Good day, ladies and gentlemen, and welcome to the TASER International Inc. Fourth Quarter twenty twelve Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host, Rick Smith, Chief Executive Officer. Sir, you may begin.
Hello, and thank you all for joining us for our twenty twelve Tayshore National Annual Results Conference Call. Before we get started, I'm going to hand off to Dan Behrend, our CFO, for the Safe Harbor Statement. Sure.
The Safe Harbor Statement. This press release contains forward looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. The Exchange Act including statements regarding our expectations, beliefs, intentions or strategies regarding the future that we'll continue to make investments through increased SG and A in 2013 that we anticipate agencies will take advantage of our upgrade program and that we are well positioned to execute our strategy. 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 Tazer International Incorporated.
These estimates and statements speak only as of the date in which they are made. They are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. We caution these statements are qualified by important factors that could cause actual results to differ materially from those reflected by the forward looking statements herein. PACER International assumes no obligation to update this information contained in this conference call. Other factors are identified in documents filed by us with the Securities and Exchange Commission, including those set forth in our Form 10 K for the year ended December 3131, under the caption Risk Factors.
And with that, I'd like to turn it back over to Rick Smith.
Thanks, Dan. We're appreciated with the opportunity to report some great results for 2012 and a strong fourth quarter in particular. As you no doubt seen in the press release by now, Q4 revenues were up 51% to $32,100,000 and annual revenues rose 27.5% from $90,000,000 in 2011 to $114,800,000 in 2012. If we look at this by segment, in the Conducted Electrical Weapons segment, revenues grew $9,600,000 or 46.6% over the same quarter last year. In the Video, Cloud and Software segment, revenues grew 122% or $1,100,000 over last year.
Now although video revenues grew from a small base, we're seeing consistent growth and evidence of continued traction in the marketplace. In fact, we're including some new information in our earnings release. We're now releasing the Axon and Evidence.com bookings by quarter. Given that Evidence.com is a service with revenue that will be recognized over the service delivery, we feel it's an important metric to share the total sales bookings each quarter to enable investors to see the overall traction of the business, which can be harder to discern on a GAAP basis as revenues again are recognized over extended time periods. We define bookings as the sales price associated with orders placed in the relevant time period, including hardware, software licenses, maintenance warranties and other items, which may be paid for and or recognized as revenue in future time periods.
Bookings for Axon and Enemos dot com have grown from $352,000 in the first quarter of twenty twelve to $1,670,000 in the fourth quarter. Across the business, gross margins were strong in the quarter as well, coming in at 59.7% compared to 32.7% last year. Of course, the number last year included some significant one time items. In the weapons segment, margins were a very healthy 62.7%. Now SG and A also increased significantly over last year by 23% or $2,400,000 There are two primary reasons for this.
First, we've increased our investment in customer facing roles to help grow sales. For example, we created a new telesales group function, which did not exist in 2011. In a little over a half year starting in May, the telesales group brought in well over $5,000,000 in incremental revenue. This group accounts for roughly eight additional headcount and we anticipate growing it to around 12 people in 2013. We believe the return on investment on these positions is significant in driving additional revenue.
Another example is our account management function, which also did not exist a year ago. In order to ensure that customers who purchase the Axon Flex cameras have a great experience and become long term customers for revenues.com, we've created a team of account managers, which currently includes around four team members. This team does proactive post sale support to ensure the customers who purchase our systems are able to effectively deploy and begin using our evidence.com service, which we believe is critical to growing that service over time. The second reason for the SG and A increase were increases in legal expenses in the quarter. For strategic litigation reasons, we offered a $750,000 settlement in a commercial litigation case involving the termination of a contract with an international distributor.
The offer protects us against legal fee damages in the event that an award is made during litigation for any amount less than our offer. Because we do have an outstanding offer, we reserved the full $750,000 There were other legal expenses related to two cases that went to trial in the fourth quarter, which is a particularly heavy legal caseload for the quarter, both of which cases we won. We have seen overall a decrease in our total legal caseload in recent quarters, a trend which we hope will continue due to our strong record of successful defense, which again, we hope to see that trend continue going forward, which over the long haul should see declines in legal expenses. At this point, I'll pass over to Dan to go over the financial results in more detail.
Thank you, Rick. As Rick said, revenue for the fourth quarter was $32,100,000 which is up approximately $10,800,000 or 50.6% from the prior year. The increase in sales versus the prior year was driven by the continued option of the X2 Conducted Electrical Weapon, CEW. The North American law enforcement business continues to be strong, mostly driven by the upgrade cycle to the new X2. The PASER protection plan, our municipal leasing program contributed approximately 10% of our revenue in the fourth quarter, which shows the continued positive reception the program has by our customers.
