Good day, ladies and gentlemen, and welcome to the TASER International Third 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 may be recorded. I would now like to introduce your host for today's conference, Mr.
Luke Larson, President. Mr. Larson, you may begin.
Thank you, and good afternoon to everyone. Welcome to TASER International's third quarter twenty sixteen earnings conference call. Before we get started, I'm going to turn the call over to Dan Baron, our CFO, to read the Safe Harbor statement. Thank you.
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 future, including statements around projected spending.
We intend that such forward looking statements be subject to the Safe Harbor provided by the Private Securities Litigation Reform Act of 1995. The forward looking information is based upon current information and expectations regarding TASER International Incorporated. These estimates and statements speak only as to the date in which they are made, are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. All forward looking statements that are made on today's call are subject to risks and uncertainties that could cause our actual results to differ materially. These risks are discussed in our press release we issued today and in greater detail in our annual reports on Form 10 K
and
in the 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. And with that, I'll hand the call over to Rick Smith, our CEO and Founder.
Thank you, Dan, and good afternoon, everyone. I have the distinct pleasure of once again being able to report great results that are the result of tremendous work by just a fantastic team of people, blessed to work with. We had a tremendous quarter with strong domestic and international revenue growth across our Axon network of connected devices, applications and people, a network which now connects over half of the major city police departments in The United States and dozens of the major prosecutor offices. Our results reflect the continued strong demand for our range of technology solutions and reinforce our belief that our vision and strategy continue to resonate with our customer base. In the third quarter, we expanded our major city presence with wins in Cincinnati and Atlanta, an agency which we won back for a competitor, VeeView, where the agency had initially selected a competing body camera and yet ultimately saw this was much bigger than body cameras and they saw the value in joining the Axon network.
Since Q3 of last year, we've added 12 major new cities on our Axon platform and we now have an active presence in 35 of the 68 major U. S. Cities. Our pipeline remains stronger than ever. We're optimistic about our outlook for the rest of this year and into 2017.
Our customers value the advantages of our platform including cost savings, intuitive features, proven reliability, the ability to scale and peace of mind. Most importantly, the value of our network of people, devices and apps continues to grow in value as we add more people and technology into the ecosystem. I'm excited to report that we shipped over 30,000 cameras in the quarter, which to put it into perspective is approximately equal to the number of cameras we shipped in the first three quarters of twenty fifteen combined. The strong camera shipments along with our push to realize contractual milestones and fulfill terms on held revenue led to a 51% sequential increase in annual recurring revenue from $21,000,000 to $32,000,000 In 2016, we've executed on establishing a strong beachhead presence in our focused Tier one international market. We now have several major accounts in The UK, including the three largest agencies in The UK and the National Rail Police.
We have major accounts in Australia and several active trials in Canada. We're pushing deep into our current Tier one market. In the third quarter, international revenue was $11,300,000 or 16% of our record $71,900,000 of consolidated revenue. We're coming off another strong showing at the IACP, the International Association of Chiefs of Police held in San Diego, where we had over 3,000 visitors to our booth. Our virtual reality experience gave officers a unique three sixty degree immersive view of how the Acton network of people, devices and apps enables them to go with confidence from the field to the courtroom.
We also announced our all new point of view Axon Flex two, a camera with unmatched durability, best in class HD Retina low light image quality and enhanced wearability. The Flex two is the first wearable camera that has the polymer molded directly around the electronics encasing them in a solid brick of protection from abuse and weather. We know how tough cops are in equipment and the Flex two takes our durability up another notch. We've also increased the retention strength by over 300% while improving the user interface of all of our mounting options. This is one of our critical differentiators for the Flex product line.
And of course we've extended our industry leading retina low light capability to full 1080p HD video and yet we still retain the ability to buffer video for a full twelve hour shift even in 1080p. Customers love the NuPlex two and initial shipments are expected in December with full production ramping in early twenty seventeen. During IACP, we laid out our vision to reboot the entire enterprise software ecosystem of public safety built around video and multimedia at its core, phasing out paperwork and labor intensive manual data input, but automating data collection through our sensors and our apps. We see this as a breakthrough capability only possible with our network of devices, apps and people. We are uniquely positioned to extend the concept of body worn video.
From today, it's something that protects an officer an individual officer in high profile cases to a capability that automates the entire process of gathering, analyzing and acting on information in every incident of every kind. We see an opportunity to expand our current offerings on the Axon platform with the addition of a next generation records management system or RMS. RMS is the central technology hub of public safety including law enforcement, fire safety and medical emergency response. RMS systems are typically they're just simple digitization of the same paperwork driven workload of the last one hundred years. We think multimedia information is far richer, far more compelling and can actually be far more efficient to gather and analyze.
Just as smartphones with apps like Twitter, iMessage, Facebook and Snapchat have changed the way that we all communicate in our personal lives, we believe wearable cameras with the Axon network can revolutionize the backbone of public safety information infrastructure. And we are well along on the hardest part, which is building the network, getting the nation's leading law enforcement agencies on the network platform and they're now deploying over 100,000 of our camera nodes. Now we can leverage this unique network to replace the outdated manual information systems that are prevalent today. Now another key development that's moving us forward in this strategy around our creation of this rich hardware software ecosystem was the addition of Todd Baich to our management team. Todd has a long history of innovation, both as an entrepreneur where he helped create the category for personal portable scanners and as an executive.
