Good day, ladies and gentlemen. Welcome to the Quarter 3 2013 TASER International, Inc. earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session with instructions to be given at that time. Should anyone require operator assistance, you may press star and then zero on your touch-tone telephone. I'd now like to turn the conference over to your host for today, Mr. Rick Smith, Chief Executive Officer of TASER International. Sir, you may begin.
Thank you. Good morning to everyone. Welcome to our third quarter 2013 earnings conference call. Of course, before we get started, I'm going to turn the call over to Dan Barron, 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, and strategies regarding the future, including statements around projected spending. We intend that such forward-looking statements be subject to the safe harbor provided by the Private Securities Litigation Reform Act of 1995. The forward-looking information is based upon current information and expectations regarding TASER International, Inc. These estimates and statements speak only as to the date at 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 31, 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. With that, I'll turn it back over to Rick Smith, our CEO.
Thanks, Dan. We're going to be accepting some questions via Twitter during the Q&A portion of the call, and you can submit those using the hashtag TASR_earnings. Again, that's TASR_earnings. To follow our updates on Twitter during the call, follow the account @taser_ir. Again, our account to follow is the @ sign, then T-A-S-E-R underscore I-R. We'll 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'm so excited to share with you, with our investors, the results of our hard work and many exciting new announcements from the past three months on today's call. First off, we hit a historical record in our revenues this quarter, recognizing $35.2 million on a consolidated basis.
This marks the seventh consecutive quarter of year-over-year top-line double-digit growth. I'm truly proud of our team, and I think that we continue to be positioned for strong growth moving forward due to the continued upgrade cycle and the exciting momentum in the Evidence.com and video segment. Specifically, our TASER Weapons business delivered revenues that were up 16.8% to $31.6 million year-over-year. Our Evidence.com and video segment, the revenues there grew 111.5% to $3.6 million compared to last year's third quarter. Our international business made up approximately 11% sales in the quarter. Aside from phenomenal top-line growth, we've been very busy launching several new initiatives that we've previously announced. These initiatives were all very customer-focused and in an effort to continue to grow the Evidence.com and video business.
First, we announced the Axon Body, which we went into great detail about in the Q2 2013 earnings call. We spoke about its purpose to address two market tiers that we felt that our Axon Flex did not adequately address. The first of those tiers were those with a preference for body-worn cameras, and the second tier were those who were highly price-sensitive. We're hearing immensely positive feedback from customers who fit these market segments. Perhaps even more impressive is that we were re-entered into several bid processes that we've previously been shut out of when we offered only the Flex point-of-view camera. While we still believe that the point of view is the best type of camera for law enforcement officers, we think that we now have the product suite to really sweep the overall market.
With this quarter being Axon Body's first quarter in the market, it sold almost 780 units, proving that by launching this product, we are filling a much desired market niche. We've been very busy shipping this product for revenue, so we're actually backed up on getting some trial units out to customers. It's been a pleasant surprise at how well-received Axon Body has been. Second, we revamped our entire pricing structure for Evidence.com and Flex to become more transparent with varying tiers of service to drive adoption into every niche of the law enforcement market. As we went over on the pricing update call a few weeks ago, this was an aggressive move to change the sentiment that on-officer video will be on every officer in 5-10 years to on every officer within 2-3 years.
Our new pricing model was designed in extensive consultation with our customers over the past six months. We previously were using a fairly complex pricing model, which required custom quotes and negotiation with every customer. This allowed us to experiment and iterate around pricing while we dialed in what we believed would be the optimal pricing model in order to scale the business. We believe we've now refined our business model, we've now published this new pricing model to enable faster market adoption. This new pricing model is designed to accelerate the sales process by, first, eliminating the perception that our products or services are expensive. Second, eliminating any sense of customer uncertainty about future costs. Third, creating tiers of service that fit different customer segments to maximize both penetration and profitability.
The new pricing brings Flex to an extremely affordable price of $499 per camera in comparison to $150 per camera. We've also de-bundled the service from the initial purchase. The agency now has the option of buying the service at varying levels, starting at $9.95 per month, up to $49 per month. That's per license. This lets the agency buy only the feature set that it wants. Simply put, we believe that we now have the best product at the lowest prices, positioning us for even faster sales wins, absent lengthy negotiations. Third, we officially launched the Axon Capture with Evidence.com sites for individuals. This allows individual officers to utilize the app before their agencies deploy Evidence.com, which creates a low-friction way to introduce our services into the market. This free app provides another means of evidence capture, including still pictures, notes, videos, and voice recordings.
This app pairs seamlessly with the agency's Evidence.com account to store all relevant data in one place regarding a case. During the International Association of Chiefs of Police Conference, we had several hundred officers sign up for the app. Based on early customer reactions, we believe law enforcement is realizing the importance and benefits of mobility in their field. Agencies are further seeing that they can cut a lot of costs out of the process if they have integrated evidence management systems such as Evidence.com and Axon Capture. Finally, we announced the acquisition of the Familiar, Inc. team.
