Good afternoon. My name is Christine, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Axon Enterprise, Inc's reports third quarter financial results. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there'll be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Luke Larson, President, you may begin your conference.
Good afternoon to everyone. I'm Luke Larson, President of Axon. Welcome to Axon's third quarter 2018 earnings conference call. Joining us today are Axon CEO and Founder, Rick Smith, and our CFO, Jawad Ahsan. Before we get started, Andrea James, our VP of Investor Relations, will read the safe harbor statement.
Good afternoon. This call is being broadcast on the internet and is available on the investor relations section of the Axon Enterprise website. During our call, we'll be making references to our reported results, which you can find by reading our quarterly shareholder letter, which is available at investor.axon.com and on the SEC website. 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 revenue growth and profitability. 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 Axon Enterprise.
These estimates and statements speak only as of the date on which they are made, are not guarantees of future performance, and involve certain risks, uncertainties, and assumptions that are difficult to predict. All forward-looking statements that are made on today's call are subject to risks and uncertainties that could cause our actual results to differ materially. These risks are discussed in greater detail in our annual reports on the Form 10-K and our quarterly reports on the Form 10-Q under the caption Risk Factors. You may find these filings as well as our other SEC filings at investor.axon.com or at sec.gov by searching for filings under the AAXN ticker. Okay, turning the call over to Rick.
Thanks, Andrea. Welcome everybody. We've got a lot of exciting momentum at Axon. We expect to finish the year strong and believe our latest product innovation set us up for a fantastic 2019. For those of you who did not get a chance to come to IACP in Orlando and fire the TASER 7, I want you to know that it is a game changer. I thought I'd take a moment to walk you through what we really built with TASER 7. We essentially reinvented the TASER weapon from the ground up. We looked at all the factors that can lead to an ineffective use and engineered significant improvements on each of those factors. Throughout human history, lethal weapons have always been the only truly reliable way to stop people.
We've gotten to the point now where TASER weapons are getting very close. As you know, our goal is to make the bullet obsolete. Fundamentally, we believe that society's gun problem is a technology problem. TASER 7 is a big step closer to solving it. We rigorously analyzed the reasons why bullets can be more effective and more reliable than a TASER weapon. We looked at all the technical limitations and then invented ways to overcome those limitations to make the TASER weapon more effective. We completely redesigned the entire cartridge system, spooling the wire now inside the darts, which makes the darts heavier. They retain velocity better. Because we spool the wire out through a nozzle in the center of the dart, we use the drag from the wire unspooling to stabilize the dart in flight.
This design keeps TASER 7 darts really stable, whereas historically, the wires were folded in the cartridge. The unfolding of the wires actually caused the darts to oscillate, which can cause darts to ricochet off a target depending on the angle of flight at the exact moment of impact. We also designed TASER 7 to hit with more kinetic energy. We have accelerated the dart and the wire all at one time. Now when it hits, it has more mass and at higher velocity. The tips of the darts are also now designed to break away on impact. If you hit somebody at a glancing angle, historically, the momentum of the dart might cause it to bounce at an angle and ricochet off the target.
With TASER 7, the tip of the dart will actually break off and stay in the target if the body of the dart is at an angle where the momentum would have previously carried it away. The dart might ricochet off the target because of the physics around the dart. Instead of that bounce ripping the tip out, the tip will now stay in and the system can achieve incapacitation. These designs lead to better clothing penetration, which make the weapon more effective, especially in cold weather when people are wearing winter jackets. This has historically been one of the challenging situations, things like heavy leather jackets. TASER 7 improves performance in these scenarios.
We also looked at the way we deliver the electrical charge. We spent a lot of time thinking about how to maintain the margin of safety of the weapon while improving the electrical stimulation to make it more effective. TASER 7 delivers the same quantum level electrical charge, but in a shorter time period. This shorter pulse creates greater current intensity and makes it more effective at stimulating skeletal muscles while still maintaining similar cardiac safety. We increased the number of pulses delivered every second from 19 to 22, which further increases muscular impairment. We call these refinements Rapid Arc, denoting both the more rapid charge delivery and the more rapid pulse repetition frequency. All TASER weapons deliver charge voltage, but at an extremely low current.
The strength of the current from these devices is about three orders of magnitude below the current you can get from a wall outlet. We'd remind our new investors, especially, the point of a TASER is not to deliver pain, but to deliver neuromuscular incapacitation by overwhelming and mimicking the brain's own signals that tell the muscles what to do. This is why TASER weapons do not rely on pain compliance like a traditional stun gun. We preserve the same margin of medical safety. At the same time, we optimize the pulse delivery to achieve better incapacitation. We also designed a new feature called Adaptive Cross Connect, which gives a whole new meaning to the term smart weapon. The weapon actively measures and optimizes the charge according to the spread, with up to four darts in play.