While he was at Apple working directly with Steve Jobs, Todd proposed consolidating a number of different software products into the iLife suite, which included iTunes, iMovie, iPhoto, etcetera. Jobs approved the project and appointed Todd to lead the effort. Now as we discussed our strategy with our customers, we sometimes use the analogy that we're building something very similar to the Apple ecosystem, only we're building it for public safety rather than the consumer market. What a wonderful advantage we now have to have one of the leaders of the Apple transformation bringing that DNA into our executive team and into our product development programs. Todd has only been here for a few weeks, but I can tell you I'm having a ball working with him.
His creativity, imagination and operational rigor are going to add tremendous value to our company. And I hope you as our shareholders can understand how excited I am to have him on board. We're going to do great things together. Todd, if you're listening, welcome aboard, man. All right.
As a next step in our evolution, we've started development of this cloud based alternative to traditional RMS, which I talked about. Now the domestic addressable market for RMS includes all law enforcement, including both patrol and non patrol officers, both sworn officers and civilians of all public safety including fire and emergency medical services. As a result, the RMS market is more than double the size of our current addressable market, which is primarily patrol officers. RMS represents an extension of our Exxon platform and customers would also pay a monthly service fee for this new service. We believe that TAM or the total addressable market for RMS will more than double the TAM of this that we have today for our current digital evidence management solution.
We've informed our customers that we will preview the Axon RMS solution at our user conference in June of twenty seventeen. We had very strong interest from agencies interested in joining us as development partners as we develop this customer driven technology platform. We look forward to updating you on our progress on this exciting program in 2017. Now, we've gotten some questions about the long term model that we published at our last Analyst Day. We remain very bullish on our model and our ability to build a large, sustainable, sticky and profitable business in our Axon segment.
With the addition of RMS, which more than doubles the total available market, we see even more growth opportunities to build our business with high margin sustainable solutions. Before tuning it over to Luke Larson, our President for additional details on the quarter, I'd like to say a few words on today's announcement that our CFO, Dan Barrett will be transitioning from TASER in the first half of twenty seventeen. Dan has been a tremendous contributor to the organization in his time with us. He's brought financial discipline and focus to the organization through several major inflection points in our development as a company. I want to thank Dan for the critical role he's played and the dedication he's demonstrated throughout.
I also want to thank him for agreeing to stay on board through Q4 reporting and the filing of the 10 ks as we navigate this transition period and identify someone to fill the big shoes that Dan will be leaving behind. Dan, thanks for all you've done and for being a good friend to me and to the company and a good steward for our shareholders over the last twelve years. And with that, I'm going to turn it over to Luke.
Thanks, Rick. We had an exceptionally strong third quarter in 2016 and I'm proud to share the highlights of our accomplishments. Revenues came in at a record $71,900,000 with international sales contributing $11,300,000 to the total. Our other key metrics also showed continued strength within the quarter. Bookings on our Axon platform were $57,500,000 in the third quarter, an increase of 56% compared to the third quarter of twenty fifteen, but down sequentially due to twenty point five million dollars LAPD booking in the second quarter.
Annual recurring revenue in the third quarter was $32,000,000 an increase of 51% from the second quarter as we converted over 22,000 booked seats to paid seats. Our active paid seat count increased as we shipped over 30,000 total cameras in the quarter and worked through our Axon Body two camera backlog. In the third quarter, we booked approximately 15,600 incremental new seats on our Axon platform that brings our cumulative total of booked seats to 110,600 since the inception and represents growth of 16% sequentially. Operating income in the TASER weapons segment was 38% in the third quarter of twenty sixteen, up from 33.2% in the second quarter. The increase was driven by record revenues in the segment and manufacturing efficiency.
The ratio of lifetime value of a customer to the customer acquisition costs in the third quarter was 4.9%, which was up slightly year over year and is a reflection of strong bookings resulting from our investments. On a sequential basis, it was down from twenty sixteen second quarter, which benefited from higher book seats related to the LAPD award. I'm really excited about the momentum we have in all parts of our business. For our TASER weapons, we are seeing broader adoption and deeper penetration, both domestically and internationally. Our TASER payment plan programs, TASER 60 and the Officer Safety Plan are helping accelerate sales domestically and increasing our warranty attachment rate.
Our growing installed base of weapons is helping drive cartridge sales, which is a source of recurring revenue for TASER, though not reflected in our ARR metric. In the Axon segment, customers continue to resonate with our current product offering and the vision of the future. As we expand into additional solutions for law enforcement and bring them on to our platform, This creates enormous value to our customer base. Internationally, we continue to win major accounts on our Axon platform in our Tier one focused markets. In Australia, for example, we have won two key accounts with Queensland and the Northern Territory.
We have several active trials in key accounts in Canada, Australia and in The UK. We continue to welcome new agencies to the Axon platform. During the period, we announced major city wins in Cincinnati and Atlanta. Atlanta was an especially meaningful win for us because they had previously chosen one of our competitors. However, the city realized the need for a full end to end hardware software ecosystem and have now decided to join the Axon network.
