Good day, ladies and gentlemen, and welcome to the TASER International Incorporated Fourth Quarter twenty sixteen Earnings 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. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host for today, Luke Larson, President.
You may begin.
Thank you, and good afternoon to everyone. Welcome to TASER International's fourth quarter twenty sixteen earnings conference call. Before we get started, I'm going to turn the call over to Arvind Bobra, our Director of Finance to read the Safe Harbor statement. Thank you, Luke. This call is being broadcast on
the Internet and is available on the Investor Relations section of the TASER International website. Please note that the earnings press release as well as supplemental materials, including our key operating metrics are available on our website. Today, we will open the call with prepared remarks. We will follow the prepared remarks with our standard live question and answer session. Statements made on today's call will include forward looking statements, including statements regarding our expectations, beliefs, intentions or strategies regarding the forward looking statements around projected spending.
We intend that such forward looking statements be subject to the Safe Harbor provided by the Private Securities Litigation Reform Act of 1995. The forward looking information is based upon current information and expectations regarding TASER International. 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 the risks and uncertainties that could cause our actual results to differ materially. These risks are discussed in our press release we issued today and in greater detail on our annual reports on Form 10 K and quarterly reports on Form 10 Q under the caption Risk Factors.
You may find these filings as well as our other SEC filings on our website at www.taser.com. With that, I will now hand the call over to Rick Smith, our CEO and Founder.
Great. Thank you, Arvind, and good afternoon to everyone. Before we begin, I'd like to share some news on the TASER team. As we announced last quarter, Dan Behrendt, our CFO, will be transitioning out of TASER after filing the company's 10 K for 2016. On January 31, Dan was hit by a vehicle while he was cycling and following the accident he was hospitalized for an extended period of time.
Since the event, Dan has not been able to act in his CFO capacity and he will likely not be returning. We are thankful that he has now been released from the hospital and he is now recuperating at home and is expected to make a full recovery. Dan has been a colleague and a friend for twelve years and we wish him a speedy recovery and success in his future endeavors. We are in active negotiations with a strong candidate and look forward to announcing the appointment of a new CFO in the coming weeks. In the interim, Marie Masanga, our Controller has been acting as Principal Financial Officer.
Marie and Arvind along with the entire finance team are doing a wonderful job ensuring a seamless transition and that's in reference to Arvind Bobrook, our Director of Finance. And now turning to our business, our fourth quarter represented a really strong finish to a tremendous year. In 2016, we booked $254,000,000 on our Axon platform, an increase of 88% over the prior year. We now have over half of the major U. S.
City Police Departments on the Axon network. We grew our weapons business by 25% over 2015, shipping nearly 130,000 weapons and 2,000,000 cartridges to our customers. We launched two new industry leading cameras, the Axon Body two and the Axon Flex two. We also began rolling out our in car camera, Axon Fleet. Fleet trials are currently underway with with several agencies and we have already received notice we've been awarded several contracts.
Customer feedback has been very positive, particularly around the simple cloud based workflows and instantaneous upload of critical incident videos. In the past few months, we have won major body camera contracts with our first three state patrols, which we believe was enabled knowing that we have a compatible in car solution coming to market. We have multiple state patrol field trials going on currently and we expect accelerating momentum in this important market segment in 2017. In addition to our extended market share gains in The U. S, in 2016, we expanded our presence in our Tier one international markets.
We announced significant Axon bookings in The UK, including the London Met, South Wales and West Mercia and in Australia, including Queensland and the Northern Territory. We were excited to end the year with record quarterly revenue for our international business and international accounted for 23% of total revenue in the recent period. Our focus throughout 2016 was on continuing to scale the Axon platform and enhance the industry leading ecosystem as evidenced by our new product and feature releases. We are continuing that momentum in 2017. We just announced the new Signal Sidearm yesterday, the first wireless sensor to alert Axon cameras when a firearm is removed from an officer's holster.
Signal Sidearm is a seamless add on that works with the majority of holsters in use today and offers high reliability and maintainability with a battery life of around one point five years. It is a strategic addition to our ecosystem adding an important capability to sense firearm draws And we do expect Axon Signal to have a high attachment rate with our cameras and to have solid gross margin contribution. We will continue to develop and launch new sensors and devices to round out our offering to drive adoption and usage of the Axon platform applications. Earlier this month, we announced the acquisition of two industry leading teams in artificial intelligence, Dextro and Misfits Computer Vision Group. In doing so, we are moving forward aggressively with the implementation of AI technology to help our customers make use of all the data that they are recording while significantly reducing their workload.
