Good day, ladies and gentlemen, and welcome to the TASER International third quarter 2016 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. Instructions will be given at that time. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. 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 2016 earnings conference call. Before we get started, I'm going to turn the call over to Dan Behrendt, 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'll 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, Inc..
These estimates and statements speak only as to the date on which they are made, are not guarantees of future performance, and involve certain risks, uncertainties, and assumptions that are difficult to predict. All forward-looking statements that are made on today's call are subject to risks and uncertainties that could cause our actual results to differ materially. These risks are discussed in 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. 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 that I'm 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 U.S. 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 from a competitor, Vievu, 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, and 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 2015 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 million to $32 million. In 2016, we've executed on establishing a strong beachhead presence in our focused tier 1 international markets. We now have several major accounts in the U.K., including the three largest agencies in the U.K. 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 1 markets. In the third quarter, international revenue was $11.3 million or 16% of our record $71.9 million 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 360-degree immersive view of how the Axon 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 2, a camera with unmatched durability, best-in-class HD retina low-light image quality, and enhanced wearability. The Flex 2 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 on equipment. The Flex 2 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. Of course, we've extended our industry-leading retina low-light capability to full 1080p HD video, yet we still retain the ability to buffer video for a full 12-hour shift, even in 1080p. Customers love the new Flex 2, and initial shipments are expected in December, with full production ramping in early 2017. 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 the paperwork and labor-intensive manual data input by 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 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 just simple digitizations of the same paperwork-driven workload of the last 100 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. 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. We can leverage this unique network to replace the outdated manual information systems that are prevalent today. 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 Basche 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, et cetera. Jobs approved the project and appointed Todd to lead the effort. As we discuss 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's 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. As the next step in our evolution, we've started development of this cloud-based alternative to traditional RMS, which I talked about. 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 Axon 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 that we have today for our current digital evidence management solutions. We've informed our customers that we will preview the Axon RMS solution at our user conference in June of 2017, and 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. 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 opportunity to build our business with high-margin, sustainable solutions. Before turning 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 Behrendt, will be transitioning from TASER in the first half of 2017. 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-K 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 12 years. With that, I'm going to turn it over to Luke.
Thanks, Rick. We had an exceptionally strong third quarter in 2016. I am proud to share the highlights of our accomplishments. Revenues came in at a record $71.9 million, with international sales contributing $11.3 million to the total. Our other key metrics also showed continued strength within the quarter. Bookings on our Axon platform were $57.5 million in the third quarter, an increase of 56% compared to the third quarter of 2015. Down sequentially due to $20.5 million LAPD deal booking in the second quarter. Annual recurring revenue in the third quarter was $32 million, 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 2 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 2016, 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 cost 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 2016's second quarter, which benefited from higher booked 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 install 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 onto our platform, this creates enormous value to our customer base. Internationally, we continue to win major accounts on our Axon platform in our tier 1 focus markets. In Australia, for example, we have won two key accounts with Queensland and the Northern Territory.
We have several active trials and key accounts in Canada, Australia, and in the U.K. 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. 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, 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. Also, Seattle PD 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. Time and time again, agencies that undertake field tests recognize the superiority of our offerings.
When our customers trial our products in the real-world situations, the 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 are responsive and competitive. But time and time again, field tests provide agencies with the assurance that they will 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 am really happy about the progress we have made in 2016, and we expect to close out the year strong with lots of momentum to carry us into 2017. While it is too early to discuss any financial expectations for the coming year, I am 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, growing international bookings and revenue, and developing our record management system on the Axon platform. Now I will turn the call over to our CFO, Dan Behrendt.
Thanks, Luke, and thanks, Rick, for the very kind words. It has been a tremendous opportunity to work with both of you, along with everyone else at TASER over the last 12 years. When I joined TASER in 2004, we were focused solely on our weapons business with annual sales of just under $68 million. Today, we offer a comprehensive cloud platform solution along with our weapons products, and combined revenue for the recent quarter was nearly $72 million, which surpasses our full year revenue total in my first year. On a trailing 12-month basis, revenue is now more than $242 million. That significant revenue growth and diversification has required the build-out and scaling of our finance capabilities and processes. I am proud to have led that effort as we have 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 coming months to ensure a smooth transition. Now onto the results for the quarter. As Luke said, revenues for the third quarter set yet another record, increasing 43% from the prior year to $71.9 million. 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 weapons deals in Q3 were all TASER 60 deals. The growth in the Axon segment was driven by the shipment of over 30,000 body-worn cameras as we worked through our Axon II 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 $11.3 million, 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 their 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&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 $1.7 million 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 million, representing a sequential growth of 51%. During the quarter, we were 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 customer requests for staged deployments and the lag of service revenue beginning 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.