Everything I've told you in the last minute or so may sound like abstract technical concepts, but when you see the effect on a human volunteer, you will quickly see why these refinements matter. It is significantly more effective. To a lay person looking at a TASER 7, they might see, well, it's a weapon that fires two sets of darts and wonder what makes it so different from the TASER X2, our previous two-shot weapon. The answer is everything. Everything is under the hood that makes it more reliable and more effective. I have not seen as much excitement about a new TASER weapon since the TASER X26, which we introduced back in 2003. Customers who've seen it absolutely love the new TASER 7.
I believe TASER 7 creates a super compelling upgrade proposition for every existing TASER customer, which effectively resets our ability to drive a whole new upgrade cycle. Plus, there are some really important convenience factors. The Dock and Walk capability makes it super fast and reliable, so you can integrate your TASER 7 into Evidence.com. You never even have to think about it. Just swap your batteries once a month, and we move the data in the background. TASER 7 also drives the concept of TASER as a service. We're seeing proof points of early adoption with several major agencies that are field trialing TASER 7, and two major agencies are already committed to full deployment.
Also exciting, after a period of time of capturing data about TASER, we'll be able to start surfacing up insights to officers and their managers to inform officer performance and help them perform better. While TASER 7 is really a fantastic product and customers love it, so is the new Axon Body 3, which you've probably read about. We're going to talk more about Axon Body 3 as we bring it to market in the middle of next year. It's our first real-time connected body camera with LTE built in. Also exciting is Fleet 2, which we just announced in June, and we're already shipping to customers. Fleet 1 was our disruptive entry into the in-car market, and Fleet 2 has been racking up competitive wins and sets us up to extend our leadership inside the vehicle.
Our product teams are really on a roll, and if any of them are listening right now, I want to thank you guys for the amazing and hard work you're doing. These new products are a bridge to keep growth momentum going while we scale up Axon Records. All of our new hardware products drive software revenue because we're really driving adoption of connected devices and the software to manage it all. Speaking of Axon Records, we're making Axon Records' core functionality free for agencies who sign up for the new TASER 7 Officer Safety Plan, and we're making it free for the full five-year period. By core functionality, we mean basic reporting functions. After an officer shows up at a scene and performs an action, the officer then fills out an incident report about what happened.
Our mission is not just to make the incident report a little bit better. Our mission is to make that entire manual form-filling process obsolete. Our goal is to disrupt the entire manual data entry process, and that's why we chose to do a strategy to maximally reduce the friction of market adoption. We see the real value in Records is in the data, not in the form-filling software. We have the largest data set in public safety. We're now at over 40 petabytes. That's 40 million gigabytes. Aggregating the text records in the same system as the video means that we can create a uniquely powerful training set for our AI team to build out the models that extract the incident report right from the video.
Freeing officers from typing in data will be something one order of magnitude more valuable than the best form-filling software could ever be. We're streamlining our pathway to that future. Speaking of software, we're thrilled to report that our annual recurring revenue in the software and sensor segment has surpassed $100 million in the quarter. We all knew it was coming, but it's a milestone worth highlighting because it underscores our leadership in developing cloud software for law enforcement. To be clear, our annual recurring revenue of $102 million refers only to software and warranty revenue. It does not include hardware in that number. The way we approach the market and our strategy is to identify where the market is going and then look at what we can do to accelerate existing trends in a way that creates unique customer value and a competitive advantage for us.
We've been successful doing that to date, we're excited to keep that going. With that, I'm going to hand off to Luke.
Thanks, Rick. I think there are three key themes to this quarterly update. They are that we've got strong product development momentum, we're seeing an exciting 2019 sales pipeline, we continue to focus on driving margins, leverage, and profitability. Let me give some more color about our product momentum and sales pipeline. In particular, in the last decade that I've been at the company, TASER 7 was the most successful product launch that I've ever been a part of. The International Association of Chiefs of Police Conference is a big deal for Axon. It's one of the two major marketing pushes we have each year, the other being Axon Accelerate, which is our user conference. At this year's IACP, we had close to 3,000 customers visit our booth, which featured the ability to fire the new TASER 7, as well as sample our new virtual reality empathy training.
At IACP, we put 2,500 chiefs through this shooting experience. The new TASER 7 features were incredibly well-received, I'm confident in saying that this offer creates certain demand for a compelling upgrade cycle. Our sales team are also pretty excited. They haven't had a new TASER to sell in several years, so we think we are well-positioned for an incredibly strong 2019. We also had more than 2,500 guests attend a party for TASER 7 and Axon Body 3, where we unveiled the product, followed by a concert from the band OneRepublic. Our marketing team made an incredible tribute video that was played by the band, a chief took an iPhone video of it and shared it online. It was viewed over 6 million times. Jawad has friendly asked me to remind you that the OneRepublic concert was sponsored by Verizon.
