It is a tool that is used in violent and dangerous confrontations in which emotions can be extreme. While they have been involved in some tragic situations, including arrest-related deaths, they have also saved more than 140,000 lives from death or serious injury in more than 2.7 million field uses. That is the nature of exactly what TASER International is focused on, defying conventional wisdom with revolutionary and proven methods to protect life and truth. You have to be willing to endure the critics from afar as we try to resolve some of the world's most complicated and dangerous issues of stopping violent people while improving transparency at the same time. What matters is that we can make a difference that matters in the world, and we are determined to tackle these problems.
With that, I'd like to turn it over to our CFO, Dan Behrendt, to provide some more color on our financial results and the outlook for 2015.
Thanks, Luke Larson. As Rick Smith mentioned earlier, revenue in the first quarter was $44.8 million, a growth of 24% compared to the first quarter of 2014, which is stronger than expected. There were a couple deals on either end that bolstered the results for the first quarter. We had some deals which were pushed from Q4 into Q1, and we were also able to pull a couple Q2 deals earlier. But we're certainly very happy with the results. Research and development expenses of $4.6 million are slightly lower than anticipated, again, due to the slower hiring than planned. We did make several critical hires in both project management engineering roles but have plans to continue to aggressively grow both hardware and software engineering staff levels throughout the remainder of the year.
We anticipate that with the hiring plans as well as incremental consulting spend in the hardware segment, we will grow R&D approximately $1 million quarterly from the first quarter levels into the second quarter. In order to maintain a leadership position in the market, we will make bold technology investments in emerging technologies such as wearables, mobile, and cloud. The gross margins in the quarter were epic. In the TASER Weapons segment, gross margins were 71.1% in the first quarter of 2015, compared to 66.4% in the prior year. In the AXON segment, gross margins increased to 40.6%, compared to 17.5% in the prior year. As you can see from the supplemental package online, there were a few one-time reversals that contributed to the gross margin strength.
However, as our service revenues continue to increase and a critical mass of licenses is reached, cost of service delivered margins will continue to improve as the fixed costs associated with the provision of software as a service. Due to the one-timers, we think the gross margins on a go-forward basis will be in the 64%-66% range on a consolidated basis. The investments we're making are still paying off and proving to be prudent. In the first quarter, our customer acquisition cost to lifetime value, a standard ratio used to evaluate the level of investment spend in SaaS companies, was three and a half. As a reminder, the general rule of thumb is investments are well-placed with a ratio greater than three. With an active user base of approximately 22,000 users this quarter versus approximately 15,000 last quarter, we're seeing continued growth.
While the fourth quarter ratio greater than four, our incremental investments in sales personnel during 2015 creates a longer return runway as reps get trained up and deployed into the field. We're certainly very comfortable with the three and a half ratio for this quarter. We are realistic in knowing that some of these investments will succeed and some will fail. We believe that the investments we make in both our successes and failures will be critical to maintaining a learning organization that can evolve and adapt to future technologies and market challenges. We are diligent about integrating our customers' feedback into our technologies so that we ideally innovate to their direct needs. Today, we're 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 the public safety market as it has to so many other markets that are intent on being leader. We are intent on being a leader in this space. 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 our leadership team. We have assembled a world-class development team, which we see as a competitive advantage and which we will continue to supplement with strong hires. We're playing to win a much larger market over the long run and look forward to generating long-term shareholder value as a result. You may have also noticed the tax rate for the quarter is 32.5%, which is lower than the historic rate. This is due to two things.
The first is we're benefiting from the domestic production activities deduction, which we get for producing our goods in the United States. The second, and even more significant, is the impact we're having from having our international business structure run out of Amsterdam. While we set up the Amsterdam office to be closer to our customers, we do get some tax benefits under this arrangement. It's worth noting that because we'll have income in the United States, as well as various foreign jurisdictions outside of the United States, our effective tax rate could fluctuate due to changes in the mix of earnings and potential losses in countries with differing statutory tax rates. We look at this each quarter and update our effective tax rate as appropriate. As a reminder, the annual shareholder meeting will be held in a couple of weeks on May 18th in Seattle.