Many of our customers have asked why it is that consumer applications are so much more user-friendly than enterprise software. In fact, there's a broad trend toward the consumerization of IT, where professional users in many industries are demanding consumer-type ease of use in enterprise solutions. This is exactly why we acquired Familiar, because this team knows how to make great, easy-to-use apps in the consumer space, and we want to bring these great user experiences to our law enforcement customers. The Familiar team will be spending the next quarter researching the various adjacent technologies in law enforcement before diving into development. One of the advantages of our acquiring a functioning team is that we can immediately put them on the projects that will create new revenue streams down the road.
I want to be clear that we are not deploying the Familiar team simply to augment our existing engineering resources on our existing Evidence.com product. We're assigning them to develop our next-generation mobile and cloud service offering, the first extension into our platform strategy. We look forward to updating you on our next-generation products in the coming quarters. Again, welcome to the Familiar team. To top off all those exciting announcements in the third quarter, we just wrapped up the International Association of Chiefs of Police Conference in Philadelphia, where we were actually presenting our booth as the Evidence.com booth rather than the TASER booth. This generated a tremendous amount of buzz regarding our revolutionary cloud offerings. There were a lot of themes discussed in IACP sessions that mirror the overall macro environment we've been seeing over the past six months to a year.
There was a noticeable shift in momentum around both on-officer video and cloud computing. At previous years' conferences, there was considerable skepticism about whether officers would wear cameras and whether law enforcement agencies would adopt cloud-based systems. This year, that skepticism was largely gone, replaced by a general sentiment that on-officer video is something that most agencies are now planning for in their future. Cloud-based solutions like Evidence.com will solve these big data storage and analytics problems better than agencies could do using older on-premise solutions. Last year, it was noteworthy when an agency indicated they were moving to on-officer video. This year, it was the common reaction. In my opinion, it is no longer a question of if agencies will deploy on-officer video and cloud-hosted solutions, but rather when and how rapidly they will adopt them, and which technology providers will win in the marketplace.
The world is seeing that video is inevitably coming to law enforcement, it's coming fast. The New York City judge ruling is just one example of that. We're seeing and hearing increasingly more conversations around this, policymakers are working hard to make sure that they are prepared for this momentous change in policing. The Police Executive Research Forum, one of the most respected thought leaders in public safety, held a session last month dedicated entirely to the topic of officer-worn video. In this session, leading chiefs indicated that they plan to implement body-worn video in the near future. The IACP also reported that over half of police chiefs surveyed indicate they are deploying or actively considering cloud solutions in the near future. The U.S. CIA recently awarded a cloud-based contract to Amazon Web Services to build their next-generation data storage or data center.
Obviously, that's been an incredibly good development as far as for state and local law enforcement agencies, seeing an agency such as the CIA selecting Amazon as a data provider. All these macro trends help our customers get used to this paradigm shift to cloud-based evidence management and storage. We're really seeing some of the larger agencies in the U.S. embrace this technology wholeheartedly. We've talked about Albuquerque in the past, but it is truly a great example, as they are now the world's largest officer-worn camera deployment, to our knowledge. This is a large city that's under a lot of scrutiny from the public. They initially launched with a competitor's body camera and then transitioned their entire agency to the Axon product line.
We're seeing agencies utilize crowdfunding to purchase cameras, and we're seeing city councils lead the charge in some cases. We're seeing agencies remove in-car systems in preference for body-worn cameras, a seismic change in our opinion. The large agencies understand the intricacies of large-scale digital evidence management and know it's not just about buying a camera anymore. Subsequently, they're choosing Axon and Evidence.com. All these factors give us confidence that we're on the edge of something big, something that our bookings figure of $5.8 million in bookings this quarter soundly reflects. All these internal and external events are indicators that we are on the edge of a tipping point with the entire Evidence.com and video business. We see 2014 as the year that things are going to be moving at light speed. TASER, and frankly, our competitors, are going to be defining and solidifying their relative market share.
In light of these market dynamics, we feel that now is the time to invest to make this happen, and happen in a big way for the company and for our shareholders. We are out to own this space and to grow it fast. We see the opportunity to create the central cloud-hosted technology ecosystem for the public safety sector, including both our current Evidence.com offering and future products and services such as we'll be building with the Familiar team. The recurring subscription revenue opportunities create a very high potential lifetime value for every customer. Hence, we believe the biggest mistake we could make would be to under-invest in driving market share right now when the market is forming. We have already begun to make some of these investments through 2013 in functions such as account management and field services.
