Good day, ladies and gentlemen, welcome to the TASER International, Inc. Quarter One 2013 Earnings Conference Call. At this time, all participants are in listen only mode. Later, we'll conduct a question and answer session with instructions to follow at that time. Should anyone require operator assistance on the conference, you may press star and then zero on your touch-tone telephone. As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host for today, Mr. Rick Smith, CEO. Sir, you may begin.
Thank you. Before we get started this morning, I'm going to have Dan go ahead and read the safe harbor statement, and then we'll get started.
Hey, good morning. Safe harbor statement. Statements made on today's call include forward-looking statements, including statements regarding expectations, beliefs, intentions, or strategies regarding the future. We intend that such forward-looking statements be subject to the safe harbor provided by the Private Securities Litigation Reform Act of 1995. The forward-looking information is based upon current information and expectations regarding TASER International, Inc.. These estimates and statements speak only as of the date in 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 and 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 of these filings, as well as our other SEC filings, on our website at www.taser.com. With that, I'll turn the call back over to Rick Smith.
Great. Thanks, Dan. All right. Surely you've all seen the press release this morning. The team here has been working hard, and again, I think turned in some great results. First quarter revenues were up 19% from $25.6 million last year to $30.4 million this year. Most of that driven by law enforcement agencies purchasing and upgrading to our new smart TASER weapon platforms, namely the X2 and the X26P. You're all familiar with the X2, which we've been selling for several years. The X26P is a new product where we integrated many of the new smarter features and upgraded to an all-digital platform in a device that does not require changes in user training or behavior. It's a very seamless upgrade for agencies that have already deployed the X26. We've received extremely positive feedback from the market.
For those agencies that are looking to be increasing their capabilities, the X2 has been widely adopted and is widely selected. For a lot of agencies that are dealing with a tougher budgetary environment and reduced training staff, that would just really want to keep things simple, yet still upgrade to some of that new technology. The X26P has been, frankly, a home run. Those agencies see it as being very responsive to the voice of the customer, that it really meets their needs, in particular with simplifying their deployment process. One example of that is that less than 90 days after its launch by March, the X26P in the month of March outsold the X26. It's certainly too early to call that a trend or to depend on that going forward, but that's pretty remarkable for a new weapon to have that happen that quickly.
We are seeing the intended features of the X26P making it easy to adopt do seem to be resonating well in the market. The CEW, or the weapon segment revenues, were up 13% over the prior year to $28 million. In the video segment, we saw an increase of $1.5 million or 175% up to $2.4 million in the first quarter of 2013, up from a small base the year prior. Sequentially, video segment revenues grew $0.6 million or 32% from the fourth quarter. Also important, we saw net operating losses. We pared those by 50% over last year, down from $3 million to $1.5 million in the first quarter. Obviously, part of that is due to the increasing revenues, and part of that is due to continued optimization in that business unit. Gross margins overall were up to 61% from 59% a year ago period.
SG&A expenses were down sequentially 10% from the fourth quarter, although up 27% from the prior year. As we've talked about, increasing our investments in customer-facing roles as we transition from a company that traditionally has just sold weapons or products in a box to a more solution sales company. We've created whole new customer-facing functions in order to do that. We believe those investments are paying off. We also did see some increase in litigation activities, about a half a million dollars compared to last year. Before handing to Dan, let me comment briefly on litigation. We're seeing a very promising trend in our litigation. Many of you know that we've taken a number of steps, including revision of our warnings in 2009 and 2010.
Since that time, given that most of our cases are related to warnings, not actually to any product defects, we've seen our rate of litigation drop significantly over the past year. One example of that is 2 years ago, we had 60 active cases, and today we have only 25. We've cut the number of active cases by more than half because the rate of dismissals is significantly greater than the rate of new litigation. I should caution for modeling purposes, we don't expect to see financial benefits from this decreasing trend for probably at least another year to 18 months due to the lag time between when cases are filed and how they're adjudicated. We're still working through the backlog of cases from prior to those dates. For the long term, we see this is a very promising trend in the business.
With that, I'm going to turn it over to our Chief Financial Officer, Dan Behrendt, to go through the financial details.
