TASER International's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb.26.14 | About: TASER International, (TASR)

TASER International, Inc. (NASDAQ:TASR)

Q4 2013 Earnings Conference Call

February 26, 2014 10:00 AM ET


Rick Smith – CEO and Co-founder

Dan Behrendt – CFO


Steve Dyer – Craig Hallum Capital

Greg McKinley – Dougherty and Company

Glenn Mattson – Sidoti & Company


Good day, ladies and gentlemen, and welcome to TASER International’s Fourth Quarter 2013 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions). As a reminder this conference call maybe recorded.

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

Rick Smith

Thank you and good morning to everyone. Welcome to our TASER International’s fourth quarter 2013 earnings conference call. And joining the call remotely today is, I have an opportunity to address over 300 Chiefs of Police at the California Police Chiefs Conference. So as can happen when doing these things remotely, there’s some risk of technical issues in which case Dan will deliver the entire call today, but let’s hope that doesn’t happen. So before we get started I’m going to turn over to Dan Behrendt our CFO to read the Safe Harbor statement.

Dan Behrendt

Thank you Rick. Statements made on today’s call will include forward-looking statements including statements regarding our expectations, beliefs, intentions or strategies regarding the future, including statements around projected spending. We intend that all such forward-looking statements be subject to the Safe Harbor provided by the Private Securities Litigation Reform Act of 1995. The forward-looking information is based on current information and expectations regarding TASER International, Incorporated. These estimates and statements speak only as of the date in which they are made, are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict.

All forward-looking statements that are made on today’s call are subject to risks and uncertainties that could cause our actual results to differ materially. These risks are discussed in our press release we issued today and in greater detail in our Annual Report on Form 10-K for the year ended December 31st, 2012, under the caption of Risk Factors. You may find both of these filings as well as our other SEC filings on our website at www.taser.com.

Rick Smith

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

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

We’re working hard to execute our strategy to grow the top line and invest in the right opportunities. And I think the fourth quarter 2013 as a whole, our evidence that are efforts are working. Our view to progress leads to TASER’s three core strategies today. First the CEW upgrades, second International and third dating dominant market share in the cloud computing and aware able technology space for public safety.

To start I’d like to share the traction in the EVIDENCE.com and Video segment. So EVIDENCE.com and AXON bookings saw its second consecutive quarter of bookings in excess of $5 million. For the full year of 2013 bookings grew $10.7 million or 282% to $14.5 million. EVIDENCE.com and Video segments GAAP revenues in the fourth quarter grew 33.6% to $2.5 million compared to last year’s fourth quarter.

We think this is EVIDENCE of the staying power of our Electronics business, so while we don’t expect this curve to always be consistently up and to the right during this early stage. We’re very excites about the continued growth of bookings in the fourth quarter. Also in the quarter there was several notable deals such as the New Orleans Police Department, the Birmingham Police Department and Las Vegas Metropolitan Police Department, all deploring our AXON cameras and EVIDENCE.com solutions.

Larger agencies like these understand the intricacies of large scale digital evidence management. And know that this is not just about buying a camera. And as a result they’re choosing AXON and EVIDENCE.com as a complete end-to-end system. We can hardly continue to demonstrate to law enforcement professionals that EVIDENCE.com is a technology that will maybe administrative sign of law enforcement significantly more user friendly, cost effective and efficient. As well as reducing litigation costs for taxpayers and providing accountability to the public.

As we mentioned on the last call this year we branded our booth and our most important conference, the International Association of Chiefs of Police or IACP. This we branded it as the EVIDENCE.com booth, to generate buzz and segment about our newer brand. We believe this approach was highly successful helping build brand awareness for EIDENCE.com, again our newer brand. According to our surveys of IACP attendees, before and after the conference we listed EVIDENCE.com brand awareness of among these chiefs from 43% who were aware of EVIDENCE.com before the conference, to 80% after the conference. So we nearly doubled market awareness.

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

It’s also important to establish TASER as the front leader as such the key decision-makers see TASER as the right partner to bring best in class technology to their agencies. And we think our strategy is working, not only from the financial results but from the invitations that we receive to present and speak of large-scale law enforcement events. I was recently invited to present from the IACP executive committee about these trends and later this month or later today I’m going to be speaking to the California Chiefs Association right up to this call in fact. In March we will be hosting our technology summit here in Scottsdale which we anticipate will be attended to capacity. In fact we’re to schedule a second event in April with the first event filled to capacity.

