Good day, ladies and gentlemen, and welcome to the TASER International Inc. Q1 twenty fourteen Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given at I would now like to turn the call over to your host for today's conference, Mr. Rick Smith, Chief Executive Officer.
Sir, the floor is yours.
Thank you, and good morning to everyone. Welcome to the Tater International first quarter twenty fourteen earnings conference call. Before we get started, I'm going to turn the call over to Dan Barrett, our Chief Financial Officer, to read the Safe Harbor statement.
Thank you. 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 on current information and expectations regarding Tejas International Incorporated. These estimates and statements speak only as to the date 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 3133, under the caption Risk Factors. You may find both these filings as well as our other SEC filings on our website, www.hazer.com. With that, I'll turn it back over to Rick Smith.
Thank you, Dan. As a reminder, we're going to be accepting some questions via Twitter during the Q and A portion of the call, which can be submitted using the TASReearnings. And that's TASReearnings. To follow our updates on Twitter during the call, follow the account TaserIR. So this is TaserIR.
We'll be posting graphics and commentary during the call. For those of you without Twitter, all updates and graphics stream directly to our Investor Relations website at investor.taser.com. I'm eager to share with you our investors the results of our hard work from the first quarter on today's call. First off, we grew revenue 18.9% to $36,200,000 compared to $30,400,000 in the first quarter of twenty fourteen. This marks the ninth consecutive quarter of year over year top line double digit growth.
We also hit a historical record in international revenue, recognizing $10,600,000 on a consolidated basis. Bookings in the Evidence.com and Video segments held their third quarter in excess of $5,000,000 We continue to work hard to aggressively grow the top line and we're excited to continue to share our progress and successes throughout 2014. I'll review the progress in each of TASER's three core strategies today. Those strategies being number one, international expansion number two, CEW or weapons upgrades and number three, gaining dominant market share in the cloud computing and wearable technology space for public safety. I'll start by discussing the traction that we are seeing internationally.
We're seeing the results of our investments start to pay off with smart weapon upgrades in our primary focus territories. Further, we're seeing growing interest internationally for Axon and Evidence.com products. The London Metropolitan Police, arguably the most influential law enforcement agency in the world and certainly outside of The United States, will be rolling out a 500 unit pilot program of our cameras and Evidence.com, which TASER won after a competitive bid process. We're looking forward to working with the Lendly Met to make sure the pilot goes well and that we can expand the program with them. One thing to note is that this is basically an unpaid trial with no associated revenue.
These successes are the result of hard work and we're bringing the TASER experience to our international customers. One way of doing this is through what we call technology summits, which have been tremendously successful here domestically. Through these tech summits, we bring in technology leaders to speak about the rise of cloud and Internet technologies and wearables and how it is going to change the way that policing is done. It reiterates that we are here to be a thought partner for our customers as they enter this new technological age in policing. Internationally, we've localized these tech summits, bringing in local experts and studies to continue the technology discussions.
We think these are a very valuable tool in driving not only international success, but success in the Evidence.com and Video segment specifically. We're continuing to invest in other ways as well. We're very excited to announce the hire of Ron Brandt as our new Vice President of International Products and Services. Ron was the former Chief Technology Officer on major projects at T Systems. He brings a wealth of experience in deploying major cloud hosted systems into large international organizations.
We believe his skills and strategic insights will be key in winning large international agencies with evidence.com. We're excited to welcome Ron to the TASER team and look forward to sharing the successes of his team in the future. Also a significant announcement is our plans to open a new European headquarters in The Netherlands. We'll be expanding our direct sales team abroad through this office and plan to have it up and running in the second half of this year. In summary, the results internationally have been strong for two quarters in a row now.
And while this market is still very dependent on large deals and it can be quite lumpy in nature, we have a strong outlook for the remainder of the year. Traction in the Evinist.com and Video segment continues to accelerate as well. As we saw Evinist.com and Axon bookings saw its third consecutive quarter of bookings over 5,000,000 FX dot com and video segment GAAP revenues in the first quarter grew 52.6% to $3,700,000 compared to last year's first quarter. We think this is evidence of the staying power of our cloud based and wearable electronics business. And while we don't expect this curve to always be consistently up and to the right during especially during this early stage, we are very excited about the continued strength of bookings in the recent quarters.