It will be held at 1800 Yale Avenue at the SpringHill Suites Seattle Downtown at 9:00 A.M. Pacific Standard Time. After the formal voting procedures, presentations will be made by Luke Larson, Rick Smith, and Marcus Womack. There will also be an informal roundtable discussion with the company's product managers on both the video and weapon side of the business where you can ask questions about the product offerings and the development process. We also have some videos and mementos from the IACP conference so investors will be able to experience a bit of what our customers went through at that important conference in the fourth quarter. While not required, we would appreciate RSVPs to be sent to ir@taser.com so we can plan for the right appropriate number of attendees. You may have also noticed we changed up earnings process this quarter.
We heard feedback from last quarter that we're perhaps a little bit too verbose during the call and did not leave enough time for questions. This call is meant to update you, our investors, on our quarterly progress, so we tweaked the process to hopefully make this more useful for you. We not only added AXON segment statistics into the release as well as a few more business highlights from the quarter, but for the first time we've uploaded a supplemental package to the investor website, which goes through each of the line items and line item drivers to provide investors a little bit more color about what happened in the financial statements. As a result, we'll be skipping most of the financial highlights of the call and going right to Q&A. At the end of the call, we'll be tweeting out a survey link.
Please let us know what you think about this new format and ways that we can continue to improve this process going forward. With that, we'll go to the Q&A portion and take questions from the audience.
Ladies and gentlemen, if you have a question or comment at this time, please press star then one on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, simply press the pound key. Again, if you have a question or comment at this time, please press star then one on your telephone keypad. Our first question or comment comes from the line of Paul Coster from JPMorgan. Your line is open.
Good morning. This is Mark Strouse on for Paul. Thanks for taking our questions. Rick, thanks a lot for going through your travel plans, I guess, for the next six to nine months. I guess, are some of those countries and cities you're going to be visiting, are they cities that have already expressed an interest in on-officer video? Or is the goal more to set up a sales force and build more of a sustainable long-term business? I think another way of saying it is, should we think about those international opportunities as kind of pilots maybe in 2015 and then more full deployment orders in 2016? Or could there be some meaningful orders in 2015?
Certainly I think the U.K. is getting to a point of maturity where we could start to see meaningful orders this year. France, we've got to just, frankly, get a little more engaged there with the customer. They have 8,000 weapons that are, I think, Dan, eight or nine years old.
Easily eight or nine years old.
We see a real need for them to upgrade those. I hope we can make some progress on that in the relatively short term. Italy's a brand-new market for us. There, they've got the largest police force in Europe, I'd say that one is more of a long term. The general idea here is really more to start momentum. I don't think I'm going to be closing orders per se, but what we're finding is these international agencies are really large compared to the U.S. Like the City of London is considered a small agency in the U.K. It's got 1,000 officers. Here in the U.S. we'd call that a pretty good size agency.
For example, as a result of some of the work I was doing in the U.K., I was invited into the London Met to do a session on leadership during transformation of an organization. This had nothing to do with sales per se, but the London Met is going through their own transformational project right now. I think that's not something that typically they would invite a sales rep in to do something like that. That gave me access to something like the top 150 leaders. Of course, I'm very careful in those things not to turn that into a sales pitch, but really to try to be a helpful thought partner. I think that really resonates with these agencies more so than the product per se, because most police agencies around the world, I think, are struggling with the same problems.
They're very far behind technologically. I mean, heck, just this past quarter, the NYPD had put in, I guess, a million-dollar line item to replace their typewriters, and that resulted in the City Council of New York actually banning typewriters from the NYPD or putting in a motion to do so. And that's not a uniquely American problem. So I know it's a little bit of a long-winded answer. I'm not going over there to sign contracts and celebrate big orders that are already baked. This is setting the foundation for the long term. And also we're using this as sort of a forcing function like we did in the UK. This kind of helped focus the team on getting new hires in place, so we had a team in place to continue to follow up as we start each market.
Yeah, it's make sense. Dan, just on the elements.com. The 26AD monthly revenue proceeds figures that you just have. And I know that's an average number. Is there anyway to kinda frame what the derange if there's ARPU's are. Maybe not by the customer obviously. Maybe by the customer's that are doing the bare minimum with you versus those that are doing those that are doing the total package. What kind of range is there in a monthly or pre-number?
