided the other standard to integrate with. So this is an important general movement. So multiple systems communicating with each other are smarter than independent systems.
Rise in mobile broadband. So we have mobile technology but that’s slightly different than high speed internet that’s wireless because of the kind of data that you can handle. So LTE, you can download you a YouTube video on your phone now. Five or six years ago, it wasn’t really the case. In law enforcement, what this means is not just high speed but high speed that’s reliable.
So you can -- this opens up all kinds of new applications, uploading video from the field, you don’t have to go back to the agency, live streaming. There is all kinds of potential product and solutions that come from this trend.
So those are the five trends that we see that we’re trying to capitalize on. As far as these movements have the industry support, CIO -- First CIO of the company -- of the country, excuse me, had a cloud first initiative for all the reasons that we discussed. It’s more efficient. So the cost is more productive et cetera. So pushing government there is an important direction that they need to go.
IJIS Institute, I’d like to term it inevitable just because we’re building solutions for this industry. This is a body that advises law enforcement on technology solutions, directions that they should go, cost savings. It’s the same theme, right, with all associates offer. It’s simpler, more productive, cost savings, lower maintenance et cetera.
So the industry is trying to move it there. So we talk a little bit before about digital video becoming more the record, like more the purest record, that’s what happened. So we asked our customers, hey, do you see that happening and the general answer is yes. And all your current systems -- do your current systems need to change to leverage all that new technology and all that new video and all that new content. The answer is yeah. 70% of them said our systems need to change. They need to be improved, they need to be different.
But their concerns from a technology standpoint are now being handled by their existing systems. They are hard to match. They are hard to use. If you ever see one of these systems, they are still using command lines and command thoughts for accessing these systems.
Storage is usually not too professionally handled at a lot of these places, right. They are not ready for video. They are just able to handle the tax data that they have today. The need for integration on premise systems today -- on premise systems especially legacy systems in the government sector tend to be hard to integrate with.
So when you look at buying a new solution, what do you want. You are like all the things you hate about your old solution and your new solution. So that’s what we looked at like. That’s what we heard from our customers and that’s what why we build EVIDENCE.COM to do.
Interesting stat here, 80% of them have zero connected systems. Could you imagine your cloud systems didn’t talk to each other. Like if your customer relationship management system had no idea when an order actually came in, right, if you are huge productivity stock.
ICP also did a survey that after world, hey why would you want to move to the cloud and they are seeing the same things as everybody else, saving money, number one thing. Limited budgets, how do we save more money, move to the cloud. No more software and hardware, let’s get out of being IT company.
Why are they in this business, they don’t build their own thoughts, right. So dynamic provisioning, we want computing whenever we need it. And we don’t want computing when we don’t need it because we just wanted to go away that’s what the cloud offers.
You plug in, you connect to the internet, those are the applications in your data. Lots of other things, you have features, easier brand user et cetera. I won’t go through all of them. So from a practical standpoint, state law enforcement today, you said you have set the context because there is a lot of frustration, maybe some of us feel it is right too. But lot of frustration in law enforcement is about the current state of things, that’s the last thing I’m going to talk about which is the exact problem that EVIDENCE.COM is targeting to solve now.
You have all these inputs, right, all these multimedia inputs. We’re starting with the hardest things to manage because that’s where the biggest pain point is. We got six surveillance cameras, we got cameras actually from your local gas station or whatever agencies to build relation with local businesses to get video streams.
Our videos, smartphones et cetera in-car audio recorders, there is lots and lots more of course. But each of these things are going into their own system. Some of them are going to EVIDENCE.COM today. We are working with agencies today is connecting more things to EVIDENCE.COM but on the backend when you have this many systems, what you have is, you have a lots and lots of people going to lots and lots of different systems.
So many inputs, many systems of information and then many people turn access which is super and efficient should note that way. So, what we’re driving our product in the market is to put all of that in EVIDENCE.COM and we’re investing a lot of resources to do that. So it just simplifies every thing.
So when they want to know, hey give me all of the data associated with this case or all of the data associated with this officer, it’s all in one system connected together. And there is a lot of -- this is obviously simplified representation but there is a lot of engineering work and lot of technology to make that happen. So, that’s we’ve investing that way at EVIDENCE.COM and this is the problem we’ve solved. Thanks
Next up is Jeff Kukowski.
Good morning. My name is Jeff Kukowski. My responsibilities at TASER basically for everything the customer facing around the world. My background, starting with an undergraduate degree from Northwestern, MBA from University of Chicago. This fact is hard to belief but I entered my 24th year working for technology companies around the globe.
So it’s been a long run. I have had the benefit of working for some of the largest software companies in the world. I've also had the benefit of working for number of different start-up firms, two that are notable, most relevant to this space, are Destinator and Cyclone. Destinator was a company that was early in the mobility, personal navigation and location-based services space.
So the interaction of these smart devices with backend services, as the market that took off in Europe many years ago and became popular here with companies like Apple introducing the iPhone. And then more interestingly as Rick talked about the big opportunity in law enforcement and Jason went deeper on these information systems on law enforcement.
Now, talking, Cyclone was start-up company that basically went from $1 million to $25 million in the enterprise application integration space. So taking big enterprises and multiple industries around the world, retail, CBG, financial services, healthcare, connecting these value chain securely over the Internet. So both of these companies were net new spaces. They were both start-ups and they both grew to critical mass and are continuing on.
Well, as far as do, is take the opportunity to talk about how we approach the market, how we sell? I then like transition into the results that this approach is already producing. I’d like to talk about the repeatability of that approach and then also then and on the international opportunity. So when we talk about the customer group, all of the functions in blue are functions that the company has had for quite a few years.
As we talk about how we address the international opportunity and these net new markets in video and evidence management sales, everything in yellow is essentially a net new investment. So Doug talked about a customer-driven profit that came from an investment years ago in product management and getting more in touch with customers to drive our solutions from a customer perspective.
Investment from the sales team in Q3 and Q4 not only added to our North American team and our video and evidence sales team but we added substantially to our international teams. Let me cover that later. Tele sales is a brand-new function. So we have some information on the hypothesis. On hypothesis, it’s proven true on part of the market that was under served.
On the right hand side, services, when you talk about plugging in something as simple as EVIDENCE.COM, all you really need is an Internet connection, well kind of -- just like we use salesforce.com and it’s easy to plug in, these agencies have workflows between the front-end officers and other people in ecosystem, their supervisors, attorneys and other parties of interest in that public safety infrastructure.
So the account management team in the professional services organization are getting involved upfront in sales cycle, making sure that customers are successful in their trials and they are successful in their implementation and going deeper in their implementation through services.
So if we look back a couple of quarters. Some of these changes have already started to produce results. So we made -- started making changes in fundamentally how we sold in the market, about the same time we launch the X2 back in mid 2011.
You can see in the subsequent quarters that the growth -- that there is growth after other changes. But you can see a big jump in growth about three to four quarters later. So the changes in those processes along with the changes in solution that offer even more value to our customers is driving the growth that you guys are seeing today.
Comparatively, we just started making investments Q3, Q4 even heavier investments in the AXON and EVIDENCE.COM, field facing, customer facing people. So you guys saw the expenses go up there for investments. We also saw corresponding increase in the camera and evidence sales in Q3 and Q4. Similarly, we started making investments in international in that same timeframe and will talk about what we think those investments are going to yield to investors.
Some of the rigor that we’ve put into place from a customer group perspective really is based upon three different, three different factors. One is what’s our visibility into what's happening into the market? Do we have coverage? Are we talking to those accounts? And then finally in these absolutely awful economic times the public sector, how did we get in front of those accounts to become a funded priority.
So if you look at market, just of our any market you can divide into segments. And the way our sales team view their market is really across three different segments. In the mid market, our distributors have built -- helped us build a great business with average yield sizes around $20,000.
At the top under the market, Rick talked about the relationship special and privilege relationship, we have with law enforcement. We have direct access to chiefs. We have direct access to training. We have direct access to people in front lines everyday.
So not only large agencies but even agencies of moderate size can drive larger deal. And then finally, we had a hypothesis that all the agencies that are -- that make up a smaller part of the market, large inside -- the total number of agencies that are actually small are the majority of the market. We felt that that was under served. So started the tele sales function.