It’s just so clear as we continue to move forward to move full speed ahead toward the tipping point where we believe video will become a required tool for law enforcement And progression toward cloud computing where the technology law enforcement is actually a little faster than we had previously anticipated which of course is very exciting but it underscores the need for us to move fast in 2014 to solidify our position from the space. We’ve received several inquiries from investors regarding the potential threat from Google glass in whether or not it could be integrated in law enforcement.

We think that the Google glass is a great innovative product, and I even have one myself. The more wearable devices like glass interaction, the faster that we believe law enforcement will move to wearable video. The more that wearable computing, wearable technology, the mainstream within the public realm, the easier it will be implementing law enforcement. Further, we strongly feel that the long-term play here for TASER is not with the cameras and the hardware the router with the cloud technology platform EVIDENCE.com.

If an agency chooses to use Google glass or the hardware to collect evidence, they’re still going to need a digital EVIDENCE management system at EVIDENCE.com is most flexible and accommodating a digital EVIDENCE management system to handle digital EVIDENCE from multiple sources. As glass becomes a commercial product we intend to support EVIDENCE.com applications running on glass the same way that we provide applications on I-phone and android devices today.

As [indiscernible] it’s not the camera that’s stupid, it’s the – and that’s where we’re focused. We see 2014 as the year that things are going to be moving forward at full throttle with EVIDENCE.com our goal is to solidify market share and frankly market dominance. We’re out to own this, and we’re out to go out fast. The occurrence of subscription revenue opportunities create a very high financial life and value for each customer. Further for every EVIDENCE.com customer, they become a natural customer for future cloud hosted services.

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

We’ve already begun to make these investments which are in 2013 in functions such as accounts management and field services. We deployed additional sales representatives for the EVIDENCE.com and video team in the second half of 2013 with more planned in 2014. We more than doubled our manpower in each region in order to reach more customers at faster rate. In addition to the incremental standard SGNA, for the additional sales representation, customer facing events and tradeshows.

We feel it’s imperative to keep a strong investment in research and development for new products and services as well as enhancing existing functionality of EVIDENCE.com. Technologies moving fast, we know that and TASER continues committed to being at the cutting edge of technology continuously assessing how to make our products even better and how to create innovative new products to serve our customers. We begin our most recent product initiative with the acquisition of Familiar, Inc. in late 2013.

The team is hit the ground running, and they spent much of their time meeting with our customers to get a deep understanding of the key customer pain points and to determine where we can create the most value for our customers next. Customer reactions have been extremely positive. Customers are telling me that they’ve never seen a company go to such great lengths to involve them in building the right solutions for their challenges. Of the team coming up to speed very fast they’re spending a lot of time in the field, on site with key customers around the country.

We’ve decided to keep this process going through the first quarter as we firm up our product strategy with more and more customer input. It’s most important that we get this right, not that we hurry to get it fast. One result of this is that we expect we will see higher R&D charges in Q1 than previously expected, by about $500,000. This is because we have the team doing customer oriented research rather than active product development work. Accordingly a higher proportion of the work will be expensed in Q1 versus development work which can be capitalized.

But we believe this is the right approach, we need to run the business to get to the right answer for the long-term and take the time that it takes to get it right. Break even for our EVIDENCE.com businesses also are the hot topic among some of our investors at the front end of building a cloud-based or SAS business there’s a high level investment required. And as revenues being preferably the contract there’s an inherent loss period until a critical mass of customers is achieved.

Our philosophy and breakeven in investment is that so long if the business is growing and the size that our product is going to work are evident we need to continue to invest. If the gross growth of the business slows then at that point we can pull back on our investments.

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

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

The next strategy I will review is our CEW upgrade. The TASER Weapons business continues to execute and show very strong results. Our delivering revenues we’re up 24.1% to $37.6 million year-over-year. Our fourth quarter realized several large stocking orders as a result of yearlong volume incentive programs that added about $2.5 million dollars the top-line results in the fourth quarter.

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

To refresh your memory the TASER Assurance Plan allows agencies after the purchase of their initial CEW unit. They can make equal installment payments over the period of the contract. At the end of the contract period, the customer receives a new up – a new CEW. So along the way to customer realizes other benefits as well. We’re passionate about helping our customers budget for CEW and TAP, allows our customers to have a predictable and manageable expense, that’s consistent during the contract period and results in an upgrade five years from now.

We still believe there lies a large opportunity ahead in upgrading aging weapons as well to sell more into those agencies that don’t have a CEW on every officer today. In our North American Weapons business which is obviously in a more mature phase we’re focused here more and operational excellence in driving long-term profitable growth. One more update for the TASER Weapons business is in regards to our product offerings, now that we have the X26P and the X2 which are getting very well accepted in law enforcement markets. We made a decision to discontinue new product sales of the legacy X26 CEW which we introduced in 2003. We’ll be discontinuing new product sales at the end of 2014 and we’re now entering the end-of-life phase for that product. We’ll be migrating customers over to the new 2013 model X26P.

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

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

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

Since the rollout of these newer warnings and we associated training, the rate of new cases presented to the company has significantly declined. Three years ago we had 52 pending cases. Today we have 18. In the second half of 2013 we only had one new case, it was presented to us. Again that’s in the course of two quarters, we only had one new case. We’ve had nine consecutive quarters were dismissals of our number of new cases are, we think this is a testament to the strength for our defense and legal teams and training and risk management.

In the fourth quarter we had a few other significant events in regard to our litigation and defense. Number one in the Turner versus TASER case, we were awarded a new trial on damages only. This resulted in the reversal of $1.1 million in litigation reserve in the fourth quarter. Due to this reversal additional insurance coverage became available and SGA realized a $0.6 million benefit to litigation related activities in the fourth quarter in addition to the $1.1 million reversal.

Secondly we did several two cases for combined $2.3 million as previously announced in 8-K on November 27th. Of these cases will now be paid to insurance coverage due to the reversal of the Turner versus TASER case as well. And therefore there’s no reserve on the balance sheet at this time and no expenses necessary. Third we were awarded a permanent injunction against Karbon Arms for patent infringement on our CEWs. We awarded damages in the case but at this time there’s nothing on the books as collectibility is I’m sure. We’re happy that this case is resolved and our CEWs can continue to be the market leader in safety and effectiveness. We will continue to aggressively defend our intellectual property.

In addition the company is currently in a jury trial in the commercial litigation lawsuit entitled AA Saba versus TASER International. This lawsuit is seeking monetary damages and attorney’s fees for an alleged breach of a distributor agreement. On behalf of any litigation is uncertain and it is possible, the company could lose the trial with an adverse judgment.

That being said we do have some cases still pending that are from the pre-2009 era. We aggressively litigating these cases at this a financial cost to it. We’ve implemented measures to mitigate these costs to in house attorneys expense. And that we’ve always maintained, defense is not something we take lightly. We’re in the final stages of litigating the pre-2009 cases over the next one to two quarters.

Accordingly we do expect our litigation expenses to remain in the elevated range, there right now for another one to two quarters. On the bright side we’re happy to share, we continue to expect these expenses to trend downward in the second half of 2014, as we bring the pre-2009 caseload to conclusion. Other litigation always remains inherently unpredictable. The company does plan to invest the legal savings in the new customer facing initiatives to accelerate further sales gains.

To wrap up before Dan goes over to financial results in greater detail. Exciting things continue to happen here at TASER and I am looking forward to sharing more success in the coming quarters.

And with that, let me hand over to Dan to review our financials.

Dan Behrendt

Thanks Rick. As Rick said in the fourth quarter consolidated sale were $40 million, a 24.6% increase from the fourth quarter of 2012. The increase in sales is primarily driven by the continuation of the upgrade cycle with agencies upgrading to the new X26P and X2 Smart Weapons, combined this attributed $15.9 million in the fourth quarter. AXON cameras and EVIDENCE.com sales also grew by $0.5 million to $1.4 million in the fourth quarter of 2013.

And sales of our cartridges increased to $1.5 million in the fourth quarter result as a result of several year-end distributor stocking orders like our X26 revenues declined by $0.6 million in the fourth quarter result of agency integrated in this smart weapons platform. There are still some international federal customers who continue to purchase the X26 because they’re selling CEWs improve for their market application.