Thanks, Rick. As Rick mentioned, revenue for the first quarter was $30.4 million, which is up approximately $4.8 million or 18.7% from the prior year. The increase in sales versus prior is mostly driven by the continued adoption of the TASER X2, as well as the adoption of the new TASER X26P, a CEW that was announced in January 2013. The North American law enforcement business continues to be strong, mostly driven by the upgrade cycle of the TASER X2 and TASER X26P CEWs. We actually sold $8.1 million of the TASER X26P and TASER X2 CEW handles in Q1, and North American law enforcement sales are actually up 31% over the first quarter of 2012. The upgrade opportunity in North America remains one of our growth drivers and one that we're excited about as we continue into 2013.
Gross margin was $18.5 million or 60.6% of revenue, which is up slightly from 59.4% of the prior year. We continue to see the benefit of higher operating leverage in the business as the fixed and semi-fixed expenses and manufacturing overhead are levered up as we see increased sales. We also had a higher percentage of drop shipments and other direct sales to customers in the quarter, which increases our average selling price. The higher average selling price from direct business has a partial offset in that for some of the drop shipments, we actually have higher variable selling expenses because we pay distributors their commission in SG&A when we drop ship on their behalf. Cost of service delivered actually decreased $417,000 as we continue to realize the lower cost structure that we benefit from moving to a public cloud web services from our own data center.
We made that move, completed that in about midway through last year and started seeing the full benefit of the fourth quarter. That continued into the first quarter here. SG&A expenses of $11.2 million for the first quarter of 2013 compared to $8.9 million in the first quarter of 2012. As a percentage of sales, SG&A was 36.8% of net sales in Q1 of 2013 versus 34.5% in 2012. Comparable levels overall. The primary driver for the increase was personnel costs, which increased $1.1 million due to the making of additional strategic hires as part of our ongoing commitment to enhance our customer-facing capabilities. Variable selling expenses also increased in the quarter when compared to prior quarters. Again, we mentioned that's due to paying distributors their overages, as well as paying higher commissions for our inside salespeople when they make some of these direct sales.
We also saw an increase to trade show expense in the first quarter due to the technology summit we conducted for our video segment. Legal-related expenses, as Rick mentioned, increased approximately half a million dollars when compared to the first quarter of 2012. SG&A expenses in the video segment overall increased $341,000 when compared to the first quarter of 2012, as a result of investments in customer-facing roles, as well as technology summit. We also had an additional $210,000 of increases in SG&A to support the growth of our international business. The R&D costs of $2 million for the quarter, which are pretty much flat compared to 2012 and really are in line with sort of the run rates. We're seeing efficiencies in consulting and a decline in depreciation expense offset by some higher payroll-related expenses.
We do expect R&D expenses to trend up over the year, especially in the video business, as we fill some critical open positions and reinvest in those. When you look at the segment results, you'll see the video business R&D came down during the quarter. That's really mostly a result of hardware R&D. There's folks that are in the Scottsdale headquarters office that support the hardware development of Axon Flex and TASER CAM. Those expenses have come down in the first quarter as those products are as matured up so they don't need as much work. Moving on to adjusted EBITDA, which includes the add backs for depreciation, stock compensation, among other items, was $7.7 million in the first quarter of 2013 compared to $6.9 million in the first quarter of 2012, with improvements being driven mostly by the higher sales levels.
We have a table that reconciles adjusted EBITDA to net income in the earnings release you can refer to. Income from operations for the quarter was $5.3 million, and we saw net income in the first quarter of $3.3 million or $0.06 a share on both basic and diluted basis. This compares to $3.8 million or $0.07 a share on basic and diluted basis in the first quarter of 2012, although the prior year, if you remember, benefited from the $2.2 million reduction in accrual on the Turner case. On more of a normalized basis, the results this year were better. As we move on to the balance sheet for assets, we finished the quarter with $38.6 million of cash.
We were able to offset the $5.4 million that we spent repurchasing common stock bought back through the quarter as part of the $25 million buyback approved on February 25th, 2013, with operating cash flow and cash flow from the tax shield provided by employee stock option exercises. We actually bought back 702,866 shares during the quarter for $5.4 million with an average purchase price of $7.61 per share. Accounts receivable of $16.8 million are down $1.3 million from year-end due to the timing of collections that occurred during the quarter. Inventory $11.8 million is up about $800,000 from the year-end balance, mostly attributed to build-up of X2 and X26 inventory, X26P inventory, just in anticipation of the sales trends for 2013. We saw the investment in property equipment at $21.2 million. It's actually down $800,000 when compared to the prior year-end.