Following the close of the quarter and earlier this week, we received notice that we were awarded the Seattle Police Department body cam and digital evidence management contract. There had been some noise in the market of late around less well established competitors trying to blunt our momentum and gain market share with lower priced offerings. The recent Seattle PD win is a great example of a strong customer acceptance of TASER and the demonstrated performance of our platform as a key differentiator. In our press release on the Seattle Award, we linked the preliminary and final scoring of our product versus our competitors. In the initial scoring based on a written evaluation, TASER was virtually tied with two other competitors.
As with most large agencies though, Seattle PD opted for a thorough product testing of the full hardware and software solution and also was made aware that certain competitor capabilities were not yet developed. After a thorough testing and review, we received the highest score by a wide margin and were subsequently awarded the contract. This is very noteworthy and indicative of the real value of the platform. Situations, difference between us and the competitors is clear between how our full solution stacks up to the commodity camera offerings of our competitors. This is a testament in part to the time we spend with our customers to best understand their needs and then innovate and expand the platform feature set to meet their requirements.
When field tests have been conducted as part of the process, our win rate stands at nearly 100%. Price is often a consideration and we work with our law enforcement partners to ensure that we're responsive and competitive, but time and time again, field tests provide agencies with the assurance that they'll be purchasing a vastly superior experience with TASER and that others simply cannot deliver at scale regardless of how they price their body cameras. I'm really happy about the progress we've made in 2016, and we expect to close out the year strong with lots of momentum to carry us into 2017. And while it's too early to discuss any financial expectations for the coming year, I'm excited about shipping full deployments of Axon fleet, continuing to consolidate the major cities on our Axon platform, adding new customers on our TASER payment plans and growing international bookings and revenue and developing our record management system on the Axon platform. And now I'll turn the call over to our CFO, Dan Barrant.
Thanks, Luke, and thanks, Rick, for the very kind words. It's been a tremendous opportunity to work with both of you along with everyone else at TASER over the last twelve years. When I joined TASER in 02/2004, we're focused solely on our weapons business with annual sales of just under $68,000,000 Today, we offer a comprehensive cloud platform solution along with our weapons products and combined revenue for the recent quarter was nearly $72,000,000 which surpasses our full year revenue total in my first year. And then on a trailing twelve month basis, revenue is now more than $242,000,000 That significant revenue growth and diversification has required the build out and scaling of our finance capabilities and processes. I'm proud to have led that effort as we've established a top notch finance team with the capabilities and resources required to see TASER through its next phase of growth.
I look forward to working with the team over the next over the coming months to ensure a smooth transition. And now on to the results for the quarter. As Luke said, revenues for the third quarter set yet another record increasing 43% from the prior year to $71,900,000 The increase was driven by a 34 increase in the weapons segment revenues and a 75% increase in the Axon Video segment revenues. The increase in weapons segment was driven by growth in both domestic and international sales. Domestically, we're seeing continued success in our TASER payment programs such as TASER 60 and the Officer Safety Plan in agencies of all sizes.
In fact, the top three domestic deals weapons deals in Q3 were all TASER 60 deals. The growth in the Axonant segment was driven by the shipment of over 30,000 body worn cameras as we work through our Axonant tube backlog as previously anticipated. This drove up an increase in both our hardware revenue and the number of active paid seats, which narrowed the gap between the booked seats and the paid active seats. Total international revenues in the third quarter increased 69% from the prior year to $11,300,000 or nearly 16% of the total revenue for the period. We saw strong sales in several markets with no single country accounting for more than 25% of our international revenue.
We continue to have strong momentum in both weapons segment and the Axon bookings in our target international markets. However, as we discussed previously, due to the procurement patterns and typical size of our international orders, we expect to see some revenue lumpiness from quarter to quarter in the international part of our business. On our last call in August, we mentioned that we shipped 10,000 cameras in July. We're on track for record shipments in the third quarter. We ended up shipping approximately 30,000 cameras in the quarter, more than doubling our previous record of 13,300 cameras set in the previous quarter.
As anticipated, we did not see a commensurate increase in camera revenue due to additional discounting initial camera purchases, but the gross margins on the underlying contracts continue to meet or exceed our expectations. As a reminder, over 80% of our contracts include the TASER assurance plan feature under which customers prepay for the future camera upgrades. Future hardware upgrades under the program will have a lower implied discount than initial camera purchase and as such will flow through the P and L at a higher average selling price. Axon segment service revenue grew 78% sequentially, driven by the additional active paid seats to the Axon platform and a $1,700,000 in catch up service revenue. The catch up revenue was due to the recognition of service revenue previously held due to delay in meeting contractual terms and milestones on certain of our contracts.
Annual recurring revenue in the third quarter, which excludes the impact of the one time catch up revenue was $32,000,000 representing a sequential growth of 51%. During the quarter, we are also able to reduce the delta between our booked seats and active paid seats by almost 7,000 seats. As a reminder, there will always be a delta between the booked and paid seats due to the customer request for stage deployments and the lag of service revenue beginning in the month following the shipment of cameras. Camera shipments on new orders remain strong and we expect continued growth in our annual recurring revenue. As we look to our full year 2016 results, Q4 is typically the highest revenue quarter of the year.