Our partnerships with both Verizon and AT&T for FirstNet also sponsored portions of our IACP presence that were hugely synergistic because they're building a nationwide LTE network dedicated to first responders, we are the market leader in connected devices that can communicate over those networks. We believe we'll see an inflection point next year in reliance upon those networks. Axon Body 3 is perfectly timed to leverage that inflection, starting in the back half of next year. The other thing I'd like to update you on is a recent incident we had with a major customer. A VIEVU LE5 camera overheated, no one was hurt, but this did attract some press. You'll recall that we acquired VIEVU, a competing body camera provider, in May of this year. I'm pleased to say that we've reached a resolution with the large customer in question.
That customer will accelerate their transition from VIEVU cameras to Axon Body 2 cameras and Axon Evidence. The transition may result in some incremental Q4 expense, which Jawad will discuss. Overall, this is an excellent long-term development for Axon to accelerate that major customer moving over to the Axon network. Axon is proud to join forces with agencies to make their body cameras a success. Every new customer on that network benefits the others. Now I'll turn the call over to our CFO, Jawad.
Thanks, Luke. We feel great about delivering another quarter of solid performance. More importantly, we feel confident about the underlying strength of the business, our strategic direction, and ability to drive meaningful growth going forward. At our Analyst Day one year ago, we projected a three-to-five-year CAGR of 16%-20% revenue growth with continued margin expansion. Today we feel very confident about that trajectory. As we approach the final months of the year, we're tracking to hit the midpoint of our revenue guidance. Q4 is typically our strongest weapons quarter, but this year we have a lot of customers trialing TASER 7s for shipment in 2019. Weapons will be lighter than usual, and we expect software and sensors to carry most of the growth.
You heard the level of enthusiasm from Rick and Luke around product innovation, particularly the ability to drive substantial volume and margin from TASER 7, which sets us up really well for 2019. We expect a modest contribution from TASER 7 in Q4 with a more significant ramp next year. Our 2019 sales pipeline looks strong. In addition to TASER 7, we expect growth to be driven by a full year of shipping Axon Fleet 2, which is proving popular with customers, international expansion, and several points of Axon Cloud SaaS growth. Before we go to Q&A, I want to expand on one of the points Luke mentioned regarding a large domestic VIEVU customer that's accelerating its move to the Axon platform. We may have some cost absorption associated with this move in Q4.
We're actively working to minimize the impact to our Q4 P&L. We believe we can absorb a material amount of expense and still produce adjusted EBITDA margins for the full year within our guidance of 14%-16%. For the long term, moving VIEVU customers over to the Axon network is a great outcome and provides us with opportunities to deliver even more value-added services to these customers. Thank you all for dialing in today. With that, I'll turn it back to Andrea.
Thanks, Jawad. Just really quickly before we go to questions, I wanted to remind you, last quarter we had said that in the spirit of being scrappy, we were going to ask most of our investors to listen via webcast and save the conference call line for those asking questions. It's actually thousands of dollars worth of savings per year, so I just wanted to thank those of you who are listening via webcast today for doing your part in helping us stay crappy, scrappy. Operator, let's go to questions.
Thank you. In order to ask a question, please press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Yuuji Anderson from Morgan Stanley. Your line is open.
Thanks for taking my question. On the large customer transition off of VIEVU, outside of the planned replacement there, were there additional body camera rollouts that were originally slated for Q4? If so, is there a delay there in that rollout because of this activity that's now built into guidance?
Yeah. This is Rick. Several of us have been back and met with the customer there. This is creating a little bit of a delay in the program in that there was a shift, the decision to accelerate over to the Axon body cameras. Obviously it takes a little bit of effort to pivot the supply chain to make that happen. It will push out, I think, by the end of February is the goal now to get the complete rollout done.
That's very helpful. My second question is sort of a just broadly on body camera deployments. In anticipation of Body 3, are you seeing customers pausing before that? Can you just remind us broadly how you're handling expected replacement activity before the slated launch? Thanks so much.
Yeah. The majority of our body camera customers buy on one of our service plans where they get a TAP upgrade, that allows them to transition to the latest body camera. We haven't really seen any kind of blip in demand through Q4, we expect this, you know, to be strong right up until the launch of AB3.
Yeah, the one thing we've learned by including hardware refreshes in our subscription plan, it really does reduce some of the sort of discontinuity that might happen when you introduce a product, people are waiting for the next one. Where, you know, we did want to introduce AB3 early enough before launch to have our customers have time to put it in their procurement cycles. We felt this year was a really transformative year for the LTE networks with both Verizon and AT&T FirstNet, really pushing hard to get these mission-critical networks live. We made the conscious decision to go ahead and announce AB3 a little further in advance than, you know, we would have been, you know, with a normal product launch.
What we're hearing from our customers is, for the most part, you know, they can buy and get started on an AB2 and just take the AB3 during their upgrade cycle. We're feeling pretty good about how things will balance out.
Okay, great. Thank you so much.