The net decrease includes approximately $949,000 depreciation expense offset by in the quarter. Most of that was for production equipment, with some purchases of computer equipment as well, made in the first quarter. The total assets as of March 31st, 2013, were $117.1 million. Let's move on to the liability and equity section of the balance sheet. Accounts payable of $4.8 million. It's actually down $1.4 million from year-end due to the timing of some check runs and the processing of invoices. Accrued liabilities of $6.8 million, decreased $0.3 million, primarily as a result of the timing of bonus payments accrued in Q4, which were paid out in Q1. Total deferred revenue of $13.8 million has actually increased $1.7 million from year-end, primarily due to the increased sales of the X26P and X2, both of those being sold with trade-in programs that included extended warranties.
We're seeing higher warranty purchases because we're selling more of those products with the warranty bundled in, as well as deferral revenue associated with evidence.com service, which actually grew deferred revenue $767,000 over the fourth quarter of 2012 due to increased sales of the video segment. As people probably remember, with the selling of Axon Flex video products, we're deferring revenue related to evidence.com service. The revenue for the service piece will be recognized over the service period of between one and five years, depending on the contract that customer is signing with us. Of the $13.8 million of deferred revenue on the balance sheet, $2 million of that is actually related to evidence.com service, and that continues to grow pretty sharply from the fourth quarter balances, which I think is a good trend.
Total liabilities of $28.9 million, and the company finished the quarter with $88.2 million in stockholders' equity. Again, we have no long-term debt on the balance sheet other than a small capital lease, and continue to have plenty of liquidity and strong cash flow engine in our core business to fund our R&D efforts and operations as we move into the future. When we're looking at the cash flow information, we did have cash flow provided from operations of $4.5 million during the first quarter of 2013. We also had some net cash provided from investing activities in the first quarter of 2013, mostly driven by some maturing short-term investments of $1.7 million during the quarter. They weren't reinvested in the quarter because we made a decision to change investment advisors in early Q2, so it just made for a cleaner transition to just those short-term investments matured late March.
We just waited to invest them in April. Cash used in financing activities was $3.3 million. That's driven mostly by the stock buyback of $5.4 million executed in Q1, partially offset by the $1.9 million tax benefit from employee stock option exercises. Finished the quarter with $38.6 million of cash. Very confident in the liquidity position of the business. Really, the strong cash generation in the business is what gave us the confidence to continue the stock buyback in 2013, and we feel good about where we sit right now. One of the things I want to just talk about briefly on the call today, I've gotten a couple questions from investors. It's just sort of the press release strategy for the business. You've probably noticed that the company's been making press releases more often talking about new orders that we're booking throughout the quarter.
We just think it's important for our customers, many of whom look to each other for guidance on technology shifts to see which of their peers have deployed our new video technology or are upgrading to the new CEW platforms. It's not something that we want to, from an investor perspective, we don't want investors to read too much into it one way or the other. It's just something really more for commercial purposes, just have that weekly cadence of press releases each week just talking about our customers that are either upgrading to the new CEW platforms or deploying the video. We think it's important commercially, you should expect to continue to see sort of that cadence of weekly press releases. Finally, I wanted to cover just the sales statistics for the quarter. We actually sold 9,024 X26 units in the quarter.
As Rick said, the X26P was actually off to a strong start. We sold 4,345 X26Ps in Q1. X2s were 4,946. We sold 628 M26 CEWs. We sold 200 of the X3. That's mostly in the consumer segment of the business, so that continues to sell slowly, but we're happy with where that sits right now. C2, we sold 2,295 C2 units in Q1. TASER Cams were 2,313 units. We sold 363,515 cartridges. Again, cartridge sales continued to be strong, partially driven by the X2, because it uses a different cartridge design than the X26 that it's replacing in a lot of cases. It's forcing customers to have to buy a sort of a new arsenal of cartridges, so that's part of what's driving that. We sold 788 of the Flex video cameras. With that, I'd like to turn the call back over to Rick Smith.
Great. Thanks, Dan. One thing you'll actually notice in the quarter. Well, a couple things. First, a significant number of X26P orders, including some of the larger agencies, New Orleans with 400, New York State Police with 334, Sunnyvale with 210. Then, of course, the X2 continues strong as well with Atlanta buying 200 more. Louisville Metro Police Department, Buncombe County, Garfield, and a bunch of others. What you don't see this quarter is there were no particularly large orders of the magnitude like a Phoenix Police Department. In fact, San Diego County Sheriff's Office was on our pipeline we expected the first quarter, and it slipped into the second quarter. Yet we were still able to meet an impressive sales result this quarter, largely to the continued success and growth of the telesales team that brought in $3.3 million in business from the smaller agencies within the market.