As many of you know, our Axon platform is based on the concept of a network of people, devices and apps that collect, analyze and put data to use. AI represents the next step in harnessing the power of this data. To build a world class AI platform in a specific space, you need three elements. One, access to lots of data for your specific problem. Two, access to users for training the system on how to interpret the data and three, the right machine learning expertise to research tailored deep learning models and engineer the machine learning infrastructure.
All three are critical and we now have achieved a uniquely powerful combination of these three elements. We have the largest community of users in public safety with over half the major cities and over 100,000 users. Evidence.com now secures over 6,000,000 gigabytes or six petabytes of law enforcement video data and it's growing along an exponential curve. And now through the acquisitions of Nisfit and Dextro, we now have state of the art machine learning pipelines and a world class team of experts dedicated to applying artificial intelligence in law enforcement. These two strategic investments will highly differentiate our offering in a way that no one else can deliver and can create a highly defensible platform that will continue to pull further ahead of our competition.
Additionally, we do expect AI related services will create entirely new lines of revenue generating business. Our company's advantages in AI aren't just somewhat better than our competitors, it's structurally superior. All systematic incentives for progress in AI for us are aligned towards deepening our market lead in users, which means deepening our market dominance in data, which means deepening our market lead in AI. Our initial focus will be around redaction in video, which is a very repetitive and time consuming process for officers today. With our existing Axon capabilities, we have been able to reduce the time it takes to redact one hour of video in half from eight hours using other solutions to four hours using our solution today.
We expect to reduce that time from four hours down to just ninety minutes by the end of this year with our new AI team and capabilities. This will represent a huge savings in time and resources. And within the next five years, we believe that number could drop to zero as AI does all of the work without requiring any human interaction. It's application of technology like this to our ICON platform that will automate data gathering and records management, freeing up officers to focus on the human element of policing, so that they can spend their time interacting with the community. We're really quite excited about how AI fits in with this vision and we look forward to updating you on our progress.
We will hold our second annual user conference in June, where we help our customers learn how to better utilize and deploy the cutting edge technologies available on the Axon platform. At the conference, we will also unveil our records management product and share more on the value our RMS product will bring to customers compared to their current options. Today officers around the world spend about two thirds of their time on data entry and paperwork and only one third of their time doing actual police work. We now know based on the extensive field experience we have that body cameras record far richer and far better information than the handwritten forms of yesterday. All the information needed for police reports can be easily captured in the audiovideo record from our ecosystem of cameras and sensors.
The only information not captured are the perceptions of the individual officer, which frankly can be more easily dictated to the video after the incident than being painstakingly typed on a keyboard. The remaining challenge for us is to extract this information into a searchable format that can be utilized to transform the business processes, reviews and the prosecution and litigation processes that currently run on text data. This is where our ecosystem of devices, software and users now powered by AI will be a game changer. Our AI tools will extract the information for the police record system and in the future that we are building, records will be recorded, not written. The value proposition for our customers is enormous.
We can free up to two thirds of their time their officers spend on tedious data entry. This will be akin to tripling their force of police officers on the street. And all the while, the back end data will be far richer qualitatively similar to the archive of televised sporting events as compared to the newspaper accounts that predated televised recordings. As you can tell, we are incredibly excited about the market opportunity for RMS in conjunction with our sensors, cloud and AI capabilities. In summary, the long term outlook for the business is stronger than it's ever been.
In the fourth quarter, we booked orders of over 130,000,000 across both our Axon and our weapons business segments. Continuing to execute at this pace would drive GAAP revenue over $500,000,000 per year in the next three to five years, roughly doubling the business. However, the investments that we have made and are making are not intended to simply maintain our current revenue bookings rate. We see opportunities for significant continued growth from here. As one example, we've looked at some of the early Axon fleet orders and the revenue per user over contract term roughly doubles when agencies add fleet to their body camera program.
Now that's for agencies that have a vehicle for every officer. We're just now starting to see our international investments really contribute to Axon bookings, which we believe can scale to a size similar to our U. S. Business, if not larger. With fleet international growth plus the record management system and Axon AI, we now have visibility to a $1,000,000,000 annual run rate business, predicated of course on continuing our strong execution.
After we have onboarded our new CFO, we plan to hold an investor event and provide you all with an update on our long term business model, financial outlook and strategic vision. We're on a truly exciting trajectory from 2016 going into 2017, executing across the organization and adding the right people and resources. We will maintain discipline in our investments and our quest to transform public safety through technology, while building a highly defensible and profitable business for our shareholders. I'll now hand over to Luke to take us through an operational update.