Within the quarter, there were several notable deals, including the follow on order from Fort Worth. These large follow on orders are perhaps the most important indicator of success, showing that large agencies are seeing great value in the system. Fort Worth did an initial paid trial with 50 cameras, then in this quarter, they subsequently expanded their deployment from 50 to 400 cameras. By heavily testing and using the initial deployment of 50 cameras, Fort Worth saw the benefits of wearable technology and the ease of managing their digital evidence through Evidence.com. These large agencies understand the intricacies of large scale digital evidence management and know that it is not just about buying a camera.
As a result, they're choosing the Axon and Evidence.com as a complete system. We're working hard to continue to demonstrate to law enforcement professionals that evanids.com is a technology that will make the administrative side of law enforcement far more user friendly, cost effective and efficient, as well as reducing litigation costs for taxpayers and providing accountability to the public. We've spoken about the technology focused events that we've been hosting and we're finding the large agencies from the major cities are attending in disproportionately high numbers. We find this to be incredibly encouraging that the discussion and movement towards the cloud is really here to stay and is accelerating. The focus is to continue to invest in these initiatives to aggressively drive top line growth and become the standout leader as well as the thought leader in this field.
As an update to the progress of the next generation products team, they're having they've completed some really interesting research in the field with our customers to define what the next prospect should be for product development. The team has also established a real technology center of excellence within the company, and we've significantly expanded our software development talent. We've expanded our Seattle office as a result with now more than 25 employees working on that team today. Seattle is a hotbed of talent and we're looking forward to continuing to grow that team in 2014, accelerating our development efforts. As I just mentioned, large agencies are moving faster than anticipated towards our solutions.
Large agencies are highly anticipated and require more sophistication of features than a small agency does. Our next generation products team is working hand in hand with these larger agencies to develop the features necessary for them to get up and running on our systems smoothly and effectively. So while the team is prototyping options for new products, they're also very hard at work making sure the experience our customers get today ensures these customers are here for the long haul and that we continue to provide a great experience when it comes to wearable technologies and cloud solutions. We'll continue to update on the team's accomplishments as we move through 2014. We see 2014 as the year that things are going to move forward at full throttle with Evidence.com solidifying market share.
We are out to grow to own this space and to grow it fast. The recurring subscription revenue opportunities create a very high potential lifetime value for every customer. Further, every Evidence.com customer becomes a natural customer for future cloud hosted products. The more services each customer is using, the more likely they are to adopt additional services virtual cycle, I'm sorry, in a virtuous cycle, where adding capabilities with one integrated platform gets easier and easier rather than going out to outside vendors. In this virtuous circle, the lifetime potential of every customer is far more significant.
At the front end of these SaaS businesses, there is a high level of investment required. With revenues being deferred over the length of the contract, there is an inherent loss period until a critical mass of customers is achieved. Our philosophy on breakeven is that so long as the business is growing and the signs that our products are going to work are evident, we'll continue to invest. If the growth in the business slows, then we'll pull back on our investments. We're managing our evis.com and video business with aggressive investment to drive top line growth and see its maximum market share now as the market is forming.
We continue to believe the biggest mistake we could make would be to underinvest in creating market share now. The TASER weapons business continues to execute and show strong results, delivering revenues that were up 16% to $32,500,000 year over year. The push for upgrades continues, but starting in 2014, we're introducing an incentive to promote the upgrades. So the normal trading credit for the first quarter was $85 but if an agency signed up for TAP or again the TASER Assurance Plan, they would receive an additional $100 credit per unit. In the second quarter, this is $75 per upgrade, but the additional $100 for signing up for TAP stays the same.
Now to refresh your memory, the TASER Assurance Plan allows agencies to after the purchase of their initial weapon to make equal installment payments over the period of a five year contract. At the end of that contract period, the customer receives a new weapon. Along the way, the customer realizes other benefits as well, including a white glove customer service plan and full warranty coverage and on-site spares. We're passionate about helping our customers budget for their future CEWs and for their programs. TAP allows our customers to have a predictable and manageable expense that is now consistent during the contract period and results in an upgrade five years from now.
So we sell a lot from today, lock in the upgrade in five years and the customer achieves both savings and budget predictability. It's a real win win. We still believe there lies a large opportunity ahead to upgrade aging weapons as well as to sell more into those agencies that don't have a CEW on every officer. In our North American weapons business, which is in a more mature phase than our cloud business, we're focused on operational excellence and in driving long term profitable growth. Income from operations in the weapon business increased to 29 of revenue in the first quarter compared to 24% in the prior year.