Yeah, it's a fairly wide range, Some of the new offerings are actually pushing up at least the top end of that. Our basic service starts at $15 plus storage. Sort of assume at sort of the low end of the market, you may be at $20 or $22, probably closer to $20 before discounting. Our highest tier for the highest tier service with unlimited storage and integrations would be $65 per month before any discounting. There's a fairly wide range there, but obviously, hopefully we can drive people into programs like the unlimited storage program with the Ultimate Plan with unlimited storage, or the Officer Safety Plan, or both some of the higher tier programs. As we get traction on those higher tier programs, hopefully that can start moving the needle.
The other thing that we're cognizant of is that as that install base gets bigger and bigger, it's going to be harder to sort of move it radically in one quarter. It's going to be more of a trend over time just because you've got that large installed base.
One thing I would add as well, Dan, is that that number is just the software and storage services. Additionally, people that go on these new higher-end license tiers are also signing up for some pretty significant sort of monthly-
Sort of deferred revenue related to hardware and warranty services.
That's correct.
Got it. Okay, that's helpful. Thank you very much, guys.
Sure thing.
Thank you. Our next question or comment comes from the line of Glenn Mattson from Ladenburg Thalmann. Your line is open.
Hey, good afternoon, gentlemen. Questions about the gross margin, especially in the video hardware segment. Maybe Dan, can you walk us through why that was so strong? It's fluctuated widely over the past four or five quarters. Maybe a little more on that.
Sure. On the software side, we're really encouraged to see that sort of 65% margin for the quarter. That's mostly driven by the fact that we sort of finally got to that critical mass where we're starting to see the benefit of our variable cost of one more user in the system versus variable cost of delivering that. That's why that improved so much this quarter, as we sort of finally crossed that point where we're really seeing that benefit. On the hardware side, we did benefit a little bit this quarter. As you know, we took a large reserve last quarter, and for some excess and obsolete inventory. We were able to reverse a little bit of that this quarter, about $200,000, which improved the margins.
Those margins on a normalized basis would've been closer to 25% this quarter.
Okay. Then, could you say what you think, going forward, the video, the service, the software margins would If you look out two or three years, kind of what the potential is on that side?
Well, I think, again, it's partly based on that ARPU. As we move that ARPU up, I think that's got the ability to expand margins. A lot of these advanced features that'll drive people to those higher pricing tiers, there's not a lot of variable cost to delivering that. There's a lot of R&D costs, but our cost to service a customer on the Ultimate Plan is not that different from customers in some of the lower tiers. As we move that ARPU up, I think that 65% can improve over time. Certainly, if you look at other sort of SaaS companies, we certainly have the ability to move that up.
I would say that probably unique or somewhat unique to TASER is the fact that we also have storage, which is going to be a little bit of a lower margin product over time just because of the efficiencies of what customers would expect to pay for storage. Overall, we're very happy with the 65%, and hopefully we can improve that over time as we see that ARPU go up.
Great. Last for me, the weapons number was quite strong this quarter. You mentioned that you may have pulled an order or two forward from Q2. Can you talk about the magnitude of that, and do you expect Q2 to be Last quarter, Q1 to Q2 was basically flat. Do you see it maybe sequentially down or still growing here? What do you think?
That's a good question. As you know, we're sort of a book and ship business, so it's a little bit harder. I can tell you that we did have $2 million worth of orders that we expected in Q4 that basically just missed, and we were able to close those deals early in Q1. There's $2 million of stuff that sort of trickled in from the fourth quarter that was pushed to the first. We pulled in probably another $1 million plus of Q2 orders as well, so we certainly benefited from that. As far as the sort of the seasonality, it's always hard. You get some of those positive sort of lumpiness in a quarter, it sort of mutes some of that normal seasonal trends, just because Q1 is typically one of our weaker quarters from a seasonality perspective.
We exceeded even our own expectations for the quarter with these results.
Okay, great. Thanks. Congratulations.
Thank you.
Thank you. Our next question or comment comes from the line of Greg McKinley. I'm sorry, Steve Dyer from Craig-Hallum. Your line is open.
Nice quarter. Dan, I just want to clarify something you said on gross margins. Did you say excluding kind of one-time items, you expect 64%-66% gross margins going forward?