So the result and what I’ll cover in the next couple of slides have been every single quarter. From the last six quarters, we’ve improved our large deal executions simply with this focus. With distribution, we are distributors that make us the priority to help us become a funded priority with our customers. And we have at least half of them that are growing along with us.
Some of our distribution is flat. So we’re working with them to improve their skills. And some of them just aren’t making the cut. They have other priorities or they just don’t have the skill to help us grow our company.
And then finally, telesales in Q3 and Q4, we added substantially to that team is really became our second best source of distribution. So as we look at headcount increases and the cost increases, the return has been significant even in the short term. Usually just taking a look at that over the prior bunch of quarters, you can see, prior to basically Q2 of ‘11 when we started making these changes.
If you redraw this chart out left, for a bunch of prior quarters you would see $1 million to $3 million being the average number of deals that would drive, would have deal sizes over a quarter of million bucks. If you look right of Q2 of 2011, you can see that that’s jump substantially with this focus. And then on the right-hand side, you can see the significant growth in our telesales function, addressing the smaller agencies and the smaller deals in the market.
Doug’s already covered most of the strategies that we have employed to drive growth in our primary segments. So these are blue bars, basically represent our weapons revenue over the past bunch of quarters, and the green bars represent the quarter-over-quarter growth -- excuse me from the prior year.
So, Doug already covered the benefits, which primarily are the driver for growth, the benefit of our smart weapons platform. I think other things that we have done in the sales process along with the right economic incentives, trade-ins, financing, other things that our customers need to get value out of what they've already purchased are also driving our weapon sales to be a funded priority. I look upon for some.
Basically, what we've done is we’ve done, we do declining value trade-ins from the launch of a product over a certain number of quarters. So last year, we started when we launched the X2, we started with a $300 trade-in credit against the package, which included the X2, cartridges, the wholesale, warranty basically everything that they needed to get started. And those trade-in credits declined quarter-over-quarter. We are doing the same thing in 2013 with the launch of the X26p, but we are including those trade-in credits against the X26p or the X2 and they declined quarter-over-quarter. Does that answer your question?
Okay. On the AXON and EVIDENCE.COM side of the business, the video side of the business, our strategy is really simple. About 65% to 70% of the North American law enforcement market has in-car cameras. 90% of what happens in law enforcement does not happen in front of the vehicle. So our customers can have a disruptive technology and at quite frankly, disruptive price. 90%, more utility, less than half the total cost of ownership over a three or five-year period of time by moving from in-car systems to on-officer systems.
So the budget line items are there. Our sales teams are out there chasing those budget line items. Going further to their back end systems, what we hear from our customer is that they are awful. They are separate, they are standalone. They are not connected to their RMS systems. They don't manage the other sources of digital evidence. So we have this huge opportunity, not only in disrupting this in-car market but also the back-end systems to make those workforce work better with the law enforcement. This is $300 million to $400 million a year in annual spend in North America alone for the in-car segment.
This is basically another chart showing the bookings only for the AXON and EVIDENCE.COM product, as it reflects a launch of the Flex product. So it takes out a prior generation, AXON Pro unit. These are the numbers that we have reported on recent calls. Some of you may ask in the strategy, is this strategy repeatable? And what I would answer is with the rigor that we’ve put into the process, we do regular sales forecasting calls and pipeline reviews.
Two-thirds of our pipeline today, our deal is greater than quarter of a million dollars. The balance also being, some of those smaller deals from the telesales team. We’ve also had more rigor in getting visibility into what distribution is selling and forecasting. So part of bringing up the game of all of our people in the field is working with distribution as well and having them forecast along with us. So we believe the model is repeatable.
Move on to our international strategy, I apologize this slide is a bit busy but let’s focus on the centre of the screen to begin with. Our international strategy is quite simple. We in North America, Rick had talked a little bit about the TASER experience and the special relationship we have with law enforcement in North America. I would say that that’s true everywhere around the world. But it’s especially true in North America, because we have so many people that are so engaged with our customers in the market.
Everyday, we have people in the market with our customers listening to how we can improve the solutions. Our solution is based upon their needs. We’ve developed an incredible master instructor network, that’s a great customer facing educational channel for us. Jason played a video from our recent thought leadership event we did.
We did over 12 or 13 thought leadership events last year, where we bring in the senior most officials from agencies all across the U.S. We talk about their issues. We talk about safety. We talk about effectiveness. We talk about what they need going forward. All of these things together in the center are what we call the TASER experience. And what we are going to do internationally is quite simply is just invest in creating the TASER experience in countries where we see the greatest economic opportunity right now.
So in 2012, we went from one website in the English language to six. Why is that, because people need to learn their own language? So we went from English to French, Portuguese, German, U.K. English and Spanish. Each of those websites are seeing increased traffic and part of our process is that people come to the website and get educated.
They actually raised their hand and fill out a form and say, I want follow-up. I’d like somebody to contact me about one of your solutions on your website. This fills the pipeline. It gets people in the customer facing group engaged, that’s how we forecast, that’s how we are providing results today in the domestic market and how we are going to grow the international markets.
Our first focused areas are Brazil and Europe. In Europe, we will talk about primarily being, there is opportunity across Europe but there is a big opportunity in France and French-speaking countries. And then, we also have a strategy for basically the next tier. And then for the rest of the world, we have distributors in place to service those.
So as we look at why we selected Brazil and why we selected Europe, as they are two places we are going to implement the TASER experience. You just look at the left-hand side here of addressable market and you can just add up Brazil, U.K. and France and you have a market size of the total available market in those three countries alone, does equivalent to the same market we are in, up here in North America.
So our hypothesis, which is already showing some results, is that the TASER experience will help us grow those markets. And if you go to the right-hand side of the chart, each of those markets already have devices, many of which are already at or exceeding their recommended five-year usable life. So the upgrade cycle applies there as well, going 5% deeper with 5% additional penetration in these markets creates a real business in each of these countries for us.
So by investing today, we believe we are going to see results more. We -- as a approved point, we started investing in our own people in the French market a couple of years ago and from 2006 to 2011, I believe France produced about $6 million of revenue for us. Last year in 2012, it was $2.4 million alone in that market and there are additional opportunities for us.
By having people in country, we are learning. So in Brazil, for example, we learned that approximately 5% of their officers are in court defending themselves every single year, which doesn’t sound uncommon. But we heard that their defense is so poor that they have to pay up to a year salary, defending themselves against grievances and citizen complaints. So as we put people in market, we have those first-hand opportunities to learn from those customers in that market and better adjust those opportunities in that sell-through.
With that, I would like to hand out to Dan Behrendt. All of our approach, I think you’ve seen some of the investments. Hopefully, you’ve seen how they are paying off and I can see how our hypothesis can also prove true for these additional international markets.
Thanks, Jeff. I’m Dan Behrendt. I’m the CFO of TASER International. Maybe just start a little bit of my background. I got accounting degree from Mount Union College and MBA from Case Western Reserve in Cleveland. I started my career at Arthur Andersen in commercial audit and I’m the CPA. After my years at Anderson, I went to the Power Generation Group of Babcock and Wilcox. It’s a $1 billion division of big service.
And after that, I took a number of financial management roles in sort of industrial companies in Northeast Ohio, Precision Castparts Corp, Teledyne and then a Blackstone Group Portfolio Company called Imperial Home Décor. It’s a $800 million company and it was the world’s largest wallpaper company at the time. I started there as Director of Planning, became the Treasurer and Corporate Controller and eventually became CFO where I successfully lead the company and joined TASER in 2004.
So before I share with you sort of the long-term model, I wanted to talk about some of just the underlying assumptions that went into that, long-term projections for the company. So let me start showing the sort of 2017 projections and this is sort of the underlying assumptions we have.
We assume that the upgrade continues and actually accelerates in North America. We continued to have the TPP, which is just releasing program, result of TAP which allows agencies to actually prepay for the TASER in order to make the TASER more of an operating line item for their budget versus the capital line item, which is difficult for them sometimes in this budget climate.
International efforts that Jeff talked about, we expected those to succeed at a reasonable level but really no home run market, sort of that, sort of the steady increase in sales sort of that 5% penetration additionally in each of those markets. But nothing is dramatic as what we see in the U.S. in order to be sort of conservative on an international side of the business.