Given the strength of the Q3 results, the $1.7 million catch-up in service revenue, and the shipment of the backlog cameras, we expect the 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, down $14.5 million from the second quarter due to the $20.5 million 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 30th were $302 million, an increase of 15% sequentially from the second quarter, which was 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 $1.7 million of catch-up service revenue and favorable mix impact with higher margin service revenue taking up a larger proportion of our total sales. Sales general and administrative expenses increased to $28.1 million, compared to $17.8 million in 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 million of non-recurring legal expenses and professional fees. Research and development expenses of $7.4 million, compared to $6.5 million 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%-3% to end up in a range of $130 million-$132 million for the year. Our strong sales and bookings growth result in increased variable compensation, but excluding our non-recurring expenses in Q3 of approximately $2 million 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 US dollar.
Income tax expense for the quarter was $6.8 million, 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 tax return true-up 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 provision true-up, is approximately $1.5 million, or $0.03 per diluted share. We expect the fourth quarter effective tax rate to be in the 44%-47% range. Operating cash flow in the third quarter of 2016 was $11.6 million, a decrease of $7.7 million compared to the third quarter of 2015.
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 60 customers, weapons revenue will be recognized at 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 on a schedule with lower upfront costs while also increasing the warranty attachment rate.
One of the things we announced in the Q that we're filing today is we've canceled our Rule 10b5-1 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. With that, I'm going to turn the call back over to the Q&A section of the call.
Thank you. Ladies and gentlemen, if you have a question at this time, please press the star then the one key on your touch tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Again, that's star one for questions. 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, et cetera?
This is Rick. These subscription payment plans are really being well received. I think our three largest orders all came in on some sort of subscription plan. In those, we bundle together for the customer. One thing they like is that we're sort of taking a lot of the unpredictability out of the cost. We include things like warranty and service, but also five years worth of cartridges in many cases, or at least in some of those plans. That can also help drive the cartridge volume. It's primarily domestic, I would say, is what was driving most of that volume.
Got it. 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 will send them out as the contract progresses?
This is Dan. 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. On the Axon side, you obviously worked through a lot of the backlog. Do you still have some remaining Axon II backlog entering Q4, or did you work through all of that?
Yeah, this is Dan. We always have a little bit of a backlog, just the orders we received in the last few days of the quarter. 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 finished Q2 with.
Okay. I guess just back on the weapons then. I'm wondering as you kind of think about future growth rates, it seems like you always talked about sort of 10% to 15%-ish on a CAGR basis. Does anything change there, are you pulling some weapons demand from future years forward because of the offer and the terms right now, or how should we think about sort of overall growth?
Yeah, I think we're still really confident in that 15% growth target. I think the service plans, we're seeing a lot of traction with TASER 60 and OSP. We currently don't disclose what % of the deals are on those service plans, 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, we feel really good about the teams that we're building out in those markets.
If 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 frontline officers. We're hearing rumblings from some of the other largest agencies in the country 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 lethal force is becoming an imperative. We see the expansion in the larger accounts.
The subscription plans are helping agencies accelerate their deployments. We also feel pretty confident that that's also going to accelerate the upgrade cycle, which if we can take the upgrade cycle from an eight to 10-year 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. We think between that and the international segments, that there 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. Last question from 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? Do you feel like you're at a point where you're well-staffed in 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. 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.
Yeah, 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&D to support something that doubles the total available market. 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 could 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&D. In the SG&A, these international opportunities, we're really starting to see some fruit there.
You look at what's happening in the U.K., Australia, and Canada. 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. 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. We will be getting back to you guys, obviously, as we get into 2017. We're still kind of fleshing out our model. Frankly, part of what happened this year is the bookings growth in particular, and the revenue growth really exceeded our internal expectations. As the year went along, we were sort of recalibrating spend to sustain and augment the growth.
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. Our next question comes from Mark Strouse with J.P. Morgan. Your line is now open.
Yeah. 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. Luke, I know you don't want to get into details, but I just wanted to press you a little bit more on Seattle. I can appreciate your commentary around quality versus the price-based competition. 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?
Yeah, 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. 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. Fundamentally, we think the landscape hasn't changed. Our head of sales likes to say an informed customer is our competitor's 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.
