Good day, ladies and gentlemen, and welcome to TASER International fourth quarter 2013 earnings release conference call. At this time, all participants are on listen only mode. Later, we'll conduct a question and answer session, Instructions will be given at that time. If anyone should require operator assistance during the conference call, please press star then zero on your touchtone telephone. As a reminder, this conference call may be recorded. I would now like to hand the conference over to Mr. Rick Smith, Chief Executive Officer. Sir, you may begin.
Thank you. Good morning to everyone. Welcome to TASER International's fourth quarter 2013 earnings conference call. I'm joining the call remotely today as I have an opportunity to address over 300 chiefs of police at the California Police Chiefs Conference. As can happen when doing these things remotely, there's some risk of technical issues, in which case Dan would deliver the entire call today, Let's hope that doesn't happen. Before we get started, I'm going to turn over to Dan Behrendt, our CFO, to read the safe harbor statement.
Thank you, Rick. Statements made on today's call include forward-looking statements, including statements regarding our expectations, beliefs, intentions, or strategies regarding the future, including statements around projected spending. We intend that all 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 TASER International Incorporated. 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 risks and uncertainties that could cause our actual results to differ materially.
These risks are discussed in our press release we issued today. In greater detail in our annual report on Form 10-K for the year ended December 31st, 2012, 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.
Thank you, Dan. As a reminder, we are going to be accepting some questions via Twitter during the Q&A portion of the call, which can be submitted using the hashtag TASR_earnings. That's TASR_earnings after the hashtag. To follow up on our updates on Twitter during the call, you follow the account @TASER_IR. We will be posting graphics and commentary during the call. For those of you without Twitter, all updates and graphics will stream directly to our investor relations website at investor.taser.com. I am eager to share with our investors the results of the hard work from the past year on today's call. First off, we hit a record in terms of revenues for the second quarter in a row, recognizing $40 million on a consolidated basis.
This marks the eighth consecutive quarter of year-over-year top-line double-digit growth, 2013 was the second year in a row for record revenues, with nearly $138 million. We have been working hard to execute our strategy to grow the top line and invest in the right opportunities, and I think the fourth quarter and 2013 as a whole are evidence that our efforts are working. I will review the progress in each of TASER's three core strategies today. First, the CEW upgrades, second, international expansion, and third, gaining dominant market share in the cloud computing and wearable technology space for public safety. To start, I would like to share the traction in the Evidence.com and video segment. Evidence.com and Axon bookings saw its second consecutive quarter of bookings in excess of $5 million. For the full year of 2013, bookings grew $10.7 million, or 282%, to $14.5 million.
Evidence.com and video segment GAAP revenues in the fourth quarter grew 33.6% to $2.5 million compared to last year's fourth quarter. We think this is evidence of the staying power of our cloud-based and wearables electronics business. While we do not expect this curve to always be consistently up and to the right during this early stage, we are very excited about the continued growth of bookings in the fourth quarter. Within the quarter, there were several notable deals, such as the New Orleans Police Department, the Birmingham Police Department, and the Las Vegas Metropolitan Police Department, all deploying our Axon cameras and Evidence.com solution. Large agencies like these understand the intricacies of large-scale digital evidence management and know that this is not just about buying a camera. As a result, they are choosing Axon and Evidence.com as a complete end-to-end system.
We are working hard to continue to demonstrate to law enforcement professionals that Evidence.com is the technology that will make the administrative side of law enforcement significantly more user-friendly, cost-effective, and efficient, as well as reducing litigation costs for taxpayers and providing accountability to the public. As we mentioned on the last call, this year, we branded our booth at our most important conference, the International Association of Chiefs of Police, or IACP. This year, we branded it as the Evidence.com booth to generate buzz and excitement about our newer brand. We believe this approach was highly successful in helping build brand awareness for Evidence.com, again, our newer brand. According to our surveys of IACP attendees before and after the conference, we lifted Evidence.com brand awareness among these chiefs from 43% who were aware of Evidence.com before the conference to 80% after the conference. We nearly doubled market awareness.
We're hosting customer events each month where sales representatives and I invite the chiefs in a given geographical area for dinners to discuss trends in technology and how Evidence.com can benefit their agencies. This also allows me a forum to personally address any concerns that agencies may have about cloud computing in general. Ensuring that the leaders in law enforcement have up-to-date and relevant information about cloud computing and wearable technology is imperative to continuing the momentum and the excitement of Evidence.com and Axon. It's also important to establish TASER as the thought leader, such that key decision-makers see TASER as the right partner to bring best-in-class technology to their agencies. We think our strategy is working, not only from the financial results, but from the invitations that we've received to present and speak at large-scale law enforcement events.
I was recently invited to present in front of the IACP executive committee about these trends. Later this month, or actually later today, I'm going to be speaking to the California Police Chiefs Association right after this call, in fact. In March, we'll be hosting our technology summit here in Scottsdale, which we anticipate will be attended to capacity. In fact, we had to schedule a second event in April when the first event filled to capacity. It's just so clear that as we continue to move full speed ahead toward the tipping point where we believe video will become a required tool for law enforcement.