This quarter, we deployed additional sales representatives for the Evidence.com and Video team, effectively doubling our manpower in each region in order to reach mid-tier customers at a deeper rate. Telesales continues to be one of our most successful programs with the small agencies. Our senior sales representatives are laser-focused on the big-name agencies in the U.S. We hope to be able to share this team's successes again in the fourth quarter with you. Last year, we began breaking out reporting by segment for both the TASER and the Evidence.com business. This is a useful tool both for investors and for our management team, since these two business units are at different levels of maturity and market development. We're managing our Evidence.com and Video business with an aggressive investment to drive top-line growth and seize maximum market share.
Again, given the recurring revenue model and inherent advantage we'll have in selling adjacent services in the future to every customer, we believe the right strategy here is to focus on driving market adoption and garnering a dominant market share. With the addition of the Familiar team, as well as planned hires and other research investments in Evidence.com and Video segment, we expect R&D expenses will increase over Q3 2013 levels by approximately $750,000-$1.25 million per quarter, starting in the fourth quarter of 2013. In our TASER weapons business, which is in a more mature phase, there we're focused on operational excellence and driving long-term profitable growth. The segment reporting will allow our investors to track our progress and our execution discipline in both segments more clearly. In regards to our core TASER weapons business, the upgrade cycle continues to expand for us.
As of September 30th, 2013, we've upgraded approximately 14% of our installed base. In the third quarter, we have upgraded over 8,000 units, which is the highest number of units in any quarter to date. We also believe that there are some agencies who are proactively upgrading their units outside of our trade-in credit program, and thereby, they're not making it into our metric. The Houston Police Department order was actually an upgrade. They've committed to upgrading their entire fleet of weapons, and in the quarter, we realized about half of that, 2,200 units. We think that the upgrade program continues to be successful in encouraging agencies to move to the Smart Weapon platform, and the declining trade-in credit has been a valuable experiment for us. In Q4, that credit steps down again to $100.
We've not yet announced a program for 2014, but we think we will continue to have some form of a program given the success of the current one. I'd also like to take a minute to discuss the current state of the business in regards to defensive product and commercial litigation. As some of you may remember, in September 2009, we issued a comprehensive set of new warnings around our TASER weapons. The large majority of our litigation has been on the premise that we have failed to properly warn of the risks associated with the operation and use of our products. Since the rollout of those new warnings in 2009, the rate of new cases presented to the company has significantly declined. Two years ago, we had 55 pending cases. Today, we're down to just 23.
In the third quarter, we did not have a single new case filed against us. We have had eight consecutive quarters where dismissals have outnumbered new cases served. We think this is a testament to the strength of our defense and legal teams. That being said, we do have some cases still pending that are from the pre-2009 era. We are aggressively litigating these cases, but this comes at a financial cost to us. This quarter, for example, had expenses related to the cost of defense of commercial and product litigation, $2.2 million higher compared to the same period in the prior year. We've implemented measures to mitigate this cost through in-house attorneys and defense, but simply put, defense is not something that we take lightly. The good news, we're in the final stages of litigating the remaining pre-2009 cases over the next two to three quarters.
Accordingly, we expect our litigation expenses to remain in this elevated range for another two to three quarters. On the bright side, we're very happy to share that we expect these expenses to trend downward in the second half of 2014 as we bring the pre-2009 caseload to conclusion. We expect to see significant reductions in legal and litigation expenses from the second half of 2014 going forward. This has the opportunity to significantly further improve profitability in our TASER weapons business unit going forward from the middle of next year. To wrap up, before Dan goes over the financial results in greater depth, I would say exciting things are happening here at TASER, and we think this is just the beginning. Dan?
Thank you. In the third quarter, consolidated sales were $35.2 million or a 22.3% increase from the third quarter of 2012. The increase was primarily driven by the continuation of the upgrade cycle with agencies upgrading to the new X26P and X2 Smart Weapons. combined is contributed $13.2 million in the third quarter. TASER CAM also had a strong quarter, growing $1 million over the same period last year, and the Axon cameras and Evidence.com sales also grew by $0.8 million to $1.7 million in the third quarter of 2013. Sales of our cartridges declined $1.5 million in the third quarter, resulting in some sales promotions this year versus last year. Our X26, the legacy X26 unit, declined approximately $0.2 million in the third quarter, representing agencies moving to the Smart Weapon platform versus the legacy products.
We still have some international and federal customers that continue to buy the legacy X26 product because it's the only conducted electrical weapon that they have approved in their market or application. We're working with these customers to get them on the new Smart Weapon platform by having them review and approve the new weapons for their purchases. As of September 30th, 2013, we have to upgrade approximately 14% of our installed base of units over five years old. We clearly still have a large opportunity in front of us with roughly $400 million of future upgrades still to be gone after from a company's perspective. Gross margin for the third quarter was $22.1 million, or 62.8% of revenue, which is up from $16.8 million, or 58.4% in the prior year.