Thanks, Rick. We had an exceptionally strong fourth quarter and full year 2016 and I am proud to share the highlights of our accomplishments. Revenues came in very strong at $82,100,000 with international sales contributing $18,600,000 to the total. Our other key metrics also showed continued strength within the quarter. Bookings on our Axon platform were a record $72,500,000 in the fourth quarter, an increase of 62% compared to the fourth quarter of twenty fifteen and up 26% sequentially from the third quarter.
It is important to note this number exceeded the bookings of Q2, which included the very large LAPD order, yet without any similar singular large event. We see the achievement of this milestone without any outliers as strong evidence of the general momentum of this busiest unit. Annual recurring revenue in the fourth quarter was $40,200,000 an increase of 26% from the third quarter as we converted over 17,000 seats to paid seats. In the fourth quarter, we booked approximately 21,400 incremental new seats on our Axon platform. That brings our cumulative total book seats to 132,000 since inception and represents 19% growth sequentially.
Operating income in the TASER Weapons segment was 36.1% in the fourth quarter of twenty sixteen, down from 38% in the third quarter. The slight decrease was driven by higher research and development expense as well as end of the year physical inventory adjustments. The last metric, the ratio of lifetime value of a customer to the customer acquisition costs in the third quarter was 6x up from 4.9x in the prior quarter on higher bookings. We view this ratio as one of the key operating metrics used by management to evaluate the effectiveness and validation of our strategy as we invest in the customer acquisition. It should be noted that this ratio is calculated only including current product at current price level.
We believe the true value of each customer will be significantly higher as we are able to add premium service tiers and new products such as our RMS fleet in car systems and AI based offerings. Together, we see these offerings more than doubling the potential value of each customer seat. We had several notable bookings in Q4 as we continue to consolidate the market. Louisiana State Police went with full deployment on the Axon platform on our unlimited plan for all officers. Other notable Q4 wins included Seattle, Winston Salem, Garland and Chattanooga PDs.
We're excited with the pace of innovation at TASER. We're not satisfied with just maintaining our position as the leading provider. Instead, we are pushing the balance of technology applications for law enforcement to truly deliver on our vision of an end to end experience. As Rick noted, we're extending product lines and developing future revenue streams including fleet, RMS and artificial intelligence offerings. With nearly two patrol cars for every three officers and the increasingly positive feedback from our trials, we see the Axon fleet in car camera as a tremendous opportunity to extend our capabilities.
Investment in records management systems, the central technology hub of public safety, we believe is the best way to expand our current offerings from the Axon platform. As we mentioned on our last call, we estimate the addressable market for RMS is nearly double the size of our current offerings on the Axon platform. We expect to start shipping full fleet deployments beginning in the second quarter of twenty seventeen and we will unveil our RMS products at our Axon Accelerate user conference in June. I'll now move on to the discussion of financial results, which I will be reviewing this quarter. Revenue in the fourth quarter was $82,100,000 a 46% increase from the prior year and our third consecutive quarter of record revenue.
The increase was driven by 154% increase in the Axon segment revenue and a 25% increase in Weapons segment revenue. The $14,400,000 year over year increase in Axon segment revenue was driven by 167% increase in hardware revenue as we shipped over 28,000 cameras in the quarter, a 140% increase on our Axon service revenue. We continue to add users to the Axon platform and ended the year with almost 95,000 active paid licenses on our Axon platform. The fourth quarter also included $1,500,000 in catch up service revenue previously held due to the delay in meeting contractual terms or milestones. The $11,600,000 year over year increase in weapons segment revenue was nearly evenly split between international and domestic revenue growth.
Internationally, weapons segment revenue growth was driven primarily by our focus on our Tier one markets. Domestic growth was driven by our TASER 60 and Officer Safety Payment Plan. The continued success of our telesales team servicing the long tail of the market and demand for a full deployment into existing customers. TASER 60 continues to resonate well with customers representing approximately 20% of unit volume in Q4 and we expect this percentage to increase in 2017. We continue to drive customers to our TASER 60 and Officer Safety Payment Plan to help drive full deployment and shorten the upgrade cycle.
Total international revenues in the fourth quarter increased 53% from the prior year to a record $18,600,000 The growth was primarily driven by an increase in TASER weapons and cartridges with approximately 80% of international revenue coming from our TASER weapons segment. We continue to have strong momentum in the Acton bookings in our target international markets. As we've discussed previously, due to the seasonal procurement patterns and the typical size of international orders, we expect to see some revenue lumpiness from quarter to quarter in the international part of our business. For the full year, total revenue increased 35.6% to a record $268,200,000 driven by a 25% increase in our weapons segment and an 85% increase in our axon segment. This growth rate significantly exceeded our internal expectations and we're really proud of these results.