The progression towards cloud computing and wearable technology in law enforcement is actually a little faster than we had previously anticipated, which of course is very exciting, but it underscores the need for us to move fast in 2014 to solidify our position in the space. We've received several inquiries from investors regarding the potential threat from Google Glass and whether or not they could be integrated into law enforcement. We think that Google Glass is a great innovative product, and I even have one myself. The more that wearable devices like Glass gain traction, the faster that we believe law enforcement will move to wearable video. The more that wearable computing and wearable technology become mainstream within the public realm, the easier it will be to implement in law enforcement.
Further, we strongly feel that the long-term play here for TASER is not with the cameras and the hardware, but rather with the cloud technology platform, Evidence.com. If an agency chooses to use Google Glass or other hardware to collect evidence, they're still going to need a digital evidence management system, and Evidence.com is the most flexible and accommodating digital evidence management system to handle digital evidence from multiple sources. As Glass becomes a commercial product, we intend to support Evidence.com applications running on Glass the same way that we provide applications on iPhone and Android devices today. To paraphrase Bill Clinton, it's not the camera, stupid, it's the back end, that's where we're focused. We see 2014 as the year that things are going to be moving forward at full throttle. With Evidence.com, our goal is to solidify market share and frankly, market dominance.
We're out to own this space, and we're out to grow it fast. The recurring subscription revenue opportunities create a very high potential lifetime value for each customer. Further, for every Evidence.com customer, they become a natural customer for future cloud-hosted services. The more services of ours that each customer is using, the more likely they are to adopt additional services from us in a virtuous cycle where adding capabilities with one integrated platform gets easier and easier than going to outside vendors. In this virtuous cycle, the lifetime potential value of every customer is far more significant. Hence, we believe the biggest mistake we could make right now would be to under-invest in driving market share. We've already begun to make some of these investments through 2013 in functions such as account management and field services.
We deployed additional sales representatives for the Evidence.com and video team in the second half of 2013, with more planned in 2014. We more than doubled our manpower in each region in order to reach more customers at a faster rate. In addition to the incremental spend in SG&A for the additional sales representation, customer-facing events, and trade shows, we feel it's imperative to keep a strong investment in research and development for new products and services, as well as enhancing the existing functionality of Evidence.com. Technology is moving fast. We know that. TASER's committed to being at the cutting edge of technology, continuously assessing how to make our products even better and how to create innovative new products to serve our customers. We began our most recent product initiative with the acquisition of Familiar, Inc. in late 2013.
The team has hit the ground running. They spend much of their time meeting with our customers to gain a deep understanding of the key customer pain points and to determine where we can create the most value for our customers next. Customer reactions have been extremely positive. Customers are telling me that they've never seen a company go to such great lengths to involve them in building the right solutions for their challenges. The team is coming up to speed very fast. They're spending a lot of time in the field, on-site with key customers around the country. We've decided to keep this process going through the first quarter as we firm up our product strategy with more and more customer input. It's most important that we get this right, not that we hurry to get it fast.
One result of this is that we expect we will see higher R&D charges in Q1 than previously expected by about $500,000. This is because we have the team doing customer-oriented research rather than active product development work. Accordingly, a higher proportion of the work will be expensed in Q1 versus development work, which can be capitalized. We believe this is the right approach. We need to run the business to get to the right answer for the long term and take the time that it takes to get it right. Breakeven for our Evidence.com business is also another hot topic among some of our investors. At the front end of building a cloud-based or SaaS business, there is a high level of investment required. With revenues being deferred over the length of the contract, there's an inherent loss period until a critical mass of customers is achieved.
Our philosophy on breakeven in investment is that so long as the business is growing and the signs that our product is going to work are evident, we need to continue to invest. If the growth of the business slows, then at that point, we can pull back on our investments. We're managing our Evidence.com and video business with aggressive investment to drive top-line growth and seize maximum market share. Again, given the recurring revenue model and the inherent advantage we will have in selling adjacent services in the future to each of these customers, we believe the right strategy here is to focus on driving market adoption and garnering dominant market share. Once at scale, we can pull back on the investment significantly and have a highly profitable business with long-term recurring revenues.
It will actually cost less to run the business in steady state than it's costing now to build it on the front end. The next strategy I'm going to review is our CEW upgrade. The Taser weapons business continues to execute and show very strong results, delivering revenues that were up 24.1% to $37.6 million year-over-year. The fourth quarter realized several large stocking orders as a result of a year-long volume incentive program that added about $2.5 million to top-line results in the fourth quarter. It's also important to note that historically, the first quarter for Taser has been weaker by anywhere from 10%-30% than the preceding fourth quarter. The push for upgrades continues, but starting in 2014, we're introducing a new incentive program to promote the TASER Assurance Plan in conjunction with customer upgrades. The regular trade-in credit has continued to decline.