As sales have increased, we've also continued to benefit from higher operating leverage from our fixed manufacturing costs. Also due to price increases that we put in place at the beginning of 2013, as well as more sales being sold directly to the end user rather than through distribution channels, we've realized higher average selling prices on our products, which also improved gross margin. Further, with trading credits stepping down each quarter over the last year, gross margins has been positively affected as trading credits have a smaller impact on our gross margins. Although service revenue has increased quarter-over-quarter, cost of service delivered decreased $0.8 million in the third quarter compared to the prior year for two reasons. First, we continue to benefit the lower cost structure of public cloud-based web services versus using our own data center in the prior year.
Secondly, we realized the benefit from the completion of the depreciation related to the capitalization of Evidence.com software development, which was running $300,000 per quarter previously. In the newly renamed Evidence.com and Video segment, revenues increased $1.9 million to $3.6 million for the third quarter of 2013. The loss from operations of the segment improved to a $1.5 million loss from a loss of $2.5 million in the third quarter of 2012, largely due to the reduction in cost of services delivered, as well as higher gross margin on the higher product sales. Increased revenue and related gross margins in this segment were partially offset by increases in personnel and support expenses made in the current quarter to grow the Evidence.com and Video business.
Sequentially, loss from operations for the Evidence.com Video segment also improved by $1.1 million from $2.7 million in the second quarter of 2013 to $1.5 million this quarter. The improvement was partially influenced by the higher product sales in the third quarter of approximately $1.5 million, as well as the lower cost of service and leverage sequentially of $0.4 million relating to the completion of the depreciation of Evidence.com software development. These were partially offset by increases in R&D. In the second quarter of 2013, we did have a one-time benefit from a use tax refund for Arizona, $0.3 million that ran through the Evidence.com R&D line. Sales general administration expenses of $12.8 million in the third quarter of 2013, compared to $9.5 million in the third quarter of 2012.
As a percentage of sales, SG&A was 36.3% of net sales in the third quarter of 2013, compared to 33.2% of net sales in the third quarter of 2012. Compared to the third quarter of 2012, personnel expenses increased $0.6 million as a result of strategic hires that were made over the last year, primarily in customer-facing roles such as telesales, customer service, and account management, as well as field services, and also some incremental administrative functions. Our professional accounting, legal fees, and litigation-related expenses increased $2.2 million compared to the prior year, primarily due to expenses relating to the defensive product and commercial litigation.
As Rick said earlier, the company expects expenses related to the defense product and commercial litigation to stay at these elevated levels for two or three more quarters before trending downwards in the second half of 2014 as we work through the remainder of litigation related to the pre-2009 warning cases. Sales and marketing expenses increased year-over-year due to the higher commissions of approximately $0.4 million, as well as increases in account promotion activities, e-commerce marketing, and market development as we look to expand our initiatives internationally as well as in the Video and Evidence.com segment. These increases were partially offset by a decrease in trade show expenses due to the timing of the International Association of Chiefs of Police trade show, which was held in the third quarter of 2012.
In this year, 2013, it was actually held this month in October, so it'll be in the fourth quarter expense for the 2013. Given the traction the company's experienced in our Evidence.com business unit, the company will continue to invest incrementally in customer-facing roles and infrastructure to support the growth, and therefore expects SG&A to remain or increase from this quarter's level until litigation expenses start to decrease in the second half of 2014. Research and development expenses were $2.4 million in the third quarter of 2013. This is an increase of approximately $0.5 million compared to the third quarter of 2012. The increase is primarily due to additional personnel expenses related to Evidence.com and Video segment development initiatives. With the acquisition of the Familiar team, the corresponding push to move into adjacent technology and law enforcement, we do expect incremental R&D expenses starting in the fourth quarter.
As our team is researching doing voice of the customer work on what will be the next markets that are prime for our entry, their expenses will be completely charged to R&D operating expense. In 2014, as we start to develop the initiatives, we do expect that some of these expenses will be partially capitalized until the products are launched. With the addition of the Familiar team, as well as planned hires and other research investments in the Evidence.com video segment, we do expect R&D expenses will increase over the Q3 2013 levels of approximately $750,000 to $1.25 million per quarter, starting with the fourth quarter of 2013. Specific to the fourth quarter, our expectations are R&D expenses will grow sequentially by approximately $1 million due to expenses around the Familiar acquisition, as well as some of the increases I mentioned earlier.
These investments are being made to accelerate our development and sale of adjacent technologies and new products into our markets here for the video segment. Our adjusted EBITDA, which excludes certain items as detailed in our press release, was $9 million for the third quarter of 2013, compared to $8 million in the third quarter of 2012, with improvement being driven by higher sales in 2013. Income from operations was $6.9 million in the third quarter compared to $5.3 million in the prior year's third quarter. Net income for the third quarter of 2013 was $5.1 million, or $0.10 per share on both a basic and diluted share basis, compared to $3.7 million or $0.07 per basic and diluted share in the prior year. Income taxes were $1.8 million in the quarter.