We’re working with these customers to get them the review and [indiscernible] 8.18, 3 smart weapon platform. Historically we’ve been announcing the percent of the installed basis upgrades to their legacy weapons to the niche smart weapon platform each order.

However we feel that the trade in credit as its declined over the last year more customers are choosing to upgrade weapons outside our formal program and therefore not making into our metric. Due to this we would no longer be tracking this metric publicly, but we still feel that the upgrades are still a large opportunity for us as evidence by the fact that we continue to see very strong sales in North America and in the new weapons but it’s – it’s becoming a less meaningful measure as that upgrade credit is dropping, agencies chose to upgrade outside our program.

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

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

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

Sequentially the loss for operations EVIDENCE.com and Video segment also worsened $2.3 million from $1.5 million in third quarter 2013 to $3.9 million in the fourth quarter previously stated. This is due to the decision to increase the spend in research and development as well as the acquisition of the Familiar team to accelerate our move into new products, as well as we’ve added a number of new sales reps as Rick said we basically doubled our sales reps in the field in the second half of the year so that’s where you have a bigger impact in the fourth quarter.

As well as we saw lower revenue the quarter from the TASER CAM business it also runs through that business but we do expect the current level to spend and continue to increase from this price to pre-2014-15 to gain market share and adding more customer facing roles. Sales, general and administrative expenses were $11.7 million in the fourth quarter 2013 compared $12.4 million in the fourth quarter 2012. As a percentage of sales, SG&A were 29.1% of net sales in the fourth quarter 2013 compared to 38.8% of net sales in the fourth quarter of 2012.

Compared to the prior year of litigation related activities were down $1.2 million did more actively taking price in the fourth quarter of 2012. Additionally as a result of the reversal damages in the Turner case. The company recognized $0.5 million benefit in the quarter because previous legal expenses that eloped through the P&L were not be reimbursed by the insurance companies to $7.5 million benefit in the fourth quarter for that.

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

On a normalized basis when we back out the one-time benefit for insurance reimbursement for previously recognized legal expenses, SG&A expenses would have been $12.2 million in fourth quarter of 2013. Given the track to the company’s experience in EVIDENCE.com and Video segment the company will continue to invest incrementally and customer facing roles and infrastructure to support to grow. And therefore its best take the total SG&A expenses to increase from this quarter’s level of that 5% to 10% before the benefit of litigation reversal.

Research and development expenses were $3.4 million in the fourth quarter of 2013 this was an increase of approximately $1.5 million compared to fourth quarter of 2012. As we predicted a forecast last quarter increase was really primarily due to the additional personal expense related to EVIDENCE.com and Video segment. Our team has continued to do researching and voice the customer work and what markets a proper entry and their expenses will be completely charged R&D operating expenses at that time.

In 2014 likely starting in Q2 as we start development initiatives expenses will be partially capitalized and so we launched those products or services. However given the newness of these initiative the company cannot be certain of the exact time and capitalization or the completion of other projects. With the addition of Familiar team as well as plant hires and other research investments in EVIDENCE.com and Video segment, we continue to expected to see some increases in R&D from these levels. The investments we made to accelerate our development and the sale of adjacent technologies and new products.

Adjusted EBITDA which is – excludes certain items as detailed in our press release was $13.4 million for the fourth quarter 2013 compared to $7.7 million in the fourth quarter 2012. The improvement is mostly driven by just the higher sales and gross margins in 2013. Income from operations was $11.6 million fourth quarter of 2012 this compares to $4.7 million in fourth quarter of 2012 – I am sorry $1.6 million in the fourth quarter 2013. This quarter’s income from operations benefited from the reversal of $1.1 million litigation reserve to the Turner versus TASER International case. And resulting reimbursement of $0.5 million of previous expense legal fees.

Also related litigation in quarter we announced that we received a permanent injunction against Karbon Arms and were awarded damages, we’ve not recorded this benefit as quite though, capability of that award is not recently assured at this point. The net income for the fourth quarter was $6.9 million or $0.13 per share on both the basic and diluted basis compared to net income of $3.8 million or $0.07 per share, basic and diluted share basis for 2012.