It's now down to $85 trade-in credit for an upgrade. If agencies sign up for TAP, the TASER Assurance Plan, they will receive an additional $100 credit per unit. To refresh your memory, the TASER Assurance Plan allows agencies, after the purchase of their initial CEW unit, they can make equal installment payments over the period of a contract. At the end of the contract period, the customer receives a new CEW. Along the way, the customer realizes other benefits as well. We're passionate about helping our customers budget for CEWs, and TAP allows our customers to have a predictable and manageable expense that's consistent during the contract period and results in an upgrade five years from now.
We still believe that there lies a large opportunity ahead in upgrading aging weapons, as well as to sell more into those agencies that don't have a CEW on every officer today. In our North American weapons business, which is obviously in a more mature phase, we're focused here more on operational excellence and driving long-term profitable growth. One more update for the Taser weapons business is in regards to our product offerings. Now that we have the TASER X26P and the TASER X2, which are getting very well accepted in the law enforcement market, we've made a decision to discontinue new product sales of the legacy TASER X26 CEW, which we introduced in 2003. We'll be discontinuing new product sales at the end of 2014. We're now entering the end-of-life phase for that product. We'll be migrating customers over to the new 2013 model TASER X26P.
Internationally, we're making focused investments to drive growth. Our international businesses made up about 26% of total sales in the quarter, with over $10 million in revenue. Although we've been admittedly disappointed in the full-year performance of the international segment, we see signs that our investments are beginning to bear fruit. We've recently hired a head of international services and expect higher international sales as a result in 2014. We also had more countries open up for us to sell into, which is a positive indication that the understanding of CEWs and their corresponding benefits and that the political climate is changing in our favor. We will be continuing to invest internationally in 2014 with initiatives that will generate effective tax savings in 2015 for the company.
I'd also like to take a minute to discuss the current state of the business in regards to the defense of product and commercial litigation. As some of you remember, in September of 2009, we issued a comprehensive new set of warnings and training guidelines around our TASER weapons. The large majority of the litigation that is filed against us has been on the premise that we have failed to properly warn of risks associated with the operation and use of our products. Since the rollout of these newer warnings and the associated training, the rate of new cases presented to the company has significantly declined. Three years ago, we had 52 pending cases. Today, we have 18. In the second half of 2013, we only had one new case that was presented to us. Again, that's in the course of two quarters, we only had one new case.
We've had nine consecutive quarters where dismissals have outnumbered new cases served. We think this is a testament to the strength of our defense and legal teams in training and risk management. In the fourth quarter, we had a few other significant events in regard to our litigation and defense. Number one, in the Turner versus TASER case, we were awarded a new trial on damages only. This resulted in the reversal of $1.1 million in litigation reserve in the fourth quarter. Due to this reversal, additional insurance coverage became available, and SG&A realized a $0.6 million benefit to litigation-related activities in the fourth quarter, in addition to the $1.1 million reversal. Secondly, we did settle two cases for a combined $2.3 million, as previously announced in an 8-K on November 27th.
These cases will now be paid through insurance coverage due to the reversal of the Turner versus TASER case as well, and therefore, there's no reserve on the balance sheet at this time, and no expense was necessary. Third, we were awarded a permanent injunction against Karbon Arms for patent infringement on our CEWs. We were awarded damages in the case. At this time, there's nothing on the books as collectability is unassured. We're happy that this case is resolved and our CEWs can continue to be the market leader in safety and effectiveness, and we'll continue to aggressively defend our intellectual property. In addition, the company is currently in a jury trial in the commercial litigation lawsuit entitled A. A. Saba versus TASER International. This lawsuit is seeking monetary damages and attorney's fees for an alleged breach of a distributor agreement.
The outcome of any litigation is uncertain, and it is possible the company could lose at trial with an adverse judgment. That being said, we do have some cases still pending that are from the pre-2009 era. We're aggressively litigating these cases, but this comes at a financial cost to us. We've implemented measures to mitigate this cost through in-house attorneys and defense. We have always maintained defense is not something we take lightly. We're in the final stages of litigating the pre-2009 cases over the next one to two quarters. Accordingly, we do expect our litigation expenses to remain in the elevated range they're at now for another one to two quarters.
On the bright side, we're happy to share, we continue to expect these expenses to trend downward in the second half of 2014 as we bring the pre-2009 caseload to conclusion, although litigation always remains inherently unpredictable. The company does plan to invest the legal savings into new customer-facing initiatives to accelerate further sales gains. To wrap up before Dan goes over the financial results in greater detail, exciting things continue to happen here at TASER, and I am looking forward to sharing more success in the coming quarter. With that, let me hand over to Dan to review our financials.