We assume that the Flex product, the AXON on-officer video product continues to gain adoption in the North America and also has some adoptions internationally as well. We assumed that the pricing for the Flex has sort of a slow decay of 5% a year, but we assume because of the value adds and some of the new features that Jason and his team were adding. On EVIDENCE.COM side, the pricing for EVIDENCE.COM remains consistent overtime.
We assume that 60% of the users on AXON Flex become EVIDENCE.COM customers. Right now, we are giving away free year of EVIDENCE.COM at every camera purchase. But we are assuming 60% of those customers will come to us and buy that solution for us when that one year of free trial is up.
And we assume a 10% annual churn in those customers. So we are going to lose sort of 10% of those paid customers a year, which we think is a reasonable assumption. And then, we also feel that the targeted investments we are making in SG&A and R&D will actually grow at a rate slower than sales. So we do expect operating income improvements as a result of these investments.
So look at the sort of a good count present range of outcomes for each of the segments of the business. I’m going to start with a range of outcomes for the weapon segment. So the weapon segment includes the TASER conducted energy weapons. It also includes cartridges, warranties, batteries and accessories that go in the sort of TASER devices.
Basically in our base case, we are assuming that in 2017, our forecasted sales of $174 million of sales with $59 million of operating income or 33.6% of sales. The number is sort of assumptions we make, specifically in that base case model. We assume that the budget climate we have in North America and around the world improves slightly from what we have today.
We assume that the TASER kind of maintains its current competitive position that we have. We assume that the upgrade actually continues to scale up. Last year, we saw a 7% of the installed base upgrade in 2012. We assume that that grows to 12% by 2017. We also assume that the investments we are making international -- individually, we are not assuming any sort of home run markets. We are assuming that that international business actually doubles from the 2012 levels because of investments we are making.
And from all of that, we get an EPS contribution just in the weapons business of $0.62 a share in 2017. Sort of the underlying assumptions for the EPS numbers represent, as we go forward here we are assuming a 40% effective tax rate and we are assuming 57 million diluted shares outstanding under all the scenarios here. That leads to a compound annual growth rate of 9.8% on sales and 14.3% on operating income.
Looking at sort of the pessimistic scenario, we are assuming $140 million of sales in 2017, $41 million of operating income or 29.6% of sales. Again, some of the underlying assumptions that go into that pessimistic scenario, we assume the budget climate will actually worsen from today, that we actually had entrants into the market which creates some moderate pricing pressure and also drives our ability to upgrade because there is alternative technologies out there.
On the international side, we sort of assume that it sort of stays at the current level, so roughly $25 million to $30 million a year, so no real significant growth in the international part of the business if pessimistic is the case. But even that case yields EPS of $0.44 a share with CAGRs of 5.1% of sales and 6.6% on operating income.
Moving on to the optimistic case, so in optimistic scenarios we assume actually $200 million of sales in 2017 of the weapons segment, with $70 million of operating income or 35.1% operating income as percent of sales. So kind of the key assumptions that go into that, I would assume that the budget climate actually improves from today that we have a better budget climate, both in the U.S. and internationally.
We assume that we maintain the competitive position that we have today, but the upgrade actually continues to accelerate and get to 15% of the installed base over five years, each year by 2017. And then the international effort that Jeff talked about those investments actually yield a greater result where the international business actually gets close to tripling in 2017 from the 2012 levels to the to the point where it’s about 35% of revenues.
In 2012, the supporting effort is about 18%, so significant improvement in the international part of the business because of those investments. By yield EPS of $0.74 a share with CAGRs on sales of 12.9% and CAGRs on operating income of $18.5%. So what are the challenges we had I think for investors is really as they look at the video business, we’ve been making significant investments in that business as Jason talked about. And really I think the challenge is what that business looks like at scale.
So we basically put sort of the same five-year projections in place for the video business. Again the video business includes both the, AXON, Flex and sort of on-officer video products. It also concludes TASER cam as well as our cloud solutions. In the video business, we think that business by 2017 can grow to be a $51 million year business, generating $40 million of operating income or 26.6% operating income as a percent of sales.
Some of the key assumptions we have there is that TASER captures sort of a reasonable share of the market, 15% to 20% of the U.S. market. It has some international success but nothing significant on international side of the market, although we do see really the same opportunities for the TASER products internationally as we do in the U.S.
We see that the market acceptance for on-officer video goes main stream but the markets remains fragmented. There is a lot of entrants in the market. We don’t see ourselves having a significant market share where we see ourselves sharing that sort of market share with other companies in our base case.
We still expect to see that 60% adoption rate of EVIDENCE.COM, so sort of the conversion from sort of the free one year to the paid subscription and on an 10% a year churn. That leads the contribution APS wise of $0.14 a share and that has sales CAGR of 55.3%.
Under the pessimistic scenario, we assume that, we get to actually just grow the business from today’s rate to get the $26 million in sales and $5 million of operating income, and operating income of 19.8% as percentage of share.
Now this case we do assume that we do some reductions from the spending on SG&A and R&D noted a match level of sales, right now we are investing because we think this business can be significantly bigger than it is today.
If we see that’s not the case, we’ll scale back some of those investments and make sure that match the revenues closer which is why even out of the pessimistic scenario we see this it’s accretive to earnings.
Some of the key sort of assumptions we make is that, TASER doesn’t take significant share of the market, and really we don’t have, really any international adoption or very little international adoption, market acceptance on-officer video doesn’t go mainstream, because it still sort of the niche product.
We still assume prices actually to take 10% a year, because there is more, it’s more crowded market, so we see reduce prices overtime and we only expect to have a 40% adoption rate in our back-end solution and so have a 10% churn. That actually yields even under the conservative scenario here a 5% -- $0.05 of share EPS on dilutive basis in 2017 and it has CAGR’s of 35% on sales.
Now we also look at from sort of optimistic perspective, we think that business really has ability to scale significantly. We see that on optimistic side that that business could be at over $100 million year business. So we are looking at optimistic scenario here of $103 million in sales, $34 million of operating income or 33.5% of sales.
Again, when we look at sort of what we think is going to be sort of differences and assumptions to get there, we look at the network effects, something that, Jason alluded to. We think that our system because of network effect, every new customer because of the ability to easily and seamlessly share information within customer to customer, each new customer their overall solution more valuable for the rest of the customer. So if that network effect takes place we think we’ve got the ability to take more significant share of the market because people wanted to be on our platform in order to have those efficiencies.
We assume some success internationally one or two is the targeted markets but not widespread, spread adoption out of the scenario. We look at on-officer video is going mainstream with TASER capturing a significant market share in North America.
And we -- basically we assume that because of our strong market position the price has actually remain constant in this scenario and that the EVIDENCE.COM also has constant pricing, and we assume a 70% adoption rate for the back-end solution up to the three year with 5% churn than 10%. So those are sort of the key differences in assumptions. EPS contribution on our optimistic case here is $0.36 a share and that assume 78% a year compound annual growth.
So as you can see sort of the just range of outcome, just more of a graphic representation of the difference scenarios on the video & cloud taking as a business. So, in all cases we see that business is accretive in 2017, growing from today sort of $5.7 million and operating loss in 2012 $9.7 to $26 million at pessimistic case and $5 million of operating income the base case of $51 million of sales, $14 million of operating income and then the optimistic case $103 million of sales and $34 million of income. We do expect the sort of the cloud business -- sort of continued accelerate overtime because of the back-end solution.
As we look at sort of the outlook for the weapons part of the business, our 2017 forecast. Again in 2012 we had $109 million business, generating $30 million of operating income, that is actually a record year for case from operating income on a -- for the weapons part of the business.
So we set new record both on the overall sales and also the operating income on the weapon business. But we think we’ve got ability to grow both sales and profits under our scenario here. Again, this shows sort of the base case of $107 million and $59 million of operating income.
Then on the consolidated basis, again, in 2012 company had record sales of $114.8 million, just little over $20 million of operating income. We see that in all scenarios as we see the company growing significantly from today’s base.
Again, having a video quality come accretive has a dramatic improvement on the operating results of the company. So even on the pessimistic case we see a company with $46 million of operating income.