To wrap up before Dan goes over the financial results in greater depth, exciting things continue to happen here at TASER, and I'm really looking forward to sharing more of these successes in the coming quarters ahead. Dan?
Yes, thank you. As Rick indicated, the first quarter consolidated sales were $36,200,000 which represented 18.9% increase from the first quarter of twenty thirteen. The increase in sales was primarily driven by the continuation of the upgrade cycle with agencies upgrading to the newer X26P smart weapon, which contributed $7,900,000 in the first quarter. Axon cameras and Evon Cytron sales also grew by $800,000 to $2,000,000 in the first quarter. Sales of the TASER X rep contributed 2,500,000 in the first quarter results of a large international order that was shipped during the quarter.
The X26CW declined $1,100,000 as expected as agencies move to the new smart weapon platform, but we still have some international and federal customers that continue to buy the legacy products while they get the newer X26 platform approved for purchase in their markets. Gross margin for the first quarter was $22,200,000 or 61.4% of revenue, which is up from $18,500,000 or 60.6 percent in the prior year. As sales have increased, we continue to benefit from higher operating leverage. Due to the price increase instituted at the beginning of twenty fourteen and more sales being sold directly to the end user as it entered distribution channels, we've also realized higher average selling prices on our products, also improving gross margin. Although service revenue has increased quarter over quarter, the cost of service delivered decreased $2,200,000 in the quarter compared to the prior year due to the continued benefit from the completion depreciation related to the capitalization of Evans.com software, which was running $300,000 a quarter previously.
In the Evans.com and Video segment, revenues increased $1,300,000 to $3,700,000 for the first quarter of twenty fourteen. Loss from operations in the Evans.com Video segment actually worsened to $4,600,000 from a loss of $1,500,000 in the first quarter of twenty thirteen, largely due to the increased investment in research and development activities as well as additional sales reps and additional marketing expenses for the Axon and EvisciComm products. We expect the current levels of spend to continue to increase through 2014 as we work to gain market share and aggressively grow the top line as well as invest in new products and features. Sales, general and administration expenses were $13,700,000 in the first quarter of twenty fourteen compared to $11,200,000 in the first quarter last year. As a percentage of sales, SG and A expenses were 38% of net sales in the first quarter of twenty fourteen compared to thirty six point seven percent of net sales in the first quarter of twenty thirteen.
Compared to the prior year, personal expenses increased $500,000 as a result of strategic hires that we made over the last year, primarily in customer facing roles such as sales representatives, telesales, customer service and account management and field services, but also in incremental administration functions. Commission expense also increased in the quarter as a result of higher sales in the quarter, increased number of sales reps in the field and a greater sales percentage of our sales being conducted directly through our sales folks versus through distribution. Sales and marketing expenses increased year over year due to trade show expenses associated with TASER hosted technology summits as Rick talked about earlier, as well as other customer facing events in order to continue to contribute the benefits of our products to a wider number of customers. In the first quarter, we did settle the Turner case for $3,400,000 which is a $2,100,000 savings from the $5,500,000 judgment that was vacated on appeal. Insurance will pay $2,700,000 and included in the first quarter's SG and A figure.
We expect to see elevated spend in SG and A continue through 2014 as initiatives to grow top line internationally as well as the Evansite common video segment are executed and further infrastructure is put in place. Research and development expenses were $3,600,000 for the first quarter of twenty fourteen, an increase of approximately $1,600,000 compared to the first quarter of twenty thirteen. As forecasted last quarter, the increase is primarily due to additional personnel expenses related to the Evans.com and Video segment development initiatives. Further, as indicated on the last call, the team is finalizing plans around the development. And so as a result of that, we did not capitalize any of the expenses incurred during the quarter.
As we begin development initiatives, expenses will be capitalized until the product launches. However, given the newness of these initiatives, the company cannot be certain of the exact timing of capitalization, but we will be capitalizing some of the costs associated with the new product development. With the addition of the familiar team as well as planned hires and other research investments in the MSI Con Video segment, we continue to expect R and D to increase from these levels. The investments are being made to accelerate development and sale of adjacent technologies as well as new products. Adjusted EBITDA, which excludes certain items as detailed in our press release, was 7,200,000 for the first quarter of twenty fourteen compared to $7,700,000 in the first quarter of twenty thirteen, with the decrease being driven by higher RD and SG and A expenses in 2014.