Thanks, Rick. As Rick said, in the fourth quarter, consolidated sales were $40 million, a 24.6% increase from the fourth quarter of 2012. The increase in sales was primarily driven by the continuation of the upgrade cycle, with agencies upgrading to the new X26P and X2 Smart Weapons. Combined, these contributed $15.9 million in the fourth quarter. Axon cameras and Evidence.com sales also grew by $0.5 million to $1.4 million in the fourth quarter of 2013, and sales of our cartridges increased to $1.5 million in the fourth quarter as a result of several year-end distributor stocking orders that occurred. X26 CEW declined by $0.6 million in the fourth quarter as a result of agencies embracing the new Smart Weapons platform. There are still some international federal customers who are continuing to purchase the X26 because it's the only CEW that's been approved for their market or application.
We're working with these customers to get them to review and approve the new Smart Weapon platform. Historically, we've been announcing the percent of the installed bases upgraded to their legacy weapons to the new Smart Weapon platform each quarter. However, we feel that the trade-in credit, as it's declined over the last year, more customers are choosing to upgrade weapons outside our formal program and therefore not making it into our metric. Due to this, we will no longer be tracking this metric publicly, but we still feel that the upgrades are still a large opportunity for us, as evidenced by the fact that we continue to see very strong sales in North America and in the new weapons. It's becoming a less meaningful measure as that upgrade credit has dropped and agencies just choose to upgrade outside our program.
Gross margin for the third quarter was $25.6 million, or 63.8% of revenue, which is up from $19.2 million, or 59.7%, in the prior year. As sales have increased, we've continued to benefit from higher operating leverage. Due to price increases instituted at the beginning of 2013 and more sales being sold directly to the end user other than through distribution channels, we have realized higher average selling prices of our products also improving gross margin. Further, with the trade-in credit stepping down each quarter over the last year, gross margins have been positively affected because we've given less back to the customers in those trade-in credits.
Although service revenue has increased quarter-over-quarter, the cost of service delivered decreased $0.3 million in the fourth quarter compared to the prior year due to the continued benefit from the completion of the depreciation of the capitalized costs related to Evidence.com software development, which was running at $300,000 a quarter previously. In the Evidence.com and Video segment, revenues increased $0.6 million to $2.5 million for the fourth quarter of 2013. The loss from operations in the Evidence.com and Video segment worsened to $3.9 million from a loss of $1.8 million in the fourth quarter of 2012. This is largely due to the increased investment in research and development activities as well as additional sales representatives for that part of the business.
Sequentially, the loss for operations in the Evidence.com and Video segment also worsened $2.3 million from $1.5 million in the third quarter of 2013 to $3.9 million in the fourth quarter, as previously stated. This is due to the decision to increase the spend in research development as well as the acquisition of the Familiar team to accelerate our move into new products. We've added a number of new sales reps. As Rick said, we basically doubled our sales reps in the field in the second half of the year, that's starting to have a bigger impact in the fourth quarter. We saw some lower revenue in the quarter from the TASER CAM business that also runs through that business.
We do expect the current levels of spend to continue to increase from this place through 2014 as we continue to gain market share and adding more customer-facing roles. Sales general administrative expenses were $11.7 million in the fourth quarter of 2013, compared to $12.4 million in the fourth quarter of 2012. As a percentage of sales, SG&A was 29.1% of net sales in the fourth quarter of 2013, compared to 38.8% of net sales in the fourth quarter of 2012. Compared to the prior year, litigation-related activities were down $1.2 million due to more activity taking place in the fourth quarter of 2012. Additionally, as a result of the reversal of damages in the Turner case, the company recognized a $0.5 million benefit in the quarter because previous legal expenses that had run through the P&L were able to now be reimbursed by the insurance company.
We saw a $0.5 million benefit in the fourth quarter for that. This was partially offset by increased personnel expenses of $0.7 million as a result of strategic hires we made over the last year, primarily in customer-facing roles, such as sales representatives, telesales reps, customer service, account management, and field services, as well as some incremental administrative functions. Sales and marketing expenses increased year-over-year due to higher commissions of approximately $0.5 million, as well as increases in account promotions and trade show expense due to the timing of the International Association of Chiefs of Police trade show, which was held in the third quarter of 2012, but in the fourth quarter of 2013. On a normalized basis, when we back out the one-time benefit for the insurance reimbursement for previously recognized legal expenses, SG&A expenses would have been $12.2 million in the fourth quarter of 2013.
Given the traction the company's experienced in the Evidence.com and video segment, the company will continue to invest incrementally in customer-facing roles and infrastructure to support the growth and therefore expect the total SG&A expenses to increase from this quarter's level of about 5%-10% before the benefit of the litigation reversal. Research and development expenses were $3.4 million in the fourth quarter of 2013. This is an increase of approximately $1.5 million compared to the fourth quarter of 2012. As we predicted and forecast last quarter, this increase is really primarily due to the additional personnel expense related to the Evidence.com and video segment. Our team has continued to do researching and voice-of-the-customer work on what markets are prime for entry, and their expenses will be completely charged to R&D operating expense during that time.