Your next question comes from the line of Scott Berg from Needham. Your line is open.
Hi, everyone. Congrats on a great quarter, and thanks for taking my questions. I have two. Let's start with that large deal on the old VIEVU cameras that you'd mentioned. Rick, I just wanted to understand, is there any additional revenue opportunities there? I understand they chose the VIEVU solution over Axon initially because it was more of a price-driven decision versus functionality. With the new Axon body cameras, is there an opportunity for some uplift there in the revenues? Secondly, since they're bringing on evidence.com as a result, is there some, maybe incremental revenue opportunities there?
Yeah. The way I would characterize this is right now, this is all about helping an important customer that had a challenging situation, and we're investing in the relationship. This does not create any short-term revenue opportunities, but we believe one of the things that makes us different is we do not allow programs to fail. I think that's what we're demonstrating with the customer in question here. You know, for them to go through to buying incremental services that are not part of the contract, there's a lot of processes, et cetera, they'd have to go through.
We've basically taken the approach that, hey, we're gonna help you meet your goals and get these cameras live, you know, we're going to, you know, focus on making sure this program is successful, I'm very confident that that will lead to long-term revenue opportunities. Now wasn't the time for us to be having those types of conversations with the customer. We had to help them through a difficult spot, we think that's the right thing to do. Our history has shown that pays off in really long-term profitable relationships.
Got it. Helpful. My follow-up would be maybe it's for Luke or Jawad, is on the new TASER rollout, you know, big push of that rollout, at least from a marketing perspective, was to push the Officer Safety Plan and to adopt these via, obviously via the subscription model, wanted to hear if you had any, you know, feedback from customers on kind of that thought process or what the pricing looks like there, and maybe how should we think about those expectations as we go into 2019? Does that actually be a little bit of a springboard to shift more of those sales to the OSP than a product-driven sale?
We would expect the majority of the TASER 7 deals to go on a service plan. We've got two kind of great higher-end offerings with the Officer Safety Plan 7, which is $149 a month, and that includes TASER 7, the AB3 Aware, and our core RMS offering. Then we have an expanded offering, OSP 7 Plus, that's $199 a month. That includes all of that, plus some additional software capabilities around performance, CAD, RMS integration, AI redaction. One of the great things about going to IACP is oftentimes you would hear, you know, customers, their first question is, "What's the price?" I think you know you've got a winning product when they don't even ask about the price. They're just really excited about the compelling features that Rick talked about.
We've seen just a really positive response thus far to TASER 7.
One thing I would add as well, in those two sort of different versions of Officer Safety Plan, the top version of the plan also includes some of the really intensive data streaming, like live video, et cetera. Those are, you know, price points that are significantly up over the $99-$109 that the Officer Safety Plan has been at historically. Early indications are customers are seeing the value both between TASER 7 and between the connectivity. You know, when you take a camera and turn it into a live connected sensor, all of a sudden, it's not just something that can help you after the event, it can help you during the event and with real-time information. For our customers, it creates a ton of value.
Obviously, for our shareholders, it's a compelling opportunity to continue to drive up ARPU.
Thanks again. Very helpful. I'll jump back in the queue.
Your next question comes from the line of Keith Housum from Northcoast Research. Your line is open.
Good afternoon, gentlemen. A question for you on the new product offering with the RMS and the pricing arrangement. I know it's only been out there for about a month or so, and my understanding is the RMS is generally turned over very slowly. With the offer of the five-year free licenses, are you seeing interest in some of the agencies actually looking to accelerate their replacement of the RMS?
I'd say it's probably early for us to characterize whether we're seeing that big of a shift in the overall market. I would say we have a lot more people asking about records in the context of it being included in the new Officer Safety Plan. I would characterize it's had a generally positive response, it's early for us to characterize that it's shifted the market yet in a material way.
Gotcha. If I could just follow up on the issue with the large customer. Presumably now you're going to have excess cameras in inventory. What is the opportunity to sell those cameras, I guess, to other agencies? Then are you seeing any pushback from people who are currently using the LE5 model? Are they looking also to perhaps pull those back?
The incident report that came back showed that this was a battery that was damaged, basically with a paperclip being inserted aggressively, and puncturing through the wall in the battery cell. We are also making some modifications to make that more bulletproof, so it's harder to do that. Our analysis is it's not a defective product, I think as we've had that conversation with customers, they're comfortable, they understand as well. I think it was just a bit unique in that the large customer that experienced the issue, it was right in the middle of a transition point, given the complexities around deploying at scale and all the issues in a large city that the customer worked with us and really wanted to accelerate the transition over to AB2. Frankly, our assessment was that that's not a terrible outcome, right?
This sort of shows the value of the system that we've built, that we have a major customer looking to accelerate their move over to Axon, and the Axon Body 2s. In terms of the, this does free up, we had cameras that were on order that were slated for delivery to that customer. We do believe that there are markets, both U.S. and international, where we can sell those cameras. At least that's our current plan. We're feeling pretty good about where we ended up, that it sets us up really for long-term success.