Income taxes expenses for the quarter are actually exceptionally low in the third quarter of 2013 for several reasons. First of all, we benefited from disqualifying dispositions of incentive stock options in the quarter, which reduces our taxable income. We also started applying for a credit for the Domestic Production Activities Deduction, which actually reduces our effective tax rate. We also had a favorable returns provision adjustment, which was recorded in Q3 of 2013. We do expect our full-year effective tax rate before discrete items to be approximately 38.2%. Moving to the balance sheet. In the third quarter of 2013, the company generated $10.9 million of operating cash flow, and we finished the quarter with $48.3 million of cash equivalents, and investments, which is really impressive considering the fact that we bought back $25 million worth of stock this year.
Accounts receivable of $20.1 million are up $2 million from the year-end balances due to increased sales as well as the timing of collections. Inventory of $12.3 million is up $1.3 million from year-end. Again, this is attributed to the general buildup of inventory in anticipation of future sales. Our investment of property, plant, equipment of $19.3 million is actually down $2.6 million. This is really driven by $3.8 million of depreciation expense, partially offset by $1.2 million of capital expenditures in 2013. The capital expenditures are primarily in production equipment as well as some computer equipment. Accounts payable of $5.1 million is down approximately $1.1 million from the year-end due to the timing of processing invoices and check runs. We had total deferred revenue of $18.6 million. This is up sharply, up $6.5 million from the year-end, primarily due to two reasons.
One is the upgrade program with the sales of X26 and X2, which includes that extended warranty which increases our deferred revenue for warranties. The sales of our Axon cameras and Evidence.com contribute another $2.5 million to the increase due to the deferred revenue on the sales of the future services we'll be recognizing over time. Total liabilities of $36.3 million, the company finished the quarter with $92.1 million in stockholders' equity. We continue to have no long-term debt other than a capital lease and 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 on to the information on the cash flows, the company had cash provided from operations of $10.9 million during the third quarter.
For the nine months ended September 30th, 2013, cash provided by operations was $23.1 million. We did have cash used for investing activities for the nine months ended September 30th, 2013, of $13.2 million, compared to cash provided of $0.7 million in the prior year. The net use of cash is really driven by the purchases and investments during the time period. Cash used from financing activities was $11 million for the nine months ended September 30th, 2013, compared to $19.3 million in the same period for last year. During the nine months ended September 30th, the company did repurchase 3,048,966 shares at an average price of $8.17 per share on the open market for a total share repurchase this year of $25 million.
That outflow is partially offset by $4.1 million of tax benefits from employee stock option exercises, as well as $10.2 million of cash provided by the exercise of stock options as the employees buy the shares at their strike price. We stated last quarter, to leave more time for Q&A portion of the call, we have started including some unit sales statistics in the press release for your reference. With that, we'll take questions from people in the queue.
Ladies and gentlemen on the phone lines, if you'd like to ask a question, please press star and then one now. If your question has been answered or you would like to remove yourself from the queue for any reason, you may press the pound key. Again, to ask a question, please press star and then one now. Our first question comes from the line of Steve Dyer of Craig-Hallum Capital. Your line is open. Please go ahead.
Thank you, guys. Congratulations on the good quarter.
Thank you.
Thank you.
Just wondering if we could dig into the video business a little bit. It certainly seems to have kind of blossomed here a lot quicker than anybody expected. Could you give us a little bit of the lay of the land, just in terms of your competitive position? How do you sort of see yourselves? Have you lost any particularly meaningful deals, and if so, why would you lose? That sort of thing. I think investors are now sort of to a point of believing, and now it's just a question of how much of that can you capture.
Yeah, sure. Well, this is Rick. The first thing I would say is actually the long-term view of this is it's really not a video business, it's a cloud services business that's being driven with our first major application being on officer video. I would say this past quarter, we actually picked up a lot of deals that we were at risk of losing previously, and the major thing there was that there's just a segment of the market that wants an inexpensive camera, very price sensitive, or they want something to just clip on their uniform and go, that they don't want to have to run a wire somewhere or wear a camera up on their glasses.
It's also been quite interesting, actually, that by introducing the body camera, we were able to pull several deals back that actually one of them, a fairly good-sized one, had already gone to bid and specified a competing camera in the bid. That bid was then kind of pulled back and reworked once they knew that there was now our camera on the market that had the same advantages, frankly, at a much lower price, and would give them the ability to integrate with our back end over the long term. The other thing that's been interesting is of the agencies that were looking at the Axon Flex previously, the vast majority of them stayed with the Axon Flex with the perspective view. It seems like once the customer understands the advantages of the officer perspective, they stick with it.
It seems more like agencies that are sort of newer to the concept of video, that are likely to be more sensitive around cost or convenience, and a little less performance sensitive. Of the deals we know of, I'm not aware of any large deals since we put the body cam out that have gone away from us. Again, it's only been there for a little while, there haven't been that many big deals that have closed during that time period. In terms of the competitive landscape, I would say we are competing primarily with hardware vendors, folks that sell the camera, and they might give away an app to help with some of the data management. I think we're unique in that having the integrated cloud services offering. Although this year at IACP, there was a palpable shift.
There was none of this fear of the cloud sentiment there was a year ago. We do believe that competitors over the coming year or so are going to look to move more in the direction of having a robust cloud offering. That's one of the reasons that we think we have a unique advantage today, and we've got to press our advantage now. We're finding this is a very sticky business. Once we get people on the system, they love it, and we just got to make sure we win as many deals as fast as we can during this next year when we think we'll continue to have a real advantage. Obviously, we intend to maintain that advantage over time, it would be imprudent for us to assume that we're going to be able to maintain the advantage we have today indefinitely.
Okay, great. That's helpful. You mentioned the stickiness of the business. What can you give us in terms of metrics now? It's been a period of time since some of the early adopters have been on the network. Any metrics you can share with us as to the stickiness of it?
Yeah. Steve, this is Dan. Probably similar to our comments last quarter, I think we're satisfied with the renewals we're seeing. Customers that are heavy users of the system are renewing in rates that we're very satisfied with. The tough thing is a lot of the sales that we've made over the last year are pay trials. Some of those customers have bought just a handful of units, and they may not be ready to deploy video. I don't want to overly read into just the renewal rates at an agency level. We're trying to develop the right metrics to share with the market. It's also pretty early. As we get into next year, I think it's probably more appropriate for us to share that because we'll have a little bit more data.
We're satisfied with where we sit today. The people who are utilizing the system regularly are renewing. I think they see the value. I think people that bought a couple cameras and really aren't utilizing the system much are probably less likely to renew, but they just may not be quite ready to move to video. I think we're seeing even some of those customers come back into the fold just due to the momentum in the video market in general.
Sure. I'm wondering if you can draw any parallels with the video business, with your early ECD business, which was obviously a pretty controversial idea at the time, and then it started to hit a tipping point. Any parallels you can draw that can help us see how this plays out?
It's a very insightful question. We were actually talking in the booth at IACP this year. It was very reminiscent of the 2002 IACP, which was the year that TASER, the weapons business, hit the tipping point. Prior to that, early on, there was a lot of skepticism about, "We can't use electricity to incapacitate people, and these weapons are controversial. Not sure this is for us." In 2002 was when I remember just standing in the booth talking to people. It went from sort of explaining why they should even consider TASER devices to all of a sudden every conversation was about, "Oh, yeah, we're doing this. We're planning on this.
It's coming next year." We felt a very similar sentiment shift around both on-officer video and cloud, whereas for the last several years, we've been proselytizing it in the booth, basically talking to skeptics, talking them through their concerns. Last year, having an agency come up and say they were considering buying 200 cameras would have been something that was very noteworthy. Everybody in the booth would've been talking about that one customer at the end of the day. This year, we had conversations with agencies talking about hundreds of cameras within the next year. Obviously, there's still a lot of work to be done, and I would caution that with a big order like Albuquerque made a big difference last quarter. I don't know that we're going to see a smooth and continuous upward-sloping adoption curve.
There's probably going to be some fits and starts along the way. I think we're now past the point of no return, that on-officer video has been accepted. It's coming. There's very few holdouts saying it's not coming. I think the way we look at it now is, who's going to win? What business model will prevail, and how fast is this going to happen? That's why, as we talked about our strategy, it is about accelerating both the market and accelerating our market share.
Got it. Last question, I'll hop back in the queue. Some of the other cloud services, I think it'd be helpful if you could kind of paint a picture of what those may look like. Police departments, I think, aren't often thought of as cutting-edge technologically. Help us think of, without giving away too much competitive information, how we should think about other offerings there and how that might look in 2 years.
Well, your average police department in the United States has about 50 officers. They may or may not have an IT department. They may be subject to working with an IT department that's over the reports within city, somewhere else, so that there's very little direct relationship or control between the agency and their IT department. What we've generally seen is the systems that our customers are deploying tend to be fairly outdated in terms of the user experience, in terms of the efficiency. I was at a conference at the IACP, where Chief Tom Streicher from Cincinnati talked about a program that they spent over $10 million deploying a digital record management system in Cincinnati, that ended up being 15 years approximately late in its deployment. They spent well over their budget, so they're well between $10 million and $20 million before the thing ever went live.
The day it went live, their assessment was that their technology was already at least a decade out of date. We hear stories like that all the time. Our customers, they do a number of different things. There's electronic ticketing systems. There's automated license plate reader systems. There's record management systems for their text-based records. There's jail intake systems. There's booking photos, interview rooms, in-car video systems, the associated back ends, which we're already going after with evidence.com. There's computer-aided dispatch systems, where you've got to be able to locate the vehicles, match it to the calls that are coming in. There's a lot of different systems that our customers buy, and we believe that there will be enormous opportunities. We're looking at this from a buy, build, or partner perspective, that in some cases, it's going to make sense for us to partner.