We attribute that largely to the rigor that Jeff Kukowski has brought to our sales team and our operations, with programs like and the other things we're doing. We also had a bit of a soft spot internationally in the quarter. International sales came in at about 10%, down from our historical levels. We attribute that largely to just the international tends to be lumpy. They tend to be some larger orders. As you know, we've been investing in international sales offices, that really started in earnest about nine months ago. We're expecting to see those results. It takes some time to prime the pump, but we're certainly of the belief that that same rigor that's working in the U.S. is going to help us internationally. Let me shift now to talking about Axon Flex and Evidence.com. Again, continued to see momentum and new adoptions out in the marketplace.
Bookings were up 300% over the first quarter of 2012, although down 17% sequentially. We attribute that to a couple things. Number one, the fourth quarter does tend to be a stronger quarter than the first, in general. The other is, if you look at the dynamics of the longer sales cycle in the video segment, many of the agencies we were closing up through the end of the year were actually agencies we'd started working with our first generation Axon Pro system before. They're sort of in the sales cycle, agencies like Havasu, that we closed right around the end of the year. We've been working with them for about 18 months. We're now getting into the point where we're really able to focus on many new agencies, as we're scaling up the Axon Flex, that really became commercially available last summer.
Another thing that we see is really quite reassuring in that part of the business is the number of renewals and expansions. We talked about Lake Havasu, who's gone now to full patrol deployment. Salt Lake City and the Valley Police Alliance up there, deploying cameras simultaneously across 14 agencies. Chesapeake, Virginia, they just expanded their program to now full deployment of all their field officers. Albuquerque, another big win. Albuquerque actually was the first major city, I believe, in the United States to put on-officer video on all of their officers, with somewhere between 700 and 1,000 cameras. They had originally done this with consumer cameras that were at a much lower price point. We were able to work with Albuquerque to understand the significant logistics costs associated with handling the video, as well as the sort of utility and durability of those consumer cameras.
Having them now come across as a customer, we see as an important validation, that the investments we've made in really building an end-to-end system that is both robust and really manages that workflow to reduce total cost of ownership, is able to go in and displace agencies that had previous products that they were using. Also, Cook County, another interesting one to talk about. Cook County has deployed 250 of the Axon Flex video systems. What's important about Cook County is there we found that they really wanted to save the data locally, within their own networks. They had large investments in infrastructure around fixed cameras, and other sorts of video. Our Flex system has been designed so that we can accommodate that. Customers can now use our gear and point it to store the files in their local system.
Of course, we also believe this gives us an advantage over time as the cloud deployment model, with all of its advantages around cost and speed of innovation, et cetera, that at any point an agency like this wants to then transition back, of course, our gear can seamlessly move from storing stuff on-site to allowing them to deploy Evidence.com. I am going to conclude by talking a little bit about our Analyst Day that we hosted in New York. I assume some of you, I know some of the analysts on the call were there. Many of you were not. What we really talked about there is how we've identified that really one of our greatest assets, greater than our IT, greater than our tooling or any individual product, is the relationship, the unique relationship we have with 16,000-plus U.S. law enforcement agencies and these agencies around the globe.
These agencies are spending between $10 billion-$20 billion a year on technology. We believe we have one of the strongest brands. We're seen as a company that takes advanced technology and combines it with training to provide simple, easy to use, reliable systems, end-to-end solutions that our customers can deploy. We're developing new products to go back into that same market, and frankly, enable us to win a much larger share of their dollar spent on technology. Of course, the first intention is what we're doing with on-officer video with Axon Flex and with Evidence.com, with the cloud-based digital evidence management system. Many of you saw recently The New York Times article, showing the first really academically rigorous study of the impact of Axon Flex in the field. That is out of Rialto, California, in combination with University of Cambridge in the U.K.
We're using a randomized study design. They were able to show a direct correlation from the deployment of the cameras to an almost 90% reduction in complaints against police. This is significant. Perhaps even more significant, they saw an almost 60% reduction in the use of force, meaning that when cameras were deployed, it deescalated behaviors in these tense situations. Frequently, even the suspects would deescalate when they knew they were being recorded. We have had several major agencies that have told us that that data alone empowers them to go to their risk managers and make a case for reallocating risk management funds to fund Axon Flex and Evidence.com systems. Rialto, while it is the first major academic study, they're not alone in terms of the results that they're reporting. Lake Havasu reported complaints down about 60%. Pittsburgh ran 74%. Tonganoxie reported 100% decrease in complaints.
In terms of use of force, we've seen others like Tonganoxie actually report a 90% decrease, or Sikeston Police Department down 40%, or Oviedo down 30%. We believe these early validations are super critical, both in terms of proving the value of the system quantitatively as well as qualitatively by seeing customers come back to renew and expand their programs. Our best estimates right now, based on a report from the AP, is that U.S. law enforcement agencies spend around $2,500 a year settling claims against the agency. So that's $2,500 per officer per year as an average payout for complaint costs. If you aggregate that over the U.S., that works out to well over $2 billion. It's a significant problem that we're helping them solve. We're now seeing some real similarities to the early days when we were first launching TASER devices here in North America.
There were two big factors early on that helped the TASER to gain traction. The first was the emergence of the statistics showing the deployment of the TASER M26 led to significant reductions in deaths and in injuries. The second was more qualitative. That was the personal experience of officers in the field. Many of them were skeptical. I talked to many officers who said, "I've been doing the job for 20 years. Why do I need this new TASER thing?" Those same people, after having it in the field for a while, would come back to us and share stories about how they saved somebody's life with it.
We're now seeing similarities in Axon Flex and Evidence.com, where we're seeing the statistical results, we're now having officers come back as well, some of which saying, "I do not want to go on patrol without this." Particularly officers who've had complaints filed against them where the video has clearly exonerated them. If you go to our website at taser.com and go to the Axon video page, there's a compendium of many of the testimonials from individual officers. At the end of the day, the strategy that we're employing here with this public safety platform strategy is to really come to an understanding. Even our TASER weapons are connected devices. They're smart devices. They're collecting information about how they're used. They've got sophisticated firmware. They need to be periodically connected and updated. We're using Evidence.com as the network to make that happen.
Many times, we have something like 60,000 or 70,000 TASER CAMs in the field. We're helping our customers deal with all that information, of course, expanding that network to include things like the Axon Flex wearable cameras. We believe that we're proud of what we've done historically. Many of our customers will tell us that TASER has been the biggest revolution in law enforcement, certainly in this century. We believe we're positioned to do it again. The digital video and multimedia has the opportunity to become the centerpiece of law enforcement records of the future. This goes even beyond just defending against complaints. We see video moving to the center of all law enforcement workflows. That will create a number of extension opportunities for us as we continue to scale this business. At the Investor Day, we actually shared some models.
Obviously, when you're dealing with disruptive technology, it's very difficult to make short-term models or even long-term models with much accuracy, because you're creating markets that don't yet exist. We believe with some conservative assumptions that we can grow TASER to between around $166 million to over $300 million in revenue over the next 3-5 years. I would iterate that none of these models assume the kind of rapid adoption we saw with TASER weapons in the early 2000s. If we should be fortunate enough to see a TASER-like adoption, there's upside in these models. However, again, I would caution we are seeing longer sales cycles and these more complex solution sales. That's why we're being a little more conservative. I'd conclude by just, again, reiterating that we're solving big, important problems for our customers.
When you solve big problems, you create significant value for all of our stakeholders. It includes our customers, our employees, and certainly our shareholders, as well as society at large. When we make communities safer, I think that's something we can all feel good about. Solving big problems is not quick, and it's not easy. We've done this before in creating the global market for TASER conducted energy weapons, and we've done it in this market, facing similar challenges with these same customers, and we're intent on doing it again, and I think we're making a lot of progress. With that, I'll open it up, and we'll take a few questions.
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. Your line is open. Please go ahead.
Thanks. Good morning. Nice quarter, guys.
Thank you.
Just a housekeeping question to begin with. Is the X26P a subcategory or subgroup of the X26 numbers that you give, or are those in addition?
Those are in addition. We sold 9,024 X26s. In addition to that, we sold another 4,345 X26Ps.
Okay. That's helpful. With respect to the new bookings, I realize it's very early, and this isn't going to be a linear progression, et cetera. In general, what are you kind of seeing there? That number was off slightly quarter-over-quarter. How do you sort of think that plays out from a cadence standpoint?
Well, one of the things that's interesting from a market dynamics perspective is we're seeing the larger agencies move faster than we have historically. The TASER growth early on was driven really a lot more by the smaller agencies moving more quickly. We've been surprised, frankly, at the level of interest in the big agencies. There's a plus and a minus, the opportunity there. We see that to really win this market long term, the more of the big agencies we can get, the more influential they will be. We're putting a lot of our focus, when a Salt Lake City or a Fort Worth puts their hands up, or a Pittsburgh, we really put a lot of focus on those.
If we can win over a sizable percentage or even a majority of the major cities, and begin to work with those customers to identify what sorts of information they'll want to share, those network effects it can really kick in, like we saw even with Salt Lake City, with their local agencies, the smaller agencies tending to follow the large. There's some real advantages to that dynamic. One disadvantage is relying on big agencies means it's going to be more lumpy. In the quarter, we had some pipeline that had it come in the quarter, we would've seen significant growth over the fourth quarter. Some of those deals pushed out. It happens with larger agencies.
I would say, probably for the balance of this year, we're going to continue to see some lumpier, large orders that will sort of determine some of that quarter-over-quarter sequential noise, whether it's up or down. I can tell you qualitatively, we've seen a major shift in the response to market. I actually presented at a chief's course in Louisiana about 2 weeks ago, where we get about 110 chiefs and senior administrators, and at the beginning of my presentation, I asked how many of them saw their agencies moving major systems to the cloud, and I would say 80% of the hands went up. 2 years ago, I think we might've seen 10% of the hands go up. We're seeing a lot of those good qualitative responses.
Obviously, we'd like to see sequential growth every quarter, the large agencies are going to make it a bit lumpy.
We expect the trend line will continue to be up even with that lumpiness. That's kind of what we're focused on, sort of the overall trend, although, as Rick said, we'd like to sort of see sequential growth. I think as long as we're sort of seeing that trend line continue to be up and to the right, we feel like we're on the right track.
Sure. Understood. Then just I guess sequentially from a revenue perspective, I know you don't give a lot of guidance. I had expected maybe you had talked about a little pause as agencies evaluate the X26P versus the X2. Certainly didn't seem like you saw much of one, if any. Sequentially, does it feel like kind of things get better from this level throughout the year?
I think obviously, we felt very good about first quarter. We expected to see agencies that sort of who are evaluating X2 sort of wait. We still saw some of that in the quarter. I think that's still probably stuff that we could see in Q2. We feel very good to be able to put up these kinds of numbers with that backdrop of a new product being launched. I think we're sitting in a good position. I think, as Rick said, we had a couple deals get pushed from Q1 into Q2. I think that helps a little bit with Q2. As you know, this is a difficult business to forecast. We feel very good about where we're sitting overall with a large amount of the North American business not having upgraded yet. We're starting seeing continued traction there.
Sure. Okay. Thank you.
Thank you. Our next question comes from the line of Paul Coster of J.P. Morgan. Your line is open. Please go ahead.
Thanks very much for taking my question. Rick, can you talk a little bit about the penetration of large accounts in North America with your video solutions? Where do we stand, not just in terms of the % of large accounts that have even adopted it, but within those large accounts, what's the sort of penetration level, and where do you expect it ultimately to go?
Okay. Great question. Most of the large agencies, I would say, are in early deployment. If we look at the MCC or the major cities, we've got Pittsburgh with I think around 50 units, Mesa around 50, Fort Worth is around 50 to 100. We've got a number of others that are testing, or that have made smaller purchases that we have not yet announced as we work through these. Some of these are paid trials. I'd say there's probably another five to 10 agencies that are actively testing of the major cities, which again, is the top 65 or around 70 agencies in the country. We've seen some of those mid-size agencies, like BART and Modesto, and now Chesapeake, that have gone to full deployment. Obviously, we're excited and working hard to help get some of these major cities to really expand their programs.
We do expect that to happen in several of those cities, to have significant expansion by the end of this year. We're also learning that one of the things that we're working hard at to help that happen is doing some integrations with some of their existing IT systems, to be able to pass some information back and forth logistically. For example, one of these agencies, they want the officers to be able to just record on and off all day and not have to tag any videos, and we could then match on the back end based on the time and date of who made the recording. We could pull tables from their record management system and have Evidence.com automatically do that tagging. That would remove any incremental work off of those officers, which is seen as a huge benefit.