I did, on a consolidated basis. That's right.
Okay. Real quickly, another quick question. Luke, I think you had indicated you anticipate OpEx going up by $1 million. Is that kind of per quarter, or is it the next quarter will be $1 million higher than last quarter?
That's for next quarter.
Okay.
We see the business is happening now. I'm sure you saw in the news, we had a presidential candidate, Hillary Clinton, call for body cams with the events that are occurring in Baltimore. We feel now is the time to build out the sales teams and capitalize on that momentum.
Okay, great. As it relates to the video business, ARPU obviously didn't go up kind of at the same sequential trajectory that it did last quarter. Is that a function of it's just kind of been since real recently that you guys have started signing the kind of the all-you-can-eat or the bigger data plans, or is it a function of you still have some early guys on the network that maybe got the first year free or something like that, or any color there would be great.
Yeah, Steve, this is Dan. I think it's a little bit of both. Certainly, these newer pricing tiers are new. There's kind of a long sales cycle for really both products, but certainly the video product as a new capability. There's a long sales cycle that goes with it. I could tell you that the new pricing tiers have been well received by customers that we've presented them to. Over the next several quarters, hopefully, we'll see more deals close at those pricing tiers as those sales cycles come to a close and we start getting orders with those higher tiers.
Got it. Okay. As it relates to the bookings, I know it's variable and a lot of it's swung by big deals. Generally, directionally, how do you see the trajectory progressing throughout the year, given we keep getting these public incidents? Looking at your sales book, would you expect Q1 to be a low water mark or too tough to call?
Yeah. It's tough to make an exact prediction. We certainly feel very comfortable that we're going to see strong year-over-year growth on total year to total year. As you know, it's very deal dependent. We don't want to put too much weight on an individual quarter for that reason. We feel that the macro trends are great for us. As Luke said earlier, we see this market forming this year, we think that, certainly, as we look at the market and our pipeline, we're very happy with where we sit right now.
Okay, great. Last question from me, then I'll hop back in the queue. I know there's not a perfect answer to this, just given that you don't know, but if you had to guess at kind of what % of your weapons orders this quarter or sort of in general right now are replacements or upgrade versus new, how would you make that split?
Well, that is a tough question. I would say that the international is probably still the bulk of those are still net new deployments, just because you've got so much white space internationally. The OPP is kind of a good example, where they've legalized the carry of TASER weapons for patrol officers now. Some of those are replacements for supervisor weapons, but the fact that you've now sort of opened up the market certainly makes that a net new capability for a lot of officers out there. I would say in the U.S., I think our telesales has done a really nice job. I think there is probably some white space that those guys are capturing as well.
Just being in front of customers and providing great service, we think that's enabled some of these agencies that are, say, sub-100, go from maybe the same kind of thing where they're going from sort of supervisors to wider deployment, just because they I think we're just more top of mind. There's definitely a mix in the U.S. As you know, there's still a fair amount of white space. We still have some large cities that are underrepresented with TASERs. Hopefully, some of the indications from L.A. last year as they started fielding more of the TASER weapons and their desire to put a TASER and a camera on every officer, we'll see that trend continue with some of the other big cities where a lot of the white space is.
Yeah, I'd add in as well. Yeah, we're really trying to shift the focus and the conversation with our customers, sort of away from the idea of upgrading what you have to expanding TASERs for everybody, that, "Come on, guys, it's 2015.
Every cop that goes out there with a gun should have a TASER and probably a camera now." That is why we shifted towards this Standard Issue Grant Program where we are giving. You basically, from an investor perspective, think of that as sort of a replacement for our old trade-in programs, where now the incentives are, if you want to get the $100 to $400 per officer, you basically have to step up and make TASER Standard Issue, so that every officer coming out of the academy gets one, and that they can show to us some sort of plan that they are giving every officer on patrol a TASER, a camera, or both. As we have shifted that focus, and then also, frankly, the logistics costs of having people send stuff in just so we can destroy it here.
I would say our visibility on what are upgrades and what are not is kind of dropping, we are not really necessarily focusing on that a whole lot as we shift to this focus of every officer getting a TASER.
Okay, thanks.