But given the strength of Q3 results, the $1,700,000 catch up in service revenue and the shipping of the backlog cameras, we expect that Q4 revenue will be relatively flat with Q3, which we still view as very encouraging indicative of the momentum in our business. Bookings were up 56% from the prior year, but down $14,500,000 from the second quarter due to the $20,500,000 LAPD booking in the second quarter, which made for a tough sequential comparison. Excluding the LAPD contract, bookings were up sequentially. Our bookings pipeline remains strong and we expect to see continued wins in both small and large agencies. Future contracted revenues at September 30 were $3.00 $2,000,000 an increase of 15% sequentially from the second quarter, which is driven by our strong bookings, which are made up of both service and hardware components.
Gross margins in the third quarter were 64.8% on a consolidated basis compared to 61.7% in the prior year period. The increase in gross margins was driven by manufacturing efficiencies in the weapons segment and the benefit of the $1,700,000 of catch up service revenue and favorable mix impact in the with higher margin service revenue taking up a larger proportion of our total sales. Sales general and administrative expenses increased to $28,100,000 compared to $17,800,000 in the 2
the third quarter of
the prior year. This increase is primarily due to increased headcount, variable compensation and consulting expenses. Additionally, in the third quarter, we had approximately $2,000,000 of non recurring legal expenses and professional fees. Research and development expenses of $7,400,000 compared to $6,500,000 in the prior year. The increase is almost entirely driven by increased headcount in our Axon segment.
As we mentioned on our last call, we expect our operating expenses guidance to increase by 2% to 3% to end up in a range of $130,000,000 to $132,000,000 for the year. Our strong sales and bookings growth results in increased variable compensation, but excluding our non recurring expenses in Q3 of approximately $2,000,000 and Q4 severance expense, we still expect to stay within our prior range. We're pleased with the results of our investment growth initiatives and continue to opportunistically invest in initiatives that drive customer adoption, broaden our customer reach and expand the offerings on our platform. RMS is the one area that Rick highlighted, which complements the continued development of our Axon Cloud Platform solution. In the third quarter, we had approximately 700,000 of other expense related to exchange rate fluctuations between the British pound and the U.
S. Dollar. Income tax expense for the quarter was $6,800,000 for an effective tax rate of 63.9%. We're adversely affected by losses in foreign entities, which we do not currently expect to receive a tax benefit from. Additionally, we recognize an unfavorable provision to tax return trip relating to our 2015 tax return filed in September.
The combined impact of the foreign entity losses, which we do not currently expect to receive a tax benefit from and the return to provision trip is approximately $1,500,000 or $0.03 per share $0.03 per diluted share. We expect the fourth quarter effective tax rate to be in the 44% to 47% range. Operating cash flow in the third quarter of twenty sixteen was $11,600,000 a decrease of $7,700,000 compared to the third quarter of twenty fifteen. The decrease was primarily driven by an increase in inventory, long term customer receivables and prepaid commissions offset by an increase in accounts payable and net income. As a reminder, as the number of TASER 60 deals increase, we'll see an adverse near term effect on cash from operations because customers will pay for the weapon over five years rather than the entire amount at sell in.
For most TASER sixty customers, weapons revenue will be recognized on sell in and the warranty revenue will be recognized over the life of the contract. We still believe this is a very attractive trade off as it allows agencies to purchase weapons and upgrade their weapons at a schedule with lower upfront costs, while also increasing the warranty attachment rate. We've one of the things we announced in the queue that we're filing today is we've canceled our rule 10b5 shareholder share repurchase plan based on the initial success of our TASER payment plan options in order to allow us to have flexibility as we run the business going forward. And with that, I'm going to turn the call back over to the Q and A section of the call.
Thank And our first question comes from Steve Dyer with Craig Hallum. Your line is now open.
Thank you. Dan, best of luck. You'll be missed. Thanks for everything. Great quarter guys.
A couple of different questions. Weapons overall was very strong in the quarter, both handles as well as cartridges. Can you elaborate a little bit more on what drove that? Were there any large one time orders, especially on the cartridge side? Any more color there, whether it was domestic or international, etcetera?
Yes, this is Rick. Really these subscription payment plans are really being well received. I think our three largest orders all came in on some sort of subscription plan. And in those, we bundled together for the customer. One thing they like is that we're sort of taking a lot of the unpredictability out of the cost.
So we include things like warranty and service, but also five years worth of cartridges in many cases, at least in some of those plans. So that can also help drive the cartridge volume. So it's primarily domestic, I would say, is what was driving most of that volume.
Got it. And then just from an accounting standpoint, do you actually send out the cartridges right away or is that just you're recognizing the revenue for those and we'll send them out as the contract progresses?
This is Dan. Yes, typically we'd be sending the cartridges out with the handles. They have a shelf life that's certainly the life of the weapon itself. So there's no issue with delivering them upfront.
Okay, great. And then on the Axon side, you obviously worked through a lot of the backlog. Did you still have some remaining Axon II backlog entering Q4 or did you work through all of that?
Yes, this is Dan. We always have a little bit of a backlog just orders we received in the last few days of the quarter, but we certainly built up our camera backlog to the point where we're certainly able to meet the demand as it comes in. We don't have the significant backlog we finish Q2 with.
Okay. I guess just back on the weapons then, I'm wondering as you kind of think about future growth rates and it seems like you always talked about sort of 10% to 15% -ish on a CAGR basis. Does anything change there or are you pulling some weapons demand from future years forward because of the offer in the terms right now? Or how should we think about sort of overall growth?