Great. Thank you.
Your next question comes from the line of Charlie Erlikh from Baird. Your line is open.
Great. Thanks for taking the question. Just one from me. Is there any change to the margin outlook longer term, specifically in the software and sensor segment, given all the growth opportunities and investments around those opportunities? Thanks.
Yeah. Charlie, no, there are no changes at this point in time. We're still sticking to our full-year guidance, also maintaining our guidance for the out years. We said we're going to drive leverage in the business to the tune of about 300 to 400 basis points in margin. We changed that earlier in the year to adjusted EBITDA, and with the investments we're making in Axon Records and dispatch, we're very excited about those markets and about those products in particular. We're going to be walking the line between driving leverage in the business and making investments in these new growth opportunities. At this point in time, there's no change to that.
Great. Thank you.
Your next question comes from the line of Jeremy Hamblin from Dougherty & Company. Your line is open.
Thanks for taking the question. I wanted to just ask about the Axon Cloud revenues. A little bit lower growth in that in the quarter than we'd seen. Wanted to just get a sense of whether or not, is that a function of just fewer licenses that were activated from your backlog in the quarter? Or what drove a little bit lower growth in that sequentially?
Yeah. We're seeing typically normal growth as we see in that segment. We didn't see anything in the quarter as far as deployments or installs that was out of the ordinary.
I'm sort of curious where you're drawing that conclusion from, that growth was lower than expected.
Just in terms of what the run rates from Q2 to Q3 and where the run rates had been flowing from, let's say, Q1 to Q2 or Q4 from last year to Q1.
Interesting. I'd say we'd probably want to just take a look at that, and we can have a conversation with you offline, but there was nothing that caught our attention that was indicating any sort of slowdown.
Understood. Another question, I may have missed it, but in terms of international sales in the quarter, what was that as a percent of total sales? Just an update in terms of, you reported a really nice large order, non-English-speaking country. What kind of progress are you seeing, again, in those kind of non-English-speaking countries in Europe or otherwise? Just an update there. Thanks.
Yeah. We've been really pleased with our country managers that are managing APAC, EMEA, as well as the Americas. In Italy in particular, there was a fairly large trial that has now moved to the next phase of the trial, where they've expanded from what was essentially six major municipalities in Italy to expand that up to, I believe, 50 cities in Italy to continue the testing. That's a key milestone in that market. As we look to 2019, we feel really good about international contributing at the same level that it did this year.
Jeremy, to answer your question specifically, it's through nine months. Year to date, international is 20% of our overall revenues. That's up 34% year-over-year.
Great. Thanks so much for taking the question. Good luck.
Thanks, Jeremy.
Your next question comes from the line of Jonathan Ho from William Blair. Your line is open.
Hi. Congratulations on the strong quarter. Can you guys hear me okay?
Yeah.
Yeah.
Perfect. I just wanted to get a little bit more detail on the Axon Records launch. Can you give us a little bit more color in terms of what you're hearing, in terms of feedback from customers and maybe what they're most excited about as they start to test the solution more?
Yeah. What customers are really excited about is that we're taking a very different approach to the problem set, which is what we're not building is sort of a product that is optimized sort of for going through the RFP box-checking exercise. I think that's what's led to a lot of really sort of overly complicated and hard-to-use software. The thing that we're really focused on is just crushing the user experience for the things they do day in and day out, where it's all about making that officer able to operate efficiently all the way through the chain of those reports, getting through approvals, et cetera, and ultimately automating the creation of the police report so that cops aren't spending half their time sitting at a keyboard typing stuff up. We're getting just a ton of excitement.
In fact, we had one major city that had recently gone through a major RMS RFP and acquisition process, and we thought they were off the table for a decade, and they're back talking with us already saying, "This is really interesting. If the vision you guys have laid out, if you can deliver on this, we're interested in taking a look and engaging with you," which to me, again, was a very pleasant surprise to see an agency less than a couple of years out of a major RFP process putting their hand up and saying they're interested. Yeah, it's going to be a lot of fun in 2019 as we start to roll this out into the marketplace. Going to be pretty exciting.
Perfect. Just wanted to also follow up on Fleet 2. Just wanted to get a sense from you guys in terms of how has that looked in terms of the initial reception, win rates. I know it's pretty early, but just wanted to get some perspective in terms of how we're doing on that as well.
Yeah. Fleet 2 has been really well received by the market. We've had several customers comment on just the ease of use with the cloud-connected features, which really differentiates us from these kind of large incumbent, burdensome, hardware-centric options. We've had a really strong performance there. I would expect Fleet to continue to grow as a percentage of our software and sensors business, and we're taking share from the incumbents, and we feel really good about its momentum.
Great. Thank you.
Your next question comes from the line of Mark Strouse from JP Morgan. Your line is open.
Yeah. Hey, everybody. Thanks for taking our questions. If we can just talk about the shape, I guess, of the revenue curve for the weapons business. If I remember right, you guys had talked about that being kind of a long-term, low-double-digit grower. This year to date, you're tracking around 10% or so. If I'm reading your comments, though, correctly, it sounds like there could be some acceleration in that over the next certain period, 12, 18, 24 months. Not looking for specific 2019 guidance, but just kind of generically, are you expecting that to accelerate near term?
Yeah, that's a fair assumption, Mark. I think you could probably hear the enthusiasm in our voices about TASER 7 and about the new OSP, how positively they've been received. At this point in time, we have no update to the guidance. I'd still say that your assumption of low double-digit growth is a good one, and I'd say that's very conservative.
Okay.
I would just say over the contract life, TASER 7 significantly increases revenue per user because we're increasing with new software services, with the dock, with the end-user certification plan. Not only do we think it obviously could open up new markets with its new capabilities, it can accelerate our ability to go back and upsell the installed base, but it also significantly raises revenue per user.
Right. Yeah, that's great. Okay. I know it's only been a month or so since the 7 was announced, but can you just talk about what you're hearing from recent buyers of the X2 or the X26? Do you think that?
I believe there's a trade-in credit for those customers, and if so, just kind of talk about if you think that's at an appropriate level to drive upgrades of those customers.
Hey, Mark. This is Josh Isner. We have not had any cause for concern in that regard. We feel that our customers are excited about the trade-in program, and our customers always know that we will never let them fail in any way. This has been kind of a non-event for those customers, and we're doing right by all our entire installed base of weapons.
That was Chief Revenue Officer Josh Isner.
Right. All right. Thanks, Josh. Thank you very much.
Thanks.
Your next question comes from the line of Steve Dyer from Craig-Hallum Capital. Your line is open.
Hi, guys. This is Ryan Sigdahl on for Steve Dyer.
Hey.
Within bookings, the S&S bookings, can you break out either the dollar value or the percentage representing 10-year contracts?
It's a very small portion. We've signed a few recently, and we've seen an increase in 10-year deals, but overall, it's still relatively immaterial.
Maybe just a follow-up on that, is that primarily at the customer's request, or are you guys, I mean, five years has been the standard for a while, and are you guys now actively trying to move these to 10-year deals, or was it very specific instances with these customers?
They're customer requests, for us to enter into those deals, we've got to be satisfied with the long-term economics of those. They're very rare and mainly driven by customer requests.
Thanks. One more from me. Sorry to beat a dead horse here, with the VIEVU customer that you were talking about, is this a full transition for that department by February, or will they still have some of the LE4s in service and this is just a transition for all the incremental units? Thanks.
Yeah. They have multiple thousand units already deployed, we're going to keep those in the field. For the remaining units that were yet to be deployed, we're going to transition those to Axon Body 2. We would see kind of on their next upgrade cycle, the entire deployment would move over to Axon Body 3.
Maybe, I guess, one follow-up on that, then I'll turn it over. How difficult will it be then from a back-end user standpoint from Evidence.com to use the LE4s with some officers and then some officers using the Axon Body?
Yeah, we're going to make it a success and a seamless transition for the customer. We're really kind of partnering with them on what's the right way to handle that, we're very confident they're going to see the benefits of the Axon network, we're actually delighted that we're going to get the opportunity to roll out that with AB2 sooner than expected.
Thanks, guys. I'll hop back in the queue. Good luck.
Your next question comes from the line of Saliq Khan from Imperial Capital. Your line is open.
Hello. This is Reed Motulsky on behalf of Saliq Khan. We were wondering, with the improvements of TASER 7, how does its rollout coincide with the sunset of the law enforcement agency's existing conductive electrical weapons?
There's many agencies who bought the TASER X2 or the TASER X26P when those were first launched in the 2011-2012 timeframe that there's just a ton of upgrade opportunity there. Having a new weapon. Frankly, we even have agencies that were still using the older TASER X26, where for whatever reason, they had not made it a priority to upgrade those into the current generation of Smart Weapons. I believe, based on seeing customer reactions, that all of those people are now an opportunity. TASER 7 just really hit the customer sweet spot where I think it's going to be pretty compelling across the board, and we've got a lot of customers that have TASERs that are more than five years old that are really primed for a new device.
Got it. Thank you. With your service platform push, are TASER weapons beginning to replace guns? Is the total ownership cost of a TASER weapon actually cheaper than a gun?
Yes, I would say the total ownership is cheaper in two respects. One, with firearms, there's a lot of training that's required. Training means cops are coming off the street, and that's really expensive infrastructure. Two, when you shoot somebody, it's really expensive. Not just in dollar terms, but in terms of litigation, in terms of officer post-incident, a lot of officers end up leaving the profession. TASERs save money and they save lives. We're not at a point yet, even with TASER 7, it's not yet a replacement for a firearm. We're still, I'd say, about a decade away from where you'd start to think of non-lethal weapons as being a legitimate substitute. We make a big step in that direction. This is one of the reasons, though, that I think these subscription plans are really compelling to our customers.