Thanks, Steve.
Thank you. Our next question or comment comes from the line of Greg McKinley from Dougherty & Company. Just a second. Your line is open.
Oh, can you hear me?
Yep.
Okay. We have a $71 million backlog. Can you help us break that between hardware and software?
We haven't really disclosed exactly where it's coming out of. Certainly, as you see more of these Ultimate deals, that some of that backlog is going to be hardware for future cameras. Anybody on the Ultimate Plan is going to get a camera at the two and a half and five-year mark. That's definitely included in that number. We'll see. It'll certainly be a mix on a go-forward basis. The deals that are not on those Ultimate Plans, it's going to be all software on those deals. There's going to be a mix. I would say, if that's something that's interesting, we could take a look at that, but it's not something that we're ready to talk specifically to today.
Okay. Yeah, I think as your bookings continue to build, that'll be something that I think investors increasingly have an interest in understanding how that revenue and margin mix unfolds. Within that backlog, maybe, again, I'm sure you have higher ARPU in that backlog than what you reported this quarter. Can you talk at all about how you expect that to behave as backlog amortizes through the income statement over the next 12 months or so?
Yeah, I'd say probably the way that we'd maybe encourage investors to look at that is look at the sort of user count and sort of we've got the 80% or so attachment rate. Look at how that approximately 22,000 user count at the end of Q1, how that grows over time. Just the fact that we're seeing about a 65% margin on the service side today, I think that makes for a pretty good case just as that user count grows throughout this year and in the next year. We see the AXON business gross margin should continue to improve because you'll see improvement in mix. You see a greater percentage of their total sales coming from the licenses versus the hardware, which should improve the overall profitability, at least on a gross margin line for that business.
Yeah. Okay. Going back to Weapons, you had really strong Weapons units during the quarter, although international didn't necessarily stand out as being the source of that. Should we interpret that your focus through the telesales group on medium to small size agencies was the big driver there? I wonder if you could tell us your thoughts on that. Then as you look at the next nine months of the year, with Rick spending a lot of time traveling internationally, is that where some big opportunities lie from a Weapons standpoint, or is it more domestically?
Yeah. On the first question, our tele team has just done a phenomenal job servicing what I would call the long tail of the market. As you know, we've got 10,000 agencies in the U.S. that are very small. Our tele team has been servicing these agencies that are one to 25 officers that have historically not been actively serviced from a sales perspective. We've certainly benefited from pulling some of that revenue in.
On the international front, certainly there are some really big opportunities internationally. Historically, I've not been happy we've been able to pull those opportunities into the boat. Certainly, that's part of the reason for the renewed focus there. I'd say the other thing is, in the U.S., I've been doing thought leadership type stuff, speaking at chiefs conferences, et cetera. It's getting less and less that I'm really involved in individual sales calls. Frankly, I'd say the caliber of our sales team is dramatically higher than it was just a few years ago. The team here is really hitting on all cylinders across the board. Certainly, as Luke Larson talked about, tele is doing great. We've also added what we call junior reps in each region to focus on the middle tier. Our senior regional reps are focusing on the largest agencies.
As we increase that level of focus, I think we're seeing improvements across the board.
Okay. Thank you. Maybe if I could just ask you to repeat, I think you commented on the degree to which the accrual reversal impacted margins in the quarter. Could you remind me of that, please?
Sure. On the AXON segment, we had about a $200,000 pickup on the hardware revenues or hardware gross margins. On a normalized basis, the hardware margin for AXON would've been closer to 25%.
Okay. All right. Thank you.
Thank you.
Thank you. I'm showing no further questions in the queue at this time. I'd like to turn the conference back over to management for any closing remarks.
Great. Well, obviously we love having calls like today. I'd like to congratulate the whole TASER team and our new Axon group out of Seattle. Just a great quarter. We look forward to seeing you all at our shareholder meeting in Seattle. You'll get a sneak peek at our new facility up there. It won't be quite ready for move in until June, but those of you who've been to our headquarters in Scottsdale know that we take great pride in putting together a unique and compelling work environment. We're doing some similar work in Seattle. Come on up, check it out, and meet some of all these new people we've been hiring. Everybody have a great day. We'll see you in a few weeks in Seattle.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.