North American law enforcement sales were up 33% over the fourth quarter of twenty eleven and the total year increase for the North American law enforcement sales is $15,600,000 dollars or 28.7% year over year. The upgrade opportunity in North America remains one of our growth drivers as we go into 2013. Total year sales of $114,800,000 set a new record for TASER surpassing the previous record of $104,300,000 that we set in 02/2009. So we're up about 10% over that previous high watermark. Gross margin for Q4 was $19,200,000 or 59.7% of revenue, which is up significantly from the 32.7% of the prior year.
As Rick said earlier, in the February, the company did have a number of one time items, including a $3,700,000 charge for excess inventory which runs through margin. Gross margin before the excess inventory charges in the fourth quarter twenty eleven were $10,700,000 or 50.3% of revenue. But the remaining improvement about 9.4% is due to the higher operating leverage in the business. We also had a higher percentage of drop shipments and other direct sales to customers in the quarter, which increases our average selling price, but has a partial offset in increased variable selling expenses due to paying distributors their margin on those drop ship products. Cost of service delivered decreased by $738,000 versus the prior year due to the move to our own data center into a public cloud provider.
And in Q4, we're finally starting to realize the lower cost structure that moving to a public cloud provider provide on an ongoing basis. So, we're encouraged by that. SG and A expenses were $12,500,000 for the fourth quarter of twenty twelve compared to $10,100,000 in the fourth quarter of twenty eleven. On a percentage of sales basis, SG and A was 38.8% of sales in Q4 of twenty twelve versus 47.4% in 2011. There were several unusual items in the fourth quarter totaling roughly $1,600,000 These include the $800,000 of litigation settlement offer that Rick mentioned earlier in the commercial case with the distributor.
There's also a stock compensation trough in the fourth quarter that contribute to a year over year increase of about $600,000 as a result of performance based stock investing sooner than previously anticipated. And we also had variable selling expenses of about $800,000 this quarter compared to prior quarters. But again, we're partially offset by higher selling prices due to more sales being direct, which increases our average selling price and gross margin. Personnel cost increase due to some of the additional strategic hires we've been making. SG and A expenses in the Video segment increased about $149,000 sequentially in the fourth quarter as a result of some of the investments we're making in these customer facing roles like account management.
The company continues to invest in SG and A expenses to grow our international and video product sales. We're encouraged by the results of these investments and we continue to reinvest in the business and therefore expect to see approximately 10 increase in the full year SG and A expenses in 2013 as compared to the full year of 2012. Research and development expenses of $2,000,000 in the fourth quarter, which were flat compared to 2011. We continue to see efficiencies in our professional and consulting fees, partially offset by some stock compensation and some employee costs as we continue to make some strategic hires in the R and D area, especially in the video area. And we expect R and D will tick up slightly in 2013 as we continue to make those investments for our R and D development headcount.
Adjusted EBITDA, which includes the impact of stock compensation charges, the loss on the write down disposal of property, plant, equipment and intangibles and the provision for excess obsolete inventory, losses on impairment, interest and other income, as well as the litigation judgment expenses were $7,700,000 in the fourth quarter of twenty twelve compared to $1,200,000 in the fourth quarter of twenty eleven with improvements being driven by the higher sales in 2012. The income from operations for the fourth quarter of twenty twelve were $4,700,000 compared to a loss from operations of $7,200,000 in the fourth quarter of twenty eleven. And net income in the fourth quarter of twenty twelve was $3,800,000 or $0.07 per share on both a basic and diluted basis compared to the net loss of $5,900,000 or $0.11 a share on basic and luda basis in the fourth quarter of twenty eleven. Income taxes for the quarter were $1,000,000 for the fourth quarter. The income tax expense in the quarter was favorably impacted by the reversal of an impairment reserve for deferred tax assets.
Strong operating results in 2012 coupled with a favorable forecast led companies to conclude that it's more likely than not that deferred tax assets are reliable and no impairment reserve is needed. So, it's about $1,000,000 benefit we took in the quarter for that reversal. Moving on to the balance sheet. In the fourth quarter of twenty twelve, the company generated $3,400,000 in operating cash flow, which helped us to finish the year with $37,800,000 of cash, cash equivalents and short term investments, which is an increase of $11,400,000 over the level we ended fiscal twenty eleven with. The increase is due to the higher sales, which generated $26,500,000 of operating cash flow in 2012.
There's an additional cash flow of $4,700,000 generated by the tax benefit created by employee stock option exercises, which provided a tax shield, which lowered our cash taxes in the quarter. But that's included in the cash flow from financing activities, not in operating activities. These were offset by the $20,000,000 of stock buyback we executed in 2012 with the company purchasing 3,800,000.0 shares during the year. Accounts receivable of $18,100,000 are up $6,300,000 for the prior year end due to the increased sales in Q4 of twenty twelve versus the same quarter of the Q4 of twenty eleven. Inventory of $11,000,000 is actually down $500,000 from the prior year end balance.
The decrease is attributed to the reductions in finished goods to the strong sales we had during 2012. We also saw the reserve for excess and obsolete inventory reduced from $4,400,000 to $2,300,000 during the year as a result of disposals on the previously reserved for inventory. The investment in property and equipment of $22,000,000 is down $4,900,000 when compared to the prior year end. The net decrease is driven mostly by the depreciation of $6,300,000 for the year, offset by about 1,500,000 of CapEx during 2012. Most of the CapEx was focused on production equipment and some computer and office equipment.
But obviously, the CapEx this year was relatively low, which contributed to part of the cash flow. Total assets at December 3132 were 116,200,000 Accounts payable of $6,200,000 are actually up $1,700,000 for the prior year end due to the increased purchases and materials to support the higher sales levels compared to last year. Accrued liabilities of 7,100,000 decreased by $600,000 primarily due to the reversal of the portion of the Turner litigation judgment we recorded last year, largely offset by accrued salaries and benefits. Total deferred revenue of $12,100,000 actually increased $4,200,000 during 2011, primarily due to the new increased sales of the X2 trade in program, which includes an extended warranty. So, when we sell extended warranties, we actually defer part of that revenue recognized over the warranty period.
So, that's part of the driver. The other part of it is deferred revenue related to the deferral of Evans.com service grew $1,000,000 during 2012. As Rick mentioned, we allocate a portion of the sales to the service part of Evans.com. We also have customers that will purchase in advance between three and five years of the service. So, we defer those revenues and we'll recognize those over the requisite service period.
The total liabilities are $29,000,000 and the company finished the quarter with $87,000,000 in stockholders' equity. Again, we have no long term debt on the balance sheet other than small amount of capital leases and we continue to have liquidity and a strong cash flow engine in our core business to fund our R and D efforts and operations as we move into the future. Speaking of cash flows, the company did have cash provided from operations of $3,300,000 during the fourth quarter and $26,500,000 for the year. So we're very pleased with that. Cash provided by investing activities for the twelve months ended December 3132 is $1,700,000 compared to a cash used of $7,600,000 in the same period for 2011, mostly driven by the fact we had some of our short term investments mature during 2012, which actually provided some cash and that cash just ended up back up on the cash line of the balance sheet.
Cash used in financing activities was $3,400,000 for the twelve months ended December 3132 compared to $31,100,000 used in the same period of 2011. Again, that's driven mostly by the $20,000,000 stock buyback in 2012, offset by the $4,700,000 of tax benefit from employed stock option exercises as flows through cash provided from financing activities. The company ended the quarter with $36,100,000 of cash and $1,700,000 in short term investments for a total of $37,800,000 of cash, cash equivalents and short term investments. Again, the sales statistics for the folks that like to track this. In Q4 of twenty twelve, we sold 10,389 X26 units.
X2 was 11,259. That's actually a new record for X2 in a quarter. M26 had five thirteen units. X3, we sold 181. We actually have been selling X3 units into the consumer space and have been moving some of that inventory through those channels.
C2 sold 3,209 units in the quarter. TASER CAMS were 2,413 and we sold 373,585 cartridges, down a little bit from Q3. But as you remember, we had a cartridge promotion in Q3 for our distribution, which drove some of that volume in Q3. So we saw that come down a little bit in Q4, but still real strong results on cartridges for the fourth quarter and for the year. We are one thing I want to talk about this morning, we're excited to announce our first Analyst Day.
It's going to be held at the NASDAQ market site in New York City on March 1233. Our entire executive team will be in attendance to discuss our business strategies and the vision for the future of TASER. We'll also have demonstrations of our X2 and X26 smart weapons, as well as our Axon Flex recording systems. Space is limited, but if you're interested in attending, please reach out to Erin Curtis, who works in our Investor Relations department. Easiest way is to e mail her at irtaser dot com.
And with that, I'd like to turn the call back over to Rick Smith, our CEO.
Thanks, Dan. So as Dan mentioned, we continue to see traction with the new X2 Smart Weapon. In the fourth quarter, we had major deployments in Phoenix, Tempe, Knox County, Cleveland and other agencies. We're continuing to see a trend of agencies moving towards what we call our smart platforms. I'll talk about that more in a minute.
However, we still have a lot of upside and room to grow in upgrading our customer base of installed weapons in the field. At the end of the year, we've only upgraded about 9% of the TASER weapons that are more than five years old. This number includes not only X2 upgrades, but also some standard X26 purchases where agencies bought new X26s to replace aging X26s. In 2013, we believe we have the opportunity to accelerate the upgrade of our installed base with the introduction of the new X26P TASER smart weapon. So while a little over half of our sales last quarter were for the new X2, the other half continued to be for the legacy X26.
So working with our customers, we've identified that some customers want to retain the smaller size and the familiar form factor of the X26. One of the primary reasons for this has to do with the expense and logistics of retraining officers on a new weapon platform. Some agencies will spend as much or more of their budget on retraining officers as they spend on the equipment. For this reason, many agencies have told us they want to stay with the familiar X26. However, they've also expressed interest in some of the new features and the technologies in our X2.
So for this reason, we've introduced in 2013, just within the last month or so, the new X26P to use smart weapon. The X26P requires no new training of officers who've already been trained in the X26, yet it does include the enhanced safety features of a smarter device that's more connected with enhanced durability and data collection. The X26P includes the advanced data logging, charge metering, which assures more precise control of the amount of electric charge delivered and the weatherproofing features that we have in the X2. So, it's basically a significant face lift or upgrade of the X26 platform. So, for agencies with older X26s that are past their useful life, we believe the X26P provides a much more compelling reason to upgrade to this new technology stack rather than just buying a new weapon to replace one they've got with fundamentally the same device by just buying a new X26.
Buying an X26P is much more compelling. So, we believe the X26P will provide an even more compelling reason for those agencies that do want to stay on a single shot device, and yet, it gives them an opportunity to upgrade their capabilities. However, in the short term, the X26P does introduce a new weapon. That means some agencies will want to evaluate it and that may delay some of the deals from Q1 until later in the year as agencies test the newly introduced weapon platform. This may cause some softening of revenues in the first quarter, which already tends to be seasonally weaker than Q4.
But we do expect that on an annual basis, it should accelerate upgrades in sales over the course of 2013. In the Video and Cloud Software business segment, bookings grew 172% over the course of just two quarters from 614,000 in the second quarter to approximately 1,700,000 in the fourth quarter of twenty twelve. Now those are bookings particular for our Axon Flex wearable cameras and evidence.com. We did not include TASER CAM bookings in those numbers. That has to do with the TASER CAMs do not see the heavy usage that the Officer Warren Flex camera does.
And therefore, the TASER CAM doesn't really drive the use of Evidence.com in the services the same way that the on officer cameras do. So when you look at our financial statements, you'll see in the video segment on a GAAP basis that includes TASER CAM and the Flex cameras and Evidence.com in this bookings number, so we can give more transparency to our shareholders on the Flex and Evans.com. We've restricted that booking number there, so it makes it easier to analyze that on a sequential basis. These deployments included some marquee deployments such as the Salt Lake Valley Police Alliance, which deployed Evans.com across 14 agencies. We think this is a very important deployment.
It really showcases how the advanced connectivity and sharing features of a cloud based solution like evans.com can enable clusters of agencies to work more effectively together and share information. The increasing sales bookings of our video and cloud business are a bit reminiscent to the early adoption rates of TASER weapons we saw back in the early 2000s, a trend which we certainly hope to see continue. As we look forward to 2013, we continue to have three primary foci in growing our business. So first is upgrading our installed base of TASER weapons. And as I mentioned, while the X2 is driven and upgraded about 9% of the installed base that's over five years old, we believe the X26P will now help the X2 in further accelerating this upgrade cycle by allowing agencies that wish to stay on the same platform and avoid retraining logistics and costs, yet get the same features of a TASER smart weapon, they now have an option with the X26P.
And by the way, when I mentioned TASER smart weapon, I'm referring to both the X2 and X26P, which are built on our new all digital architecture, which includes things like onboard diagnostics and calibration, charge metering and advanced data management features. Our second area of focus is, of course, driving international growth. We have teams in Europe, India and Brazil focusing on driving both weapon sales and the new video and cloud initiatives. We see significant opportunities in these and other markets in the year ahead. Third is driving adoption of our Axon and Evidence.com products and services.
I think I should make it clear, this initiative is actually much larger than selling our cameras and video management software. We see a convergence of new technologies occurring, including cloud services, smart mobile devices, high speed data networks and digital video, converging on law enforcement the same way these technologies are already revolutionizing other industries. Our new Smart Tasers, axon and emmis.com, are the first offerings in new public safety platform strategy, where we believe TASER can become the primary technology stack that allows agencies to get more connected with smarter devices and more agile cloud service applications. As we look at our core competencies and how to leverage these competencies to create unique, sustainable, long term value for our stakeholders, TASER has a unique benefit of greater than 90% market share with U. S.
Law enforcement agencies, meaning that more than 90% of agencies in The United States are customers deploying our TASER devices. We also have unique competencies around design and manufacture with advanced electronic devices, coupled with best in class training and support services. Over the past four years, we've augmented those core capabilities by investing heavily in building a world class software applications capability, now including teams both in Santa Barbara and our new office in Bellevue, Washington. We believe we can leverage these core competencies to position TASER to benefit from the wave of new mobile and cloud technologies, which again have already revolutionized consumer and business enterprises, positioning TASER as the leading provider to bring these solutions to the public safety market. We see the opportunity here to disrupt a $15,000,000,000 to $20,000,000,000 market in North America and a much larger international market.
We've attracted world class talent, including our new Vice President of Engineering, who joined us in the fourth quarter, Danny Dalal from Microsoft Research and our new Vice President of Information Security, Jenner Holm, who joins us from LifeLock. To enable TASER to develop a series of disruptive technologies over the next decade, we believe we now have the potential to dramatically accelerate our customers' capabilities, while simultaneously increasing our revenue and of course our shareholder value. Axonnemos.com are just the beginning of a broader platform strategy to create an ecosystem of capabilities for our customers. If you'd like to learn more about this new public safety platform strategy, please join the webcast of our Analyst Day on March 12 from the NASDAQ. We'll share more details about this strategy and we will share a model of what the business could look like over the next three to five years.
If you're interested in attending this event, please e mail Aaron Curtis at IR, as in the initials for Investor Relations, irtaser dot com for more info. These are really exciting times here at TASER. In 2012, we began to see the results of our investments in growing the business, resulting again in 27.5% top line growth with significant cash generation and profitability. We believe this is just the beginning, and we're looking forward to an exciting 2013 and beyond. And with that, we'd be happy to take a few questions as we wrap up the call.
Thank Our first question is from Steve Dyer of Craig Hallum. You may begin.
Thank you. Good morning, guys.
Good morning, Steve.
If I heard the numbers correctly, this is the first quarter that the X2 outsold the X26. Is that right?
That is correct. So the X2 for the quarter were this is Dan Baron were $11,259 and the X26 was $10,389 you're right. That's an important milestone as well. They've been kind of neck and neck throughout 2012 for this quarter, mostly driven or partially driven by the Phoenix deal that we had in the fourth quarter, which is an X2 deal, pretty significant X2 deal in Q4 that was closed through the TPP program. The municipal lease program helped us to actually have the X2 be higher than X26.
Okay. So is that a trend we you would expect to see going forward or it might be neck and neck here for a while? I'm just wondering, I remember back kind of when the X crossed over the M, it never turned back and it's obviously a nicer sale. What do you expect going forward maybe for 'thirteen on the breakout of those two?
It's interesting. With the X26P, I think that's a I think that if we didn't introduce the P, that's probably may have continued, but we certainly got as Rick indicated earlier, we've got a lot of feedback from customers who like the new technology, like to move to the digital technology and all the features that comes with that, but we're really a little bit hamstrung on the cost and complexity of pulling officers out of the field to retrain them on a new platform. The X26P really allows them to do a running change without that training. So, I expect that over time the X26 to sort of what we call the X26e, which is sort of the 2,003 vintage X26 will slowly get reduced over time, replaced by the X26P and the X2. The X26P is also a good product, got a slightly higher price point than the X26.
So it's also a product that we think that will be accretive to sales and earnings in 2013 and beyond. Okay.
And then with respect to the X2 sales that you've been having, do you have a great sense as to what percentage of that are replacement sales versus new sales?
I'd say it's probably greater than 75% are upgrades. We have had a number of agencies go right to the X2. It's interesting. I think it's just sort of taking a fresh look at the CEW technology in general and the X2 helped them to do that. And they say, hey, if we're going to be looking at CWs, you might as well buy the latest and greatest.
So, we've seen some of that. But I'd say the majority of our sales in 2012 have been upgrades from existing customers.
Okay. And then with respect to kind of the body cam and the growth there, do you expect from a unit standpoint that that's going to follow kind of a similar trajectory that the X26 did back in the day in terms of adoption from a unit standpoint? Or would you expect that will be slower to roll out just in general?
Well, with the Flex bonding cams, obviously, we'd love to see it follow the unit trajectory that the X26 did. The X26 though had a bit of an advantage and that it was just sort of a more convenient smaller form factor of the M26, which had already done the groundwork of laying the fundamental market demand. So maybe that the Flex looks more like the M26 rollout, which was a new concept really in the late 90s, 'ninety nine through 02/2003. So it's hard to say, there are some different dynamics in the sale process as well. We've got it's a bit of more complex sale.
There's more stakeholders because it involves IT as well as the trainers and in some cases, city councils and other folks in risk management. So we tend to see the time to close orders take a little longer for the Flex cameras than they do for the TASERs of either iteration. But we are seeing a lot of evidence that the general concept of on officer video is really being well accepted in the marketplace. I think on our last conference call, we talked about a survey that PoliceONE did that found like 82% to 84% of respondents now felt that officers want to wear on officer video. And we see that once they're in an agency for about sixty days, officers will begin to have those incidents where they record where somebody that they're interacting with is very rude to the officer and then files a complaint.
And the officer then gets cleared and one or two of those experiences and all of a sudden the whole tone becomes really supportive of on officer cameras. In fact, Lake Havasu, which we talked about Lake Havasu now has gone full deployment with both the X2 and the Axon Flex and they signed a five year Evans dot com deal. They started down this road about eighteen months, maybe two years ago. So it took some time to adapt it into their culture. But once they did, they actually have implemented a category for complaints called cleared by Axon, which basically means they never even bring the officer in from the field.
They watch the video and they see what the officer did and it's pretty unilaterally clearing officers. So, we're seeing a lot of the right dynamics. The question is to how fast it accelerates is one that we look in our crystal ball as well to try to figure out. I believe we know enough now to say that long term our confidence is there's a very real market there. How fast it develops is a little hard to predict.
And would you expect to see some cannibalization of the CAM, the TASER CAM as that happens?
Yes. Although, I would say that and again, the on officer space, we're not the only game in town either. This is a competitive space where there's different companies with wearable camera options. We're winning the significant majority of deals where we're being compared with competition. In the case of TASER CAM, I know I just talked to some of our salespeople recently who successfully transitioned some new orders from the TASER CAM over to the Flex camera, which we believe is a greater value for our customer.
It gets used much more often. A TASER on average gets used once every two years on the street. So you're getting one video of an incident roughly every two years. The wearable cameras like Axon Flag is worn every day. It records all sorts of incidents, so much higher utility.
So, we're actually very comfortable and we've put programs in place with our sales staff to help with agencies that are buying TASER CAM because maybe that's a historical practice since the cameras have been around since 02/2006, helping them migrate over to the on body cameras.
Okay. And then last question and I'll hop back in the queue. Dan, I think the SG and A, it sounds like about half of the incremental $3,000,000 or so quarter over quarter in there was sort of what you'd categorize as one time things. Is that sort of a fair split? The new run rate is probably half of that delta?
Yes. There's definitely some sort of unusual events, although some of that sort of the variable selling expenses. But again, those get offset in gross margin. So, if we had not had some of those variable selling expenses, gross margin SG and A would have been down and gross margin would have also been down. So, that's probably a fair approximation.
Okay. All right. Thank you.
Thanks, Steve.
Thank you. Our next question is from Greg McKinley of Dougherty. You may begin.
Yes. Thank you. Could you just remind us of the economics in terms of margins and ASPs as you would compare the X2 to the X26 and then maybe even the X26P to the X26?
Yes. So the X26 sells for about $835 The new X26P will be roughly $900 with the battery and there are some holstering options as well for that product. It will be additional sales and then the X2 is about $10.50 dollars So, we're definitely as we introduce the new technologies, we are moving the price up, but providing some pretty valuable new capabilities as well. So, there's trade in programs for the X26P in the Q1 as well as the X2 and we think that those have been successful driving that upgrade. We'll continue those in 2013.
So, that reduces sort of the realized price, although it also helps us to drive the warranty sales. As I mentioned in my earlier comments, these upgrade packages include a warranty. So, we've seen a fair amount of deferred revenue get put on the balance sheet in 2012 and expect that trend to continue in 2013. And what it allows is some very profitable, warranty revenue that just gets deferred into the future.