In 2014, likely starting in Q2 as we start development initiatives, expenses will be partially capitalized until we launch those new products or services. However, given the newness of these initiatives, the company cannot be certain of the exact timing of capitalization or the completion of development projects. With the addition of the Familiar team as well as planned hires and other research investments in Evidence.com and the video segment, we continue to expect to see some increases in R&D from these levels. The investments we made to accelerate our development and the sale of adjacent technologies and new products. Adjusted EBITDA, which excludes certain items as detailed in our press release, was $13.4 million for the fourth quarter of 2013, compared to $7.7 million in the fourth quarter of 2012. The improvement is mostly driven by just the higher sales and gross margins in 2013.
Income from operations was $11.6 million in the fourth quarter of 2012. This compares to $4.7 million in the fourth quarter of 2012. I'm sorry, $11.6 million in the fourth quarter of 2013. This quarter's income from operations benefited from the reversal of the $1.1 million litigation reserve related to the Turner versus TASER International case, and the resulting reimbursement of $0.5 million of previously expensed legal fees. Also related to litigation, in the quarter, we announced that we received a permanent injunction against Karbon Arms and were awarded damages. We've not recorded this benefit as collectibility of that award is not reasonably assured at this point. The net income for the fourth quarter was $6.9 million, or $0.13 per share on both a basic and diluted basis, compared to net income of $3.8 million or $0.07 per share on a basic and diluted share basis for 2012.
Income taxes were $4.6 million in the fourth quarter. The effective tax rate for the whole year was about 35.3%. The company's tax rate was reduced in 2013 by incentive stock option deductions, research and development credits, and favorable return to provision adjustment. Excluding these positive benefits, which are difficult to forecast, our effective tax rate would've been approximately 39%, which we think is a good number to use for the full year 2014 modeling purposes. We move on to the balance sheet, in the fourth quarter, the company generated $9.3 million of operating cash flow, and we finished the quarter with $63.4 million of cash equivalents, and investments. Accounts receivable of $22.5 million are actually up $4.4 million from the prior year balances due to increased sales. Inventory, $11.1 million, is essentially flat with the prior year balances.
The investment in property, plant, and equipment of $19.1 million is down $2.9 million from the year-end balances. The decrease includes approximately $5.1 million in depreciation expense, partially offset by $1.8 million of capital expenditures during 2013. These capital expenditures in 2013 were primarily driven by investments in production and computer equipment. Accounts payable of $6.2 million is also flat with the prior year. Total deferred revenue of $20.2 million has actually increased $8.1 million from last year's prior balances, primarily due to two things. It's the upgrade program for the X26P and X2, which includes an extended warranty. We also saw sales of the Axon cameras Evidence.com solutions resulted in an additional $2.7 million of deferred revenue related to service revenue that will be recognized over the life of the contract. We continue to defer revenue related to Evidence.com and service from the time of the purchase.
Again, we'll recognize that revenue, depending on how much the customer has paid up front, from anywhere from one to five years, depending on the individual contract. Total liabilities of $37.5 million. The company finished the year with $109.9 million in stockholders' equity. Continue to have no long-term debt other than the capital lease, and we continue to have plenty of liquidity and a strong cash flow engine in our core business to fund our sales, R&D efforts, and operations in the future. We move into the selected information provided for cash flows, the company did have cash provided from operations of $9.3 million in the fourth quarter of 2013. For the 12 months ended 12/31/2013, we had cash from operations of $32.4 million.
We did have cash used from investing activities for the 12 months of $23.1 million, compared to cash provided, $1.7 million, in the same period of the prior year. The net use of cash is really driven by purchases of investments during that time period, as we invest our excess cash into both short- and long-term investments. Cash used in financing activities was $3.2 million for the 12 months ended 12/31/2013, compared to $13.4 million used in the same period of the prior year. To refresh everybody's memory, during the 12 months ended 12/31/2013, we did repurchase 3,048,966 shares at an average price of $8.17 per share. That netted a total purchases in that buyback of $25 million completed during 2013.
This was partially offset by $6.8 million of tax benefit from employee option exercises, as well as $15.4 million of cash provided by employee stock option exercises. Really, we offset most of the buyback with option activity during the year. As we stated last quarter, we'll leave more time for Q&A portion of the call. We also will include unit sales statistics. That's included in the press release for your reference, so we don't have to cover that in the Q&A here. Just refer to the press release, you'll see the unit sales. At this point, I'd like to take a minute to address the incremental investments we've started that we've talked about making over the next year and beyond to grow the business. Last year, at this time, we also messaged that we'd be investing to grow the business.
I think that today's results for the full year of 2013 have shown that we're serious about executing on our strategy and providing top-line double-digit growth consistently. We feel that these investments are necessary to continue to solidify our market position in the video business, investigate and develop adjacent revenue-producing opportunities, and continue to grow internationally so we can provide greater long-term value for our shareholders. With that, we'll take calls from the queue. Sayeed, if you want to queue that up, that'd be great.
Thank you. Ladies and gentlemen on the phone line, if you have a question, please press star then one on your touchtone telephone. If your questions have been answered and you wish to remove yourself from the queue, please press the pound key. Once again, if you have a question, please press star then one. Our first question comes from Steve Dyer from Craig-Hallum. Your line's open. Please go ahead.