Yes. I think we're still really confident in that 15% growth target. I think the service plans are seeing a lot of traction with TASER6 6D and OSP. We currently don't disclose what percentage of the deals are on those service plans. So that's something as it becomes a bigger part of our business, we'll think through how we communicate that to investors.
The other item I would say internationally, we still have a lot of opportunity. The need for a non lethal alternative is a universal problem and we feel really good about the teams that we're building out in those markets.
I could add in there as well, Luke. This is Rick, obviously. We've seen some of the larger agencies this year start to expand towards full deployment with LAPD now moving towards putting TASERs out for every officer. The mayor of Chicago has made comments that they're going to make TASERs available to all their front line officers. We're hearing rumblings from some of the other largest agencies in the country that that idea is really gaining traction in the world that we live in now.
Frankly, with cameras everywhere, including the ones that cops are wearing, everything that they can do to avoid using legal force is becoming an imperative. So we see the expansion in the larger accounts and then the subscription plans are helping agencies accelerate their deployments. And we also feel pretty confident that that's also going to accelerate the proposition, which if you include people who haven't upgraded, that's maybe about where we're sitting today. If we can accelerate that down to a five year upgrade cycle, that basically doubles the size of the business over a five year time horizon in terms of the replacement cycle. So we think between that and the international segments that it was just still so much white space that we're feeling really good about the growth opportunities in the core.
Great. That's very helpful. And then last question for me and I'll pass it along. I know you don't want to talk probably too much about next year, but as we think about OpEx, it's been a little bit of a moving target and now we sort of seem to be zeroed in on a level. Is next year the year you can sort of find some leverage on that?
I mean, do you feel like you're at a point where you're well staffed and spending to sort of still grow or are there still a lot of things to spend on and a lot of growth in the expenses as well?
Steve, great question. 2016 has been a fantastic year for us year to date with revenue up over 30%. We expect to have some tailwind going into 2017 with a lot of our paid seats coming back. We're actually still working through our budgeting process for next year. And I think our philosophy here is as long as we continue to see the opportunity that aligns with our investors, we'll continue to build out the core teams that we need to gain the dominant market share.
Yes, I would add in a little bit there too. I would say that especially with things like RMS, we're going to continue to see some growth in R and D to support something that doubles the total available market. And I think given our position where we're at now with this unique position of having the majority of the market now on our platform, that our ability to develop and deploy frankly a business that can match the size of our current Axon business and it should be a lot more cost effective than it was to build that first business over the past seven or eight years that we are going to continue to see, I'd say, some investment in R and D and then in the SG and A, it's international opportunities. We're really starting to see some fruit there, right? You look at what's happening in The UK, Australia and Canada, and then we've got some of the non English speaking countries that some of the formative work we did over the last year, I think we'll start to see next year.
So we're continuing to watch things to make sure that the overall revenue growth trajectory of the business is heading the right direction, such that the investments we're making are all being looked at on an ROI type basis. And we will be getting back to you guys obviously as we get into 2017. We're still kind of fleshing out our model. And frankly, part of what happened this year is the bookings growth in particular and the revenue growth really exceeded our internal expectations. So as the year went along, we were sort of recalibrating spend to sustain and augment the growth.
So we're now going through really analyzing 2017, so we can give you some good numbers in the first part of the year.
Got it. Thanks again and congratulations.
Thank you.
Thank you. And our next question comes from Mark Strouse with JPMorgan. Your line is now open.
Yes. Hey guys. Thanks for taking our questions. Congrats on the strong 3Q here. Dan, I'd also like to say best of luck and thank you very much for all your help over the years.
So Luke, I know you don't want to get into details, but I just wanted to press you a little bit more on Seattle. So I can appreciate your commentary around quality versus the price based competition. But from our side of the house here, is it fair to say generally that the Seattle contract will be similar to pricing to your other contracts that you've already secured despite the NYPD noise?
Yes, I think Seattle would be a good proxy for how we would handle the majority of major cities. I'd like to add a little bit of color just on how we think about NYPD. We think that that's kind of an anomaly in terms of how they play into the market. It's drastically larger. We also with that deal, we think there's still an opportunity for us to come back and win that over the long term with one of the solutions that we bring to market.
And fundamentally, we think the landscape hasn't changed. Our Head of Sales likes to say an informed customer is our competitors' worst nightmare. And we really believe that when they do these trials, they see the value of the system that we've created, specifically around the value of the workflow. And when you start to add in the cost that it takes for them to do these processes manually, as well as the exposure that they would have if they were to have a security breach. In Charlotte, they had a major high profile video, where they had several groups calling for the release of the video and we worked with Charlotte PD to handle that situation.
And I think that's something that none of our competitors could do is provide that level of security.
Yes, we put our security operations team hand in hand. So we were working with the customer threat monitoring, monitoring network traffic and taking very proactive infosec capabilities to help our customers out.
So just to answer your question, Mark, we do think Seattle is a good proxy for the rest of the major cities. And final point for me on this is when agencies field trial, we feel very confident in our solution. And then the last item I would say is, this is part of our strategy is to get them onto our platform and then we can expand the platform with future capabilities like RMS, which Rick talked about in his section.