Okay. And on the handle sales themselves, I guess maybe it's appropriate to look at it bundled with the deferred warranty. Do these end up generating similar margin rates on those ASPs that you would have gotten on an old X26? Or when you're bundling a warranty even with a rebate, do you end up getting a higher margin rate overall?
The higher margin over the life of the product, it's probably comparable at the sell in. The X26P will probably be slightly lower at sell in than X26 because of the trade in. But over the life of the product will be slightly higher. The X2 is slightly higher at selling and also higher over the life. So, it's a little mix.
I mean, the good thing with TASER is that we're talking about we're still in sort of the mid to upper 70s as percent on a variable basis in all cases here. So, still pretty lucrative sale even if it's a little lower than X26 by itself. And I think as Rick mentioned, I think driving that upgrade is so important for our growth here in North America with such a heavy installed base. So, having new technologies that people can upgrade to, I think is a big part of what will help drive growth in the North American part of the business. And even if it's a slightly less profitable sales, still be really accretive.
It will drive overall increase in sales, which I think that at the end of the day will add to profitability.
And on a cash basis, it's certainly more profitable. Typically, the warranties are paid upfront.
That's right. Yes. Okay.
Can you just remind us a little bit of your telesales effort? Now I think you said, what do you have, eight people in your telesales group going to 13 or 12 people here in 13. Can you remind us when that initiative started? I want to say it was like early Q2. And then of the revenues generated by that group the last couple of quarters?
Yes. So the telesales effort really began in May. I think it started to hit traction in July. Or so. The team wasn't fully staffed until September.
And the total sales, depending on how you look at it, is between $5,000,000 and $7,500,000 really in about the half year. And the reason I give a range there is, there's direct sales that the telesales team generates indirect orders. And then there's also orders that are passed from a Telk Hill team to a distributor that's already working those accounts. So it's well over $5,000,000 of incremental direct order business. And then there's $2,000,000 to $3,000,000 of additional business that's generated that we find out that the customer is working with the distributor, so then the distributor fulfills that order.
Okay.
Can you remind us, what were your comments that you made on the North American law enforcement market? I think you said Q4 revenue is up 33% or so. I just want to make sure I understood that.
Yes. So North American in Q4 was up 33%. And for the total year, we're actually up $15,600,000 or 28.7% for the total year. So, really strong results in North America, really almost or the majority of that is really driven by the X2 and the upgrade programs that we had in place in 2012. And as Rick said, with only 9% of the installed base over five years upgrading, there's still, I think, a lot of room to continue that.
Okay. Yes, so the $15,600,000 growth, that was 28% growth off the 11% base? That's correct. Okay. And then maybe just two housekeeping questions.
Your share count, I don't know as maybe with the performance of the stock that's brought more options into the share count calculation. Can you help us understand what do you think share count should look like in 2013?
Yes. No, that's definitely between we have some RSUs invested in Q4 as well as with as you point out the strong stock performance we had, some employee stock option exercises in the fourth quarter, just as people who've been kind of on the sidelines for a while with the options, some of which were getting towards the tail end of their life exercise in Q4. And as a result, that drove up the share count. I think it'll be we have our issues that will also vest in 'thirteen. And depending on the stock performance in 'thirteen, I think we'll continue to see employee stock option exercises as well.
But we feel I think the buyback, one of the advantages, it really took a lot of that potential dilution from where we started out of the stock count. So even now as employees exercise, we'll end up with a share count sort of less than where we started, which I think is favorable.
Okay. Prior to your buy. Okay. And then lastly, you talked about the X26P and that's bringing some of the smart technology to market and you feel that your customers might trial that product initially before, if that wasn't in the market, they may just go ahead and replace with an X26 or a new X2. How should we think about that in terms of the financial impact of some of these delayed purchase decisions?
Well, anytime we introduce a new weapon platform, there's people want to get in their hands and take a look at it. So with the X26P, we were pretty careful in timing the release doing it early in the quarter. We've built thousands of devices on the shelf ready to go prior to the announcement. So we've been able to fulfill all the requests out there for test and evaluation weapons. I would say, we may see some impact in the first quarter.
I really wouldn't expect much impact beyond that. There might be some agencies that maybe they just don't get their evaluation done between late January and the March. But I think you all know, we tend to do about half of our business in the last month of the quarter with a lot of that the majority of that preponderance being in the last two weeks of the last month. Like in a lot of enterprise sale businesses, that's when people budgets are frequently aligned to quarter end. So we don't have any evidence per se at this point that it would push any orders out.