Annual recurring revenue, which excludes the impact of a one time catch up revenue at the end of fourth quarter was $40,200,000 representing a 26% or $8,200,000 growth sequentially. We expect to see relatively consistent growth in ARR through 2017 as we add users to the Axon platform. We are experiencing some initial backlog on our new Axon Flex two camera as we ramp up capacity to meet demand. Our backlog on the Flex two is currently approximately 9,000 units. As a reminder, we began recognition of service revenue in the month following the shipment of the camera.
We are actively working through this backlog and expect to clear it in Q2. Bookings of $72,500,000 were also a record for the company, up 62% from the prior year and 26% from the third quarter. This exceeds our prior record of $72,000,000 in Q2, which included $20,500,000 in the LAPD booking. The largest booking this quarter was $5,300,000 showing broader body camera adoption across all agencies. International bookings were still less than 10% of total bookings, but are expected to contribute more meaningfully to bookings in 2017.
Domestically, our bookings pipeline remains very strong and we expect fleet bookings to begin to contribute incrementally as well. Total deferred revenue increased by $7,900,000 sequentially to $85,200,000 As a reminder, over 80% of our Axon contracts include the TASER Assurance Plan feature under which customers prepay for their future camera upgrades. Axon hardware deferred revenue or customer prepayments for future camera and dock upgrades represent $21,100,000 of the total deferred revenue balance. These future hardware upgrades will have a lower implied discount than the initial camera purchase and as such will flow through the P and L at a higher average selling price. Gross margins in the fourth quarter were 60.6% on a consolidated basis due primarily to a significant decrease in Axon segment hardware gross margin.
This decrease was driven largely by non recurring items, including inventory write downs related to the end of life of Flex1 and year end inventory adjustments. We expect Axon hardware gross margins to increase back to the 25% level we saw in the first half of twenty sixteen, though we can still have some quarterly fluctuations based on the customer mix. Longer term, we see the opportunity for the Axon segment hardware margins in the 50% range as service plan upgrades start to kick in. Sales, general and administrative expenses increased to $30,700,000 compared to $21,900,000 in the prior year period. This increase was due primarily to increased headcount, variable compensation, legal expense and professional fees.
In the fourth quarter, we also had $600,000 of CFO severance costs and we will have another $900,000 of CFO severance costs in the first quarter of twenty seventeen. R and D expenses increased to 9,600,000 compared to $6,600,000 in the prior year. The increase is driven primarily by increased headcount in our Axon segment and higher professional fees. Due to the strong momentum in our business, we elected to increase spend in areas where we expect to generate superior levels of return. As a result, our 2016 full year operating expense was $138,700,000 dollars This was above our target range for the full year of $130,000,000 to $132,000,000 which excluded non recurring expenses in Q3 of approximately $2,000,000 and the Q4 severance expense of $600,000 As previously noted, we continue to ramp investment levels as we saw the opportunity to drive revenue and bookings levels higher.
Income tax expense in the fourth quarter was $3,200,000 for an effective tax rate of 33%. We recognized some favorable R and D tax credit adjustments, which were partially offset by losses in foreign entities, which we do not currently expect to receive a tax benefit from. We expect the first quarter effective tax rate to be in the 41% to 44% range. Turning to 2017, we expect first quarter revenue growth of approximately 25% year over year. However, we expect Q1 to be down sequentially due to seasonality around municipal budget cycles.
For the full year 2017, we expect year over year revenue growth consistent with our stated objective of 15% to 20% growth. We anticipate 4% to 6% sequential increase in operating expenses in twenty seventeen first quarter as we continue to add customer facing roles, invest in R and D initiatives and expand into new international markets. Our key areas of R and D investment in 2017 consist of new hardware technology, including the signal holster we announced yesterday, next generation Axon body cameras, Axon fleet records management system, Axon artificial intelligence and continued feature enhancements to our Axon digital evidence management platform. We are confident that our investments will continue to drive revenue and bookings growth and expand our addressable market over time. We will continue to calibrate our expense level relative to bookings and revenue and carefully assess the return on our spend.
We expect to see margin pressure in Q1 twenty seventeen with margin improvement sequentially through 2017 as we add users to our Axon platform and continue to make inroads internationally. Please note that the anticipated sequential increase in Q1 operating expenses is in addition to the expenses relating to our two recent artificial intelligence acquisitions. The combined impact of the two transactions is expected to approximate $6,500,000 of incremental R and D expense for the full year, of which $2,000,000 will be non cash amortization expense. We're now going to move to the Q and A portion of the call.
Thank you. And our first question comes from Mark Strouse of JPMorgan. Your line is now open.
Thank you very much for taking the questions. Dan, if you're listening, best of luck. Wish you a speedy recovery. So guys, just wanted to talk about the timeline for new offerings here. Understand fleet in 2Q and you're going to introduce RMS at the user conference, but when can we expect RMS and a bigger presence of the AI to be commercially available?