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'd 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. I think that's something that none of our competitors could do, is provide that level of security.
We put our security operations team hand in hand. We were working with the customer, threat monitoring network traffic, and taking very proactive info sec capabilities to help our customers out.
Just to answer your question, Mark, we do think Seattle is a good proxy for the rest of the major cities. Final point for me on this is when agencies field trial, we feel very confident in our solution. 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.
Yeah. Just to be super clear, the Seattle pricing is consistent with prior contracts.
Perfect. Okay.
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. Unfortunately, we had New York and frankly, Phoenix PD, both just kind of tested cameras and priced out cameras and liked 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. 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.
Once we get agencies looking at that, there's no one else in the market that can deliver on it. 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. One of the things that our customers will tell you, and we take great pride in, our customers do not fail. We do not allow them to fail. 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. All that has to come together for a large-scale program to roll out effectively.
Got it. Okay. 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. Are you able to quantify how much of an impact that was, if at all, to 3Q bookings? How we should think about those deployments and the impact on bookings over time? Thanks.
The London Met was included in bookings. There was a bit of a small true-up in the quarter. They're a very strategic customer for us, as we've talked about some of the dynamics in first-mover agencies and beachhead accounts in international agencies, may be on a more different or aggressive pricing model, we're not going to shine a lot of visibility on it, frankly, for strategic reasons.
Right. Okay. Thank you very much.
Thanks, Mark.
Thank you. Thank you. Our next question comes from Jeff Kessler with Imperial Capital. Your line is open.
Thank you. Thank you for taking my question. Dan, for the short time we've known each other, congratulations. Just quickly, at IACP, did you demo enough video multimedia integration to show that somehow you could get the end user to believe that that upgrade cycle, because of greater technology, greater integration that was needed, that you got feedback saying that their upgrade cycle might be shortened on the services side?
I think we're talking about the service plans increasing the, I'm sorry, decreasing the length of the upgrade cycle.
Yes.
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 and a half to three years. That's kind of baked into the service plan.
Okay.
Yeah. Something like 80% are choosing those plans. It's really that same dynamic we're trying to replicate over in the weapons side of the house. 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. I would say, as long as we've got compelling new products for them, cops really like weapons. It's an important part of what they do. 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. It's still too early for us to have statistically relevant data on that.
On a real-life basis in discussion, 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. We've really started these discussions at this year's IACP 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. The real benefit that we have is 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. 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.
Really what we're setting up here is a records management system is the core ERP of a law enforcement agency. These things have very long sales cycles, and long implementation timelines historically. We're beginning the process now of discussions with our customers, and frankly, giving them the opportunity to be participants in how we're developing and how we're prioritizing the features of this. Ultimately, if you think about it, today, records in police work are primarily text-based. It's a cop sitting at a computer typing about stuff. That's sort of the world of 50 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 1,000 times more informative and more credible and more transparent than anything you could ever achieve with all the time police spend creating paperwork. 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 21st century. I would say that vision absolutely struck a nerve where customers were like, "Yes." I had one guy, I think from Minnesota, chief came up to me, he was emotional. He was like, "I've been talking about this for 10 years.
It seems like it's finally happening." We're early in the process, where we have the June conference where we're going to be showing sort of the initial product and having customers help us iterate on it. Don't expect this to be a revenue product in the short term.
Yeah
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. The real question is, the value proposition that you present, how is that going to be reflected in the ways, in the suggestions they're giving you to put into this new product?
Got you. If 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. Really this is about our sensors doing the information gathering into the back end. 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?
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. 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, 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 a street cop with minimal training.
Just one quick example. One of the first things we launched is transcription. Our customers can now mark any video or any segment of a video and say, "I want this transcribed." Now, in the future, we'd love to have a computer do that transcription. The fact is, today, computers are not that great at transcription, particularly of sort of messy audio like you would get in a police recorder. 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. In many states, actually, if you're going to submit a video to court, you have to have a transcription. Now for our customer, that's as simple as clicking a button. You have to pay for it.
We handle all the back end of transporting that to a court-certified transcriptionist, and it will, the next day or so, magically show up in Evidence.com. 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. I just wanted to highlight on the weapons outperformance again this quarter and the subscription plans. How it's recognized. You said you're going to recognize five years' worth of cartridges up front, but the weapon, the handle itself, that gets recognized over time. Is that right?