Income from operations were $4,900,000 in the first quarter of twenty fourteen compared to $5,300,000 in the first quarter of twenty thirteen. Net income for the first quarter was $3,400,000 or $0.06 per share basic and diluted basis, which is basically in line with last year's results as well. Income taxes were $1,500,000 in the first quarter. The effective tax rate for this first quarter was 30.6%, which is unusually low. The company's tax rate in Q1 was reduced by incentive stock option deductions for disqualified dispositions of incentive stock option exercises in the quarter.
Excluding those benefits, which are difficult to forecast, our effective tax rate would have been approximately 39% and then we continue to think that's a good number to use for the remainder of 2014. Moving on to the balance sheet. In the first quarter of twenty fourteen, the company generated $4,300,000 of operating cash flow, which drove our cash balances up to $77,500,000 for cash, cash equivalents and investments. Accounts receivable of $20,500,000 were down 2,000,000 from the year end balances due to the timing of collections. Inventory actually grew $2,000,000 to $13,300,000 for the prior year balances due to increased stock of raw materials anticipation of 2014 sales.
Our investment in property, plant and equipment of $18,400,000 is actually down $600,000 from the year end balances, basically driven by depreciation expense of $1,000,000 offset by new CapEx in the quarter of $400,000 CapEx is primarily for production equipment as well as some computers and some other investments in technology around the expanding employee base. Accounts payable of $7,000,000 which was approximately up $800,000 from the year end balances, just driven mostly by that increase in inventory. Total deferred revenue of $21,500,000 has actually increased $1,300,000 for year end, primarily due to the upgrade program, which for the X26P to X2, which includes an extended warranty. We also had the sales of our Axlecambra's MSCI Com Solutions also contributed $400,000 to that increase as we deferred revenue related to those deals we'll recognize again over the service period. Total liabilities of $41,000,000 and the company finished the quarter with $123,800,000 of stockholders' equity.
The company continues to have no long term debt other than the capital lease and we continue to have plenty of liquidity and cost and the strong cash flow engine in our core business to fund our sales, R and D efforts and operations in the future. As we move on to selective information for cash flows, the company had cash provided by operations of $4,300,000 during the first quarter of twenty fourteen. Net cash used in investment activities for the three months ended March 3134 was $12,300,000 compared to cash provided $1,200,000 in the same period last year. The net use of cash is driven by purchases and investments made during the first quarter. Cash provided by financing activities was $10,900,000 during the first quarter compared to cash used in finance activities of $3,300,000 in the same period last year.
The net cash generation was driven by proceeds for employee option exercises of $7,300,000 as well as excess tax benefits from a stock based compensation of $4,700,000 As we stated in the last quarter, we'll leave more time for Q and A on the call, we've started including the unit sales statistics in the press release. To wrap up, we're continuing to invest in the business because we're serious about executing on our strategy and providing top line double digit growth consistently. We feel these investments are necessary to continue to solidify our market position in the video business, to investigate and develop adjacent revenue producing opportunities and to continue to grow internationally so we can provide long term value for shareholders. And to that, we'll take questions from the audience here. So if we could go ahead and make
Our first question comes from the line of Steve Dyer with Craig Hallum. Your line is now open. Please proceed
Steve. I think in the past, you have given a metric just regarding the percentage of five plus year old handles in the field that you had thought had been upgraded at that point. Do you have that sort of updated?
Yes. Steve, we're it's become difficult to track that. I think we still feel like there's the majority of the weapons over five years still remain to be upgraded and that number continues to grow, but we don't have that exact percentage. It's been tough to track because of the as we've reduced the trading credits, we have a number of customers that are just going through with their upgrades without actually trading in their old weapons. So it's been become difficult to track that.
But we still think that the majority of the weapons in the field that are over five years old remain to be upgraded.
Okay. And the international business obviously, was great to see again this quarter. But I think if you back it out, it implies that the North American business was actually down year over year, which seems unusual at this point kind of in the upgrade cycle. Anything kind of one time there that we should look at whether it was a big order that slid or was done last year? I don't know if there was anything in particular last year that would have driven that.