And just look at EPS again it’s -- just thought this might be useful. So, looking again, in 2012 the company had EPS of $0.27 a share, actually included some one-time benefits in 2012 for things like, we had a deferred tax assets that we had reserve against. We took back income in the fourth quarter worth of couple cents a share, couple other one-timers.
But even with those one-timers included we had $0.27 of EPS in 2017, because of the contribution of video & cloud the fact that that now becomes accretive to earnings versus say it’s a drag on earnings. You see sort of dramatic improvements in EPS under our scenarios here going to $0.49 of EPS under the pessimistic scenario, the base case of $0.76 a share and optimistic case actually yielding at $1.10 per share EPS of $0.27 on a forecast basis.
We talked about sort of the three growth strategies for the company and sort of investments we are making to grow the company. So this sort of the graphical representation of what those growth strategies look like.
We expect that because of the upgrade cycle in North America we expect the domestic weapons business to grow $31 million from the 2012 rate to 2017. We expect international weapons part of the business to grow by $34.8 million due to the investments that Jeff has talked about making in these targeted markets with ability to actually that’s more market that we success, and in the video & cloud dramatic increase from sort of low base of $44 million year increase in sales in 2017 to get to a total sales of $225 million in 2017.
Now, we had a fair amount of feedback from analysts and investors after the fourth quarter earnings call when we talk about the investments we are making, SG&A and the fact that we expect those investments to actually increase by roughly 10% in 2013.
This is really kind of a waterfall chart to really show you where those investments are being made. They are really the vast, vast majority our customer facing roles. So increasing our international sales efforts and marketing efforts by $1.8 million over the 2012 base.
We’re seeing account management the brand new function, a year ago we didn’t have account managers, but we’ve really come to the conclusion that we need those initial customers to be successful their product, we want them to be referenceable in order to grow that business, our customer is very much talk to each other, we want to make sure that the people who bought early have really the great success possible in order to make sure they become referenceable for us.
Video sales team, the video sales is really more of direct sales effort. We use distribution for lead generation that really, our team is really the one doing the sort of the demonstrations and really rolling out that product. So we do have to make investments in those direct sales people for video.
And as Jeff talked about telesales has been a huge success, I mean, it’s roughly 10% of our sales yet, it’s high margin business, we are really servicing that small -- those smaller customers much better than they got through distribution. We are going to continue to make that investment because it’s a higher life worth and then just sort of the total SG&A is sort of $43 million.
I think at TASER we’re really excited about the sort of the future of the company our ability to grow. We’ve also concluded that we can’t really grow without making these investments in SG&A. We can’t sit back and rely on our distribution to sort of take the ball for us.
We need to really make those investments ourselves to grow the video business, make sure those customers are happy, grow the international part of the business, that we can sort of sit back and wait for the growth or we can sort of take a more direct approach and that’s we’ve chosen to do. We are going to make these investments. We are basically very confident these are going to be high ROI investments for the company. So we plan to carefully monitor and evaluate these investments. We are not going to sort of make these investments and continue to grow us without seeing some results.
So these are some of the ways where we really measuring the success and really decision catalyst to make deeper investments in the future. We are going to evaluate the incremental sales, our ROI from investments we are making international sales.
Before we really expand much beyond investments we are making in Europe and Brazil. If those investments have high ROI’s we’ll be looking for other markets to have similar characteristic where sort of in that adoption phase at the market sort of out the evaluation phase where target investment for us, have the ability to grow other markets as well.
We are going to wait for traction in the video business. Again, we show significant growth from 2012 levels, but really going to make sure that we are seeing that traction before we make deeper investment in SG&A and R&D, and we continue to drive for sales to grow faster than operating expenses in order to get operating leverage in the business. So, we see operating income growing faster than sales by sort of monitoring these investments and making sure we are seeing that ROI.
So last slide here, before we go back to Rick is that, we’ve really enjoyed strong operating cash flow in the business, and in 2011 and 2012 we executed stock buybacks because we have more cash on the balance sheet we needed.
We bought back $32.5 million with our stock in 2011, another $20 million in 2012, so almost 19% of our shares outstanding on January 1, 2011, were bought back by the company in 2011 and 2012.
We just announced another $25 million buyback about week and half ago. And again, even with those buybacks we did we finished 2012 with $37.8 million of cash investments on the balance sheet, because we don’t know how many depth we generate lots of operating cash flow, there is really not a need to throw that cash, we see that we are in a good position from a cash generation perspective, we have revolver that’s largely untapped, we have ability to increase revolver overtime if we need to. So we feel very confident, we return this excess cash to investors in the form of the buyback.
So, with that, I’d like to turn it back over to Rick Smith, our CEO.
Great. Thank you, Dan. At this point I want to talk little bit about how we see this all coming together and where does the company evolve as we approach 2017 and beyond. So we are adopting we call public safety platform strategy.
Before I get into that let me just again sort of touch basically what we have talked about so far, we see these three major opportunities to drive growth with our existing business, it’s doesn’t require sort of any additional new products and services outside what we’ve already developed in the pipeline, obviously continuing to invest software as always being updated, et cetera. But with just our new smart weapons, the video & cloud services, international growth, we believe we can drive significant growth in both revenue and profits for the business.
If we take the step back, we say, okay, what is the real problem we are solving for our customers? So our customers are typically, in the United States our average customers are 50% police department. They either have no IT stuff. What they do might be over the city, or they might have a police officer that rotate in to handle their IT.
So the ability for them to be able to handle informatics complex new technology is very challenging, so as we struggle with technology. And then they are hampered by this government procurement processes. We had dinner with 11 local police chiefs last night and it was universal. They all said we are so far behind in technology and we are falling further and further behind everyday, because just for us to make a decision to deploy technology takes 18 to 36 months; go through the procurement process, they’ve got buy and build it.
Tom Streicher, one of our chief, he is retired out of Cincinnati talks openly about just they’ve spend $50 million on and over a decade and it never made it live, in fact its only partially operational today and its already 10 years out of date. So in that environment where and those are, the industry is wipe with those stories, where it could be big investments with big execution risk in technology. And as a result, this traditional sort of IT deployment model needs very expensive systems with low customer satisfaction and a low success rate.
So we believe, we look at it and say, okay, what can we do to help our customers, we’ve got a great brand, we’ve got a great relationship and our customers look at us as a technology innovator.
So the things case it us very well, building -- designing and building electronic devices. We make all our stuff (inaudible) increase all the command take through the factory. We’ve got a fully automated cartridge production line. I’d say we are best-in-class for industry like electronic devices.
In software applications, when we started this 25 years ago this was a new space for us. It’s been expensive to build the right team. We made some miss hires. We are now -- finally, we’ve got it done due. We’ve got a great team. We’ve got an office in California we acces that tech community in Santa Barbara. We just open an office in Bellevue, Washington with our first two employees up there. So we can access the Washington States which is little more of a stable tech community not quite as hyper active as the Bay area. But I’d say our team and when it comes to hosted applications, I’d say that we are best-in-class in our industry.
So, obviously, cloud services with EVIDENCE.COM. We got over 1000 agencies using EVIDENCE.COM today, over about 330 of those are paid customer using EVIDENCE.COM with our cameras. We also have a free version of EVIDENCE.COM that enables agencies to manage all the data it out our weapons, because every weapon we make is a handheld computing device.
They’ve got onboard telescopes now. They are recording lot of data and we’ve got to be able to push firmware updates out to those devices as we learn things about different use cases in the field, we can improve the weapons performance. So we are in over 1000 agencies, total now manage, weapons their video on EVIDENCE.COM. It’s a big first mover advantage.
And in training and support, because what we do with TASER devices, we have over 30,000 certified instructors around the world and we certified 10,000 instructors every year. So we’ve got a very robust training infrastructure.
One thing we’ve learned from our customers is their technology providers one of their weakest point is training. They rollout new IT systems and nobody gets train in it, nobody knows how to use it very well, that plays right into our strength. We know how to work develop training organization.
And in value added services, things like Doug talked about our TASER insurance plan or TASER protection plan, these new financing services, they grew from zero in the middle of last year to 10% of sales in the fourth quarter, so always finding ways to add more value for our customers.
We even provide legal advice about how to optimize their use of force policies and how to defend their TASER cases that just build a closer relationship between all the things we do from a customer support perspective.