In some cases, it's going to make sense for us to just build extensions from evidence.com. Once our customers are managing their users on evidence.com, and once we're managing their digital evidence, those are their most precious and core records that you have, because the digital evidence is not workflow. This is stuff you collect at the scene. You've got to make sure you protect it in such a way that it meets the federal rules of evidence, and to be able to show that it's not been altered in any way. We believe that becomes really a core system, and by analogy, if you look at what salesforce.com has done, they entered corporate America through sales force automation, but they've since had adjacent offerings. We're a Salesforce customer. We love it. It makes our lives easy.
We don't have to think about managing a big sales customer relationship management system on-site. We now use their service cloud offering for customer service. We've gone to Work.com, which is their HR module, et cetera. We see a similar opportunity for us to extend from just the digital evidence into several of the other core systems that takes to run a police agency.
Okay, great. I'll hop back in. Thanks.
Thanks, Steve.
Thank you. Our next question comes from the line of Paul Coster of J.P. Morgan. Your line is open. Please go ahead.
Good morning. This is Mark Strouse on for Paul Coster. Congratulations on the quarter.
Thanks, Mark.
Obviously, the investments on the Evidence.com side are starting to bear fruit. I just wanted to go, though, earlier this year, when you were talking about the, I think it was a 10% OpEx improvement or increase. You kind of broke that down into different buckets. I think there was telesales and building out the international footprint a bit. Can you just give an update as far as the payoff on some of those investments and how we should think about that spend going forward? Or is there a reason to invest more in those areas, or should we think about you kind of pulling back on some of those things in favor of the increased Evidence.com spend?
Yeah. Mark, this is Dan. Yeah, absolutely. Certain investments we're definitely seeing an immediate return for. I think telesales is one of those areas where those are self-funding positions. We continue to see our telesales by each quarter increase, and we haven't hit the point of diminishing returns at this point. We've added a significant of those resources, and it's paying off. Some of the other things we're investing in have longer-term payoffs, things like the investments in international. We're definitely making those investments, as we indicated. We haven't seen that translate into sales yet, but we knew going in it's probably an 18-month to 24-month cycle before those investments start paying off.
We'll continue to make those investments. The investments we're making on customer-facing roles in the video segment, things like account management, as well as additional outside sales resources, as well as implementation services, those are investments we've made. In fact, we're accelerating some of those investments. As Rick said, we've basically doubled our outside sales headcount for the video segment, and we'll continue to make those investments to grow that business. As Rick said, it's a bit of a land grab right now. We want to make sure that we don't under-resource our investments, especially in those customer-facing roles. We want to make sure we're in front of every customer who's got an interest in purchasing video products or digital evidence management solutions. We want to make sure that our ability to win or lose, we don't want that to be dependent on under-resourcing that.
We do expect we'll continue to increase our investments in those areas. I'd say the one thing that has been higher than maybe originally planned is some of the costs around litigation. As we indicated, I think we're going to sort of stay at these high levels for a few more quarters, and then we expect those to tail off. Some of this is just due to the timing of cases. It's tough to predict exactly when cases are going to come to trial, and there's just a lot of workflow around that. I think so far, we're satisfied with our ROI and those incremental investments, and I think we'll continue to increase them over time to make sure that we can grow that video business as quickly as possible.
Okay. Lastly, we completely understand and agree with the investment on the Evidence.com side, but just for simple modeling purposes, is there a certain revenue run rate or a date and time that you're expecting that to flip profitable on an operating margin anyway?
I think our focus right now is really in growing the top line more than just sort of the near-term profitability. One of the great things about a cloud business is that recurring revenue stream, so that for us, the focus is to get as many people on that system right now. The profitability will come with scale, but we don't want to run it for the sort of the near-term profits. It's really more of a long-term play at this point.
Right. Got it. Okay. Thanks very much.
Thank you.
Thank you. Our next question comes from the line of Peter Mahon of Dougherty. Your line is open. Please go ahead.
Good morning, guys. Just wanted to touch on a topic that we really haven't hit on yet, that is the core Lineage business. That definitely outperformed our expectations. Can you attribute that to a larger volume of smaller sales, or have you seen a healthy stream of kind of those mid to large-scale orders?
This is Dan again. I think we're seeing across all segments strata of the market. We're seeing the sort of the small agencies that are served by Telo, that continues to grow. I think that's been an underserved part of the market. I think that's certainly helped to grow the sales to serve that part of the market better than what they were served before, either through us or through distribution. The large agencies, you have a deal like Houston this quarter for 2,200 units. That's a big order for us, I think the fact that they went to city council and requested to upgrade their entire installed base over the next several years, with that first purchase being made this quarter, I think is just indicative of the fact that I think agencies understand the need to upgrade to the new platform.