This is Rick. I would say in general, there is the first quarter tends to be a little bit seasonally weak compared to the fourth quarter and the second quarter just based on budget cycles. So I don't know if there is anything particularly that stands out aside from just sort of typical seasonality.
Yes. I think just as you know, the business is sort of subject to a little bit of lumpiness driven by deals and that deal flow quarter to quarter can certainly have an impact. But we still feel like the North American business has been driven a lot by the upgrades and we continue to see plenty of room to continue to see that contribute.
Okay. Moving over to the video business, I noticed that the actual video service revenue was flat quarter over quarter and actually declined from Q3. And maybe I guess what I would assume is in that is a lot of the kind of the cloud service revenue, which I would expect to be modestly growing as you get more people on the network. Is there something else in there? Or is there a reason why that number wouldn't be more linear?
Yes. This is Rick. In the first quarter, we spent a lot of the quarter just sort of squaring up to the basket, as you'd say, getting our feet under us, getting a lot of the agencies from last year really scaling up and running. And because we don't really recognize the service revenue until these agencies are live, a lot of the larger, more recent orders either didn't get live till very late in the quarter or during the Q2. So, yes, it was mostly just around execution and making sure that our existing customers were having a lot of success as we continue to build out our capabilities to bring these larger agencies online.
But why would that have been down, call it, from two quarters ago? I mean, just regardless, you'd think you'd have more agencies sort of on the system and up and running now than you did in Q3?
Well, this can also include some of the professional services that we built for bringing agencies live. So a net decline there was most likely that we had some larger professional services in the prior quarter.
That's right.
Okay. I noticed you broke out ex rep and I don't recall in all the time I've covered the company, you guys breaking that out and it was a very sizable number. Any color around why that was the case this quarter?
Yes. Actually that represented a single large international order for the XpREP product. So it's as you correctly pointed out, it's not a product we talk about a lot, but it's a product we continue to sell internationally and we had a large international order that was shipped in Q1. It's certainly one of of the contributors to that record sales for international this quarter. And just because it was such a large amount, we didn't want to sort of jam it into other make other look unusually large.
So we did break it out.
Yes. Okay. And then last question for me and I'll hop back in the queue. SG and A, it sounds like $700,000 or so of legal settlement in there as well as some trade show stuff that maybe sounds like it won't be recurring. So I know it's going to be an elevated level of spend, but would you expect the spend in SG and A to be kind of lower than that 13.7% number on a quarterly basis going forward by some amount?
Yes, there's certainly the 0.7% in legal is certainly kind of on a normalized basis. We would end closer to 13. But from that level, we'll continue to make investments to grow both the international business as well as the video business. So in some respects, I think the unusual items will be replaced by just sort of normal spend as we increased our customer pacing roles for both video and international.
Okay. Thanks guys.
Thank you. Thank you. Our next question comes from the line of Paul Coster with JPMorgan. Your line is now open. Please proceed.
Yes. Good morning. This is actually Mark Strauss on for Paul. Thanks for taking our questions. Going back to just following up on Craig's question on the international sales, we were kind of bumping along in the low single to mid single digit millions in the last couple of quarters.
We've been north of 10 here. And obviously, understanding there's a lot of lumpiness in the business quarter to quarter. Do you think this is a more sustainable level now or do you think that's obviously the target, but there were some one time things in the last couple of quarters and more sustainables in the mid single digit volumes?
Yes. That's a good question. I think certainly, I mean, that's one of the attractive things with international sales is they tend to be larger deals in general. Our average ticket size in international is about 10 times as big as our average domestic order. So it tends to be lumpy as a result.
But at the same time, I think we've certainly been investing heavily, as you know, over the last couple of years to grow the international business. I think we're seeing some of that pay off of these higher levels. You're right, some of this is
whether
we're going to have $10,000,000 a quarter consistently if that's the new normal, it kind of remains to be seen. But certainly, as Rick said earlier on the call, we feel good about the international business in general. We've got a good pipeline there and we expect to grow that part of the business year over year.
Okay, thanks. And then it's been about a year now since you had your Analyst Day and you provided the twenty seventeen targets. Just wanted to see if there's any update to that or at least on the video business, do you just there's kind of a wide range for that twenty seventeen target? How do you think you're tracking versus your upside and your downside?
Yes. No, I think we're tracking pretty well certainly on the top line. We're tracking well. I think we feel still very comfortable sort of the top line projections for the video business. And certainly, the base case as we certainly is looking pretty solid.