We're in working very closely with these customers, learning. Again, being a cloud model is great. We can roll out enhancements about every 90 days. Those types of things we think will help get these agencies from the 100-ish range up to much larger deployments. I'd also point out that, perhaps new this quarter, we now have major agencies beginning field trials in Brazil, the U.K., Australasia, and elsewhere in Europe. Don't want to give too many details until we're further into these tests, but we've been able to turn on instances through our cloud partner. We do have the ability to store data internationally, that increases the comfort level of our international customers. We're into the sales process now, globally.
Where are you seeing competition in this space, and from whom?
Great question. There's a lot of guys making cameras out there. In Albuquerque, we saw they'd bought those little cameras you can buy in SkyMall for $150. They found they were replacing some of those. I don't know if it was the exact one from SkyMall, but similar category. They found they were replacing those one or two times a year out in the field. For us to be able to upgrade them from $150 price point, obviously, to $800 or $900 price point, I think shows that, again, the industrialization we've done really pays off. Really the workflow. As we worked with Albuquerque, officers had to download their own devices and burn them to CDs or DVDs. I think they had hundreds of thousands of discs they were dealing with. Untangling that's been a big advantage for us.
Internationally, there are some local players in different countries. I know in Australasia, there's at least one on-body camera maker. In France, we believe there's one. There's a couple in the U.K. Some of them are doing software back ends. Typically, we're still seeing most of the business models we're facing, or at least all of them that I'm aware currently, are primarily hardware vendors where the software is like a free app sort of approach. I don't know that we've seen somebody yet really make the heavy investment in building out the enterprise-class software that becomes really the core. Over time, that's where, again, we see the real value add in the business. In the media, you probably saw, in one interview they asked us about Google Glass and how we see that coming. We've been selected as one of the early Glass explorers.
We look at that as when that technology is commercialized, we're building our system the same way that we frankly partnered with Looxcie to make Axon Flex, taking the right commercial technology and adapting it to our marketplace. We see our strategy as building that ecosystem that partners with world-class devices like iPhones and Android devices. We're less focused on the hardware over time, certainly will become commodity. We see the opportunity to solve the big data problem as a big one. We have not yet seen, I would say, a major competitor go there. Although I would expect within the next year, we'll probably see some of the in-car vendors that have done on-premise digital evidence management solutions, probably also start to make moves into the cloud. We've got to continue to press our first-mover advantage hard.
You could actually capture their data, I imagine. My last question is, what % of revenue today is recurring? Then looking out over your forecasting horizons, how do you see that evolving for the company?
Is your question about the % of revenue that's recurring in the video business or across the whole business?
Well, it's really both, obviously the video is very much recurring. I'm really keen to understand how you envisage this working for the whole company over the sort of five-year period that you've talked about.
This is Dan. We do expect the recurring piece of video will grow over time. As I mentioned, we've got $2 million of deferred revenue on the balance sheet right now, just for the video business. In this quarter, the service piece of the revenue was about 10% of the total. We expect that that % will increase over time. The overall business, we still sort of benefit from sort of the razor blade model and that roughly 30% of our sales are cartridges and other accessories, and that's been a pretty predictable, significant part of the business. We expect the video as a service business. Some of these early customers come back and now move from trials to deeper adoptions and buying the service, we expect that service revenue will grow over time.
Okay, got it. Do you also anticipate hardware leasing to grow?
Yes. We didn't have a lot of the TPP deals this quarter, it continues to generate a lot of interest from our customers. I think the good news is we continue to see cases where customers evaluate our TPP program and do a cash deal. That's perfect for us. Part of it is just another tool for our salespeople to use to continue the conversation, to make sure that the conversation doesn't stop with, "Hey, we're not sure we have enough budget to deploy this." In some cases, they've been able to actually find budget dollars and just make cash purchases, which is great.
Got it. Thank you.
Thanks.
Thank you. Our next question comes from the line of Glenn Mattson of Sidoti & Company. Your line is open. Please go ahead.
Hi. Good afternoon, gentlemen. Real quick, housekeeping first. SG&A jumped this quarter. First off, do you still have the same expectations for SG&A this year? More conceptually on the video business. Between the Rialto study and the attack in Boston and what a key role video played there, it almost feels like, have we turned a corner? Are you starting to see a lot more interest? It seems like you have a lot more deal flow in the video business, even in this second quarter. Basically those two points.
Dan, why don't you start with SG&A?