I think those will be AI would be late twenty seventeen and RMS would really be 2018 revenue.
Okay. And then with the OpEx, understand all the color there. Thank you very much for that. Just long term though, are we still expecting I think in the past you've said that you expect bookings to outpace the growth in OpEx. Is that still your target?
Yes. Just to add a little more color there. Specifically, I think it's important to add a little context around the fourth quarter. A majority of the increases relate to our cost structure to support the accelerated growth. So in Q1, we expect a 4% to 6% sequential increase in operating expenses.
We're not providing guidance past Q1. And I would just want to reiterate, the largest drivers of these costs are going to be towards quota carrying sales reps as well as engineers developing net new revenue streams for our business.
Got you. And I would just add, in general, we believe bookings can continue to outpace or at least match the spend rate. Now again, that may bounce around a little bit quarter to quarter, but we're really keeping a close eye on how we're spending, how we're investing. So we're building something that long term will be very profitable and defensible.
Got it. Okay. And then just one more quick one, if I can. Just pricingofEvidence.com, are you seeing any shifts either towards the low end or towards the high end of your pricing scheme? What have we seen over the last quarter?
Thank you.
Mark, that's a great question. And I think coming out of Q4, there was a lot of questions around pricing pressure in regards to the NYPD deal. And we really pointed analysts to the Seattle deal as a good proxy. I would say the other large deals that we announced on the call today would be kind of in that similar vein as Seattle and we still feel really confident in the price structure that we have.
Got it. Okay. Thank you very much.
Thank you. And our next question comes from Steve Dyer of Craig Hallum. Your line is now open.
Thanks. Good afternoon, guys. On the weapons side, based on the units and the revenue, the implied ASP appears to be very high or either that or there was a one time sort of other piece of revenue that fell in that. Any or maybe it's just the way that TASER 60 is recognized, but any sort of commentary on that? It looked like about $6,000,000 of upside either came from higher ASPs or something one time in nature?
Yes, I would say I would just talk to two items there. Approximately 20% of the Q4 deals came in from TASER 60 program. And then we also had a strong international quarter, which is going to have a slightly different ASP than the domestic deals.
Okay. And just to kind of refresh, the TASER 60 revenue is recognized upfront and it's the cash flows that come ratably over the five years. Is that right?
That's correct, except for the warranty. So we recognize the TASER handle and the cartridges that are delivered and then we spread the warranty out over time, but the cash flows do come in like you said.
Okay. On the Exxon side, gross margin as you noted on the hardware side was basically zero. If you backed out, I guess, could you give us a little more color on the one time issues, whether it's end of life inventory adjustments, etcetera? If you back that stuff out, what would gross margin have been sort of versus previous quarters?
That's a great question, Steve. I don't know that I have the number off the top of my head. I would say the biggest two reasons were just kind of deal mix in combination with some inventory write offs for Flex one as well as end of year inventory adjustments. We do feel pretty confident that we're going to see margin expansion there, especially the original cameras that are sold in are often discounted and the next camera that comes through will see a higher ASP. So we think that's going to drive up the margin.
Okay. And then we're probably far enough along into this cycle that you're starting to have some Axon deals come up for renewal. Any color around, I guess renewal rates or sort of the tone you get when you go back sort of for the second or for the renewal of that contract?
It's still not a big enough sample size where we're going to give exact data on it, but that's a great question, Steve. And I would say we feel really, really confident with having a very low churn rate. And actually we're seeing just a lot of momentum in these kind of bundled deals with things like OSP and tightening the integration with our TASER line of products with offerings like signal. And so we feel really confident in a low churn rate.
Okay. And then I just want to make sure that I'm clear on the OpEx increase here. It was $40,300,000 in the quarter, but that included some severance and then subsequently you made a couple of acquisitions. So I mean, should we just think about the $40,000,000 and add 4% to 6% sequentially?
Yes, that's correct.
Okay. And then presumably that will grow at some level sequentially after that or do you feel like you're getting to the point where most of that fast growth is behind you?
Yes. We're not really going to provide annual guidance at this point. We're as Rick said, we're still putting together the plans to monetize these acquisitions. And so I think as more information comes to light, we'll communicate that at our user conference in June and have more information at our investor events that we're going to hold once the CFO joins.
Got it.
Yes, I would add on that as well. Last year, we provided some expense guidance, but then the business frankly grew significantly faster every quarter. The bookings numbers in particular were well above what we were expecting and we were calibrating every quarter to the bookings opportunities in front of us. So we ended up making so many adjustments to the annual number that I think at this point, we felt the most productive approach was to give you some guidance on Q1 and just let you guys know that if we see the opportunity to keep growing the business, we're going to keep making those investments. But we'll give a we'll tend to give a little more color, I think quarter to quarter based on how we're seeing the business continue to grow.