We're tracking well to that base case now. I think the pessimistic case is looking even more pessimistic with the last three quarters of results. But as far as the top line, I think we still feel pretty comfortable with the top line from those from that presentation.
Okay. That's it for us. Thank you very much.
Thank you.
Thank you. Our next question comes from the line of Greg McKinley with Dougherty. Your line is now open.
Yes, thank
you. The TASER assurance plan, can you give us a sense for how significantly that has been used by customers to date? How many devices have been sold under that program?
Greg, this is Dan. I mean, it's pretty that tends to be a little bit lumpy, but it's certainly an area that we really have a focus on at TASER. The ability to sort of make the purchases of TASER technology be more of a line item in the budget and be pretty consistent every year is certainly something that's beneficial for our customers and long term will be beneficial for us as well. The ability to also lock in the next upgrade is attractive for us and for the customers that takes away sort of the challenge of finding that budget dollars for another capital purchase in five years. So as Rick mentioned earlier, we've actually are offering incentive of $100 per handle right now for people to when they upgrade their current their last generation CW to the new platforms, there's $100 incentive for them to upgrade and join TAP at the same time.
Any given quarter, we've had quarters we've had 1,000 units to TAP or a little north of 1,000. So it's still sort of less than 5% of our purchases include TAP, but that's certainly something we'd like to see over time increase.
It's really a bit of a new thought process for some of our customers. I'd also add that we're seeing more success frankly with Tap right now in the smaller agencies than in some of the larger agencies just from a market dynamics perspective. But that's obviously an area of focus for both our marketing and our sales teams to continue to increase the attach rate.
Okay. Thank you. And then just getting back to the North American upgrade cycle, I was looking back over the last couple of years and just adding up the units of electronic control devices that have been sold. Now this is for the whole company, not just North America. But going back to 2011, there were 64,000, in 'twelve there were 78,000, in 'thirteen you guys did 92,000.
I think you said you still think the majority of those five year devices are still out there and haven't been upgraded. Given what you are sensing from the market, are we still in a rapid growth phase for North America on electronic control devices with budgets maybe loosening up a little bit plus the upgrades? Or are we sort of more steady states even though upgrades will occur, it may not necessarily generate significant year over year growth like it has last few years? I wonder if you can just give us some thoughts on that.
Yes. That's a good question. I think there's certainly room for it to continue to grow, although we've seen, as you know, really strong growth two years in a row in the North American part of the business. So part of the challenge is continuing to stay at those elevated levels and then grow from there. And certainly that we see the opportunity as you mentioned budgets are getting a little bit are opening up a little bit.
That installed base continues to age. So a five year old product two years ago is now seven years old. And certainly, I think our customers appreciate the fact that this is a key piece of life saving technology and it not only protects the life of the officers, but it also saves lives for the people interacting with it. So they want to make sure that when it's time to use that product that it's going to work and proactively replacing the product is the best way to ensure that. So I think it's we certainly see there's still room, still a ready market for upgrades, and we continue to press that message with our customers.
Okay. Thank you. Just getting back to operating expenses for a moment. So what I think I heard from you is we had a $700,000 legal settlement that's non recurring. So maybe on an adjusted basis, G and A was more in that $13,000,000 range, but it will likely gravitate back toward that full kind of upper $13,000,000 range as the year progresses.
So please correct me if I'm wrong on that. And then from an R and D standpoint, would 3.6% also represent a level from which we will likely be growing or is that more of a run rate basis?
I think on the first one, SG and A, that's exactly right. We expect that the 13% is kind of normalized and we'll continue to grow from that level. On R and D, I think we'll also grow from the 3.6% this quarter, although there will be some offsets from capitalization of new product development costs. But I think overall, we do expect that number to also grow from these levels throughout 2014.
Okay.
All right. Thank you.
Thanks.
Thank you. And our last question in the queue comes from the line of Glenn Mattson. Your line is now open. Please proceed with your question.
Hi, everyone. A question on in North America, we saw kind of a smaller percentage of very large deals in the quarter. Is there how's the pipeline for large deals generally speaking? Is there still a lot there to work on?
Yes, we still yes, I mean, I think we still have a good pipeline both really across all three focus areas for the business, international, the North American upgrade as well as the video business. So I think it's certainly lots of large cities that made purchases in the past that remain to be upgraded. So that's something we continue to focus on with our customers.