It's, hey, we've got a roadmap to where over the next decade, we're going to outperform even your lethal weapons. When you go on one of our subscription plans, it basically puts them on a program into the future with us where they know that they're going to get those upgrades as they become available. I've had a number of chiefs tell me that's one of the reasons they go with us, is they trust us as a technology partner across the whole platform of software, sensors, and weapons to sort of help them transform their agencies in a continuous basis where we're rolling out new software, new hardware, et cetera. We're not quite there yet to make the bullet obsolete, we're making progress.
Thank you. Just one last one. Given the body cams' AI capabilities, would you consider partnering with gunshot detection companies to improve detection and location of the gunfire?
Sure. We generally approach this from the perspective that we need to have an open platform to collaborate with the entire ecosystem of technology providers so that our customers, they've got a difficult job to do, and them worrying about a bunch of siloed information systems is not where we want them to be. We've become, I think, the preeminent cloud software network, and we have open APIs, and we work collaboratively with our customers and our other tech providers.
Thank you, and thanks for fielding our questions.
Yep. Thank you.
Your next question comes from the line of George Godfrey from C.L. King. Your line is open.
Good evening. Thank you for taking my question. Do you have the TASER weapon operating margin for the quarter there?
Hold on a second.
Yeah, we're digging it up.
My follow-on question to that, do you expect the TASER 7, given the higher price point, to be margin positive, to have it come at a higher margin? I believe 40% was kind of the targeted range a couple of years ago. It seems like it's down around 30% now. Just curious, will that have a lifting effect?
We are expecting TASER to lift the margins overall. The gross margins for the quarter were just under 70%. The operating margin is in the shareholder letter. One thing I'd say is the operating margin is not all that meaningful. The way that we think about margins, we'll look at gross margins for weapons and at software and sensors separately, and we'll look at software and hardware at the gross margin level. Below that, the eggs get a little bit scrambled because we make investments in SG&A across both segments. Some of the allocations are disproportionately hitting TASER than they are software and sensors. We'll look at R&D by product line. We go into a lot of depth on that. SG&A, we budget outside that process, and also we want to control SG&A, and we've demonstrated that over the course of the year.
We've driven a lot of leverage on our SG&A costs. It's lower now as a percentage of revenue than it was a year ago. That's part of the reason that we've been able to drive our overall margins up across the business. For that reason, I'd say it's not all that meaningful to look at operating margins by segment, it is in the shareholder letter.
Okay. Jawad, thank you for that. That's a nice segue because that's exactly where I wanted to go, is if I look at the R&D margin two years ago was 10%, a year ago, 16%, and now it's 21%. I heard everything you said about being scrappy, it's more than doubled in two years. If I look at the SG&A, and I realize there are stock comp and amortization, intangibles, and other things in here, it's only gone from 39% to 38%. It seems like the R&D spend is far outpacing any improvement in SG&A. My question is, as we go forward from a 21% level, what exactly does scrappy mean when it applies to R&D? Thank you for taking my question.
Yeah. Great question. Scrappy does not apply to R&D. We're pretty open about that within the company. I'm a big proponent of investing more in R&D. We've targeted around the 20% range. We have some very exciting market opportunities. This is part of what we laid out at our last investor day at IACP. There are these huge market opportunities ahead of us, and we've got to invest to go capture those. We're not going to take our foot off the pedal with those R&D investments. What we are going to do is drive discipline across the business. SG&A, so it's coming down. You should expect to see us drive further leverage there. What I'd point to is that the overall enterprise, our margins are ticking upward, and will continue to tick upwards over the next few years.
Yeah, at this point, we've got this incredible asset in that we've connected two-thirds roughly of the major cities now to the Axon network. To take that and begin to scale out with records and dispatch and all the AI capabilities and analytics we can run on top of that network, all of which gives us the opportunity to build and create additional value streams. We're all about being scrappy in terms of efficiency and making sure that we're being careful how we spend the money. We also don't want to throttle our ability to grow well into the future by cutting back on our investments in R&D, given that we have this really unique competitive advantage in that we can launch new services right within the same framework that our customers are already using.
We think it would be unwise for us to over-focus on short-term profitability and leave those opportunities unharvested.
Understood. Thank you for taking. If I can just slip one more in here. The adjusted EBITDA margin for the year is 14%-16% is the range, and for the first nine months, you're at 16.5%, so there's a lot of room in Q4. Can you just qualitatively, or in some measure, quantify how difficult is it going to be to transition 2,000-plus body cameras by February for the large VIEVU customer? It seems like there's enough wiggle room here that you could absorb a very expensive project, but I'm just trying to get an idea of how expensive or complex that task is. Thanks.
