Good day, ladies and gentlemen, welcome to the TASER International second quarter 2015 earnings conference call. At this time, all participants are on a listen-only mode. Later, we will conduct a question-and-answer session with instructions following at that time. If anyone requires assistance, please press star zero on your touchtone phone. As a reminder, this conference is being recorded. Now I'll turn the conference over to your host, Luke Larson, President of TASER International. Please begin.
Thank you, good morning to everyone. Welcome to TASER International second quarter 2015 earnings conference call. Before we get started, I'm going to turn over the call to Dan Behrendt, our CFO, to read the safe harbor statement.
Thanks, Luke. Safe harbor statement. 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 of the date on which they are made, are not guarantees of future performance, and involve certain risks, uncertainties, and assumptions that are difficult to predict. All forward-looking statements that are made on today's call are subject to the risks and uncertainties that could cause our actual results to differ materially.
These risks are discussed in our press release we issued today and in greater detail in our annual report on Form 10-K for the year ended December 31st, 2014, under the caption Risk Factors. You may find both these filings as well as our other SEC filings on our website at www.taser.com. With that, I'll turn it back over to Luke Larson, our President.
Thank you, Dan. As a reminder, we are going to be accepting some questions via Twitter during the Q&A portion of the call. To follow up our updates on Twitter during the call, follow the account @taser_ir. For those of you without Twitter, all updates and graphics streams directly to our investor relations website, investor.taser.com. The team here at TASER has continued to achieve extraordinary results in the second quarter, following up on a strong start to the year in Q1. We continued to exceed expectations in both the top line and bottom line. Bookings in the Axon and Evidence.com business posted a new record of $30.6 million, a growth of 170% compared to the second quarter of 2014. Revenues in the second quarter of 2015 were $46.7 million, growth of $9.5 million, or 25.7% compared to the prior year.
We now have 26 major cities on our Axon platform, including both Evidence.com and MediaSolv. During the quarter, we announced the Dallas, Louisville, Montgomery County Axon deployments, but we also added D.C. and Milwaukee to that list as well. We remain hyper-focused on consolidating the top tier of the market on the Axon platform through incremental sales personnel, a sales development team, and a professional implementations team. We are seeing the fruits of our investments with continued bookings growth and new major city wins. We pride ourselves in being a trusted partner in law enforcement, which results in continued multiple year contracts being signed, culminating in future contracted revenue in Q2 of $94.9 million. The company had several exciting announcements in the last couple of months, including new product offerings, acquisitions, and big new order wins.
The second quarter was the first in which we had the opportunity to see early traction of the Standard Issue Grant Program, which is a resounding early success. As of the second quarter, we have already issued three-quarters of a million dollars in grants for approximately 4,300 officers. Perhaps most interesting is that we believe the program has accelerated adoption of the Officer Safety Plan licensed tier, our highest tier of service. As a reminder, Standard Issue Grant is another program in place to help incentivize agencies to ensure their officers are fully equipped on the job, not only with on-officer cameras, but also with Smart Weapons, which historically have not been standard-issue equipment.
In these times, we believe in this day and age, every officer should have a TASER, a camera, and an Evidence.com license. We are moving aggressively to bring our technology to the men and women out there doing one of the hardest jobs imaginable. Over the last 20 years TASER International has been in business, we have evolved our product suite based on the needs that we have seen via our close relationships with our customers. From the intense scenarios in which a Smart Weapon is used, we learned that a TASER CAM could capture the use of the weapon to protect officers and citizens alike in a potential excessive use of force scenario. The TASER CAM provided our first insights into video evidence market where it ultimately informed the Axon platform.
We can now capture the context of the scenario leading up to the use of the Smart Weapon by filming an entire citizen interaction rather than just the exposure itself. Upon the launch of the first generation of the Axon camera in 2009, it became abundantly clear that the management of digital evidence was the next challenge facing law enforcement entering the digital age, hence the development of Evidence.com. Next week is the one-year anniversary of Ferguson, Missouri, and the death of Michael Brown. While absolutely unfortunate from the perspective of our country's history and the present state of communities, it highlighted the need for more transparency between law enforcement and their communities. At TASER, we look to solve tough societal problems with technology. By leveraging technology, we believe we can help solve these massive societal issues in a unique way that creates the most value.
This isn't always readily apparent at the early stages of a technology investment. When we started investing in a cloud platform for law enforcement, there was a lot of doubt it would be successful. We had been investing in Axon and Evidence.com, our cloud and wearable platform, for upwards of five years prior to the Ferguson event happening. This positioned us to be the thought leader in helping agencies deal with these extremely complex and difficult problems. Since this event, the demand from both law enforcement and the general public has surged far quicker for a solution to this transparency in Axon and Evidence.com than we ever expected. This year has been a huge success from the increase in bookings, ARPU, major city adoption, active and paid users, just to name a few of the proven statistics.
As management, it is hugely rewarding to start to see those five years of grueling work begin to pay off. We believe that we are still in the early majority phase of this adoption curve and a technology refresh within the public safety sector. As we look forward, it is imperative that we continue to move at startup speed and capture the market share under our end-to-end solution, something that we believe we are the market leader in today. In 2015, as more and more agencies are joining this movement and subsequently recording, managing, and storing digital evidence, our eyes have been opened to the implications of this technology to the entire criminal justice system.
We experienced some pushback to body camera deployments from participants downstream in the prosecution cycle of cases as there was fear of a surging influx of evidence on disks, the historical way agencies share their digital evidence. We sent some of our sales team and product managers to the district in Florida to learn about their processes. We showed them Evidence.com. The result of which is an addition to our product suite of a prosecutor licensed tier. That same district in Florida chose to standardize on Evidence.com, now all agencies in the area will be required to utilize our system. A textbook example of how important the network effects are in this ecosystem. We view district attorneys and prosecutors as key influencers in the decision-making process to deploy Axon and Evidence.com.
By giving the standard version of the product to them for free, we believe we can gain additional key proponents of our platform in this increasingly competitive market. Overall, we feel strongly that our product iteration process is successful because of our intense voice to the customer research, and we will continue to evaluate opportunities accordingly. It is our long-term goal to manage an officer's entire digital life beyond cameras, hence our continued investment in cloud solutions, wearables, and mobile. In order to maintain a leadership position, we will make bold technology investments in these emerging technologies. Some of these investments will succeed, some will fail. We believe that the investments we make with both our successes and our failures will be critical to maintaining a learning organization that can evolve and adapt to future technologies and market challenges.
Today, we are investing heavily in mobile around communication and collaboration features for public safety. We see the trend from desktop to mobile as something that will certainly come to public safety market as it has to so many other markets, and we are intent on being a leader in this space. Much like our early investments in cloud technology seven years ago, the vision we have for mobile is that it will be a significant differentiator for our products from those of competitors. Our increased mobile capabilities add to our holistic end-to-end technology solution that creates great benefit for our customers and value for our shareholders. It is incremental services such as implementation and prosecutor support that differentiate us from the competition, which as everyone knows, is heating up as others seek to emulate the success we are demonstrating.
Others have realized that this is a very interesting market that is happening now. There are new entrants, more pressure in the hardware stack, and others claiming to have a comparable cloud solution. We are extremely confident that we have a substantial lead on the end-to-end solution of video capture, storage, and management through the entire criminal justice system. When we are in front of a customer, we win time and time again as our offerings excel on total value created, total cost of ownership, the ecosystem, and the customer experience. To simplify, we are investing in the channel to win share now, and we are investing in engineering to continue to deliver a world-class technology platform where the value increases with each additional user. As I mentioned on the last call, hiring is a huge priority for me, especially this year.
The first quarter started out a little slower than planned, even with adding over 50 people by the first quarter call. Our people and culture team has really been running at top speed, and we have added an incremental 50 people in the second quarter, hiring in nearly all areas of the business, but remaining focused on customer-facing positions, software engineers, and international infrastructure. In the third quarter, we have our new class of college hires starting, a truly impressive group of nine talented recruits. We also went through a hiring deep dive in July to prioritize our hiring for the rest of the year to ensure we are being diligent in our investments to make sure we are getting the most long-term ROI from each hire as they are integrated into the organization.
While we are confident that our investments in high-quality hires across the business will continue to provide corresponding incremental returns, there's a lag between the initial date of hire and the positive impact on results. As we look forward to the third quarter results, the incremental hiring is going to increase expenses in addition to some increased travel expenses due to our annual sales meeting, public relations expense for a new Axon brand campaign, acquisition-related legal, personnel, and integration expenses, and new system implementations. In the third quarter, we anticipate R&D expenses to increase sequentially by $500,000 and SG&A expense to increase sequentially by $1.6 million. In the fourth quarter of this year, we expect another incremental increase in SG&A and R&D of $1.4 million and $500,000 sequentially.
I'd like to reiterate our commitment to the long term and set the expectation this is a consistent message you'll be hearing from me and the rest of our leadership team. We believe that by investing to obtain, extend, and solidify a market leadership position, we will create a public safety platform that we can leverage to create a powerful economic model. We are playing to win a much larger market over the long run and look forward to generating long-term shareholder value as a result. Rick is now going to update you on the progress in the international market.
Thank you, Luke. Good afternoon, everyone. Or maybe I should say good morning. I'm currently in France, where it's a beautiful afternoon. I've been spending a lot of time with our international team. We're just beginning my year-long international tour to focus on getting our tier 1 markets up and running. Continental Europe and the U.K. has been my focus for the summer. As many of you know, the Europeans take their summer holidays quite seriously. While I've had several meetings with national-level police forces, we have primarily used the past few months to focus on setting up our foundation for the long-term success, and we'll begin more intensive customer engagements at summer's end.
When I talk about setting up our foundation, I'm specifically talking about recruiting the right people, setting up our facilities, and our business processes, and the key infrastructure to drive sustainable growth. One key structural change I'd like to talk about is that we have consolidated all of our global sales under Josh Isner, our Executive Vice President of Global Sales. You may recall that we restructured our sales organization in December, when I promoted Josh to run all of North America and another person to run international sales. This was largely to give me more visibility into the people and processes across our sales organization. Based upon what I learned, I felt that our international team could truly benefit from Josh's talents around hiring and implementing world-class sales process. Accordingly, in May, we made another move, I promoted Josh to oversee all sales globally.
He's been quite busy helping us build out our international team. Josh directly led the hiring efforts for our new U.K. country manager, along with three new enterprise salespeople there, sales engineering, account management, and various other support resources. Following on this, in July, we announced the acquisition of Tactical Safety Response Limited, or TSR. We're moving quickly and aggressively in the U.K., which is the most advanced market in terms of the evaluation of our product suite today. The U.K. market represents approximately 120,000 officers and currently has an installed base of around 16,000 TASER weapons. We're currently waiting on a pending approval of our new Smart Weapon, we believe that we'll be seeing that come sometime in the next six months.
This represents not only an opportunity to upgrade those 16,000 aging weapons in the installed base, there's also clearly a lot of white space in that market to expand. There's recently been support expressed by some public officials, by the National Police Union, and by the general public to arm frontline officers with TASER weapons, particularly in light of the current ISIS threats against police in the West. While encouraging, standard issue of TASER weapons in this market is a long way off due to the established policing culture, we have a lot of work to do. The acquisition of TSR will help us in this market in a multitude of ways. They are experts in the public procurement logistics, compliance, import, and export laws of the U.K., which are very complex. Further, they're deeply ingrained in existing client base.
Not only did we buy their experience and expertise on the logistical weapon side, but we're continuing the model of ensuring that we own directly the customer relationship in key markets. The TSR team brought the base foundation for our weapons business, we're now adding on top of that a new general manager, enterprise sales, and support staff to build out the full team we believe we need to win the market across our entire technology platform, including Evidence.com and Axon in our enterprise software sales. The existing staff will cost us approximately $375,000 in SG&A expense per quarter. We plan to hire out some additional talent internationally in the marketing and sales engineering roles as well in the second half of 2015.
We are deeply committed to making the Axon platform the leading cloud, mobile, and wearable technology ecosystem across the United Kingdom and, frankly, across the world. We're actively recruiting country managers in at least three additional countries, which we expect to fill in the third quarter, in addition to two other international regional sales managers we added in the first half. This is all about getting closer to our customers. We're decreasing the communication distance from our customers to our product developers and support teams, some of which will be deploying people in country. Beyond offering heightened support, we'll now be positioned to better develop U.K. customer-driven solutions, from nationwide data management systems to U.K.-specific use of force reporting. This investment underscores TASER International's commitment to the U.K. market and our focus on the international market by delivering the best value in innovations in public safety technology to our customers.
In addition to the U.K., we've been building out our team at our new international headquarters in Amsterdam. From sales to finance to IT, bringing new systems online to support our supply chain, manufacturing, and accounting logistics. This has been a significant undertaking, and our team has been working really hard, and I'm really proud of them. Our experience in building out our U.S. business, we know that we need to have the right team and right systems to win across the globe, and we've been building those and setting the foundation. The U.K. is a great example of the model that we'll be using on my international tour, where my focus is on getting the right team in place in our tier 1 countries, getting some of the higher-level introductions made with key decision-makers in these markets so that our team can run fast.
After the U.K. and Northern Europe this summer, I'm headed to France in the fall. I'll be based out of Paris, which provides a great central location from which I can support efforts across all of Europe. In the spring, I'll relocate to Rome and again, have the ability to move across Europe, as we scale up our customer engagement. I plan to spend the summer of next year in Australia and Asia helping our teams there. The addressable markets in Europe and Asia, in aggregate, represent well over 1 million police officers, which is collectively greater than the size of our North American markets. I look forward to updating you on our challenges and our success in these markets in the course of the coming year.
Before I hand off, I'd like to update you on one other metric that I personally find very helpful in gauging how our business is doing. This is what I call our steady-state earnings. One of the challenges with a SaaS business, as we have with Evidence.com, is that GAAP revenues are spread out over a very long time horizon, making GAAP revenues and earnings a very much lagging indicator. You really can't drive the business using GAAP revenue and earnings to assess relative levels of investment. It's a rearward-looking metric, especially in a business that's growing at faster than 100% year-over-year.
To help me calibrate, just to remind you, we talked about this previously, I play a hypothetical game, which is, what if the business was in a steady state, just like this quarter, and we just repeated this quarter's performance into the indefinite future? Under this scenario, GAAP revenues would eventually equalize at the same level as bookings. Sure, there might be some quarter-to-quarter timing differences, but those would cancel out over time. In this hypothetical future steady state, we would have had revenues equal to bookings, or $30.6 million in the Axon business segment, instead of the $8.9 million of recognized GAAP revenue. If we assume a 65% gross margin on this revenue at scale, the additional $21.7 million of revenue would generate an additional $14.1 million of operating margin. This would make the P&L look very different.
This would take the operating margin from an actual loss of around $5.3 million today to an operating income of $8.8 million. To me, this feels like a pretty reasonable business earning $8.8 million on $36.9 million of revenue. A theoretical operating margin of over 28%. Of course, I want to emphasize this is a purely theoretical exercise that I use to help me mentally calibrate if our level of expenditure is reasonable for the size of the business that we have today. None of the assumptions are going to hold true. We are going to continue to ramp up our investments, as Luke talked about, because we believe that we're still in a very steep part of the growth curve. We also expect the booking number to climb over time.
The steady-state earnings is a thought exercise that I find very helpful in looking at a snapshot of the business as it exists today and evaluating our level of investment spend. Dan is now going to take us through some of the financial highlights for the quarter.
Thank you, Rick. Revenue in the second quarter was $46.7 million, a growth of 25.7% compared to the second quarter of 2014. We're very happy with our second quarter sales results as they exceeded our expectations because we were able to close some deals in Q2, which we had forecast to happen in Q3. As a result, we expect Q3 results to come in close to Q2 actuals. This is more in line with our traditional seasonality, with Q3 normally being seasonally weaker than Q2. In 2013 and 2014, that seasonality was masked by strong orders in the federal space due to year-end sweep-up orders. With the sequestration, we see that the same amount of federal sweep-up monies in Q3 this year will probably not come to fruition because of the tighter budget climate.
In general, we continue to be comfortable on a consolidated basis with an annual CAGR of 15% for the foreseeable future. Gross margins continue to be very strong, with this quarter's gross margin coming in at 65.8%. This is in line with our guidance last quarter, the normalized margins on a go-forward basis. Basically, we feel that they should fall somewhere in the 63%-66% range. In the TASER weapons segment, gross margins were 70.2% in the second quarter of 2015, compared to 64.7% in the second quarter of 2014. While we expect margins to remain strong, programs like the Standard Issue Grant Program have the ability to decrease average selling prices and the resulting gross margins on those sales. In the Axon segment, gross margins improved to 47% in the second quarter of 2015, compared to 26.7% in the prior year.
As service revenues scale, we'll continue to get leverage out of the fixed costs needed to run our Evidence.com platform, resulting in improved margins over time. In the second quarter, the service margins were 66.3%, improving over the prior year service margins of 40.7%. At scale, we think the Axon segment margins could mimic the margins of the weapons business, but the timescale is clearly very dependent on future trajectory of the license count and ARPU, further necessitating the investments we're making today in sales, marketing, and research and development. While 2015 got off to a slow start with anticipated hiring, we started running fast in the second quarter. We added 50 people in the second quarter and continued to aggressively recruit very high performers from some of the top companies in the world for remaining critical roles within the organization.
We're looking forward to our new class of leadership development program participants joining us in September. We are continuing to build out the international organization with country managers in the U.K., France, Australia, and Canada. Domestically, we're hiring more telesales and sales development roles, more video regional sales managers as we increase our territories, and key software engineers to help continue to move the ball down the court in our mobile, wearables, and cloud strategy. We're still very focused on the return on these investments, measuring statistics such as customer acquisition cost versus lifetime value, ARPU, license counts, et cetera. In the second quarter of 2015, our customer acquisition cost lifetime value ratio was actually the highest we've ever had at 4.9.
We do expect this ratio to come down a bit in the near term as we add new salespeople and consider the time it takes for new sales professionals to ramp up and become productive. We're including all the pre-sales costs in the numerator to capture all the incremental salespeople, marketing, personnel, sales commissions, and sales development initiatives. We believe our investments have been well-placed thus far and are confident enough in the future growth of the video business to increase the spend for customer-facing sales and support roles sharply in the second half of 2015 in order to ensure that we continue to capture a significant share of the growing market for on-officer video and digital evidence management. With active user base of approximately 29,000 users at the end of the second quarter, compared to 22,000 last quarter, we're seeing continued growth.
As we introduce higher revenue tiers of our service, which includes additional features such as unlimited storage and integration into other core systems at agencies. We're seeing the average revenue per user, or ARPU, go up. In Q2, we had an ARPU of $29.04. This is an increase of $2.24 over Q1 of 2015. We have priced our monthly service as low as $15 a month per user for our basic service tier, and as high as $65 per user per month for the monthly service and storage part of our Officer Safety Plan. Both of those price points are on discount. Sales mix will continue to have an impact on ARPU. We're encouraged by the trend we have seen in ARPU, seeing the ARPU move from $21.70 in September of 2014 to $29.04 that we enjoyed in June of 2015. This is a 33% increase in nine months.
As we mentioned on our conference calls over the past year, we are ramping up our investments in both R&D and SG&A. We continue to see large white space opportunities in both the on-officer video space, as well as international markets. As Luke mentioned, going into the third quarter, we took a close look at our strategic hiring plan and the timing of our critical hires based on the market dynamics we are seeing. The result of that exercise is the expectation that our incremental spend in the third quarter compared to the second quarter in R&D is expected to go up by $500,000 incrementally. In SG&A, we expect an incremental $1.6 million in expense in the third quarter compared to the second quarter.
On top of those increases, as we feather in additional hires over the next five months, we expect that R&D will go up an additional $500,000 or $1 million from today's run rate in the fourth quarter. SG&A will go up incrementally another $1.4 million or $3 million more than today's run rate. In the fourth quarter, the increase in SG&A is partially driven by the International Association of Chiefs of Police Conference, which is happening in Q4 this year. It's our biggest trade show of the year in terms of expense, as well as the pipeline we generate from it. In this quarter, you might have noticed we had kind of an unusual income tax expense. We did have a benefit this quarter, as we've kind of announced on the calls and in our 10-Q, our 2012 tax return was under audit by the IRS.
That audit actually completed in the second quarter. The company takes a reserve for the audit risk around uncertain tax positions, such as potential reduction of our R&D tax credits allowed post-audit versus the amount we claimed in the return. As the 2012 audit concluded without any adjustments to the R&D tax credits claimed in the 2012 return, we did take a benefit in the second quarter of $388,000, which reduced our Q2 2015 income tax expense. On a normalized basis, our effective tax rate is approximately 36%. We've received great feedback from the shortened call structure from the last quarter. I'll wrap it up here and take some questions from the queue. We've added the supplemental results package on our investor website, investor.taser.com, to review the drivers in the second quarter results.
As a reminder, we'll only take three questions per person in the first round to ensure that more people have a chance to talk. As the operators are making the announcement to put people in the queue, we actually did receive a question from Twitter that I'll address to Luke. What other adjacent markets are there for cameras commercially?
There are several other potential uses for on-body cameras. We believe our strength is in the law enforcement arena, as we already have the relationships with 17,000 out of 18,000 of the domestic agencies through our weapons business. This has really been the catalyst for the growth in our Axon and Evidence.com business as well as these prior relationships. This market is still in the early majority adoption phase of the technology cycle. We're laser-focused on consolidating not only the top tier of the market with major cities, but also counties, and ensuring we have coverage in the middle and lower tiers of the markets through our regional sales representatives and telesales function. We're really laser-focused on our core market, which is the domestic law enforcement market for Axon and Evidence.com growth.
Thanks, Luke. That's helpful. With that, we'll turn it over to the operator to announce the Good to go to the Q&A portion of the call.
Ladies and gentlemen, if you have a question, press star, then one on your touchtone phone. Again, if you have a question, press star, then one on your touchtone phone. We do have a question. The first question is from Steve Dyer of Craig-Hallum. Your line is open.
Thanks. Good morning, guys.
Morning, Steven.
Morning.
As it relates to the weapons business, the upgrade cycle, you've had a number of very good weapons quarters in a row now. Do you have any sense as to maybe where you are in the upgrade cycle? How many of the deals you're getting are replacement versus new, et cetera? Any color there around the weapons business would be great.
That's a good question. Luke, do you want to take that?
Yeah. We're still seeing a lot of opportunity in the weapons business. What we're focused on today is selling our Smart Weapons. We've still got 500,000 officers to go in the top 1,200. We've seen a lot of traction from major agencies moving to our Smart Weapons platform. That's where our real focus is.
Okay. Really no sense as to use a baseball analogy, kind of maybe what inning we're in this upgrade cycle, et cetera? How many I know at one point in time you felt like you had a pretty good read on how many in the field were over five years old, et cetera.
Yeah. Our focus, we want to try to get a Smart Weapon on every police officer in the country. With our sales teams, we're looking at that as the kind of opportunity and driver
Yeah, Steve, this is Dan. In the baseball analogy, I would say we're still in the relative early innings here. There's a large amount of X26Es, so the legacy X26 is still in the market, as well as a number of the largest agencies in the U.S., like NYPD, still have a pretty low TASER penetration versus the officer count. We still think there's a lot of opportunity for continued upgrade. The other thing, as we look at, it has become sort of a positive cycle for the business. The early adopters to the Smart Weapons will be up for upgrades here in the next couple of years, so we think that cycle just continues over time.
Steve, if I could add in as well.
Maybe not as cyclical as it's been in the past.
Yeah, I'd add-
Maybe not as cyclical as it's been in the past. Is that fair to say?
I'm sorry, Steven, can you repeat your question?
Yeah. I think what you're saying, maybe, is just it won't be as cyclical, perhaps, as it's been in the past.
Yeah, I think that's fair. Rick, you had a comment?
Yeah, I was going to say, the upgrade cycle from the European perspective, we have 16,000-ish weapons, I think I got the number right, in the United Kingdom, all of which, or the vast majority of which, are past their five-year life. In the U.K., there's a lot of focus on making sure they are very careful about maintaining their weapons, keeping them within warranty. We're just waiting on Home Office approval. When we get Home Office approval, we think there's going to be a lot of pent-up demand to upgrade those. We've got another, I think it's 8,000-ish in France that are also getting pretty old. There's some significant upgrade opportunities internationally.
I think, as Luke was pointing out, we've really started to shift our focus away from the concept of upgrade to the concept of Standard Issue, that this shouldn't be a specialty piece of equipment that gets shared and upgraded periodically, but just becomes a part of every officer's kit. We think that is really sort of the key to Well, number one, for our customers, it's much better. To have a cop go on the street with a gun and no TASER in this day and age just strikes me as arcane. Our customers, that message is resonating with them as well.
We're also really put a lot of focus on helping our customers create a budget line item for their TASER devices, so that they're on one of our service plans, like Officer Safety, or we've got the TASER Assurance Plan and some of these managed programs we've done, so they've already budgeted for their upgrade every five years. If we look at that, the opportunity, as we move people onto those payment programs where they now have budget line items, we think we can effectively double the rate at which agencies are upgrading their weapons. Namely that, using some back-of-the-envelope math, if we look at all the weapons in the field that have not been upgraded and the ones that have been upgraded, it's probably around a 10-year replacement cycle we're on right now. Because those that do upgrade typically do it at year seven, maybe year eight.
We have a lot of folks who've never upgraded. If we can bring that sort of 10-year-ish average down to five years, obviously that'll substantially grow the business, and it'll give our customers the best equipment all the time. Between those two areas of focus, getting every officer to have a TASER and getting them on a plan where they're getting that TASER refreshed regularly every five years, there's a lot of growth left in the business as we push towards those two goals.
Okay, great. Hopping over to the video segment, TASER CAMs really jumped up in the quarter. Was that driven by one particular order or a couple of big orders, or is that just sort of a residual from sort of the move to body cams, and this is sort of a middle ground?
We had one big order from Australia that kind of drove that number up.
Okay. The last one, I'll hop back in the queue. Curious, your focus has historically been cloud-based storage of video, but you did buy MediaSolv because there's obviously some that are seeking to do it on premise. Any color there as to what you're hearing from people? Maybe the split, as to how many roughly are looking at it each way, and any characteristics of what kinds of departments opt for which?
We still think it's inevitable that these agencies are going to move to the cloud model. I think Louisville is a great example of an agency that had been a MediaSolv customer and liked their solution, and then we went in front of them with Axon and Evidence.com and MediaSolv, and they ended up going with kind of an integrated approach. We see the main value of MediaSolv as giving the agency the opportunity to have additional ingest points for more data kind of on-prem that will eventually upload into our cloud model. We feel extremely confident that Evidence.com and the cloud model is the best value for the customers, and we've been fairly successful in seeing traction with the customers to move to that.
Okay. I will cede the floor. Thanks, guys.
Thank you, Steve.
Thank you. Our next question is from Paul Coster of JPMorgan. Your line is open.
Good morning, guys. This is Mark Strouse on for Paul. Thanks for taking our questions. I think we were encouraged to see the ARPU number, especially the incremental ARPU number, tick up this quarter. Just thinking about the subscriber additions going forward, especially with some, at least press releases of new companies coming into the space. Are you seeing any lengthening of the sales cycle? Any RFPs that are out there that you would have expected in a particular month that are now a couple of months later as those agencies are potentially evaluating more technologies?
That's a good question, Mark. This is Dan. I would say that I think that agencies, there's always I think some political pressure to make sure to go out to bid on any significant purchase. I think we see that. I think we continue to win almost every RFP situation. I think although it may lengthen the sales cycle, I think the agencies continue to get to the right answer and pick us because we're really the only proven end-to-end solution that really has shown the ability to scale. A lot of our competitors have very small installed bases. I think we're really the only one who's shown that they can do this at scale. Although it may have a near-term impact to lengthen the sales cycle, I think as long as we continue to win, I think we're satisfied with the process.
Got it. Thanks.
Yeah. I would add as well, this is Rick, that we've heard from, frankly, some of the smaller agencies that had gone with competing systems. Some of the feedback we've gotten is even at relatively small scale, they're having a bunch of challenges, and we're now back in discussions with agencies that purchased within the past year. Again, that were maybe too small, or they weren't in the top agencies that we talked about mostly on the conference call in terms of size. Doing what we do well is hard. Putting together the brochures and the PowerPoint slides is pretty easy. We got a lot of folks that are out sort of marketing stuff that claims to be pretty similar to ours. There's a lot of moving parts.
There's a lot of technology from the hardware stack through firmware, through all of the intermediating pieces, whether it's software that runs on a laptop or the dock or on a server to ingest and then move that into the cloud. We haven't seen anybody else, I think, that's able to do it at scale as fast and efficiently and reliably as we're doing it. A lot of these other folks, I think they've got a lot of distance to cover to catch up to us. Frankly, that's part of the reason we're continuing to double down on our investments in engineering to make sure that we're continuing to move further and further ahead.
Right. Okay. Thanks, Rick. Dan, just one real quick follow-up. I think you mentioned something before in your prepared remarks about a 15% CAGR. What was that? Were you talking about the total revenue or were you talking about weapons revenue? What was that in reference to?
Yeah. Sorry if that wasn't clear. Yeah, the total revenue for the company, both segments of the business, we still feel comfortable that long-term CAGR can continue at that 15% rate.
Got it. That was my fault. Thank you very much.
Oh, no problem. Thank you.
Thank you. Our next question is from Greg McKinley of Dougherty & Company. Your line is open.
Thanks, guys. This is Andrew Sherman for Greg.
Morning.
First question for you, just regarding MediaSolv. Was any portion of the $30.6 million in bookings related to contracts signed through MediaSolv?
Yeah. I don't think any substantial part of the bookings was from anything from MediaSolv. Well, we did have a $350,000 section from them. Revenue.
Oh.
Just to clarify, that was revenue.
Yeah. I would add to that, though. There's a couple million dollars, over $2 million I'm aware of, in Evidence.com bookings that we would attribute those bookings to the MediaSolv acquisition. In certain accounts where we went in as MediaSolv became a part of TASER and Evidence.com, we saw those accounts move our direction and in fact expand the level of deployment by sort of deciding, rather than trying to put some stuff local and some in the cloud, they expanded their purchase sources, Evidence.com. That was worth several million dollars. To be clear, in Evidence.com business, that we would attribute to that growth to the MediaSolv integration.
Okay. Got it. Would you, I guess, on that note, are there any cities that were previous MediaSolv relationships? Are any of them utilizing competitor cameras right now? Or have any converted over yet to Axon or Axon pilots at least?
Yeah, this is Dan. I think there is an installed base of MediaSolv customers, and some of those do have body-worn video. It's a sort of small portion of their installed base. Clearly, I think one of the strategies around the MediaSolv acquisition is for the customers that have on-prem solutions or like on-prem solutions to give them sort of a clear migration path to the cloud, in the future, to Evidence.com.
Okay, great. Shifting over to margins here. Specifically, Axon product margins were pretty strong at 37, just over 37%. Can you provide any color on just which hardware components are contributing to that? It's, I guess, a little bit of a surprise at how high they were, and I know last quarter they were just over 30%, but part of that was from that reduction of an obsolescence inventory charge or a reversal of that charge.
Yeah. This is Dan. I think overall it's a little bit because of the sort of revenue recognition, you end up sort of allocating to all the pieces. I think in general, I think it's just indicative as we continue to sort of get our Operations in line and make sure that we're not having any kind of negative variances. The warranty expenses continue to be low for that product. It's a high-quality product with relatively low return rates, so that certainly helps the margins. It's a lot of little things. It's a little bit of mix, but for the most part, we're satisfied where we are. As you know, our strategy is not to maximize the profits on the sell on the cameras, but to get people into the ecosystem and on our service.
We're encouraged to be able to see that we can make money on the hardware as we continue to win business. I don't think it's really sort of one product that's driving that. I think it's just continuous improvement and then, I would say the general count would be just improved warranty cost because the product return rates have continued to drop.
Are these $15 a month TAPs, the upgrade features, is that allocating into this product margin right now?
No, it's not. The $15 a month for future cameras get deferred. That's part of the deferred revenue balance on the balance sheet. That's not included in the ARPU either. The ARPU only includes the service and storage. That service includes things like integrations and things like that, but that ARPU is sort of monthly service and storage. The payments from the customers for future cameras get deferred until we deliver the second camera.
Okay. Are you seeing any less of a need to discount in order to win some of these contracts maybe than you were six months ago? Discount on the hardware specifically?
I think in general, I think we're seeing the market firm up a little bit. We continue to instruct our salespeople to make sure that we're going to be competitive on price on the hardware. Most of the cameras in the market continue to be priced higher than our cameras. I think even just our starting price is typically better than most of the major competition we see out there. I think that's certainly helped as well.
Okay. Last from me, just a clerical question. Over the past couple of quarters, you were sharing a metric regarding the percent of contracts signed that were for five years in length, and I know this quarter you shared that 88% were for multiple year. Is this an apples-to-apples comparison, or is the language in decline?
That's a fair question. The 88% is multiple years, that could include some two- and three-year deals as well. Candidly, we also had a six-year deal that was a small deal this quarter. Really multiple years or anything sort of over one. This quarter was a little bit unusual because we had more of those two- and three-year deals than we typically see. We still expect to have a relatively low churn over time. Ultimately we don't think it makes that big a difference. The 88% would be all the customers that sign multiple year deals.
Okay. All right, great. Thank you very much.
Thank you.
Thank you. Our next question is from Glenn Mattson of Ladenburg Thalmann. Your line is open.
Hi, good morning. Can you talk about what % of the increase in sales expense that you laid out today is related to international? Is that more international? I'm just wondering about sales capacity. Do you feel like by Q4 you'll be in a pretty good spot, or does this continue to ramp at this pace or something similar in 2016?
That's a good question. I probably can't get into specifics. I could tell you that we are seeing sort of significant investments both in the international space as well as the video space. As I mentioned, we're going to continue to increase the number of territories so each salesperson has a lower number of accounts that they're working. The marketing is doing a great job of generating sales pipeline as well as leads, and we want to make sure we have enough salespeople to effectively work those leads. I think it'd be really disappointing if some of the competitors were able to get a toehold in the market or increase their market share because we didn't have the right kind of sales coverage. We're going to continue to add on the video side.
We're also adding a little bit on the CEW side as well, especially as we take more and more business direct. It's causing us to need more direct salespeople on the weapons side of the business. International, as Rick indicated, we've got a number of Tier 1 countries that we're hiring people into. In some cases like the U.K., that's now a direct country, we're making those investments. In other cases, we're working alongside distributors in order to drive market adoption of our products.
Okay. Is this an expense that you expect to continue to ramp as you exit the year, or do you feel like you're building an infrastructure that you could leverage in future periods?
Yeah, we see 2016 as being a year that we continue to ramp, although, in certain parts of the business, we think that 2016 we may get to sort of a steady state going into 2017. Certainly, on the international side, a lot of that's dependent on if these investments we're making in the Tier 1 markets start bearing fruit, then we'll look at making similar investments in other Tier 1 markets who are going into the Tier 2. International may just continue to grow even going into 2017 and beyond. For the video business, I think we'll eventually get to a point where we have the right number of territories and that'll be a leverageable expense. But I do expect that we'll still see some ramp-up in both SG&A and R&D in 2016 as well.
Okay, that's it for me. Thanks.
All right. Thank you.
Thank you. Our next question is from George Godfrey of C.L. King. Your line is open.
Thank you. Thanks for taking the question. Of the 38 hires that you hired this year in customer-facing, how many of those people carry a quota? If you disclosed, I apologize, I've been bouncing around different calls.
Yeah. For those customer-facing roles, they all carry a quota. The previous question was around capacity. We don't feel we've got capacity on the channel side. When we're talking with the market, we see serious indicators that the market is happening now, we feel strongly now is the time for us to make the investments to be in front of the customers. When we are in front of a customer, we win the majority of deals. Especially with our model, we want to capture each individual officer on our platform and really get that long multi-year contract and lock it up. We think this is our window of opportunity. We've said 2015 is our Super Bowl, we really feel strongly we've got to be out in front of the customers so we can win those deals.
Understood. Last question. Exiting 2015, the number of people carrying a quota for TASER?
I wouldn't get into specifics other than saying we're going to keep investing in the channel until we hit capacity because we think this is our window of opportunity to win that share.
Got it. Okay. Thank you very much.
Thank you. I apologize. No further questions at this time. I'd like to turn the conference over to Luke Larson for any closing remarks.
Yeah, we had a couple other questions come in via Twitter that I'll address real quick. One is can Evidence.com also be used for interview rooms and holding cells? Absolutely, Evidence.com can be used to store all of an agency's digital evidence. We see the active pain today where the biggest kind of growth in digital evidence is this push toward body camera, and we've got the best solution for that. Evidence.com can also be used to really store any piece of digital evidence. Thank you for listening in to our Q2 2015 earnings call. With that we'll end the call here. Thank you.