Typically, we'll recognize the handle and the cartridge delivered upfront. There's a couple 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 and 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 quarters and then drop off. I guess unless there's a big pickup in overall handles. Is that how that would smooth out?
Yeah. 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 up front. Instead of buying, say, a fifth of their arsenal each year for 5 years, they buy them all up front because the cash flow impact is the same, and they can sort of upgrade their entire install base at the same time. As a result, we sell more cartridges at that point as well. I think certainly, we'll see how it flushes out, but we see this as being just a big net positive for just the weapon segment in total.
Okay. Other than that, you said the 3 largest deals were on the subscription plan. I just wonder, it feels like those plans would take some time to hammer out, coming into the quarter, I think you guys were kind of guiding those kind of flat-ish or down after a big front half of the year in weapons. Did the demand kind of surprise you in the quarter, I guess?
Yeah, no, it was definitely stronger than we expected. 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. 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. On a revenue perspective, we're seeing just larger revenues because people are gravitating towards these plans and buying more product.
Okay. Great. With the comment you made on the flat, I think you said, typically Q4 is a lot higher, but you think it's going to be 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. That's minus the one-time catch-up payment, right? Excluding that, I mean.
Yeah. Well, I think the one-time catch-up is one of the reasons why we expected to be relatively flat, because we had some items that certainly helped Q3. We think Q4 will be in line with Q3.
Okay. All right, great. Thanks, guys.
All right, thank you.
Thank you. As a reminder, ladies and gentlemen, if you would like to ask a question at this time, please press star one on your touch tone telephone. Our next question comes from Jeremy Hamblin with Dougherty & 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. 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?
Yeah. I'll start with the last part. We didn't say the exact growth. We did narrow the spread between the booked seats, which we disclose, and the active paid seats. We don't disclose the exact number for the active paid seats. Q3 benefited from a few things. One is the catch-up service revenue, the $1.7 million, so that certainly helped. The fact that we had a lot of the cameras that we shipped in Q2 were shipped in June. 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. 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. Just on maybe the SG&A on the Axon side, it grew, I think, 98%, while the sales on that side grew about 75%. 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, with the much higher bookings, we're seeing a higher commission and variable selling expenses as well, which is part of what's driving that. We've got some additional marketing expenses.
Okay, great. Just on the TASER 60, I know you guys mentioned a few benefits it 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, yeah, 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. Because of that, they have the ability to upgrade a larger proportion of their installed base at once without having to outlay more cash. I think that sort of certainty comes with that, I think has really resonated well with customers.
Yeah. 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. 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. Now you're not going to have to go fight that fight every time you want to upgrade your equipment. That's a real benefit to these guys. They're like, "Great." They can see it's giving 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.
Great. I think we got time for maybe one more set of questions.
Thank you. Our final question comes from George Godfrey with C.L. King. Your line is now open.
Thank you. Just made it in under the wire. Congratulations on a great quarter. Two quick questions. The customers that chose the TASER 60 program, can you segment what % were greenfield new customer buys versus upgrades of existing weapons?
I would say the majority. We're in 95% of agencies across the country, so I would say the vast majority, nearly all of them would've 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've if they just bought with a one-time expenditure.
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%-
There you go.
to existing officers who had weapons and 50% are all new officers.
Yeah.
That's correct.
That's right. They're upgrading their entire installed base all at once versus doing it over time.
Which also really helps the upgrade program, because a lot of these guys are like, 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." We say, "Great. Guess what? If you can just put us in your budget, we'll give you the 500 now." That unsticks the deal because otherwise they're thinking, "Well, geez, now we've got to support two different weapons in the field, 2 different types of training." Here we can say, "Look, you got a clean program cut off. Let's upgrade all your officers and pay for it over time." That deal otherwise might not have happened at all because of the sort of complexity of having a mixed fleet of devices.
Right. Understood. The second question, on the Records Management System, which sounds very exciting, two pieces. One is after you show it in the June user conference next year, would you expect GA to be in the second half of 2017? 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?
Yeah. 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, we need to even have these edge cases covered before we could upgrade to it." In terms of pricing, those are decisions we're going to refine based on how the product evolves. 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 depend on strategically how we can determine the best fit 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've had some shareholders who've been with us for a while, sort of exuberant at today's results. Delighted we could surprise you with some great results here, but surprised us as well as our customers continue to just really find value in what we're doing together. Everybody have a fantastic holiday season. Happy Thanksgiving, 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, you may now disconnect. Everyone have a great day.