Yeah. This issue, there are developments that are still unfolding. It's going to depend on exactly which cameras are deployed, how many of each are deployed, how much development work is required, if any, what the RMA pool will look like going into this. For that reason, we're unable to determine at this point what the costs are going to be to transition that customer. We wanted to maintain some conservatism there as far as our Q4 estimates.
Thank you, Jawad. Appreciate it.
Your next question comes from the line of Glenn Mattson from Ladenburg Thalmann. Your line is open.
Hi. Thanks for taking the questions. Operating margin in Weapons was 27%, by the way. It was in the release, so there's that figure. I'm curious about the excitement you guys are seeing around the new weapon. I was at IACP also, and certainly, there was a lot of excitement around the booth and everything, but that's always the case for you guys. You put on a good show down there, as usual. There's a significant price point, and I think, if I'm not mistaken, the first few deployments that you saw were agencies that just took the weapon and didn't take the whole pricing plan.
I was wondering what the reasoning behind that was, if there was some sensitivity around the Officer Safety Plan and the increased price there or anything, and just kind of some more concrete evidence about why you're so enthusiastic about the uptake as you're looking into 2019.
One of the greatest assets that the company has is our TASER instructor network. Over the next year, we're going to be rolling out an aggressive campaign to hold these events at multiple cities at a high frequency. Since IACP, I've already been to two of these events where we have essentially a room full of police trainers, and we talk about TASER 7, and the excitement in the room is palpable in terms of they want this weapon, they want the capabilities. That's something where it carries through to them going back, talking about officer training and how this is really going to benefit communities. That goes a long way when you're getting kind of stakeholders to buy in for it.
To me, that's just an incredible data point that's hard to communicate in numbers, but when you go out and you see literally hundreds of police officers excited for the device, that's giving me a lot of confidence. In terms of those first two deals, we had actually been talking about those deals before we kind of had the final pricings and stuff bundled. We really wanted to lock in a couple key launch partners. I wouldn't read too much into them buying on a program. We were just trying to secure them as launch partners.
Yeah, exactly. I would say as well, AB3 is going to be a couple quarters behind TASER 7. I would expect we may see more decoupled sort of TASER 7 programs before AB3 really starts going into field trials, which is fine. That's actually in our interest to continue to accelerate and make sure that we're able to ship and deliver revenue on the TASER 7. This happens fairly regularly, where as we launch new features or new products, the customers will come back, and they'll do contract upgrades and rewrites. As Luke pointed out, with TASER 7, those customers, we were obviously showing the product to them much earlier in the process to where the new Officer Safety Plans weren't even really fully baked, and we did not want to introduce the additional uncertainty and complexity of AB3 into those projects.
There was already enough uncertainty with the new TASER 7 weapon, so we focused our sales team on those and getting those across the goal line.
What's the pricing like when it's sold as a standalone? Have you released that?
Yeah. The all-in price is typically $60 a month. 60 dollars a month is what we call a certification plan that includes the weapon, the docks, a subscription plan for all the cartridges they need for training, the online training, the VR empathy training, et cetera. Then there's a $40 a month plan where they just get the weapons, the docks, and then they buy cartridges and training à la carte. Some of the early ones as well, I think, were on the more basic plan because we hadn't fully fleshed out the full certification plan. Again, a lot of this was we were in with these customers while the product was still sort of getting finalized in terms of the go-to-market proposition, but you basically expect between $40 and $60 a month.
Okay, that's like $500 a year, and they're 5-year lifespans usually, right? That's $2,500 basically is one way to think about it. Does that get increased?
That's right.
$1,200-ish or so that the prior weapon would sell at?
Yes.
You get the docks.
A good portion of that does go into, Yeah.
We will have an Evidence.com license that'll be like $7 a month, and then there's some allocated to the cartridges, but the overall economics are.
Just because that's in the numbers we gave you. Luke was just saying some of that revenue doesn't all come in upfront. A good portion of that is service revenue over the life of the weapon, the warranty, and cartridges and training services.
Right. Okay. All right, great. Thanks, guys. Good luck.
Thank you.
Since there are no further questions at this time, I will now turn the call back to management for any closing remarks.
All right. For those of you that came out to IACP, it was great to see you there so you could look customers in the eye and take their temperature on our new products. For those of you that weren't, I'd encourage you to come out to the show next year. Obviously, we're really excited. I think we've now got a lot of opportunity ahead of us. It's all about execution now as we roll into 2019, but a lot of opportunity for us. We've just got to deliver on it now. Our mission is stronger than ever, and the opportunity in front of us is better than ever. Thank you to you shareholders who've been with us for, some of you, for more than a decade. We'll be back to see you guys with our end-of-year results, and look forward to talking to you then.
This concludes today's conference call. You may now disconnect.