But as we look at it, we thought it was something that intellectually made sense and is something we should make the investment community aware of. But I would say that shouldn't be an impact we would see beyond the first quarter.
And as Rick mentioned in his earlier comments, we expect it won't really have an impact on the total year. It's really just sort of pushing some business out from Q1 later into the year, but the total year won't be impacted by that. Okay.
It's not in a negative way. We see a very positive impact on an annualized basis.
Thank you.
Thanks, Rick.
Thank you. Our next question is from Glenn Mattson of Sidoti and Company. You may begin.
Hi, Rick, Dan. How's it going?
Good,
good. Thanks for some of the clarifications on the SG and A. I think that number kind of jumped out of people to start off the press release. But one question I have is, what did you say for 2013 SG and A? Did you guide to that?
Yes. So in 2013, we're actually encouraged by the investments we made. We've had a really strong sales year in 2012 and part of that is driven by some of these investments we've made in customer facing roles and some of the sort of targeted investments in SG and A. We expect that to continue in 2013. So, we expect about 10% approximately 10% increase in 2013 total year spent versus 2012 total year spent.
Okay. That helps. I guess moving on to international market, can you give a little more color on what gives you so much enthusiasm as Rick kind of talked about earlier?
Yes. I mean, I think it's if you look at the North American business, it's roughly depending on how you look at it, there's close to two out of three officers carry a PACER at the patrol level. Internationally, it's still less than one in 50. So, there's still just lots of white space internationally. We do feel that by putting people in country, we can help drive some of these countries that have been buying the product, albeit slowly and accelerate some of those sales by, in some cases, assisting the distributions there, in some cases, taking more of that business ourselves and just being focused on and putting sales and marketing resources in those countries.
The technology obviously is widely adopted in The U. S. And we think that the international markets is still ripe for new sales opportunities and we expect that that we had actually pretty strong results in 2012 and we expect that there's a lot of white space there that will allow us to grow that part of the business in 2013. I don't know if you have anything to add to that, Rick.
Yes. The other thing I think I would add is, we see a lot of new opportunities with what we're doing with video and Evidence.com in the international markets as well. One of the things that's made for slower adoption, I think, of the weapons internationally is that most countries organize their police into much larger agencies like France's One we've talked about regularly that has a Gendarmerie and Police National. These are each like 150,000 person organizations and the decision making happens up at the minister level. So it becomes much more political in nature.
And certainly, there's groups that like Amnesty International that might take a position that's very conservative towards police and towards TASER devices. But even those groups, what we see is being generally much more supportive of the idea of on officer video. So we think those there's less risk in adopting from a political perspective and adopting the cameras. So we may actually see the international market start to adopt even at a faster pace than they have with the weapons over the coming years.
Yes, that sounds good. I guess kind of related to that either we could talk about either international or domestic, but you had some big orders in Q4, particularly the Arizona one. I guess, it gets tougher to lap those. Do you have any foresight into big orders in the pipeline and
anything on that?
We do have a number of orders, some of which are even larger than the Arizona order in our pipeline for 2013. Of course, we can't count those chickens till they hatch. But there's plenty of pipeline with large orders in 2013 relative to 2012 for us to be able to continue to grow the business this year.
Okay. And also, I guess, lastly, the cash generation is pretty impressive and should continue. So what are the plans going forward? Do you ever talk about another buyback or anything like that?
Yes. We'll continue to evaluate as we accumulate cash on the balance sheet and we count the composite here at the end of the year. Obviously, we're happy with the results of the buyback. But we'll continue to evaluate that with over $37,000,000 cash on the balance sheet and really as you point out strong cash generation in the business. We'll have to just sort of evaluate what the best way to deploy that cash as we move forward.
But I guess, stay tuned, nothing to announce on that yet.
Okay. Thanks.
Thanks. Thanks, Glenn.
Thank you. I'm showing no further questions at this time. I would like to turn the conference back over to Rick Smith for closing remarks.
Great. Well, thanks everyone for joining us this morning. Obviously, as we look back at 2012, the record year for us in a lot of ways. We're very happy to see the growth in the core business as well as the trends. We think in 2013, we should be able to see some significant improvements at both top and bottom line in the video business, which is now showing a lot of the signs of gaining traction.
And we look forward to also seeing you all, the analysts certainly on our Analyst Day, and investors are welcome to tune in on the web. And I think that will be very helpful as we've been putting a lot of thought into helping folks model what the business can look like, including the video and software business over the next three to five years. I think you'll see that why we're so excited about the opportunity that that presents for us in addition to our core business. So thanks for your time today and we'll see you all in March.
Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have