So, now as shareholders, how do we take advantage of these competencies, to build sustainable, defendable, long-term value? Well, we think we can combine these services to create a platform for our customers.
What our customers want, they didn’t want video, they want to be able to buy a camera from us, say, this is our AXON Flex, by the way we didn’t want to use up our time to do with product demos, but we’ll have people afterwards, you can all go take a look at it. So instead of, taking patrol cars out of service and putting a $5,000 camera and then installing and anytime there is a maintenance issues, the car is out of service, lots of throw just in his pocket, now this magnitude, a pair of (inaudible) or caller amount, appellate amount or helmet or hat or even about dozen different amounting options, they are good to go.
They can take this they compare it with any Android or IOS device. So I mean, when Motorola launch which gets a lot of yeah from our customers, I hear big trace line we’ve shown this, I compare this right with my Motorola launch, I compare with my smartphone. So they don’t have to go out and make a lot of investment in the technology that become our fleet pack, many agencies are allowing their officers to use their own personal smart devices, because officers already have Android devices and iPhones just like every other consumer.
But our customers don’t want to have to go buy and build a bunch of technology to become outdated or as technical risks, what they want is a capability. They want to take something in the field, with these cameras you are not go to build the data center. You can plug it in and we have you live today, with the best digital EVIDENCE management system in the industry and it’s evolving faster than the competition because of its cloud hosted model. We’re not out there spending all the resources to try and deploy at hundreds of sites and all the customer support issues that go with it.
So at the end public safety platform strategy is to take the things to do really well. And -- but you’re technology partner for our customers, so they don’t have to worry about technology issues. They can focus on being police departments, going out and protect and serve the public. They do that really well.
Let us take more and more of this technology lift and bring you finished solutions with training and support services that will be best in the industry. And as a result, we see an opportunity for us to leverage all this disruptive trends that are hitting industries around the world, positioned that to our strengths to enable our customers have technology breakthroughs, even capability breakthroughs without technology headaches.
And with that, I’ll open it up and I’ll have the rest of the staff come up here. And Erin is going to wonder around for those people who are online. So they can hear the questions. So you raise your hand, Erin will come, help you with the question and then we’ll have the appropriate number of management give you an answer.
Hi. Quick question. I guess, first on the X260. I was wondering how big the crime aim was in customers that made you want to go out and develop that product. And also on the Q4 comments clearly mentioned that there might be some hesitation by customers as they evaluate whether to go to X2 or X26P. So I was wondering that was kind of serious. What you’ve seen complain out of the first quarter?
Sure. I’ll take the question on the X26P sort of rationale and have Jeff answer on the second part. So we’ve seen about half our customers, about half of our sales are now X2 versus the X26. So in fact, last quarter X2s were little bit higher but with half our market, 18 months into it, still buying legacy device. But if we look from the M26 back into the date to the X26, we saw fairly rapid market shift over.
And so we were not -- we talked too much to customers and what we heard was the number one reason that the agencies that were staying with X26 were staying with it was just to add the logistics, the supply chain. They have cartridges in the stock and they didn’t want to have to retrain their officers.
So we heard them. We said okay. Got it. We had some agencies that were even buying new X26 to replace old X26. That’s a little bit of tough cell to buy the exact same thing, just a newer serial number. So in terms of our customers, we had a number of them say, hey look, we want to stay on this platform but we understand we got evolved. We want the safety update features. We want the weatherproofing. We want some of the features of X2. So we don’t have to retrain our officers.
And again I say it’s probably about half the market which we believe now will help us accelerate. Yeah, we’ve only upgraded about 9% of our installed base. It’s over 5 years old, 91% to go. Now, we’re giving all of them the reason up here, hey you want two shots and more capability. Great, we’ve got the X2.
You understand what you’ve got but get updated technology. We’ve got the X26P. So regardless, I think all those people who now become viable targets. And let me have Jeff talk about what we’re seeing in sales.
Sure. So Rick explained some of the underlying reasons why people stay with X26 versus the X2. Now that we have a new improved X26 with the P smart weapon. Yeah, we are saying customers now have the ability. They have the ability to evaluate two new smart weapons instead of one. So we do see agencies looking at both. That does take little bit longer against all the considerations that Rick had mentioned.
Hi. Question on the five-year upgrade cycle. What were some of the testing that you did to indicate that it was in fact the five-year cycle and not a seven year or a three-year cycle. And then if you look at, you’ve upgraded maybe 10% or so of the outstanding upgradable weapons. What are the 90% saying to you coming back and extending that cycle on their own to six year or a seven year. What are you getting back from them? Thanks.
Doug, do you want to take the question on the five-year -- the testing around the five-year life?
Sure. We’ve actually had quite a bit of success getting that message out. And as I said, it resonates with the customers. They are already replacing body armor that reaches the useful life as well, as well as their radios in the squad cars.
So we are making quite a bit of effort in getting that message out. We get it through training. We get it through customer visits. We send our training bulletins and customer bulletins reminding them of this. And we are trying to see that is taking effect in the field.
What is some of the testing that indicates the cyber-attack. I can understand you didn’t get the message out. I’m just trying to understand how did you come up with the five year number. Was it ….
There was some -- that’s actually started with some independent TASER who done up in Canada for The Royal Canadian Mounted Police and others. They went to some independent testing. They started to see that weapons that were beyond five years old. There was an uptick in devices which tests below the output specification.
We also, for example, X26, there was a panel of analog gas tube that was talked about in the video that will wear out over time. Now, it should last longer than the typical five year use but if it’s under a heavy usage cycle, we can start to see again the pitting that happens with all the electric sparks how they occur. I think we also just put that with looking at other things like laptop, cell phones, radios et cetera, electronic devices.
Three years would probably be too aggressive. We hadn’t an independent study that’s a ship, starting at the five-year market and so that correlated with some of our estimates about heavy usage on things would wear out about that five to seven year use. Particularly, you don’t want to wait until you don’t want to drive the car till the wheels fall off, right.
I’m using a TASER. It’s probably potentially a life or death situation which is again why you don’t want to just keep taking any things, you said they just don’t work one day.
What about the people who haven’t updated what they’re saying to you?
The proceed that Erin updated, could you take that one, Jeff.
Yeah. The folks, again, these are at high level of worst economic times for government organizations in the last four years. So what they are saying is we understand we need to move. We understand that there maybe increased risk of failure. But those conversations do get us into budget cycles with those agencies and do build forecast and do build subsequent quarter and subsequent new sales.
Yeah. I would actually add onto that as well. With 2000 -- we’ll get the years right. In height of the crisis, over the last two or three years, like 2010 and 2011 were really pretty brutal. What was happening there, in 2009 you have the stimulus dollars that came out. So that was a record year for us.
And lot of agencies were able to postpone making workforce changes. But it became clear in 2010, I guess what there is no more stimulus dollars coming from the federal government down, lot of agencies look back and said you know what, we’re going to have to lay people off. These are paramilitary organizations. These guys put their lives on line together. There is a very tight sense of camaraderie.
Back in 2010, I remember we had one major agency in California we were working a big deal with. One of the guys from the Union pinned our quote in the locker room. He said, hey, they are about to layoff 10% of the force, now it’s spending money on new gear but needless to say we didn’t get that order.
So with these agencies, they were doing everything they could to avoid going through the reductions in force, which meant over the past couple of cars, they did not buy new cars, they did not their union radios. Now, the good news to this is we’re now seeing stabilization. Most agencies are now saying that they are not going through forced layoffs any more. They might have some natural attrition occurring.
But by and large most agencies are released in a stable financial condition. But they all realized now that they have gone two or three years without a significant capital spending. So we believe there is an opportunity for some pents-up budget dollars, that they’ve got to come back with several question on equipment. Any other question?
Yeah. I wonder, if you could talk a little bit more about international. So you identified friends in Brazil as big market largely because of the size of these office of force but could you talk a little bit about what are you seeing in those markets, your dialog with respective customers, where some of the demand drivers. What are the hurdles you are having to come over to pushing peoples across the lines? Thanks.
Let me just -- I'll cover a couple and if you want to go deeper, we can. In places like the U.K. for example, roughly about 15,000 devices sold against the -- total we sold about 150,000, maybe a little bit larger. We’ve got commissioners like Bernard Hogan-Howe from the London Metropolitan Police that wants to do even more deployment. He wants to go beyond firearms certified officers to non-firearms certified officers.
And in some of the constabularies around the U.K. we have a mix where some of the firearms carrying -- carry TASERs not all and some that have non-firearm certified people carrying TASERs. So even if they consolidate, there is now the chance of getting more penetration in that market. So the law enforcement leaders want to move in that direction. And some of the forces are setting precedence with these non-firearm certified guys carrying weapon CEWs.
In the French market, we have two very large national police forces, Police Nationale and the Gendarmerie. They are moving more towards municipal policing services. So we’ve seen the municipal market start to grow where budget dollars are now flowing to the municipalities. And I believe that municipal police force represents a total available market of 70,000 or 80,000 officers and it’s growing.
So putting people in country, having a French language website, doing a TASER experience in that country is already bringing those municipalities to the website. They are raising their hand. They are going through sale cycles and we believe we’ll see growth in that market.
Brazil, in and off itself, very large market. A number of events coming to Brazil with a lot of government funding to make sure that world knows it’s safe to visit for these events. They have the same use of force issues that you see in other countries. Very large opportunity but their markets comes with some challenges as well.
So I mentioned earlier, the liability of the individual officer, many of these guys are putting up to a year salary out of their own pockets to defend themselves. What we’re hearing from that market is those officers are buying their own video equipment today. So just being present in market with a solution like AXON Flex and EVIDENCE.COM, we think it will be a game changer in that market.
So we’re learning these kinds of things in our primary markets. And then there are also some secondary markets that countries like Germany today, the special forces in Germany, the SWAT seems essentially equipped with TASERs. WE think that, that will eventually move to patrol.
We had in Switzerland. We had the approval of all officers and all the municipalities to carry by name a TASER X3 or TASER X2. So just with that large changing, that opens up albeit a smaller market but a market opportunity in that country. So we’re seeing these kinds of drivers in markets all around the world with emphasis being in the primary markets, we mentioned Brazil and then Europe.
Yeah. I would add a couple of others, Colombia, just this past year passed, excuse me, a policy that recommended widespread deployment in the Colombian National Police. So we are working there.
In India, we are the first major orders -- first significant orders. It’s in the hundreds of thousand dollars, not million. But these were things we started in India. We have a salesperson in India. Enormous market potential in terms of number of people obviously.
In South Africa, there was a violent clash between police and miners that were striking that ended up, I think, 30 some people lost their lives in this competition. So now having discussions there about how could this be deployed to save lives in South Africa.
In the Middle East, if you look at what happened with the Arabs springing lot of public unrest in the Middle East. We’ve got some significant increase. And we’ve got decency of pipeline coming out of the Middle East as well. So it’s not just a primary markets that we’re in but we think that will give us the highest probability of success that we can make the greatest impact of -- I mean, people in market. But we do also have traveling sales people at service. These are the sort of second tier markets.
So of the customers that signed up for the free year EVIDENCE.COM. What is the retention rate abhors that after the year is up are expanding up to be paying customers?
Dan, you want to take that one?
Yeah. At this point, we’ve really just started selling that Flex Solutions beginning really kind of the midpoint of 2012. So it’s really too early to say. And I think that one thing we’re encouraged by is we’ve got a number of customers, actually by three and five year EVIDENCE.COM backend solutions with seller because they don’t need that three year to be convince of the value.
So we’re seeing that, offsets one of our metrics which we watch internally to see how many of those customers buy right out of the gate. But I think we’re encouraged by that but it’s really too early to see how many of those folks get the free year come back in five of the year. We’ll certainly know lot better by the end of ‘13 because you’ll have the 2012 sales that sort of see that repeatable.
We’ve got some -- if you look at Lake Havasu. For example, Lake Havasu started with like a dozen units a year, 18 months ago with our original, sort of, much bulkier camera system. They just want full deployment and they signed a five-year deal. And they signed up for our TASER protection plan and the TASER assurance plan. So if those payments over the five years, they are paying for the service, they are paying for the product. They just bought in there, basically getting a free upgraded included or prepaid upgraded at the end of year five.
We have a number of deals in the pipeline currently. You’ll be hearing more announcements of renewals of people that thought a year ago coming back and renewing. But it’s surely for us to put a number on -- I can just say qualitatively.
If we get them on the system and they are using it, we’re hearing feedback from agency saying you heard (inaudible) this is god send. You don’t have too mess around with it. It’s -- we have 99.96% or 99.98% uptime, which is unheard of for a lot of these legacy systems.
So we’re getting great qualitative feedback and again of the agencies, we’ve announced year ago, I’d say most of them were in some sort of, they view exciting center signing contracts or bought more cameras or in discussions what we will do that.
Your IP portfolio has been, I think a key competitive advantage over the years, just especially, on the ECD side, I’m talking about lot of the, kind of, the competitors that have come and gone. Could you talk a little bit about sort of where the key patents there, the NMI patent, in particular, or series of patents in shaped pulse technology and sort of when those sunset and if you have enough ability to kind of tweak those enough to kind of start the clock over again?
Will you take that Doug?
Sure. It’s actually a good question. When we came out with shaped pulse technology, probably about 10 years ago. We filed a couple of patents right away. Since that time we have filed four additional patents on that technology that included improvements to it.
And we currently have a patent litigation lawsuit filed against Carbon Arms, one of our competitors in Delaware. And it’s notable to really note that in their case we not only suit on the two original patents we have but we also have three additional patents we’re suing on, which represented those successful patents for improvements.
And we also have other patents that are pending and also invention that we will be filling patents for -- they began aggressive improvements in that especially around our smart weapon technology. So we feel that we’re in a very good position from a patent protection standpoint to continue to defend our dominant position and conduct the electrical devices.
And on the dates on the shaped pulse which is probably the biggest one that reads right on all these medical studies. I think that’s a 2023 or 2024 date and then some of these improvements rollout all the way through 2030-ish?
Two unrelated questions. First of all, I think you sold about 17 cartridges for every device you sold in 2012. Can you talk a little bit about cartridge consumption, and how many cartridges get used given that they are already fired a couple of times?
And then an unrelated question. On the video side, how do you help the police departments given that they have this IT problems in this long deployment cycles, how do you overcome that and not just basically something that they can’t deploy because they can’t really see?
Yeah. On the cartridge side, I think that the 17 for new HANDALL sleeve, I think it’s because you’ve got this large installed base at this point. So we’ve got, plus a $600,000 weapons in the field. We expect that in training every year, each one of those will use two cartridges a year just in training. They used one every other year in the field, but we have some customers actually train a little deeper on it because they are maybe, they are less familiar with the technology, so they may use more cartridges.
Military tends to use a lot of cartridges because they will train lots of people across the platform. They may not issue into each person, but they want to be familiar with the technology, so that sort of drives that at overall adoption. But we’ve seen pretty consistent to see sort of the two per year in training and then one every other year in the field and that’s been pretty consistent overtime.
We have some international customers that will do 15, or as many as 20 cartridges at the initial certification.
So on the question about rolling out our solutions with agencies given, how long it takes for them to roll out in a year, 10-years roll out of system. So our customers rollout really as quickly if they want. For a bigger deployment, we will actually put two or three people on site and that will be rolled out at the end of it. So with our service and with our camera, it rolls out in days and that includes all the training of all the officers and the training of how to use the system et cetera.
On the issues around integrating with other systems, that’s going to be a longer time to implement because we are dependent upon the other system that are out there. But our systems rolls on in base case.
You just outlined kind of like competitive environment that you’ve drawn acting relative to like Digital Ally and maybe similar other products that are out there, in terms of how you feel our position relative?
Yeah, so I think -- it’s Mike Garnreiter. I think whenever you look at the market there is sort of in-car vendors that are trying to go on-officer, which is again like Digital Ally. They have cameras. The issue from a hardware standpoint is that whenever you put something on someone’s body, it’s a very sensitive discussion because it’s got to be light. It’s got to be small. Wires that are of concern, they are only okay in certain situations. And our competitors, we just haven't seen them actually developed products that solve that problem.
There are competitors that are selling against us, using up a very simple like body camera kind of thing, which you put on you. The issue there is that, they don’t -- they are creating a back end problem for them. So when we are going and selling, we do a series. And during that C&E, if the officer chose, hey, we like this camera better than that camera and we’ve been successful thus far.
And then the administrator will start looking at all the data that’s generated and when it goes into EVIDENCE.COM, the administrators have no concerns at the end of 30 or 45-days because they didn’t have to do anything. With competitor’s cameras, it’s just skewing data onto their existing systems and it creates a whole IT project. Does that answer your question?
So, yeah, we do have -- when you ask about specific competitors, so we mentioned some of the in-car guys and then there is a small start-up called Bellevue out of Washington State that sells a body cam. I know we’ve seen some out of Australia. He witness out of Australia and I think there is a couple of small firms in the U.K.
I have a question or two. Are there any states in United States that you are not allowed to sell in, either law enforcement or other being security guards companies individuals?
When we started seven -- when we started out, there were seven states that were illegal for both police and for consumers. We’ve now rolled that back where it’s now legal in every state for law enforcement. The last one being, New Jersey and we still have some technical implementation issues, the way the law is written in New Jersey. The training is quite cumbersome. So we are working with various regulators to try to streamline that because there is a lot of interest in New Jersey.
And in consumer, we started with seven states where the reason I believe we rolled back Wisconsin and Michigan to where we now have five states that are illegal, which are New York and New Jersey because there is no crime here and then Massachusetts, Rhode Island and Hawaii are the five where consumers came down.
So, I guess the closest we will sit around here is kinetic, if you want to buy you have to be a resident of that state, right. You still made a lot of purchase on item.
Yeah. We don’t ship to any other restricted states. So you’ll have to have a residence or an address in a legal state.
Going with the international side with Brazil, I believe I saw one of the slides that manufacturing is required there. Does that mean you are an assembler? You import parts and put it together, do you actually manufacture the part, the workforces? Is it U.S. run, how do you maintain quality controls? How much of an investment have you made? Questions like that, could you address that?
Do you want to take that one, Doug?
Sure. We have looked into the issues down in Brazil and what our plan -- we have a phase plan for nationalization of our product in Brazil. And the most critical component that we have is our high-voltage section and we park that in a proxy. So it sealed. We are not going to take that operation down to Brazil anytime soon. That is probably the most critical component we have.
The contract manufacturers that we are going to be using in Brazil, actually manufactures some of our boards, printed circuit boards. So they are an deal partner for us. We are also gong to be sending down engineers to assist with that process until we get peoples sufficiently trained up. But with the phase plan, we are going to be starting with very few of the critical components being actually made in Brazil to a point where we will be making those over time. We feel that we can minimize the risk of doing that.
And there is not a lot of capital investment upfront again, because we are using one of our trusted suppliers that makes frankly, some of the most intricate parts today, which is electronics. So we just need to collaborate with them on the mechanical assembly. But we are not putting a TASER building down in Brazil with the bunch of TASER people. We are using parkers to accomplish these.
Are there any countries throughout the world that you are not permitted by the U.S. government to sell off? I’m thinking of Cuba, Venezuela, North Korea around companies, countries like that?
Yeah. We can’t sell in any of those and there is another little country called China that we currently cannot sell our TASERS into.
How do you control that with distributors though? Do you use foreign distributors and obviously doing that?
We do. We are very careful about making sure that we and our distributors are compliant with any of the U.S. export controls. So while philosophically, we actually think we can save a lot of lives in China. We cannot disagree with sales opportunities but we are not going to follow a lot very carefully. And so with all of our customers, we get export licensees, we get the signed statements as to where those devices are going. And we are typically also working with the end customers as well. We have been training them et cetera, so we can monitor.
If we get a suspicious order, we try on building we’ve ever had when coming where it is like out of the blue, somebody is trying to buy something. So we have been working with the end law enforcement committee to. It’s something we keep an eye on. We really haven’t seen anybody trying to do anything with it.
Finally, is Maricopa County a customer of ours?
Sheriff Joe Arpaio
Yeah. The Sheriff Joe is pretty well fully deployed with TASERS. They’ve got TASER cams and they were one of the early testers that helped us develop the AXON Flex.
I would think that TASER would be the very, very favorite company of the bad guys in the world, whether you are a terrorist or whether you are trafficking kids, wouldn’t you love to have a TASER because you want things to happen that don’t necessarily or even someone who is legally savvy. If somebody commits a crime with the TASER, you cannot be accused of attempted murder because by definition it’s non-lethal. So, I know you’ve done interesting things to prevent this technology falling in the hands of users, identifying admissions streams purchasing. Can you elaborate, how this isn’t been used by criminals more opportunistically and what you are doing to prevent that?
Yeah. Certainly. As you mentioned, we do serialization of our cartridges with confetti tags that fire out anytime you fire a TASER device. The fact of the matter of those, we just haven’t seen that much interest from criminals. Apparently, they are not just very concerned about the health and safety of their victims.
We find that a gun is really intimidating scary thing. It’s high available in all sorts of black markets where you can go and get a firearm. And so luckily, whether it’s a preventative measures we take or just the dynamics of bad people that they don’t seem to want to save other people’s lives or risk of injury so.
In fact, we had some stage legislators tell me they wished if they could get out all the bad guys to convert using TASERS because we showed you lot of -- lot of people lose their lives in violent confrontations. But we are doing everything we can to avoid any misuse of our products, that’s why we even didn’t make the TASER devices for police. We report the time and data of every discharge, scrutiny and back end audit. Is it being overused or misused? We put video cameras on it. We can see what’s happening.
I think we try to be responsive to the public concerns, any concerns of our customers, that’s a whole reason we are in this video business now is we want to solve this problem with this trust. Okay. Our assessment of law enforcement is that they are 99% great people. And they get verbally abused, they get accused of everything under the sun and it’s very stressful for them.
So we got in this really to protect them, but we also think you know what, business can help improve relationships with the community because some people just have a negative perception of police. They believe all the negatives things that are said and then, occasionally get a bad cop who loses it, like the Rodney King incident who’s been out-of-control.
We believe that that’s going to happen more or less, if a cop is wearing a camera you will get Rodney King incidence when they know it’s being reported. Those things happen when people lose it and they think you know what, nobody is looking. Well, somebody is always going to be looking into future and we think that’s going to take up everybody’s behavior.
I’ve just got a specific question in a minute. Just understand the technology a little better. This is exaggerated to thesis ready to make the point. But is it somewhere in the trafficking kids business and there are a lot of people in the world, if they want to damage those kids because they are actually physically valuable property. But taking that ridiculous example, you talked about serialization of cartridges. If someone steals a TASER from a cop, is it usable? Is there fingerprint ID or is there any kind of -- what are the systems that protect it from being abused by non-authorized user?
Thank you. Good question. I mean, like a gun or a stun gun, I mean if it gets stolen it could be misused. But they would have to come back at some point and buy cartridges. And then what we find is and so we do get this argument, for example from some of the human rights organizations. Some of which were very favorable to us. I know we have some amount of critical that while we are concerned that TASER might be used for torture.
By definition if it’s torturing somebody, they are probably already restrained. You can buy a stun -- you can get a stun gun for $10 to $20, that’s perfectly adept to that. The customers that are paying $750 to $1,000 for our solutions are doing it because they want to be able to engage moving targets in situations of uncertainty and they put a high premium on the medical safety testing and things that we do. So we just really haven't seen. If certainly, something could be misused but there is much cheaper better tools, frankly for misuse than ours.
That helped. Thank you. There is a big silence on international about Mexico. Here we are right, Mexicans, they got a lot of situations where they got a lot of bad guys in Mexican communities where lethal weapons, which would normally be needed and can be used. What is your prospects in your business in Mexico?
Thanks. We actually see Mexico as one of the up and coming target markets. Right now from what I understand, there is a lot of distress of municipal police in Mexico and there is a lot of investment at the federal and state level. So a lot of the investment is going into more highly trained, educated, law enforcement professionals at the state and federal level in Mexico.
And some of are even moving, what they're calling Commando Unicos where they are consolidating away from the disruptive municipalities to the more trusted and educated services at the state and federal level. So we do see it as a market that that will be a good market for us coming.