Good morning, guys. Very nice quarter.
Thank you, Steve.
On the weapons side of the business, we'll start there. I know you're not going to give out kind of the % upgraded anymore. I don't know whether you use the baseball analogy or what, how would you sort of, I guess, characterize anecdotally how the upgrade cycle is progressing?
Steve, this is Dan. I think we're really happy with where we are right now. I think a lot of the strong results we've seen, especially in our North American business, are directly a result of that upgrade cycle. I'd say from a baseball perspective, we're still in the early innings. I think what we've sort of discovered is as we've reduced that trade-in credit, I think the good news is we're seeing lots of trade-in activity, but we're seeing less of our customers actually choosing to upgrade through a formal program. They're just going ahead and buying new units because at this point, the bundle we're selling, they kind of work the economics. In some cases, they've decided that they'd rather just buy the TASER without the warranty and not get the trade-in credit. We still see that as a growth engine for 2014.
We still see that there's a good part of the market. I'd say, a majority of the install base is still to be upgraded. I think we still think that's going to continue to provide plenty of growth for the company.
As you look at the number of handles in the field that are over five years old, is that number sort of still growing by the day, or has the upgrade kind of gotten to the point where the average age, so to speak, is now starting to shrink?
I think we're probably still seeing some growth in the total number of units over five years old, just because we were getting into some strong sales years five years ago. I think even at a steady state, there's still a large opportunity for us where if we can upgrade anywhere from, say, 12%-15% of that install base over five years old each year, that that's going to provide a very strong base for the North American business.
Lastly, on the video business, it sounds like you're going to end of life the TASER X26. Are you also going to end of life the cartridges at that point in time, or will there be a tail there as well for a while?
For the TASER X26, the legacy TASER X26 product that was introduced in 2003, we'll not sell that commercially after 2014, but we'll continue to support that program from a warranty perspective through the end of the decade. The cartridges for the TASER X26 legacy product, the TASER X26P uses that same cartridge, so we'll continue to sell that legacy cartridge for the foreseeable future because the new platform takes the same cartridge.
Okay. Jumping to the video business. It looks to me, at least from what I can tell, that almost anybody that announces a vendor, you're winning the vast majority of those deals. Do you have any kind of a win rate that you're willing or able to share that you're using in your marketing and sales process?
Probably not anything we can share. I think we're very satisfied. I think we get in these competitive situations. We think that customers are really appreciating sort of the end-to-end solution and the key things we can differentiate, like the Evidence Transfer Manager, which makes the ingest of video significantly more efficient than any product we're competing against. The robust back end with Evidence.com. Customers, especially larger agencies, we see that they really are getting that message well, and our salespeople are doing a good job of delivering that message.
I guess anecdotally, it seems like 2013 was sort of the year that the video solution moves from a bunch of small agencies using it to at least getting on the radar of the larger agencies. Do you view 2014 as kind of the year that you start to see some real meaningful deployments with the large agencies, or are we not there yet?
Hey, Rick, do you want to take that one? I know you've been meeting a lot with the customers out in the field.
Yeah. We do expect this year to see larger deployments than we've seen historically. There are a number of RFPs on the street right now for the 1,000 to 2,500 unit sort of ranges. We've been actively engaged with those accounts, and we think we've got a very good shot at them. We're also hearing a lot of rumbling and activity internationally on cameras. There's a number of RFP deals that are coming out there as well that we think we've got a very good shot at. Coming into this year, we see several deals that are larger than anything we've sold to date that are in the pipeline. Now, as you know, insert all the disclaimer language here about the inherent riskiness of those, and they're not in the bag until we get them.
We certainly do see the opportunities are getting larger, and I think that's a function of some of these agencies are moving from the, "Hey, let's test this out," to, "Okay, we're going to make this part of our standard operations." We hope to see that continue through the end of the year.
Internationally, it was always sort of my understanding that having a data center or the data itself housed in-country was sort of a big deal for a lot of countries. Is that sort of receding a little bit? I've seen a lot of the stuff internationally as well and was not sure how much you guys think you can play there.
Yeah, we certainly think we can play. We have instances running in Amazon's data centers in Brazil and in Europe. I believe we either have one up or running or we're close in Australia. One advantage of working with AWS is that they do have data centers around the world, and we can, at very low cost, bring up additional instances. Those are mostly being used right now to support field trials. We're certainly in discussions with some of the larger international agencies that may want to see the data in their country, and there may be, frankly, some discomfort even around using an American vendor, just given all the PR about what's been happening with the NSA.
Good news for us is Amazon's getting enough sort of market share clout that there are a number of competitors that are arising that are making it a goal of theirs to make it easy for Amazon customers to deploy on the competing clouds that are local companies in some of these different countries. We haven't done that yet, but we do have plans in place. We're not going to be losing business or shut out of these countries by the fact that we're going to require they store their data in the U.S. We do have a very strong preference to, and work with our customers, not to try to have them house the data on site. There's just a whole bunch of challenges in doing that.