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

As we move on to the balance sheet in the fourth quarter the company’s generated $9.3 million of operating cash flow. And we finished the quarter with $63.4 million of cash, cash equivalents in investments. Accounts Receivable $22.5 billion we’re actually up $4.4 million from the prior year balances due to increased sales. And inventory at $1.1 million is actually flat with the prior year balances.

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

Accounts payable $6.2 million is also flat with the prior year and total deferred revenue of $20.2 million has actually increased $8.1 million from last year’s prior balances primarily due to two things, that’s upgrade program for X26P and X2 which includes an extended warranty. And we also saw sales of the AXON cameras – resulted in an additional $2.7 million of deferred revenue related to service of revenue that would be recognized over the license contract.

We continue to defer revenue related EVIDENCE.com in service for the time of purchase. And again we’ll recognize that revenue depending on the – how much the customers pay upfront from anywhere from one, two, five years depending on the individual contracts. Total liability is $37.5 million and the company finished the year with $109.9 million in stockholders equity. We continue to have no long-term debt other than capital lease. And we continue to have solid liquidity and strong cash flow engine in our core business to fund our sales R&D efforts and operations in the future.

As we move into the financial information provided for a cash flows. The company did have cash provided from operations of $9.3 million in the fourth quarter 2013. And for the 12 months ended 12, 30 – 12, 31 ‘13 we had cash from operations of $32.4 million. We did have cash used from investing activities for the 12 month of $23.1 million compared to cash provided of $1.7 million in the same period of prior year, that use of cash is really driven by purchases of investments during that time as we investor access cash in the both short and long-term investments. Cash used from financing activities was $3.2 million for the 12 month ended 12. 31 ‘13 compared to the $13.4 million used in the same period of the prior year.

To refresh memory during the 12 month ended 12, 31 ‘13 we did repurchase 3,048,166 shares at an average price of $8.17 per share, that netted the whole purchases and that buyback of $25 million completed during 2013. And this was partially offset by $6.8 million benefit for employee option exercises as well as $15.4 million cash provided by employee stock option exercises. So really we – we opted most of the buyback with the option activity during the year.

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

At this point I’ll like to take a minute to address the incremental investments we’ve started that, we talked about making over the next year and beyond to grow the business. Last year at this time we all also messaged that we did investing to grow the business, and taken the today’s results for the full year 2013 and certainly we’re serious about executing our strategy and providing top-line double-digit growth consistently. We feel that these investments are necessary to continue to solidify our market position in the video business. Investigating involves revenue producing opportunities and to continue growth internationally so we could – greater long-term value for our shareholders. And with that we’ll take calls from you, if you want to, that would be great.

Question-and-Answer Session


Thank you. [Operator instructions]. And our first question comes from Steve Dyer from Craig Hallum, your lines open please go ahead.

Steve Dyer – Craig Hallum Capital

Good morning guys, very nice quarter.

Dan Behrendt

Thank you Steve.

Steve Dyer – Craig Hallum Capital

On the welcome side of the business we’ll start there and I know you’re not going to give out kind of a percentage upgraded anymore, but I don’t know whether you used the base fall analogy or what but how would you sort of I guess [indiscernible] anecdotal and how the upgrade cycle is progressing?

Dan Behrendt

Hi Steve, this is Dan. I think we’re really happy with where we are right now. I think a lot of the strong results received, especially in our North American business or directories also of that upgrade cycle. So I’d say from a baseball perspective we’re still in the early innings. I think that we’ve discovered as we’ve produced that training. I think the good news is we’re seeing lots of trading activity but we’re seeing less of our customers actually choosing upgrades through a formal program that’s going ahead and finding the unit because it at this point the bundle we’re selling, it’s kind of worked the economic. In some cases they decided they’d rather just buy the TASER without the warranty and not get the trade-in credit. So we, out of the growth engine for 2014, that there’s a good part of the market, and I’d say the majority of the – still will be upgraded so I think we still think that can continue to provide plenty of growth for the company.

Steve Dyer – Craig Hallum Capital

As you look at the number of handles in the field, they’re over five years old. Is that number still growing by the day or has the upgrade got to the point where the average so to speak is now started to shrink?