And my last question is military applications. I was intrigued by work you’ve done, for example in minds. The job that is required for mind is deterrence and detection among other things but it’s nonlethal, so in case, Doug, sets on it if you don’t have a case that’s one example. What are your military potentials?
So right now most of our military programs are for military police and they are using TASERS very similar to municipal police. We do have some ongoing R&D. I think we’ve talked about that we are developing a long-range TASER projectile for a 40 millimeter launcher platform for the military and we do have the area denial device.
Unfortunately, that has not yet been approved for us. There is a very long lead time for getting new technologies in the military. The other thing that we’ve learned along the way was developing a -- we have an Advisory Board of Generals that advises on how to pursue military. And around 2006, we had a meeting where they said, what we really need is an area coverage weapons for these checkpoints.
And we decided to go ahead and say you know what, let’s bypass the military development program, let’s go fill this and we will take you to the military to finished item because we can do that much faster if we try to get DoD funds to develop it. And what we learn in that process, frankly was, the military has a set way that they develop and buy things. And if you don’t go through a military development cycle, you don’t feel the advocates that are there to then help create the adequate requirements written, and then there is a whole bunch of bureaucratic things that have to happen to get approvals for weapons for military.
So we now think the position that we are going to follow more traditional unlike we do with this 40 millimeter program, working with the Joint Non-Lethal Weapons Directorate. Even though we moved at a slower pace, we believe long-term that’s how the military acquire things and we got to play within those rules and not try to shortcut it. So we will hear a couple other questions and then we will break for demonstrations.
Quick question on EVIDENCE.COM. Is it internally hosted solution or is it an externally hosted solution for you guys? Is it out of the data center or is it inside your office and what’s the CapEx requirement with that going forward? Thanks.
So we leverage Amazon Web Services, so there is no CapEx. Just trying to make sure I understood, so it is just a monthly fee. So we are eating our own dog food. We are not experts that building out data centers and having redundant cooling systems and fight back as for power. We are experts at deploying applications in the law enforcement.
Yeah. Good point. So when we choose the provider to help host EVIDENCE.COM, we looked at their international locations. So we said, okay, what’s important in provider? And one of those things was allows us to deploy internationally easily and cheaply.
So Amazon has locations in Dublin, in South Polo, in Singapore and Sidney, and Japan and a bunch of others. And they are constantly investing and rolling out everyday, because they make their system so easy to deploy on, it’s also fairly straight forward to rollout internationally quickly and we get computing on demand too, so the cost is very low even test the country.
Just quick question, the legacy X26, when and how often does that has to be recalibrated and I have a follow-up question?
So there is no technical reason for the device to be clinical recalibrated because you can’t really adjust the device. Now, following that test, I mentioned up in Canada, some of the Canadian agencies are now recommending I think annual testing of the device. Where they’ll just basically take it and test it against targeting the telescope.
One of the interesting things that, TASER can’t really fail high, imagine you are driving a Ferrari at 200 miles an hour, when something goes wrong, it doesn’t go 300 miles an hour, it breaks down. Similarly TASER is operating at about its maximum output and actually take in this case.
So if we do see component start to breakdown, they’ll fail low, so the result is not sort of spectacular safety issues you might have heard in the media the result was actually more an officer safety issue that fails, it’s going to be you stop working on the under effective but it was based on, so I was take from a scientific perspective, this is really more of a public relations issue than there is a scientific need to test the devices.
But that’s why we build calibration into all of our new smart weapons. So now you can just plug it in and download a report off the device worth measuring and calibrating itself reporting those logs, because we’ve heard in some of these places, they might spend $500 have a weapon tested, that’s half the cost of acquisition. So we see a significant benefit for those agencies there and particular giving Canada, they are requiring regular calibration to just build into the device.
And then the follow up question is, what’s the main reason for failure of an X26 legacy, is it the number of firing, is it?
There are couple things, there is obviously physical damage, if it’s broken, drops, et cetera, might crack unit. We do a spark test on a daily basis, is a recommendation so basically you take it out on petrol, you arc the weapon before you get out into petrol. And that means if there is something that’s gone wrong like things humidity, in certain areas if you have really high humidity inside the device, again that’s not an issue with the newer devices, because we now weatherproof them, rain or submerging can get in or just extended use, where overtime you might see this spark up internally start to ware out or you might get breakage in the high-voltage circuit, there is a high-voltage transformer.
We actually have an improve design in both the X2 and X26P, where we’ve dramatically decrease the changes of those breaking, because it’s a physical molded part whereas the previous one is more sort of around assembly so it’s not quiet as robust as we are doing some of the new devices.
Yeah. Hi. You mentioned France a couple of times, and also there were two large agencies that company accounted for 80% of officers I believe in France. Not that you are expecting, but you ever got one of those agencies, would that going to be a game changers internationally and in that in light of that, you are increasing SG&A $1.8 million internationally, any of that a large bid on some sort of large international deals like this?
So, in the model that Dan presented, one base case, we don’t assume that there would be some game changers, but to answer your question, yeah. If we were just to go 5% or 10% additional penetration in some of those larger agencies or even get them up to the deployment that we see here in North America. Those would be game changers internationally. Then the second part of your question was?
The investment internationally is primarily in two regions, Brazil being about 80% of the market below the border and sales, marketing, services people, same in France, probably, a little bit it’s not 100%, it’s basically evenly split between those two geographies with sales, marketing and services people.
I would say the, we do have some other game changers in other parts of the world. But we haven't invested in putting teams there because those we assessed are less likely and/or will less likely to change the outcome, because it might be just a country with a small number of decision makers in one large agency.
So those we might still handle direct from U.S. whereas Brazil and France and India, there is enough agencies that we can be very successful there, just blocking and tackling proven customers we’ve had and grow them in a predictable. Now there could be a game changer out of there, but I wouldn’t characterize any investments we’ve made that on a very large low probability event.
Right. And just to go one step further, Dan, can I outline some of the criteria for where there might be additional investment. So if we were to have, for example, a large agency in one of these countries, want to deploy lots of cameras, do full implantations, that would typically be the point which we may invest more to get, not only that agency up and running successfully but to leverage that to make create market?
That’s an interesting thing for international, the camera and EVIDENCE.COM technology, we believe actually has an opportunity to succeed in countries where TASER is might be more controversial, right. Because and that’s one of the chance we face, when you deal with national level police force, we are dealing with national politician.
Here in U.S., the chief police was a cop a few years ago, most places. So very connected toward the job, the cop do understand what this device does, understands the safety implications.
Frankly, even in the U.S. we are less penetrated and the largest agencies the two LAPD L.A. Sheriff's New York and Chicago. We have a much lower penetration then we do everybody below that level. And part of it is, those are just very big agencies, they are more prone to city politics frankly.
For internationally you take that up or not, you are dealing like the Ministry of the Interior. But in those scenarios, number one, when they go it could be much larger but there the camera opportunity. We don't have the controversy around that. So we actually think that that could have a very different and potentially more favorable international dynamic.
You have a slide that show that the new telesales force sort of addresses the fact part of the market. How large is that opportunity and then the sales you’ve seen today, today tend to expand the installed base where have they have been upgrade.
The Turner available market is at least, probably 14,000 or 15,000 agencies, less than 100. And as Rick mentioned, the average agency is 50 or less, right, so there is a steep decline in the number of officers in some of these smallest agencies. The -- what was the second part of your question?
Yeah. It's kind of combination of both, so while we did see some small orders the volume of small orders, the average deal size for that segment of the market for us is about 3 bucks. And the multitude of those deals has gone up exponentially. So it's wide space. It’s also upgrades as well, so it’s both of those.
We’ll take maybe one more question and cut it off. Erin, do you want to come up and explain where we go from here if they want to see a product demo et cetera.
So thank you everyone for second around. We do have presentations, the hard copy in back for you take nearly out. On back side of the room we have lunch set up for those of you that want to stay and then we will all be available in the room as well. If you pass the lunch we will have demos of our video products, as well as the weapons. And for those of you on the webcast the slides we posted momentarily if you want to download one copy as well. So thank you everybody.
Okay. Again I just say thanks. We appreciate you are coming. We’ll all be here and please help yourself to some lunch and our product manager look lots will be back they are demonstrating video and we have a local police officer who will be demonstrating TASER. Thanks.
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