Yeah. On the SG&A side, we do still have the same expectations that we'll see SG&A expenses go up about 10% year-over-year. Really not a change in strategy there. This quarter, we saw about half a million of incremental legal expenses in the quarter. Overall, we still feel comfortable that we'll be in sort of 10% growth, with a lot of that growth being in customer-facing roles, so growth both the video segment as well as the international part of the business.
On the other front, it's too early to say about the role of video in Boston. I don't know that we have a good feel on whether that has an impact. Certainly, Rialto, we've been sharing that study liberally. The first place we had an opportunity to gauge customer reactions was we held what we call a tech summit, here in Scottsdale about 60 days ago, where the chief of Rialto came and presented his results before they were public. At that event, we had roughly 100 law enforcement officials from various agencies around the country. Many of whom we've actually helped cover the travel costs, because many of their budgets aren't allowing them to travel. Just to be able to make sure we had good attendance, we provided some grants to cover the travel costs.
What we found was, of the folks that came in, including some major agencies that I would say were skeptical the night before the conference at our welcome reception, by the evening after the conference, we saw marked changes in their receptiveness. I'd say almost everyone I interacted with that was leaving the conference was of the tone that they were going to go back to their agencies and begin the process to deploy this technology. We're now looking how we can scale that by moving those tech summit events around the country, by scheduling them around other events where senior law enforcement officials will be, other major conferences, so that it doesn't have the incremental travel costs or significant incremental travel costs.
That's probably one of the biggest things we can do from a thought leadership perspective, is getting the chiefs to these events where they hear chiefs like Chris Burbank, Chief of Salt Lake, who's a speaker talking about how they're deploying multi-agency model in Salt Lake, William Farrar from Rialto, Jeffrey Halstead from Fort Worth, talking about the benefits that they're seeing. Yeah, it feels to me like we've crossed a tipping point intellectually. Again, we need to be conservative about, we just don't know. As we point out in the study, the innovator's dilemma, one of the challenges in modeling or analyzing or forecasting disruptive technologies is it's really hard, if not impossible to do. We just don't know where we see that economic tipping point. I think we're starting to see some evidence in the numbers that we're certainly on an upward slope.
The question is what that ramp looks like.
Okay, great. I think that does it for me. Thanks, guys.
Thanks.
Thanks.
Thank you. Our next question is from the line of Peter Mahon from Dougherty & Company. Your line is open. Please go ahead.
Yeah, good morning, guys. Just had one question. Looking at the CEW segment, Dan, actually gross margin declined almost 200 basis points year-over-year. I was hoping that you might elaborate on that, especially after you guys talked about having more direct sales and things like that increase ASP.
Yeah. I think that's a good question. I think it's really driven a little bit by the mix. Also, as we sell more of the X26-P units, we are offering trade-in credits to encourage our customers to do that. While we'll see maybe a higher ASP for cartridges and things like that for those parts of the business, we are offering trade-in credits, that does have an impact on gross margin. Although we think that the trade-in credits, we see those as being a very successful way to drive the business. I think that small decrease in gross margin is really just driven by the trade-in credits we run through the income statement.
Most of the trade-in credits are against packages that include extended warranties. Part of this is probably related to a higher percentage of deferred revenue associated with a higher percentage of units being purchased with warranties.
That's right. As I mentioned, we are seeing that deferred revenue line on the balance sheet continue to grow pretty sharply. Which is, again, I think to Paul's question earlier. I think again, that becomes one more predictable part of the business that's going to run in every quarter because we know we're going to see that deferred revenue for warranties as well as the service on [MSI-COMP] come through each quarter.
Got it. Just to clarify, you guys have a trade-in program on both the X2 and X26P, is that correct?
That is correct.
Okay. Would you mind letting us know what those credits are at this point in time?
Yeah. I believe it's $135 per handle for the second quarter.
Okay, great. Thanks a lot, guys.
All right. Thank you.
Thank you. Ladies and gentlemen, that does conclude our Q&A session. I'd like to turn the conference back over to Mr. Smith for any closing remarks.
Great. Thank you very much. We appreciate those of you who stuck with us through the whole call here and stuck with us as shareholders over the years. I think we're seeing the return on investments that we've made as we start to scale new parts of the business. I would also invite all of you to join us for our annual shareholder meeting, which will be May 23rd at our headquarters here in Scottsdale in sunny Arizona. Come on out and join us then. We'll have more updates on the business, we look forward, if you can't make it then, to talking to you on our next quarterly results call, which should be in July. Thanks and have a great day.
Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, you may all disconnect. Have a great rest of the day