Dan Behrendt

Yeah I think we’ll probably still say we’re probably still seeing some growth in the total number of units over five years old, just because we’re getting into some strong sales here five years ago. But you know I think even at a steady pace there’s still a large opportunity for us where if we can for upgrade anywhere from say 12% to 15% of that over 15 year cover, over five years old each year. That’s going to provide very strong base for the North American business.

Steve Dyer – Craig Hallum Capital

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

Dan Behrendt

Yes so for the X26, the life of the X26 trial is in 2003. We’ll not sell that commercially after 2014 but we’ll continue to support that program from our warranty perspective through the end of the decade. The cartridges for the X26 like the product the X26P uses that same cartridge. So we’ll continue to sell that cartridge for the foreseeable future because the new platform will take the same cartridge.

Steve Dyer – Craig Hallum Capital

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

Dan Behrendt

[indiscernible] that we can share. I think we’re very satisfied and I think we’re getting as competitive situation as we think that the customers are really appreciating towards the end of the solution And – we can differentiate the data transfer machine which makes the, ejects the video, significantly more efficient than anything, any product we’re competing against. And then there’s low customers especially larger agencies which is that really are getting that message well and people are doing a good job delivering that message.

Steve Dyer – Craig Hallum Capital

And I guess that teams like 2013 was sort of the year that the video solution moves from a bunch of smaller agencies using it to at least getting on the radar of the larger agencies. Do you view 2014 as the year you start to see some real meaningful deployment of the large agencies or are you not there yet?

Dan Behrendt

Hey Rick do you want to take that one, I know customers out in the field?

Rick Smith

Yeah. We do expect this year to larger deployments then we’ve seen historically. There are a number of RFPs on the street right, for the 1000 or 2500 unit sort of ranges. We’ve been actively engaged with those accounts. And we think we’ve got a very good shot at them whilst we’re hearing a lot of rumbling and activity internationally on cameras. That is a number of our PDOs that are coming out there as well. We think we’ve got a very good shot at. So coming into this year, we see several deals that are larger than anything you’ve sold to date. And are in the pipeline as you know it will all be disclaimer language here about the inherent riskiness of those that and are not in the bag until we’ve got them. But we certainly do see the opportunities are getting larger and I think that’s a function of some of these agencies moving from the test this out to okay we’re going to make this part of our standard operations. And we hope to see that continue through the end of the year.

Steve Dyer – Craig Hallum Capital

And internationally it was always my understanding that you know having a data center or the data itself. How in this country was sort of a big deal for a lot of countries is that sort of receding a little bit or because I’ve seen a lot of the stuff internationally as well and was not sure how much you guys think you can play there?

Rick Smith

Yeah. We certainly think we can play, we have – running in Amazon data centers and Brazil and in Europe. And I believe we have one up and running or we’re close in Australia. We’re managing to work that they do have data centers around the world and we can at very low cost bring up additional instances. Those are mostly being as read as support field trials, we’re certainly in discussions with some of the larger international agencies that they want to see the data in their country and may not, and maybe frankly some discomfort even around using an American vendor I’ve just given all the PR about what’s been happening with the NSA.

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

We do have a very strong preference to work with our customers. Not to try to... house the data on-site, there’s just a whole bunch of challenges in doing that. Foreseeing that most customers are getting comfortable, that if we get it in country, that we’d be able to use a reputable local cloud provider. Again those deals are... we haven’t announced any of those because we haven’t closed any substantial deals. Actually we’re more in test mode. So those are challenges that I think we’ve got a number of ways we can work through them.

Steve Dyer – Craig Hallum Capital

Thank you, I’ll hop back in the queue.

Dan Behrendt

Thanks’ Steve.


Thank you. Our next question comes Greg McKinley from Dougherty. Your line’s open please go ahead.

Greg McKinley – Dougherty and Company

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

Dan Behrendt

Yeah, so we started the year with about $130 or so in r credits. We’ve kind of worked that down throughout the year, so we’ve been having sort of incremental reductions each quarter in order to create sort of urgency for our customers. And one of the things we announced earlier, one of the earlier calls was the fact that the market to understand what that proper sort of upgrade credit amount is which tell us important to have some kind of upgrade credit available for customers to encourage them to take weapons that are over five years old but still in working order. And sort of make some guy see his weapon.