And just to be super clear, the Seattle pricing is consistent with prior contracts. So and then the one other thing I would add is it's not just about your question talked about quality. This isn't just about quality. It's really about capabilities. I think fundamentally what we're competing with are camera vendors selling cameras.
The majority of our investment has been around the integrated hardware software experience. And unfortunately, we had New York and frankly Phoenix PD both just kind of tested cameras and priced out cameras and like the price of cheap cameras, we're doing everything we can. And frankly, I don't think those are fully baked yet, where some of the people are asking questions, given the complexity of deploying thousands of cameras, maybe a field trial is in order. And it's not just again the quality of the cameras, it's the full ecosystem of information management and sharing. There's a pretty rich enterprise software program on the back end of this.
And once we get agencies looking at that, there's no one else in the market that can deliver on it. Now of course, everybody can put together a PowerPoint that says we're in the cloud and we'll do this and sure, we'll have docs that connect to the cloud by sometime in the middle of next year if you give us the deal. It's a whole lot different when people have to deliver on it. And one of the things that we our customers will tell you and we take great pride in, our customers do not fail. We do not allow them to fail and that's a combination of the investments we made in technology, but also customer service and support and field engineers and sales engineers and training staff.
And all that has to come together for a large scale program to roll out effectively.
Got it. Okay. And then
just one more and I'll hop back in queue here. It's my understanding that the deployments under the London Met program have begun. Were there are you able to quantify how much of an impact that was, if at all, to 3Q bookings? And then how we should think about those deployments and the impact on bookings over time?
Yes. I think so the London net was included in bookings. There was a little bit of a small true up in the quarter. They're very strategic customer for us as we've talked about some of the dynamics in first mover agencies, beachhead accounts and international agencies may be on a more different or aggressive pricing model, but we're not going to shine a lot of visibility on it frankly for strategic reasons.
Thank you. Our next question comes from Jeff Kessler with Imperial Capital. Your line is now open.
Thank you for taking my question. And Dan, for the short time, we've known each other, congratulations. Just quickly on at IACP, did you demo enough video multimedia integration to show that somehow you could get the end user to believe that upgrade cycle because of greater technology, greater integration that was needed, that you got feedback saying that their upgrade cycle might be shortened by on the services side?
I think the service we're talking about the service plans increasing the I'm sorry, decreasing the length of the upgrade cycle. That's primarily on the weapons side. The upgrade cycle on the camera side is actually kind of built in because the majority of our customers on the Axon side actually choose service plans that include automatic upgrades that happen every two point five to three years. So that's kind of baked into the service plan.
Okay.
It's something like 80% are choosing those plans. So it's really that same dynamic we're trying to replicate over in the weapons side of the house. Now we don't have a lot of data because those agencies really are just maybe in the next year starting to come up, the first agencies that went on these service plans five years ago. But I would say as long as we've got compelling new products for them, cops really like weapons. I mean, it's an important part of what they do.
And we're pretty confident that what we've identified is the budget cycles are the main impediment. But if we're bringing out compelling new product offerings and they've already got a budget line item assigned to it, we think that really should help accelerate it. But we do it's still too early for us to have statistically relevant data on that.
On a real time basis on a real life basis in discussion, how are you getting how does sales or how to get your clients to upgrade to RMS? What is the pitch and what is the mechanism by which they're doing that?
Jeff, that's a great question. So we've really started these discussions at this year's ICP about the capability of the ecosystem. We've got a great user conference lined up for next year, where we're really inviting a lot of our existing Axon and Evidence.com customers, actual users of the system to come to that user conference where we'll talk to them about the RMS capabilities. And the real benefit that we have is that just the TASER brand strength and the customer experience that they provide. The vast majority of our customers really value the TASER experience that we've created.
And I talked with probably over 300 customers at IACP and the general response, which was very high, was customers were interested in expanding to more capabilities on our platform.
Yes. And really what we're setting up here is a record management system is the core ERP of a law enforcement agency. So these things have very long sales cycles and long implementation timelines historically. So we're beginning the process now of discussions customers and frankly getting them the opportunity to be participants in how we're developing and how we're prioritizing the features of this. But ultimately if you think about it, today records in police work are primarily text based.
It's The cops hearing a computer typing about stuff. That's sort of the world of fifty years ago, right? We used to get our news and information reading the newspaper. Now we have totally transitioned to where we're consuming multimedia information, photos, videos, whether it's Snapchat or frankly watching a game on TV as opposed to reading a newspaper about a sports game. Similarly, a law enforcement activity or report, when you can show people a video, it is a thousand times more informative and more credible and more transparent than anything you could ever achieve with all the time we spent creating paperwork.
And so what we basically have announced is a vision that says we're going to use these videos to be your reports and we will extract from those videos the information that needs to be searchable and shareable and redefining what a police report is for the twenty first century. And I would say that vision absolutely struck a nerve where customers were like, yes. I had one guy, I think from the Minnesota chief came up to me. He was emotional. He was like, I've been talking about this for ten years.
It seems like it's finally happening. So but we're early in the process where we have the June where we're going to be showing sort of the initial product and helping customers help us iterate on it. But don't expect this to be a revenue product in the short term, but it can be a very large one in the long term.
Okay. Last question about that and that is the feedback you're getting from customers on this, are you beginning to develop analytics that are going to create the type of user experience that they want? I mean, that's an obvious question. You're going to say yes to it. But the real question is, is the value proposition that you present, how is that going to be reflected in the way in the suggestions they're giving you to put into this new product?
Got you. So when you think about it, all the information that we would ever need for a police report is based on what an officer sees, hears and thinks during an incident. Our cameras can capture what he sees and hears and with a little bit of dictation, we can capture what he thinks and what the perceptions were. So very really this is about our sensors doing the information gathering into the back end. Now where we need a lot of customer input is what are the most important features early on and what should the user experience feel like and what do they want to dictate versus what do they want to type and where do we want to use selections and drop down menus.
And this isn't going to happen overnight where we have this incredible artificial intelligence robot or agent that's able to watch the videos and write the reports for us. So there's sort of an element of crawl, walk, run as we move into the end state where ultimately we do want to get to where the AI tools that are so rapidly evolving are machine learning and natural language transcription, sort of big data use your buzzword of the day. All these technologies that are rapidly advancing in sort of the core tech industries. For us, the sort of magic here is we're not going to go develop all those groundbreaking tools, but it's us mapping them on top of the right user experience that's appropriate given the maturity of the technology today and developing the user interface that just works for Streetcap with minimal training. So just one quick example, one of the first things we launched is transcription.
So our customers can now mark any video or any segment of the video and say, I want this transcribed. Now in the future, we'd love to have a computer do that transcription. But the fact is today computers are not that great at transcription, particularly if sort of messy audio like you would get in a police recorder. So that is we've taken that business process and we've managed that through a partnership with a partner that has lots of people that are court certified transcriptionists. And in many states, actually if you're going to submit a video to court, you have to have a transcription.
Well now for our customer, that's as simple as clicking a button. No, you have to pay for it. We handle all the backend of transporting that to a court certified transcriptionist and it will the next day or so magically show up in Evidence.com. So again, this is sort of mapping that what level of things can we do with technology versus people services and then taking that into the future and having a good strategy and good understanding of where the right technologies meet the right customer need at the right point of maturity.
Okay, great. Thank you very much.
Thank you. Great questions.
Thank you. Our next question comes from Glenn Mattson with Ladenburg Thalmann. Your line is now open.
Hi. Congrats on the results for the quarter guys. And Dan, congrats on moving on and a great job at TASER. So I just want to highlight on the weapons outperformance again this quarter and the subscription plans and how it's recognized. So you said you're going to recognize five years worth of cartridges upfront, but the weapon, the handle itself that gets recognized over time.
Is that right?
So typically we'll recognize the handle and the cartridge delivered upfront. There's a couple of different TASER 60 plans. One that includes just a few cartridges, one that includes more cartridges. Depending on which plan people pick, we'll record the handle on the cartridges with the sell in and then record a long term receivable. The piece we recognize over time is the warranty.
Okay. I wonder if the cartridge number is going to be inflated for a couple of quarters and then drop off, I guess unless there's a big pickup in overall handles. Is that kind of how that would smooth out?
Yes. And a lot of it will depend on how many of the TASER 60 programs we sell. I think one of the things we're seeing, at least early on, is that people are buying more weapons upfront. So instead of buying say a fifth of their arsenal each year for five years, they buy them all upfront because the cash flow impact is the same and they can sort of upgrade their entire installed base at the same time. So and as a result, we sell more cartridges at that point as well.
So I think it's certainly we'll see how it flushes out, but we see this as being just a big net positive for just the weapons segment in total.
Okay. And then but other than that, you said the three largest deals were on the subscription plan. But I just wonder, it feels like those plans would take some time to hammer out and coming into the quarter, I think you guys were kind of guiding to kind of flattish or down after a big front half of the year in weapons. So did the demand kind of surprise you in the quarter, I guess?
Yes. No, it was definitely stronger than we expected. And again, I think that these subscription plans are making a difference. I think they're helping to drive business and helping to make the overall deal sizes a little bit bigger. So again, somebody is potentially buying.
Our cash flows maybe aren't going to be as reflective as the deal sizes because people are paying over time. But on a revenue perspective, we're seeing just larger revenues because people are gravitating towards these plans and buying
more product.
Okay, great. And then with the comment you made on the flat, I think you said typically Q4 is a lot higher, but you think it's closer to flat to Q3. Was that regarding the total revenue or was that one segment? I didn't quite catch that.
That's the total revenue.
Total revenue, okay. But that's minus the one time catch up payment, right? Excluding that, I mean.
Yes, we expect well, I think the one time catch up is one of the reasons why we expect it to be relatively flat because we had some items that certainly helped Q3. So we think Q4 will be in line with Q3.
Okay. All right, great. Thanks guys.
All right. Thank you.
Thank you. And our next question comes from Jeremy Havilland with Dougherty and Company. Your line is now open.
Hi, there. This is David Burdick on for Jeremy. Thanks for taking my question and great quarter guys.
Thank you.
I just wanted to touch on the Axon Service revenue growth. It looks like it had quite a big jump, about 80% sequentially. Just wanted hopefully you could provide some more color on that as well as I wasn't sure if I caught it or not, but did you tell us the active users growth in Q3 by chance?
Yes. So, yes, I'll start with the last part. We didn't say the exact growth. We did narrow the spread between the book seats, which we disclosed and the active paid seats. We don't disclose the exact number for the active paid seats.