We certainly see a big opportunity there, we're really seeing across all segments of the market, and that upgrade remains a big opportunity. I'd say the other thing is we're continuing to see further penetration in the market as well, where we have agencies that maybe didn't have TASERs before or only had a small part of their police force carrying the TASERs are now either buying for the first time or going to full deployment from partial deployment. I think we still have some white space in North America. As well as even though the international business was disappointing this quarter, that remains to be an opportunity that's 10 times bigger than the U.S. market. It's one we're going to continue to invest to grow.
I'd add one other thing to that. Just standing in the booth at IACP talking to chiefs, the one other dynamic that's happening is the financial environment is improving, and I talked to a lot of chiefs who basically said, "We spent the last three or four years going through cut after cut after cut," and they're now coming out of that, and they're saying, "Our patrol cars are worn out." Basically, they're coming into a situation where they realize they're going to have to upgrade a lot of their capital equipment to include TASERs. I think this market tends to lag much of the economy.
While things have recovered the last couple of years, I think they're finally starting to come out, and we're seeing just some strength there, that they've got the budget availability now to go in and upgrade some of those units that are getting older. Hopefully, that'll continue and maybe even accelerate into next year.
Sure. What were Telo's sales in the quarter?
It was over 10% of our sales again this quarter.
Okay. Got it. Dan, I know you talked about a couple of items that impacted taxes on the quarter. Would you mind re-listing those and maybe quantifying how much of an impact those did have?
Yeah. The two main items were the return provision. We estimate our taxes each year, when you file the return, the return can differ from the estimate. We actually had about a $425,000 benefit this quarter, where our actual tax return had lower taxes than we'd accrued for in the results last year. Putting the Domestic Production Activities Deduction, which is a mouthful, starting to take that's going to lower our effective tax rate roughly by 1%. Because we just put that in place, there's sort of a year-to-date catch-up. That was worth about $200,000 in the quarter. The last thing is, with disqualifying dispositions of incentive stock options, the company can't deduct incentive stock option expense for tax purposes until the employee has taxable income.
Unlike non-qualified stock options, which we deduct over the service period, incentive stock options, you don't deduct the expense around that until the employee actually has a disqualifying disposition and pays taxes. We had some tax relief from that this quarter as well.
Okay, perfect. Well, great. Thanks a lot, guys.
Sure thing.
Okay. Now let's go ahead and take a question that came in from Twitter. The question was, how much of a threat does Google Glass pose in the short-term and long-term future to TASER's Axon Flex and the body cameras? It's a great question. I've got a Google Glass. We're one of the early explorers. It's a great product. Really enjoy it. Really our strategy is to enable these consumer devices to be deployed by law enforcement through our cloud infrastructure. Google Glass will be a great option for our customers down the road. I would say that I've shown Glass to a number of law enforcement officers. The current iteration of Glass is probably not going to really fit the needs of patrol police officers for a couple of reasons. Probably the biggest one is officers really are very particular about keeping their visual field distraction-free.
If they're going into an environment, they want to keep their peripheral vision, they want to keep their hearing free on both sides, and really be able to focus on the threat environment around them. Again, Google Glass is a fantastic product, having the screen in your visual field can be quite distracting, the vast majority of officers I showed it to said for patrol use or for tactical use, they wouldn't wear that while doing a tactical job. They would prefer to have a camera that's unobtrusive, that doesn't really come into their visual field, and frankly, they don't want to think about the camera, or their computer screens when they're actually in an incident. I would say we're also keeping an eye on what's happening in the smartwatch space, the wearable computing.
Based on early customer feedback, we think that for alerting purposes, something on the wrist is probably more amenable to law enforcement use case. That way, they can choose to look at it or not with a vibration type of alert, but not have things popping up in their visual field that can be distracting at critical moments. We remain excited to see what happens in the consumer space, and again, that's really part of the Evidence.com plan is to enable our customers to use these great consumer technologies seamlessly without having to buy and build a bunch of IT infrastructure on site. On that, we want to wrap up and thank everyone for participating in today's call. Thanks to our shareholders for your continued support. We know it's been a long road to get here.
Obviously, we're really excited at what's happening, and we're hopeful this is going to continue upward and to the right. We think we're in a great position. We saw these trends coming early. We invested well ahead of the market, and that's positioned us now with, I think, the best camera out there. We've had years to really refine and stabilize our Evidence.com product offering, so we're ready for the growth to occur. We look forward to updating you on our fourth quarter progress on our next call in February. For those of you who are interested, I will be appearing on CNBC's Fast Money tonight at 5:30 P.M. Eastern. Tune in, and we'll get a chance to talk some more about the great things happening with Taser and Evidence.com. Everyone have a great day.
Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may disconnect. Have a great rest of your day.