We're seeing that most customers are getting comfortable that if we get it in country, that we'd be able to use a reputable local cloud provider. Again, those deals are, we haven't announced any of those because we haven't closed any of the substantial deals. I'd say we're more in test mode. There are some challenges, but I think we've got a number of ways we can work through them.
Thank you. I'll hop back in the queue.
Thanks, Steve.
Thank you. Our next question comes from Greg McKinley from Dougherty. Your line's open. Please go ahead.
Gross margins. Those have been continuing to improve. Can you just remind us where you were with trading credits, where you are now, where you see the company migrating to over the course of this year? Maybe comment as well the degree to which your direct sales efforts are expanding those margins and where we are in the process of that playing out.
Yeah. We started the year with about $130 or so in trading credits. We've kind of worked that down throughout the year. We've been having sort of incremental reductions each quarter in order to create sort of urgency for our customers to upgrade. I think one of the things we announced earlier on one of the earlier calls is the fact that we're going to continue to test the market to understand what that proper sort of upgrade credit amount is. We felt it was important to have some kind of upgrade credit available for our customers to encourage them to take weapons that are over five years old, but still in working order and sort of give them some value for those weapons. We continue to think that's important.
I think with the NOC program, if they go through the TAP program, they can actually get $185. The advantage for us is we're selling in the upgrade today, but we're also pre-selling the next upgrade at five years, I think it's good for our customers to take this capital expense to turn it into operating expense. It's good for us in order to have that predictability of knowing that you're going to get that customer to upgrade in five years versus having to try to resell them on that upgrade opportunity. I think it certainly helps. I think that the company has increased prices again in 2014. We're sort of taking inflationary size price increases to our products across the board each year, I think our customers understand that certainly will continue to help maintain these margins.
I think the one thing we'll see a little bit on a consolidated margin basis is that as the video business scales up, we will have a little bit of a mix pressure in that the video products, when we lowered the prices for the hardware, we think that's helping to drive adoption, which is great. As you know, there's not a high margin on the camera sale itself. The real margin for us is that long-term service opportunity. As video business scales up, we may see a little bit of a mix shift as the video becomes a bigger part of the total. We certainly feel like we can stay at this pattern above 60% on a go-forward basis.
Yeah. Okay. Just, I didn't catch it. You started the year at $130. Where did you end the year at?
Eighty-five.
85. If they purchase a sort of TASER Assurance Plan, they're getting an $85 credit for the new TASER plus $100 credit for when that TASER's replaced five years from now. Is that what you said?
No. What they get is, this is starting in the first quarter. They get $85, and if they choose to also sign up for the TASER Assurance Plan, they also get $100 off their first payment towards their next TASER. It's $85 immediately and then, say the payments are $200 a year for five years, then that first payment is $100 instead of $200 towards that next TASER.
Oh, okay.
This is Rick. Just to clarify on that, the net sale, like if we, for rounding purposes, say it's a $1,000 sale, if they just take the trade-in credit, they're going to be paying $1,000 less $85, so they'd be at $915. If they take the additional $100 by signing up for TAP, there's going to be the $200 initial payment to get on the TAP plan, and they get the $185 off of that. The cash sort of at time of purchase goes up from $915 to $1,200 less $185 gets you to basically $1,015.
Okay. That's helpful. Can you give us a sense for maybe the number, I guess I could probably go back and compute it, the number of licenses that you've booked now with Evidence.com and maybe, because I know you give us your booking rates. I think that also includes the Axon hardware sale. Can you give us a sense for maybe how many licenses have been booked for Evidence.com and what the aggregate booking value of that software sale has been, so we get a sense for future revenue recognition off of the base as it exists today?
Yeah. We probably can't go to that level of granularity. I can tell you right now on the balance sheet, we've seen the deferred revenue associated with the video business actually increase from last year by about $2.7 million. The bookings number includes future invoiced amounts as well. It's not, when we book $5 million in a quarter, we don't always invoice that full $5 million. Some of that may be future. If somebody signs a three-year deal, we may bill that customer initially and then the anniversary of year one and year two for that three-year deal. Some of those bookings will be invoiced in the future. As far as the total license count, we are providing the unit sales each quarter.
I think, as this business continues to evolve, we're going to continue to look for what the metrics that we're using to sort of manage the business, and we'll share those, as appropriate in the future.
Yeah, this is Rick. Just to add a little more color to that. We just switched to a per user seat model in the fourth quarter. Prior to that, we were doing a per camera model. It's a little hard for us to blend those two together. As we get people off of the per camera model and onto the per user model, we'll have a little more clarity around how to best characterize the number of seats.
Rick, by that do you mean, for example, there might be three shifts occurring during a day that would use that individual camera for eight hours per. In the past, you were selling one license for that camera, but now you're selling three for the individual users of it.