How fleet gets accepted is going to be really a significant opportunity for us. And that's where some of the investment in the fourth quarter came in, adding the right roles and people to be able to support the whole new implementation of rolling out in car video and then the international space. So we'll continue to calibrate relative to the bookings level.
Okay. One last question for me and I'll hop back in the queue. Inventory was up pretty meaningfully sequentially, almost doubled year over year. Anything to read into that? Is that just Gen two Axon backlog or was there any sort of year end push or pull around that?
Yes, I'll take that one. We've really been in at this point, we think it's most important that we're able to satisfy orders quickly as the bookings have continued to grow. And frankly, earlier in the year, we had some times where we thought we were not providing the right customer experience. And so we strategically made the decision that it made sense for us to ramp up some of our finished goods inventory to make sure that we were able to fulfill demand in a really timely fashion.
Got it. Okay. Thanks guys.
Thank you. And our next question comes from Salut Khan of Imperial Capital. Your line is now open.
Great. Thank you. Hi, Patrick. Hi, Luke. Hi.
Just two quick questions on my end. First one being is, if you take a look at the international bookings, there's still a relatively small part of the total bookings. So what do you need to do on your end to make sure that international bookings become a much larger percentage of the total bookings?
Yes. So we see international opportunity is to have markets where we can sell our full product suite with both TASER, Axon and the service. Today, we see really, really big opportunities in The UK, Canada and Australia, where I would say we've become kind of the market leader in terms of capturing significant footholds and we'll continue to drive out full deployments and add offerings there. And then our next big focus is on Continental Europe and we're in key discussions. Rick has actually spent a lot of time in Europe and might be able to add a little more color on that.
Yes. So again, I think we've now got to the point where we've got really good momentum in our Tier one countries. So some of that required investing ahead, acquiring our firm distributor in The UK, and some of these beachhead accounts, we have found sometimes getting into a market that we've got to be more aggressive on pricing to get a foothold and then we tend to see pricing return to more normal levels as we start to scale up in each market. So really at this point, what we need to do is just continue to execute really well. We feel great about the team we've got on the field.
We spent the last two years really revamping our whole structure, going much more with a direct sales force internationally. Now long term, that's going to lead to better margins and a more reliable customer relationship. The downside of what we've seen over the past couple of years is that you've got to invest in teams of people probably two years ahead of when you start to see meaningful revenue. But we should start to see some we think that the Tier one markets will become more significant this year that the bookings are going to really start to become material. And then we should start to see some of what we consider Tier two markets start to place some initial orders and start to get some footholds.
Great. And the other question I had was, previously you've talked about the Tier two market, that market opportunity being roughly about $1,000,000,000 or so with a little bit over 800,000 officers that you had talked about previously. From the conversations that you've had with your country managers, particularly in France, what feedback are they giving you right now regarding either the competition from low priced providers that are out there or other reasons why they think that either 2018 or 2019, there could be other things outside of lower priced solution providers that could serve as headwinds as opposed to what they previously thought?
Yes. I'd say the main thing we've learned globally is we've got to help our customers get to field trials, so that they're actually deploying the products in the field. That is where the game changes. When you're buying it off of some arcane bureaucratic purchasing process, that's where you get things like late last year, we had a large U. S.
Order that didn't go our way and there was no field trial. So we're really trying to be frankly aggressive in educating our customers. You can't buy sophisticated technology with procurement processes that were built twenty, thirty years ago for buying belts and holsters and that sort of stuff. So we're really working proactively with our customers to enable field trials both in The U. S.
And internationally. I think that's our most powerful weapon. As our Head of Sales likes to say, our best advocate is a well educated customer. And we're starting to see some real momentum around that where we're starting to see a shift in perspective where agencies are starting to do some more field trials.
Great. Thank you, Rick.
Thank you. Good questions.
Thank you. And our next question comes from Jeremy Hamblin of Dougherty and Company. Your line is now open.
Hey, guys. Congratulations on the terrific year and quarter. I wanted to ask a couple of questions about the weapons side of the business for 2017. You saw 25% growth year over year. Can we safely assume that you expect that business, that segment I should say to grow in 2017?
We are still expecting growth. 2016 was really a banner year. I think we are still prognosticating double digit growth. We do see some opportunities where we could see some upside to that, but I would model it or plan on low double digit growth. It's not clear that we'd be able to replicate the same level of growth that we had this year.