But Q3 was benefited from a few things. One is the catch up service revenue of the $1,700,000 so that certainly helped. And then the fact that we had a lot of the cameras that we shipped in Q2 were shipped in June. So you saw a lot of those cameras come into the service revenue in the third quarter along with the 30,000 cameras we shipped in the quarter. So I think that really led to roughly a 50% increase in the ARR and as a result we're seeing that in the quarterly service revenue.
Okay. And then just on maybe the SG and A on the Axon side, it grew, I think, 98%, while the sales on that side grew about 75%. Wondering why there is such usually those are maybe a little more connected?
Well, we certainly continue to add salespeople both domestically and internationally. We're sort of paying attention more to the bookings growth versus the GAAP revenue sales just because GAAP tends to be sort of a trailing indicator. The other thing I would say is that because we with the much higher bookings, we're seeing higher commission and variable selling expenses as well, which is part of what's driving that is and then we've got some additional marketing expenses.
Okay, great. And then just on the TASER 60, I know you guys mentioned a few benefits and offers as well as it seems like it's finding some success. Just hoping to maybe get a little more color on that as well as maybe just when looking at the cost for your customer, what kind of incremental benefit do they gain by choosing the plan over just maybe a one time purchase?
I think, yes, they get a few benefits. One is they're getting the warranty sort of bundled in. They've got the ability to spread out their cash flows, which I think is important to them. And because of that, they have the ability to upgrade a larger proportion of their installed base at once without having to outlay more cash. So I think that sort of certainty comes with that and I think has really resonated well with customers.
Yes. The other thing I would say is, anytime you're doing a big purchase, there's a certain amount of bureaucracy that they have to navigate. And one thing that we're finding resonates well with them is, if you're going to navigate that bureaucracy to go get special one time dollars, you could spend that same amount of effort to get budgetary approval to put it in your budget and now you're not going to have to go fight that fight every time you want to upgrade your equipment. And that's a real benefit to these guys. They're like, great, this is one they can see it give me a future pain point that's eliminated because they've sort of planned for this as an ongoing program, not something they just buy once and then have to deal with it again down the road.
That's a plus for both of us.
Okay. All right. Great, guys. Thanks and good luck in Q4. Thank you.
I think we've got time for maybe one more set of questions.
Thank you. And our final question comes from George Godfrey with CL King. Your line is now open.
Thank you. Just made it in under the wire. Congratulations on a great quarter. Two quick questions. The customer that chose the TASER 60 program, can you segment what percentage were greenfield new customer buys versus upgrades of existing weapons?
I would say the majority we don't have we're in 95% of agencies across the country. So I would say the vast majority, nearly all of them would have been existing customers. What we do see, especially in the smaller deals, is that when they buy on one of these payment programs, we're seeing a great indicator that they're actually buying more unit handles than they would have if they just bought with a one time expenditure.
So we could have been selling the weapon to an existing customer, but now they're rolling it out to a larger percentage. So I'm making this up, but 50%
to
existing officers who had weapons and 50% are all new officers?
Yes, correct. That's right. Or they're upgrading their entire installed base all at once versus doing it over time.
Which obviously really helps the upgrade program because a lot of these guys are like, well, I want to I've got maybe for somebody who is upgrading, oh, I've got 500 TASERs and I want to upgrade them, but I can only afford to do 100 this year. And we say, great, guess what, if you can just put us in your budget, we'll give you the 500 now. And then that unstick the deal because otherwise they're thinking, well, geez, now we've got to support two different weapons in the field, two different types of training. Here we can say, look, you've got a clean program cutoff, let's upgrade all your officers and pay for it over time. And so that deal otherwise might not have happened at all because of the sort of complexity of having a mixed fleet of devices.
Right, understood. And then the second question on the records management system, which sounds very exciting, two pieces. One is after you show it in the June next year, would you expect GA to be in the second half of twenty seventeen? And then the second part of that is the pricing. Would you price that as a standalone recurring monthly model?
Do you augment existing contracts? How does the accounting work on how you roll it out to a customer that has Evidence.com and now wants to go with the RMS?
Yes, I hate to say this. I think it's premature for us to comment on either of those. Just at this point, I don't know that we'd have part of it depends on how wide and complex the initial version of the product has to be to meet customer requirements. If it turns out that a fairly narrow product that covers the 80% of interactions they have is sufficient, then that's going to be launched sooner than if what we learn with customers is no, no, no, we need to even have these edge cases covered before we could upgrade to it. And then in terms of pricing, those are decisions we're going to refine based on how the product evolves.
So we know that it will be a significant incremental there are budgets for this today as a core system law enforcement. Our ultimate pricing I think is going to turn you depend on strategically how we can determine to best make that work for our customers.
Got it. Understood. Great. Thank you very much for taking my questions.
All right. Thanks a lot. Thanks, everybody. Obviously, exciting day for us here. Appreciate I saw some comments online back and forth.
We had some shareholders who've been with us for a while, sort of exuberated today's results. Delighted we could surprise you with some great results here that surprised us as well as our customers continue to just really find value in what we're doing together. So everybody have a fantastic holiday season, happy Thanksgiving and I look forward to talking to you all in 2017.
Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you
may
now disconnect. Everyone have a great day.