So you can see that it’s important I think what the new program get – $185 we’re selling the upgrade today but we’re also pre-selling the next upgrade at five years. And I think it’s good for our customers to take this capital expense and turn it into operating expense. And it’s good for us in order to have that predictability of knowing that you’re going to get a customer to upgrade in five years versus having to try to resell them on an upgrade opportunity.

So I think it’s certainly we’re the company has increased prices again in 2014. We’re sort of taking sort of inflationary side price increases to our product across the board each year. And I think our customers understand that. And certainly we’ll continue to, to help to maintain this margin – but once they will see a little bit on a consolidated margin business – basis is that as the business scales up and we’ll have a little bit of a mixed pressure in that the video products.

We did, well we lowered the prices, for the hardware we think that hoping the drive adoption which is great – as you know there’s not as higher margin on the camera sales, the real margin for us from our camera service opportunity. So we may as benefit as scales up we may see little bit of a mix shift as the video becomes more bigger part of the total but we certainly feel like it is fair to – add above 60% on a go forward basis.

Greg McKinley – Dougherty and Company

And deciding to capture – you started the year at 130, were did you end the year at?

Dan Behrendt


Greg McKinley – Dougherty and Company

85. And then, but if the purchase, a sort of TASER Assurance Plan, they’re getting an $85 credit for the new TASER plus $100 credit for when that users replace five years from now is that what you said?

Dan Behrendt

No it’s actually – what they get is, they get this is starting in the first quarter. They get $85 and if they choose to also sign up the TASER Assurance Plan they also get $100 off their first payment for their next TASER so $85 immediately. And then say the payments are $200 a year for a five year, that first payment is $100 instead of $200 towards their next TASER.

Greg McKinley – Dougherty and Company


Rick Smith

This is Rick just to clarify on that the net sale, like if we for rounding purposes say it’s a $1000 sale if they just take the trading credit. They’re going to be getting a $1000 less $85, so they did with that $915. If they take the additional $100 by signing up for TAP then there’s going to be the $200 initial payment to get on the TAP plan. And they get the 185 off that but the cash sort of at the time of purchase goes up from $915 to $1200 less $185 gets you to actually a $1015.

Greg McKinley – Dougherty and Company

Okay. That’s helpful can you give us a sense for maybe the number I guess I could probably go back and compute it but the number of licenses that you’ve booked now with EVIDENCE.com. And maybe because I know you give us your booking rates I think that also includes the AXON hardware sale. Can you give us a sense for maybe how many licenses have been booked for EVIDENCE.com and what the aggregate booking value of that software sale has been? So we get a sense for future revenue recognition off of the basis that exist today.

Dan Behrendt

Yeah we probably can’t go to that level of granularity I could tell you right now on the balance sheet there’s we’ve seen the deferred revenues associated with the video business actually increased from last year by about $2.7 million. The booking number includes future invoice amount as well. That’s not when we book $5 million in a quarter – we don’t always invoice that full $5 million some of that maybe, if somebody starts a three year deal with me.

I’ll be like customer initially and then and the anniversary of year one and year two for that three year deal, so some of those bookings would be invoiced in the future. But as far as the total license count we’re providing the unit sales each quarter. If this business continues to evolve, what – we’re going to continue to look for what the metrics are. We’re using the sort of to manage the business and we’ll share that as appropriate in the future.

Rick Smith

This is Rick. Just add little more color to that. We just wished to a per user seat model in the fourth quarter, prior to that we were doing a per camera model. And so it’s a little hard for us to blend those two together. So as we get people off the per camera model and on to the per user model we’ll have little more clarity around to how to best characterize the numbers of seats.

Greg McKinley – Dougherty and Company

And so Rick by that do you mean for example there might be three shifts occurring during the day that would use that individual camera for eight hours per in the past you’re selling one license for that camera but now you’re selling three. But the virtual users know that.

Rick Smith

Correct wherein before we had a model where we included the first year free. And the price of the camera we’ve now bifurcated that. And so we’ve been able to lower the net per license cost to the customer. Now we’ve moved to a per officer for exact reason you just talked about.

Greg McKinley – Dougherty and Company

Okay. And then I know you just made reference to your Brazil distributor, disagreement is that, how important is that in terms of you tapping the opportunities in the market I know one of things that people are focused on is obviously some big emerging events, world sort of stage events in Brazil over the next couple years. How you feel about your opportunities in Brazil in sort of resolving any distributor issues there?