No, understood. And just embedded within that, you saw significant acceleration in the second half of the year on your single cartridge sales. In terms of why what is driving that? Is that really attributable to TASER 60? Is that partly attributable to field usage increasing because you simply have more officers carrying the product?
Yes. Jeremy, that's a great question. I would say it's attributable to three things. We've got our service plans that include TASER 60 and the officer safety program. Overall, the strength in the business as we're selling more TASERs, we're going to be selling more cartridges.
And then we've actually introduced an unlimited cartridge plan as well, where officers can sign up to pay for their cartridges with a predictable line item. And so those kind of three key drivers are where we're seeing the strength.
Okay. And then in terms of just a follow-up on that on the international side, you've obviously seen some success on body cameras. But in terms of the weapons side of your business, the profitability that you're getting overseas on your weapons segment, how is that comparing to what you've seen in your U. S. Markets in terms of kind of your margin profile?
This is Rick. I'll take that one. I would say generally international is somewhat favorable to The U. S. In general.
Okay, guys. Thanks for taking my questions. Best of luck this year.
Yes. All right. Thanks.
Thank you. And our next question comes from Glenn Mattson of Ladenburg Thalmann. Your line is now open.
Hi. A question I guess for Luke, the 9,000 unit backlog, I believe it was in the Video segment, is that can you talk about how that's going to flow through as the year progresses?
Yes. So as we mentioned, Glenn, good to talk to you. There is a backlog of 9,000 seats today due to us just launching Flex two and making sure we have good quality. In Q1, we expect clear some of that, but the bulk of it is going to be cleared in Q2.
Okay.
So I'm just trying to
think about the guidance for 25% sequential revenue growth, was that that was the number, correct? Sorry, 25% year over year, right?
Yes. We committed to 15% to 20% for year over year for the whole business.
Okay. And that's for the whole year. In the first quarter, I think we're projecting 25% revenue growth for Q1.
Right.
That's over Q1 of twenty sixteen.
Right. I guess in order to get there, I mean, weapons has been so strong, part I'm guessing due to the TASER 60 program. You have to have kind of a significant down quarter in weapons, assuming that video is I imagine the service business is not going to be down sequentially, maybe hardware fluctuates a little bit. But I wonder what's the thought process behind the drivers of the weapons being down so significantly sequentially?
Yes, yes, yes. Seasonality in our business, Q4 is always a very, very strong quarter with us. So we believe year over year Q1 is going to be up from the previous Q1, but not sequentially to Q4 and that's just normal business conditions for our market.
Okay. It just seems a little more severe than in previous years, the sequential perhaps you're being just cautious or maybe there was some driver in Q4 that
was stronger
than expected?
Yes, Glenn. International in Q4 was a record for us. And so that's also going to drive some of our thinking around what we're communicating for Q1.
Okay. Great. And then on the free cash flow, affected this year by the changes in working capital, is that are those changes expected to continue to affect free cash flow in 2017 or do they stabilize here? I'm talking about like inventory and receivables growing.
Or Binon, if you want to comment to that?
Yes, we'd expect free cash flow to be relatively stable. We don't expect working capital will be a significant tie up in free cash flow for 2017. Of course, we have some long term receivables driven by our TASER 60 program, which may see a continued increase in 2017.
Okay, great. Thanks for the color guys.
Thank you. And our next question comes from Andrew Urquowitz of Oppenheimer. Your line is now open.
Hey, thanks gentlemen. I'm not sure if you addressed this in the comments before. When you do the dash cameras, you start selling those commercially. What's going to be the accounting treatment for those? Will those be similar to like an officer safety plan?
Will be more TASER 60 like? Could you walk us through the different pieces there? And then additionally, will you package DASH camera with officer safety or with weapons and introduce a new
program? Yes.
So on the accounting, it's going to be very similar to the body cameras, upfront hardware and service, storage license, and then any kind of warranty will spread out over the deal.
And then implementation time for dash cameras, is that long like the body cameras where we could see an implementation over multiple quarters? Or is it a pretty quick introduction?
No, I think it's going to be similar to the body cameras where you'll have an agency and they might buy just for example several hundred, but they might roll out that over a couple of quarters.
Got it. Thank you. And then on RMS, I think, Rick, you mentioned, could see that sometime in 2018. Could we start to see like a new product offering overall and how you tackle rolling that out, either discount some of these other programs to get RMS in there or how do you see selling that into the end markets once that gets closer to being ready?
Yes. At this point, I'd say strategically, we haven't announced anything and probably wouldn't want to give too much color. We're operating in some pretty competitive spaces already with cameras and certainly RMS where we do entrant. So we are certainly looking one of these that I think if you look at all the new products and services we're talking about, they share two characteristics. One, they increase the value of the ecosystem.