Correct. Before we had a model where we included the first year free in the price of the camera. We've now bifurcated that, and so we've been able to lower the net per license cost to the customer, but we've moved to a per officer for exactly the reason you just talked about.
Okay. I know you just made reference to your Brazil distributor, I don't know, disagreement. How important is that in terms of you tapping the opportunities in that market? I know one of the things that people are focused on is obviously some big emerging events, world sort of stage events in Brazil over the next couple of years. How do you feel about your opportunities in Brazil and sort of resolving any distributor issues there?
I'll take that one. The issue with the former distributor, we terminated the agreement because we didn't believe that frankly he was going to be able to get the job done. We believe there were breaches of the agreement. He obviously doesn't see it that way. The risk with this trial is pretty much just that we get hit for some damages. We don't see it impacting our presence in Brazil. We see that we're in a much stronger position with the team that we have addressing the Brazilian market than we were with our former distributor. I wouldn't think of it in terms of impeding our ability to operate in Brazil. It's just a risk that you never know what a jury's going to do, and we're in trial right now.
In terms of the opportunities in Brazil, we see there's obviously a lot of opportunity. We've had a lot of interest around the cameras. We've not yet been able to get the government to approve our plan to bring up a local manufacturing partner so that we can reenter with the weapons. There's been a tremendous amount of pressure from our customers. The police agencies down there are clamoring to get the TASER devices back in country. They're not happy with the local competitor, which once that sprung up, that's what led to the block for us to be able to get import licenses. There's a lot of customer pressure. We've been aggressively working the market. It really just comes down to politically, when we can get the approvals to start reselling in the market. We think there's a lot of demand.
As anything that requires a regulatory approval or an approval at a high government level, it's not really predictable if or when we're going to get that approval. We're working pretty hard.
Thank you.
Thank you. Our next question comes from Glenn Mattson from Sidoti & Company. Your line's open. Please go ahead.
Hi, good morning, everybody. Just a question about the TASER CAM. That's kind of the older legacy product. We did see that go down this quarter, which probably was pretty impactful on the video product sales. Are we starting to see kind of a natural cannibalization of that product? Is that something you expect to continue throughout 2014 or to accelerate at all?
This is Dan. The TASER CAM, a lot of the TASER CAM sales are driven by agencies or even countries that have sort of mandated that when they buy a TASER, they also buy the TASER CAM with it. We certainly see the Axon Flex and Axon Body having a higher utility, and really being a sort of better value for our customers because it gives them the ability to capture every event from the beginning to the end versus the only events that involve the TASER. Certainly, one of the things that we see with the video product is the value is having the officer's perspective of the whole event. TASER CAM doesn't do as good a job of doing that because you only capture the event from when the TASER comes out. Lots of things happen before that.
We think longer term, we'd certainly like to see our customers migrate to the Axon Body and Axon Flex just because we think it provides a higher utility and a better value for them. We wouldn't be surprised to see over time the market shift over to the newer products.
Okay. Is there any way you can explain, it seems like there was a bit of a surge in that in Q3, and then even though Q4 was down, there's still a decent quarter for TASER CAM. Is there a way to explain what happened there, or it was just a series of orders came in?
Yeah. Actually, Q3 was driven by one significant order, international order, where they do mandate the TASER CAM for any of the TASER purchases for that market. We saw that in Q3, and it's just the international business, as you know, is a little bit lumpier. That's, it was just sort of one large order that drove most of that change. We do see, again, a number of customers that continue to buy the TASER CAM. It's a good product. We redid that product over the last year in order to create some new features and functions for that. Again, I think it's just really very customer specific.
Again, in lots of places, what we're trying to do is in places where they have those rules in place that they have to buy a TASER CAM, we're trying to get them to sort of loosen that to say they just need to buy an on-officer video camera with the TASER because we think that's a better utility and a better value for them.
Okay. Yeah, then last thing, on the investments in internationals, it's still kind of the big three markets that you've historically been going after, U.K., France, and Brazil, is there any other new areas that you're also investing in?
Yeah, we're continuing. Those are the primary investments are sort of in Europe and Brazil. We're investing really around the world as far as capabilities, websites, marketing collateral, trade show type expenses, and really just working sort of hand-in-hand with the distributors to make sure that we support them and send people as appropriate to help them to grow their businesses as well.
Okay, great. Thanks.
Thank you.
Thank you. I'm showing no further questions at this time. I'd like to hand the conference over back to Mr. Rick Smith for closing remarks.
Thank you, everybody, for your time this morning. Obviously, we're very proud of the hard work our team did. It's not every day you get to turn in results like this. As we look forward to 2014, we see lots of indicators, again, that there's an opportunity for the Evidence.com and Axon to really go mainstream. We're seeing a lot of opportunity internationally on both sides of the business. We're very excited to be looking forward to a great call a year from now. Thanks for everyone who stuck with us over the years as we made the investments that have made 2013 possible. Everybody have a great day.
Ladies and gentlemen, thank you for participating in today's conference. This concludes our program. You may all disconnect, and have a wonderful day.