Rick Smith

Bill I’ll take that one. So the issue with the – distributor we terminated the agreement, guys we didn’t believe that maybe who is going to be able to get the job done. And we believe there were breaches of the agreement. He obviously doesn’t see it that way. So the risks with these trial is pretty much just that we had hit for some damages. We don’t see it impacting our presence in Brazil. We see that we’re in a much stronger position with the team that we have addressing the Brazilian market than we were with our former distributor. So I wouldn’t think about in terms of imputing our ability to operate in Brazil. It’s just risk. You never know what the jury is going to do and we’re in trail right now.

In terms of the opportunities in Brazil we see there’s obviously a lot of opportunity we’ve had lot of interest around the cameras. We’ve not yet been able to get the government to improve our plan to bring up a local manufacturing partner so that we can reenter with the weapons. There’s tremendous amount of pressure from our customers the police agencies down there, are clamoring the TASER devices back in country. They are not happy with the local competitor which one – that’s what lead to the block for us to be able to get import licenses.

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

Greg McKinley – Dougherty and Company

Thank you.


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

Glenn Mattson – Sidoti & Company

Yeah hi good morning everybody. Just a question about the TASER CAM that’s kind of the older legacy product, we did see that go down this quarter which probably was pretty back from the video product sales. Are we starting to see kind of natural cannibalization of that product? And is that something to expect to continue throughout ‘14 or to accelerate it at all?

Dan Behrendt

This is Dan. I think the TASER CAM I think lot of the TASER CAM sales are driven by agencies or even countries that are sort of mandated that when they buy a TASER they opt to buy the TASER CAM with it. We certainly see the AXON Flex and AXON Body having a higher utility and really been sort of better value for customers which gets the ability to cash every eventful gain. The adverse all the events that involve the TASER and certainly one of the things that we see if the video product is – is having they opt this perspective with the whole of that TASER CAM doesn’t do as good a job of doing that because you only capture from when the TASER comes, lots of things happened before that. So we did bother certainly like to see our customers migrate to the AXON Body and Flex because we think it’s a – provides a higher utility of our value for them. Yeah we wouldn’t be surprised to see overtime the market shift over to the newer product.

Glenn Mattson – Sidoti & Company

Okay is there any way you can explain there seems like there was a bit of surge in that in Q3 and then even Q4 was down, still a decent quarter for TASER CAM. Is there a way to explain what happened there it was just – just serious orders came in?

Dan Behrendt

Yeah actually Q3 was driven by one significant order, international order where they do mandate the TASER CAM for any of the TASER purchases for that market. So we saw that in Q3 it’s just the International business that, little bit lumpier so it’s that sort of one large order that drove much more to that change. We did see again a number of customers that continue to buy the TASER CAM it’s a good product. We redid that product over the last year in order to create the new features and functions for that but again I think it’s just really very customer specific. Again its, in lots and lots of places what we try to view is, in places where they have those rules in place they have to buy a TASER camera we’re trying to get them the sort of – those for that instead of just need to buy an officer video camera with the TASER because we think that’s the better, better utility and better value for.

Glenn Mattson – Sidoti & Company

Okay and then last thing on the investments in internationals, it’s still kind of the big three markets that surveyed you’re going after UK France and Brazil. Is any other new areas that you’re – you’re also investing in?

Dan Behrendt

Yeah we’re continuing yeah those are the primary that, that’s – in Europe and Brazil but we’re investing really around the world as far as capabilities west side marketing collateral, trade shows type expenses. And really just working sort of hand to hand with the distributors to make sure that we support them and some people are appropriate to help them to grow their businesses as well.

Glenn Mattson – Sidoti & Company

Okay, great. Thanks.

Dan Behrendt

Thank you.


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

Rick Smith

Thank you everybody for your time this morning. Obviously we’re very proud of the hard work our team did. It’s not every day you to turn in result like this, but as report the 2014 we see lots of indicators. Again there’s an opportunity for the EVIDENCE.com and AXON to really go mainstream. We’re seeing a lot of opportunity internationally on both sides of the business. Were very excited to be, – looking forward to a great call a year from now. And thanks for – stuck with us over the years as we made the investments that have made 2013 possible. And everybody have a great day.


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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!