They're more valuable as a part of the ecosystem we've already built and they make the ecosystem what we have more valuable by adding the new service. And each of them are new profitable highly profitable product opportunities. So none of these things are big loss leaders. Each of them will be able to stand on their own from a profitability perspective. Now in terms of how we end up selling RMS in terms of bundling and what we do with fleet and the body camera programs, we tend to be very customer driven looking at what are the hot buttons, frankly, that matter to our customers that make the offers most compelling to them.
And one of the examples, if I just sort of look back at history, with body cameras, what we have found in a lot of cases is that customers really appreciate discounts on the hardware upfront. And we've been very successful gaining market share. And I think we're now going to see the benefits of that as we start to get in to I think in 2018 I'm sorry, 2017, we'll start to see the kick in where customers have gone on these replacement plans and you're going to see those second and third cameras as the hardware goes in, it's going to be much more profitable on the back end because the way we structured our programs really catered to the way our customers what they were focused on. So I guess it's a long winded way of saying, we're not going to give any more color on it right now other than I can tell you we will apply a lot of creativity based on where our customers see values in bundling them together.
Sure. Understood. I appreciate that answer. Last question, as you guys did a great job of kind of penetrating Tier one cities. How do you see your sales force size?
Is this sized appropriately as you approach Tier two, Tier three and maybe even Tier four cities going forward to kind of drive that bookings growth? Yes. I think overall,
we go ahead, Luke.
Yes. I think domestically, we've really built out a strong sales channel where we've got great coverage in all segments of the market. So I would say our sales channel is going to be relatively flat where we may continue to add additional SG and A costs would be on kind of post sales support and implementation, specifically around products like fleet and RMS. But in terms of our domestic sales force, we feel like we've built just a really strong channel there today and that should remain relatively flat.
Great. Thanks guys. I appreciate the color.
Thank you. And our final question comes from George Godfrey of CLK. Your line is now open.
Thank you. Good afternoon, gentlemen. Just two questions. Arvind, I wasn't clear on the free cash flow from working capital impact in 2017. Historically, working capital has been a net contributor.
Do you expect it to be a net contributor or a drag on free cash flow?
Working capital in general, it's tough to tell, but it generally should be relatively flat going into 2017. We have two kind of offsetting factors that we hadn't had historically. We primarily had the prepayments for the hardware upgrade being a source of cash, but we have that a little bit offset by the TASER 60 payment plan. So it really depends on the level of TASER 60 uptake in 2017 that will only drive how much working capital we generated. And
then my other question on the fleet camera, is the pricing of the service component similar to the body camera or is there anything different depending upon the tier that's chosen?
George, great question. It's going to be similar to the body camera.
Okay. And then just follow-up on that, you said you already have some orders. So a two part question. One is, I guess, there for some departments, there isn't a concern of overlapping services or cost as such an issue that they still feel the body camera on the officer as well as in the car is something they want? And then the flip side of that is, are you still are you having to educate departments on the value of having two cameras or are departments continuing to push back, say no, we'll choose one or the other, but not both?
Thank you, Damon.
Yes, let me take that one. I would say a few years ago, I was under the impression that body cameras would obsolete the need for in car cameras. And turns out we're dead wrong, particularly for the state patrols. We had zero uptake in the state patrols until this last quarter. And now we won three of them and we've got a bunch more that are going into testing.
And the rationale was really the state patrols felt that they really needed the in car camera. Frankly, I think some of it's just become so much a part of their operating use case. So this is a qualitative statement, but I would say in general what we're finding, it's not just the state patrols that once agencies have gotten used to dash cams, I'd say the vast majority of them want to maintain dash cams even if they add body cameras. And they typically already have pre existing budgets where they've just built it into when they buy a patrol car, they've got budget money there to outfit the car with an in car camera and to allocate money towards the back end. And so we certainly aren't having to educate them on the need for both.
I would actually say our customers educated us more on their need for both, mainly if they've already had in car.
Understood. Thank you for taking my questions.
Yes. Thank you.
Thank you. And ladies and gentlemen, this does conclude our question and answer session. I would now like to turn the call back over to Rick Smith for any further remarks.
Great. Well, thanks everybody. I know it's been a little bit of a long call. We had a lot to talk about. And man, what an exciting year it was in 2016.
As we've told you, we've been very focused on consolidating the market. I think we made a ton of progress there. And we're really excited to continue that momentum this year and with some of the new service offerings we're bringing out to start to launch some additional revenue streams. So it's really exciting time to be at TASER. We're delighted to have you as shareholders.
And we look forward to seeing you all at our shareholder meeting coming up in May. And with that, I wish everyone a good day and we'll see you all soon.
Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.