One thing that obviously you just pointed out is we've seen a lot of our growth being generated in the bottom 80% of the market with our telesales effort that we launched was about two years ago now. That's just continued to be a real growth driver for us. Again, the first quarter, I think, tend to be a little weaker on the larger deals because they tend to have more sort of budget cycles we hit in the fourth or second quarters. And now I was trying to think back from the question earlier. I think last year, we may have had one or two sort of larger deals in the first quarter than we had this year.
So good news is the telesales is really adding some more consistency to our growth and it's obviously a little more predictable because you get the large I'm sorry, the law of large numbers kicks in with that telesales effort, but we do feel very good about the pipeline for large deals for the balance of the year.
And then on the investment in familiar, have you now that that's kind of been absorbed and you've been working with the team, is there any timeframe as to when you expect some products out of them? Is it later this year or more in 2015?
Yes. At this point, we don't have firm dates. We've just really come out of the research phase. We're prototyping a number of sort of different options to continue to iterate and receive customer feedback. One thing I would tell you, the Familiar acquisition has been just phenomenal for the organization.
It's created a real sort of center of mass in the Seattle market. And just through the Familiarize networks, we've hired, I think, another five to seven really solid people that have come in and really helped build out our team. So it's not only affected our ability to generate new products, but it's really improved our overall engineering talent base in our core evidence.com business as well. So we couldn't be happier with the acquisition, and we're very excited to see it move from sort of the research phase, we're now into prototyping phase and then into full blown product development on some great new stuff.
Okay, great. Thanks guys.
Thank you.
Thank you. And we have a follow-up from the line of Greg McKinley. Your line is now open.
Yes, thank you. Just a numbers question I had at the segment level. It looked to me like within video, the cost of product, not the cost of service, but the cost of product relative to revenues had gone up quite a bit. Is that what's driven that? Is that more body versus flex or?
That's exactly right. As you see in the quarter, we had a large number of body cameras, which are great. I mean, we sold that continues to be a strong driver for video and certainly kind of reinforces that, that was a good decision to launch that product. But that does the gross margins on body are going to be lower than flex just because the average selling price is about half as much on average. And as a result, it's got a lower it's got a higher cost of sales as a percentage of the total sales.
So it's kind of a mixed issue.
Thanks. And then can you give us some more color on the London relationship? So it sounded to me like it was a competitive bid, but you also said it was an unpaid trial. So let me just walk through with us how you end up getting in there and what are the prospects for this actually to turn into a paying customer?
Yes, this is Rick. The fact that it's basically an unpaid trial, don't let that fool you that this was not a super competitive situation. Body cameras, really sort of the concept, the early concept, a lot of the work was done in The United Kingdom. There are some local companies there that have been supporting the body cam market in The UK over the past several years. And obviously, the London Met is the most influential and sort of the largest major agency and a real thought leader that's looked to around the world, especially with all the former influence of Great Britain across the former empire.
So it was, I would say, very competitive as far as people working with the MET and the MET looking at the different solutions. So the fact that we were chosen, I think, just speaks to the fact that they saw the value of the overall solution, whereas I would say, in general, most of our competitors are primarily hardware vendors. And I think that we're uniquely able to come in and deliver a solution that does not require a lot of technical lift from our customers to go and solve difficult IT problems. So we're very excited about it, and we do believe there's a major revenue opportunity. What we're hearing from London Met qualitatively is that if this trial goes well, that there could be a major expansion of body cameras within the London Met.
And we think it has the opportunity to be very significant financial account for us, as well as being an important thought leadership account.
Yes. What is the intended or expected duration of the test before a commercialized decision would be made?
We believe it's going to be about a year is what it's scheduled for.
Okay. All right. Thank you.
Thank you. And with that, I am not showing any further questions in the queue. I would like to turn the call back over to Rick Smith for any closing remarks.
Great. Well, thanks everyone for your time. Obviously, we're excited to continue to report traction in Evidence.com as well as growth and profitability in the core business. And we look forward to seeing many good at our shareholder meeting, which is going to be here in May, just a few weeks out. And we can't make it to the shareholders meeting, then certainly we hope to hear your voices on the next call when we announce our second quarter results.
Thanks everyone. Have a great day.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect.