Good day, ladies and gentlemen, and welcome to the Q3 twenty twelve TASER International Inc. Earnings Conference Call. My name is Matthew, and I will be your operator for today. At this time, all participants are in a listen only mode. We will conduct a question and answer session toward the end of this conference.
As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Mr. Rick Smith, CEO. Please proceed, sir.
Thank you. Good morning, everyone, and thanks for joining today. Before we get started, I'm going
to hand over to Dan Barrett to read the Safe Harbor statement. Thank you, Rick. Certain statements contained in this presentation may be deemed to be forward looking statements as defined by the Private Securities Litigation Reform Act of 1995, and Tazir International intends that such forward looking statements be subject to the safe harbor created thereby. Such forward looking statements relate to expected revenue and earnings growth, estimations regarding the size of our target markets, successful penetration of the law enforcement market, expansion of product sales to the private security, military and consumer self defense markets, growth expectations for new and existing accounts, expansion of production capability, new product introductions, product safety and our business model. We caution that these statements are qualified by important factors that could cause actual results to differ materially from those reflected by the forward looking statements herein.
Such factors include, but are not limited to, market acceptance of our products, establishment and expansion of our direct and indirect distribution channels, attracting, retaining and endorsement of key opinion leaders in the law enforcement community, the level of product technology and price competition in our products, the degree and rate of growth in the markets which we compete and the company demand for our products potential delays in international domestic orders implementation risk in manufacturing automation risks associated with rapid technological change execution and implementation risk of new technology new product introduction risk ramping manufacturing production to meet demand litigation resulting from alleged product related injuries and deaths media publicity concerning product uses and risks potential fluctuations in quarterly operating results competition negative reports concerning TASER device uses financial and budgetary constraints of prospects and customers dependence upon sole and limited source suppliers fluctuations in component pricing risks of government investigations and regulations TASER product tests and reports dependence upon key employees employee retention risks and other factors as detailed in the company's filings with the Securities and Exchange Commission. Now I'll turn it back over to Rick Smith. Thanks, Dan.
As you all can imagine, once again, I'm in a very nice position. I'm thrilled to be able to be so proud of the team of people here at TASER that have worked so hard for you over the past several years due to turn in results like this, our third consecutive quarter of strong operating results. As you've probably seen in the press release, net sales of $28,800,000 were an increase of 18% over prior year and the business generated $9,900,000 in cash from operations. Our ECD business segment, as you know, we've broken them out now, so that our shareholders and investors can see how we're running the core ECD business versus the video business. It's obviously there are two different phases.
The ECD is a very strong and growing cash generation segment of business and we've been investing in video, although you're starting to see some traction take hold there. In the ECD business segment, revenues were flat in the second quarter, although the second quarter is sequential is typically a seasonally stronger quarter. So it was a good achievement for our sales group to hit the same mark in the third quarter with revenues growing 15.9% over the prior year. Our EPD margins, gross margins came in over 64%. So in our operations and manufacturing teams have been doing a great job there controlling costs and driving margin.
In the video business, we saw a 30% sequential increase on a GAAP basis, 1,300,000 to $1,700,000 in recognized revenue growing 65% year over year. But if we look at the sales bookings, they doubled sequentially from the second quarter to the third quarter. Obviously, there's a difference between GAAP and bookings in that a portion of the revenues are ascribed to services. In some cases, services being delivered over a five year time horizon. And as such we defer those revenues and recognize them as the services delivered.
And with that, I'm going to turn it over to Dan to go into more detail on the financial aspects and I'll come back to talk more qualitatively about the business.
Thank you, Rick. As Rick indicated, revenue for Q3 was $28,800,000 which is up approximately $4,400,000 or 18% from the prior year. The increase in sales versus the prior year is driven by the continuous option of the X2 electronic control device. The North American law enforcement business continues to be strong, mostly driven by the upgrade cycle to the new X2 electronic control device. North American law enforcement sales are actually up 15% in the third quarter of the same quarter of 2011.
This follows a 3925% year over year improvements in Q2 and Q1, respectively. Review of the pipeline of ECD segment is continuing to be strong as we go into the fourth quarter. Gross margins for Q3 on a consolidated basis were $16,800,000 or 58.4% of revenue, which is up four seventy basis points from the 53.7% in the prior year. We continue to benefit from higher operating leverage in the business. We also had a higher percentage of drop shipments in the quarter, which increases our average selling price.
The offset to this is in SG and A as we see variable selling expenses due to paying distributors a commission on their sales versus having to buy and then resell out of their stock. The gross margin percentage was especially strong this quarter when we consider that we had 34% of our sales coming from cartridges this quarter, which are normally that mix differential is the cartridge margins are slightly lower than the ECD margins. So it was good to see strong gross margin performance even with 34% coming from cartridges. SG and A expenses for the quarter were $9,500,000 That was basically 33% of net sales compared to 38.9% of net sales in 2011. Sequentially, SG and A increased 13.5% from the $8,400,000 in the second quarter of twenty twelve.
In addition to the strategic investments we're making to continue to work back in the business, we had several one time events totaling $190,000 that not expected to repeat in the fourth quarter. These include a lease buyout, a portion of the stock compensation expense for the quarter and some severance pay. Variable selling expenses also increased $290,000 due to the prior quarter, but again offset by higher selling prices that we recognized in the gross margin line of the business. We also saw increases in payroll expenses due to annual raises and some of the strategic hires. And then finally, we saw trade show expenses were up about $150,000 over the second quarter, run rate due to a couple of trade shows in the second quarter, including Major City Chiefs and the International Association Chiefs of Police show, both occurring in Q3.
We're starting to see a return and increase in SG and A costs. One of the areas we've been investing in is our telesales group. This is a function we didn't have last year, but those folks are already adding a lot of value. Sales for the telesales group this quarter is up over $2,000,000 for the quarter. So we're seeing a solid contribution from those strategic hires.
We're also making hires in account management and some other functions that we think will pay off long term for the business. Research and development were $2,000,000 for the second quarter, which was favorable by $400,000 compared to $2,011,000,000 dollars due to continued cost containment efforts in R and D. Specifically, we've seen a reduction in consulting and professional fees in R and D. The adjusted operating income, which excludes the impact of stock based compensation charges, depreciation, amortization and litigation judgment expense, was $7,800,000 for the third quarter of twenty twelve. So the adjusted operating income effectively doubled from the same period last year.
As we move on to the GAAP income from operations, those were $5,300,000 in the third quarter compared to income from operations of $1,200,000 for the third quarter of twenty eleven. Net income for the quarter was $3,700,000 or $0.07 per share on both a basic and diluted basis compared to net income of $1,100,000 or $0.02 a share basic and diluted for the same period last year. We did benefit in the second quarter from some income tax expense reductions or somewhat of a one time nature. As you know, every year, a company files its tax returns in the third quarter as we do a true up to reconcile the amount of income tax expense we recognized in the prior year versus what was on the tax returns. That combined with a rate reduction because of the strong operating results this year, our tax rate actually comes down as things like lobbying and meals and entertainment have a smaller impact on our tax rate.
So between those two the tax rate reduction and the true up to the prior year return, we had about $500,000 benefit or about $0.01 a share just on the income tax line. As we move on to the balance sheet, the company did generate $9,900,000 of operating cash flow in the quarter, which led to having $29,100,000 of cash, cash equivalents and short term investments on the balance sheet. Even that's despite the fact that we continue to do the buyback this quarter. So we feel very good about the cash balances. Accounts receivable of $14,600,000 are up $2,800,000 from the prior year end due to an increase in sales in Q3 of twenty twelve versus the fourth quarter of twenty eleven.
Inventory at $10,400,000 is down $1,100,000 from the year end balances. One business to continue to manage our working capital very effectively. Investment in property and equipment of $22,700,000 is actually down $4,200,000 when compared to the year end balances. Basically that's mostly driven by depreciation expense. We've got depreciation of approximately $5,000,000 offset by some new purchases of equipment about $989,000 So you've seen a net reduction on the property equipment line.
I should point out that some of that's also driven from we're taking advantage of sort of the low interest rate environment. So we have done some operating leases this year, which has helped in the capital expenditures as well. Accounts payable of $4,300,000 are down $300,000 from prior year due to just timing differences and check runs. Crude liabilities of $8,900,000 actually increased $1,300,000 due to the accruals and federal income taxes of $2,500,000 and some changes in some of our crude variable marketing and selling expenses of $500,000 and that's offset by the $2,200,000 reversal of the accrual in the Turner case that we took earlier this year. Deferred revenue of $10,500,000 has actually increased $2,600,000 from the 2011 due to increased sales of the X2.
We've got a large the X2 trading program includes the warranty, so we're seeing that will drive a high attach rate of warranties. We actually defer that those extended warranties and recognize those over time. We also with the increase in the sales of the Axon Flex unit, we also see an increase in deferred revenue. As Rick said, we ascribe some of those sales to the service and recognize those over the service period. So that's also driving an increase in the deferred revenue.
And as I said, we ended the quarter with $10,500,000 in deferred revenue on the balance sheet. Total liabilities of $26,300,000 and we finished the quarter with $76,300,000 stockholders' equity. As we move on to the cash flow information, as I said earlier, the company generated $9,900,000 of cash from operations in the third quarter. The year to date cash from operations is $23,300,000 This compares to $14,600,000 in prior years. We feel very good about the amount of cash we've been able to generate in the business this year.
Cash provided from investing activities was $700,000 dollars This compares to cash used in investing activities of $7,800,000 last year. Mostly the differences between us is really just the purchases of short term investments in the prior year and some of those were actually redeemed this year providing some cash. So that's why the large change between years. Cash used in financing activities was $19,300,000 for the nine months ended September 3032. This compares to $24,800,000 used in the same period in 2011.
In the third quarter, the company repurchased $3,900,000 or approximately 700,000.0 shares this quarter. And for the nine months, we've repurchased about 3,800,000.0 shares at a cost of $20,000,000 We've actually completed that stock buyback that was approved by the Board of Directors in April. On a cumulative basis, over the last twenty one months, we've actually purchased 11,300,000.0 shares or approximately 18.7% of our shares outstanding when the program started. We did extend the quarter with $26,000,000 in cash and another $3,200,000 in short term investments. So we continue to feel very confident about liquidity.
It's been good to return that excess cash to shareholders this year in the form of buybacks and that's been, I think, a very successful program for us. And so it's been good. For the analysts, for their models, let me just quickly go through sort of the unit sales for the quarter. We sold 8,312 X26s in Q3. We sold 7,290 X2 units.
M26s, we sold sixteen seventeen. We sold 36 of the X3s. C2, we sold 2,832. We sold nineteen fifty seven TASER CAMs. And cartridges, we sold 428,911 cartridges.
Again, that was a very strong cartridge execution number for the quarter, represented about 34% of our sales. You may have noticed that the X2 units came down a little bit from Q2 to Q3. That was really driven mostly by a large order we had in the second quarter to unnamed agency about 2,500 units. So if you sort of consider that large orders, the lumpy part of the business, we believe we're continuing to progress well in the X2 adoption and see continued upgrades in the field further the installed base. So we still feel good about how that program is working for us.
And with that, I'll turn it back
over to Rick Smith, our CEO. Thanks, Dan. As we've talked about on I believe every conference call this year, we have three primary areas of focus at the company and I'm going to talk about each of those briefly. First is upgrading our installed base of users that have devices that are more than five years old. And our primary effort there is with the X2 ECD.
And as of the end of the quarter, we have upgraded 6.1% of the devices, the ECDs in the field that are more than five years old. So we're continuing to make progress there. That's helping drive the strong top line results, but we still have 94% of the market to go. So a lot of opportunity for us to continue to grow the business through our upgrade program. As we look at this a couple of the major orders we announced Pima County for 600 x2 ECDs and Colorado Springs for five twenty five x2 ECDs.
Now one thing that you're seeing about those which were two of our largest deals this quarter, those were both results of our new TPP program, the TASER Protection Plan, which we talked about briefly on the last call. That is a program where we now partnered with the municipal leasing partner and we're able to offer our customers the ability to pay over the five year expected use of the life of the device in equal annual installments. We're finding that makes it much easier particularly for some of the larger agencies to be able to fund this out of their operating budget rather than having to go back for special capital equipment packages. And we actually believe that having agencies on these TCP deals will make a really big difference over the long term as we get to year five, year six since they already have built in to their operating budgets line items for their ECD programs, we believe that we should see significantly higher upgrade opportunities as those units come to the end of their useful life. Also we saw orders for IQs from Indian River County Sheriff's Department for $249 Orange County Sheriff's Office in Florida for 400 X2s Miami Dade purchased 200 X2s and the New Jersey State Patrol started out with their first purchase with 40x IIs with the high definition cameras.
That's an important one just because New Jersey was the last state to legalize these CDs and it's important we're starting to see some traction there. So focus one, upgrading the market. We're making good progress there. Focus number two, Flex and Evidence.com growing our video business. And again, we're seeing significant traction there.
This quarter, we saw Pittsburgh deploy 50 units. Chesapeake deployed 125 with a five year service contract. And Pittsburgh bought a three year service contract. The Hartford Police Department deployed 42. They're taking advantage of the one freer of evidence dot com and maximizing the number of hardware units they get on the street.
Topeka deployed 30 units with a three year program. Wentzville in Missouri deployed another 30 units with the free year of Evans.com. And we're seeing significant growth in our pipeline as we look forward to 2013. As we mentioned, there is a longer sales cycle of these Flex units and with the Evans.com because there's many more decision makers involved in IT and operations within the police department and patrol and training to to at least to a longer sales cycle. And Flex has only been shipping really since late at least in the second quarter.
So this was its first full quarter of shipments. And we're seeing the results and increased traction. Particularly, we've been pleased with how fast some of the larger agencies are moving. Pittsburgh, Chesapeake, Hartford, Fort Worth, Mesa, these are large agencies that typically don't move this quickly when new products are released. So we see that as really some validation of the importance of on officer video.
Speaking of which, we did have the IACP conference this year. The Chiefs of Police was actually straddled across two quarters right at the end of the third quarter and into the fourth quarter. And two things really stood out at IACP. One was the continued interest in Flex and Evans.com. In fact, one of the buzz items that we heard particularly from some of the chiefs of larger agencies, we heard on multiple occasions chiefs saying, we believe every officer in North America is going to be wearing a camera within the next five to ten years.
That's not a sentiment that we've heard previously. So we do believe the market is really accepting the concept of officer worn video. In fact, that was borne out in a survey done by PoliceONE, which is one of the law enforcement oriented websites. And in their survey reached out to line level officers, Chiefs, etcetera, the general law enforcement community and over 82% of respondents said that they see a need for on officer video. Again, we didn't see those sort of acceptance rates a number of years ago.
So we're delighted to see the traction taking hold and our pipeline growing and we look forward to great 2013 with FlexInnovates.com. On the international front, we had a strong quarter coming in at 5,400,000 of international sales representing roughly 19% of sales. The bulk of those sales really coming from within the European sector, whereas you know we've opened an office in Europe and we've got a team on the ground there. And we're in the process this quarter. We actually have got our team deployed now into Brazil in South America.
So we look forward to seeing some more contribution from South America over the next twelve months. Some other things to talk about in terms of our focus on growing the business and just improving our general operating total here. Dan talked briefly about telesales. That's been a new effort. We really stood telesales up starting from a zero start in February and March.
They've already sold $5,000,000 year to date and the rate of sales is accelerating and the charts are all up and to the right. Jeff Kukowski, our CMO, had the hypothesis that the smaller agencies in the market weren't necessarily giving the level of service and touch that we could accomplish if we had a dedicated sales team. And that hypothesis is certainly bearing fruit that we're seeing a lot of growth come from those smaller orders. We're talking on average here orders that are around $3,000 to $4,000 compared to our typical distribution orders which are more around $20,000 But there's a very large segment of small agencies out there that we're now touching more effectively. Also to accelerate the adoption and the upgrade to the X2, we launched two service plans now.
We talked about the TASER Protection Plan previously, which allows agencies to spread out their payments when they acquire a new ECD, they can spread those payments over a five year time horizon. We've also this month announced a new program called the TASER Assurance Plan or TAP. So the difference is the TPP again they can spread their payments over five years for the devices they're buying now. TAP allows us to target agencies that do have the capital equipment purchase to purchase today or they may have bought within the last couple of years. And what we do with CAP is it's an extended service plan where they pay in at around $195 per year per handle.
And for that, we give them a no questions ask warranty extra service and support including on-site spares and spare parts. So if a vehicle ever breaks they're not out of a unit while it's being repaired. And at the end of year five, they receive a free upgrade to or replacement of the same product or upgrade to a similarly priced product. So basically with TAP, that allows agencies who just bought to put in their operating budget that will cover their upgrade five years out. And in fact, we offer ten year price protection on this plan, so we can keep going another five years at the same price and receive a replacement or upgrade at the end of year 10.
So it's early to we don't have any results really that are measurable yet on TAP. We've just announced the program. In fact, I'm doing a webcast on it this week to our customers. But we've added tremendous interest conceptually where we floated this in marketing focus groups. So we'll be excited to see what TAP does.
So between TPP and TAP, we're looking for ways to add more value to our solution set for our customers and help them overcome any of their budget hurdles. One other thing to talk about in terms of focusing the business, I talked about the Chiefs of Police Conference, the IACP, the tremendous interest we saw in our product. Something else we did at IACP was we donated the $300,000 that was in the TASER Foundation to the IACP Foundation. Effectively what we've done is we've now partnered with the IACP. So rather than running our own foundation, which we'd set up in 02/2004 to make donations to the families of fallen officers, we realized maybe this is better to partner with a larger foundation, so that they can focus on the operating day to day of the foundation and we can just continue to do the financial support.
And we actually felt that this builds more goodwill in the market space by us partnering with the foundation of the IACP. So that enables us now to focus our resources better. We've got a great partnership with the IACP and they will continue to do a fallen officers fund made as I believe the TASER fallen officers fund, but being administered and run by the IACP. The last thing I want to talk about was you all probably saw a press release within the last couple of weeks that we've hired Danny Dalal as our new VP of Software Engineering. Danny comes from the research group at Microsoft.
He's got twenty years of experience doing some pretty sophisticated software development running reasonably large teams. But what we really like about his background at Microsoft Research was really focused on relatively small teams with fast time to market in cloud based solutions. So we're excited to welcome aboard Danny. He started just in the past couple of weeks here and we're really excited to have him now leading our software engineering efforts. So with that, I'll wrap up and we'll move to questions.
But before we do, I'd like to take a moment and just thank our shareholders who've stuck with us. We started a heavy investment cycle in 02/2009. Obviously, those were challenging times for many companies in the world. We stuck to it. I think we've got the products right.
I think we've got our execution right. We've got our staffing right. I know it's been a bit painful for some of our investors along the way. I'd like to thank you for sticking with us. We're proud to be able to be turning in the results that we have these past three quarters and we remain very committed to continuing to grow this business and turning great operating results going forward.
So thanks for being a shareholder. And with that, we'll take a few questions.
Thank you. And your first question comes from the line of Steve Dyer from Craig Hallum. Please proceed.
Thanks. Good morning.
Good morning.
Good morning.
Could you remind me a little bit about the rebate program? I think that is scheduled to sunset that here at the end of the year. What the amount was right now? And then Dan, how that's accounted for?
Yes. Sure, Steve. So the so in the third quarter, we still had a rebate in place. It was $210 per unit. And that goes down to $160 in the fourth quarter.
We haven't announced a 2013 program yet, but there will be some program in place. We've seen that having those trade in programs has made a difference. Our customers have a hard time basically disposing a unit that's still operational. So giving them some value for that unit has made a difference. We saw that in the first quarter where we sort of went without a program for the first two months of the quarter and we had low unit sales in the X2 as a result.
So we definitely see a correlation there. The accounting for it is we basically just take a full reserve for the trade in credit at the time of the sale. So we basically reduced the total sale value by that trade in credit. So it's already reflected in the results in the lower sales value. And as those units come back, we'll just offset that accrual.
But there's no basically at the time of the sell in, we fully account for that trade in value.
Okay. That's helpful. And then is there any fear I mean, I think you alluded to it a little bit, but is there any thought that you're pulling sales forward or you're essentially paying people who are going to upgrade anyway? Or is your sense more that you need the trade in credit in order to spur action?
Yes. I think our view is that we do need that sort of trade in credit some kind of program. How big it needs to be, I think we can we'll continue to iterate on. But I think having especially when you're talking about somebody with an operational unit disposing of it, I think it's I think emotionally it's just a lot easier for them to get some value there. I think the good news is the higher selling price of the X2 allows us the economics still work for us and you've seen that in results all year.
Even with this trading program in place, we've been able to put up high results. It's not like we've had to sacrifice profitability to offer that. And we do believe there's a big market as far as pulling things forward. Yes, there's probably we definitely want to spur action here. Would those people eventually upgrade?
Yes, potentially. But we want to sort of spur action here. And we do think there's sort of a momentum effect here. I think our customers tend to look to each other to see how to operate their individual agencies. So the more agencies we can have upgrading and that sort of drumbeat I think will create more momentum in that upgrade and drive that point home.
Okay, great. And then cartridge sales, I mean look to me like it's the biggest number maybe on record. Maybe there was one quarter in 02/2007 that was close. Is there anything in particular that you attribute that to? Or how do we think about that going forward?
Actually in the cartridge sales, we did basically, we did have a special on cartridges this quarter for our distributors that allowed them to stock up. So the I expect the cartridge sales to probably tail off a little bit in Q4 as a result. But we basically we went through a program where we increased the price of cartridges for distribution to reflect the fact that they don't have to put in as much effort to sell a cartridge. But we basically what we did as part of that is we told the distributors that twice a year we'll run some specials on cartridges, allow them to stock up if they need to. So I do expect we'll probably see a little bit of a degradation of those cartridge unit sales in Q4.
But I think it's sort of a good balance with the distribution. And I think it's been pretty popular with our distributors to give them opportunity to twice a year they can stock up and recognize a little higher margin on those cartridges.
And those are you recognize those on sale into the distributor, right?
That's right. And the reality is, although we have 18 or so distributors, there's only a handful of stock in large quantities. So there's a few of them that really took advantage of the program. A lot of the maybe smaller distributors are the ones that don't tend to stock as much, didn't take as much. So like I said, I think we'll be back to more normal levels in Q4, but it certainly helped this quarter.
The third quarter is seasonally a little slower for us, so it made sense for us to run that cartridge special this quarter. And we certainly saw like I said, the economics are still good for us on that sale. Basically, we increased their prices at the beginning of this year and basically when we run the special it's kind of going back to the prices maybe they had back in 2011. So it's the economics still work.
Is this the first time you've done that? I guess I haven't heard of that before. Have you done that before?
This is the second time we've done it.
And when was the last one? Was it Q3 also last year?
No, we did it well, we did it in Q1. Okay.
We
did it again in Q3. Q1 was really
when we introduced the change in the price structure.
Yes. We gave them basically an opportunity even with the to sort of have the old prices for Q1 and then it started in Q2 basically.
Got you. Got you. Okay. And then one last question and I'll hop back in the queue. Any sense for when video may breakeven going forward?
It seems to be getting some nice momentum on the top line. How should we think about that from a profitability standpoint?
Yes. I think it really is driven by that swine growth. We need it. We're continuing to focus on it. We do want to we do see a situation where we want to sort of grab as much of that market as we can.
You do have sort of the long tail of the Evidence.com. So getting as many customers in that system as possible is really the primary focus. Obviously, we want to be profitable as quickly as possible, but it's we want to make sure that the product's right. We want to make sure those customers, those early adopters are well served. That's why we're looking at some account management, some other functions.
So it's a we're absolutely committed to getting into profitability, but we also want to make sure that like a lot of SaaS businesses, there's a large fixed component of cost. We want to make sure that we get as many people using that system as possible and that will pay off in the years to come.
Got you. Okay. I'll hop back in the queue. Thank you.
Thanks, Steve.
Thank you for the question. Your next question comes from the line of Paul Coster from JPMorgan. Please proceed.
Good morning. It's actually Mark Strouse on for Paul. Can we just start with your cash? So you've been able to generate a lot of cash year to date and you've put a lot of that into buying back shares. And now that that program is over, I know you're talking about investing some in the business, but are you still targeting to grow that cash balance in the near term?
And what are the plans for that? Should we expect more buybacks or M and A opportunity?
Yes. Mark, this is Dan. Obviously, we've been very happy with the cash generation of the business. Even with the buyback, we've actually grown our cash balances this year with even with the $20,000,000 buyback. We'll continue to look at buybacks over time as a way to return excess cash to shareholders.
We do see a value in those programs. So that's something we'll continue to evaluate as far as M and A. Obviously, if we do that, we'll announce that to the broader market when it happens. But right now, we're really just focused on operating the business as efficiently and effectively as possible. And I think the cash generation is a product of that and it's something we'll continue to focus on.
Right. Okay. Okay. And now we've got a few months of the protection plan under our belt. Are you able to share any quantifiable metrics as far as the number of new agencies that have purchased throughout the quarter, the percentage of those that are utilizing the protection plan and any financial impacts that you've seen now that you've got some actual evidence there?
Yes. Mark, this is Dan again. Yes, I think it's been it's early. So it's we've had a couple of deals already in the first quarter we've announced it. So I think it's good.
I think it's there's sort of some other sort of tangential benefit to the program. I think it allows us to keep the conversation going with our customers. Customers that say, Hey, this is a tough budget environment and we can't we just don't know if we can upgrade our units this year or maybe increase the number of TASERs we have. I think it keeps the conversation going instead of saying, hey, let's not stop it. You've got a tough budget.
Let's talk about things that TASER can do to spread those payments over time, maybe allow an agency to upgrade all at once versus having to do it over a several year period. So I think it's been good. It's been well received by customers. It is a little bit early. We'll I think we'll continue to talk about it on the calls as we have deals.
And certainly this quarter we had about $1,100,000 of our business this quarter was directly associated with these TASER protection plan deals. So I think that's a it's a good start for the first quarter and there's definitely a pipeline of interest there. We'll see how many deals we do. Like I said, I think even regardless of whether the amount of deals, I think the sales folks find it valuable because it gives them another arrow in their quiver to as they have conversations with agencies and make sure that the budget conversation doesn't stop the sale process.
Yeah. We've seen a number of those where the agency says, well, we don't have a budget for it. We go down the TPP route where they start moving in towards approving that and then they end up coming back and say, well, we found the money to just buy it. And we estimate that those deals may have gone hold on us had we not had the ability to make the offer.
Got it. Perfect. Okay. That's it
for us.
Thank you very much.
All right.
Thanks, Mark.
Thank you. Your next question comes from the line of Greg McKinley from Dougherty and Company. Please proceed.
Yes. Thank you. I wonder if you could just talk a little bit about first of all, it seems like a higher volume of lower value orders, which are driving fair amount of revenue upside relative to maybe your announced orders during the quarter. My sense is that's related to development of this telesales group you've referred to. But wonder if you can just talk a little bit about what you're seeing in terms of order size and order volume and if it is this telesales group and maybe just help us better understand that sales effort?
Yes. Greg, this is Dan. I think that's exactly what we're seeing. I think the theory was that those smaller agencies were underserved both by TASER and distribution and having a dedicated held sales department to take leads generated mostly through our web programs and follow-up with those customers that maybe are tough to maybe not super convenient locations or just not easy to get to and wouldn't normally warrant a face to face visit, I think it's been successful for us. That mark out is underserved, we think.
And I think the fact that we've sold over $2,000,000 through the telesales and as Rick alluded to, these are these average sale is about $3,200 3 thousand 3 hundred dollars So it's a lot of small ticket sales, but clearly it's made a difference to our business. And we feel it's been a successful program. We've invested in it throughout the year. We've made a pretty strong investment in Q3. We added a fair amount.
I think we've closed doubled the headcount in the third quarter, but it's been so far as it's been very successful and we expect that that will continue.
So just as a framework, you did $2,000,000 of revenue this quarter. What was that from this effort a year ago? And you said you doubled your headcount. What kind of what size of sales force are we talking about there?
So basically a year ago, it would have been zero. This is a brand new function.
Okay.
So and we've got about eight to nine people dedicated to this effort right now. They're doing both telesales and also as part of that they're doing some health and wellness checks with our customers. So there's some other benefits we're getting and some good situational awareness as far as what's happening in the agencies. And in some cases, it doesn't result in a sale, but it results in a lead that we can follow-up on later. And telesales is starting to create their own pipeline of future deals just like our regional sales managers are doing for the larger transactions.
Okay. And looking at the numbers a little bit closely more closely, if I look at the units that you gave us and extend those into revenues based off of what our normal ASPs for these devices in the past, there's a bigger gap between your reported revenues and what I can come up with and what is historically the case. I think that other bucket typically is maybe service and training. Was that a much larger portion of that in your revenue base this quarter than normal? Or why am I maybe a couple million dollars off there?
I mean, the service revenue will continue to grow. The amount of as I mentioned on the balance sheet, the deferred revenue is the line of the balance sheet that's growing. So that service component and the we're starting to see the e.com service revenues come through from direct deals we've done earlier in the year. That's you'll see every quarter you'll see more of that previously deferred revenue recognized. So we are seeing that.
I don't think it would be to the extent of a couple of million dollars. I think probably what you're seeing a little bit, Greg, is that because we had more of these drop shipment sales is that we see a higher selling price as we sell at the full MSRP and then pay distributor selling commission. I think that's part of what's driving it. I think ASPs are a little higher than normal this quarter because of that.
Okay. Okay. So you realized price per unit is higher than per unit?
That's right. Okay. What happens is that offset ends up down in the SG and A line because then we pay a sales commission
to the insurance.
So then selling out of their stock where we sell in at a low price and then they sell at default.
Yes. Okay. That makes sense. Now you talked about you had 15% increase in law enforcement revenues year over year and your Q4 North American law enforcement market pipeline is quite strong. So and this is now the third quarter in a row, I guess, where we've seen some generally positive traction in that market.
Does that just mean your customers are sort of slowly coming out of what might be sort of a four or five year perfect storm in terms of pressures on their budgets? Or how would you characterize any changes in the ability of your customers to spend some money?
I think it's the budget climate remains tough. It's certainly I think it's better than it was a few years ago, but it's still a tough environment. I think what our sales team is focused, Jeff Kukastky and his team is really focused on being a funded priority. Even though municipalities are spending less on capital equipment than they were in the heyday, that number is not zero. So we just need to make sure that we're a funded priority.
And if we're a funded priority, we think those are deals we'll continue to get even in a tough climate. We just need to make sure we're showing enough value in our product offering to just be high that list of priorities. And we believe that that maybe at the heyday the top 10 items got funded and now it's the top three which need to be in that top two or three priorities and we think we can have success there.
Okay. And then on just two last questions. The ECD gross margins again remained quite healthy 64%. Is that a good represent a good baseline for us to think about that business going forward?
I think that's a we feel very happy with that. Again, mix will always have an impact on that. Again, we saw those higher average selling prices this quarter because of the drop shipment. So you'll see there is the ability you'll have some mix. So as you model the business, you have to just be cognizant of that's the amount of direct business either we take ourselves or we drop ship and then pay a distributor a sales commission that will definitely increase the gross margins and then you'll see that offset somewhere else.
So you saw that drop ship in essence offset the higher mix we would have seen from cartridges from a margin standpoint?
That's right. That's exactly right. Because normally if we've had a sort of the normal complement of direct deals, we would have seen that margin maybe at the 62% range instead.
Yeah. What how big of a mix was dropship versus where it historically has been?
It's definitely higher. We had like I said, we had almost $300,000 of variable selling expenses. So I would say that several million dollars more of direct business this quarter versus quarters.
Okay.
So it was a pretty big swing. It would be about 10% more sales direct versus what we had maybe in the second quarter as far as direct business.
Okay. And so direct overall is roughly?
About a third.
A third. Okay. And so that was up from call it 20% it went to 30%.
Well, actually it's normally about a third. So it probably went from a third to about 40%.
Okay. Okay. And then finally, Rick, you had mentioned the TAP program and I got a little bit sidetracked there. I wasn't quite sure what that was referring to.
Got you. So the TAB program is let's say you buy a TASER today for round numbers for $1,000 You can go you could either buy an extended warranty, which is basically around $300 if there's no questions asked five year warranty or we can put you on this new TASER Assurance plan. And what you do there is you pay it's included for the first year if you sign up for it. There's no additional payment upfront. Then at year one, you pay $195 and you get on that pay basically every year it's $195
Okay.
What we do with that is we include the no questions asked warranty. We give you some on-site spares. So if you ever have a unit go down instead of waiting having an officer without a TASER while it's being shipped back for repair or replacement, you can pull one from your spare parts inventory to keep your operators alive. That's been a really well received benefit from the people we've talked to.
Okay.
And then at the end of year five, we replace that unit with a light unit, a brand new unit every five years. But basically the way to think about it, you get the for $1,000 that you're paying on almost like a prepaid basis, we bundle in warranty and other value added services. So we position it as fundamentally they get about a 33% discount over what they would get if they bought all the components separately. But by getting us on this cadence, they get a free warranty and services and they've paid for that unit. And as soon as they've paid up the next unit, we swap out their whole fleet.
Okay. Is the gist of this just gets it as sort of a recurring budget line item and you're no longer dealing with one off purchase authorizations, you make it more part of the annual expense structure?
Yes. Yes.
Absolutely. That's what we heard from our customers. They don't like spending their political capital to go back and make special requests. It's just it's a kind of a pain for them to do that where they prefer putting it on operating budget autopilot, so to speak. Once they've accepted the TASER the capability they're going to need, it's an interesting dynamic.
New agencies tend to want to just sort of buy new capabilities and test them out using like drug asset forfeiture funds etcetera sort of one time money. Once they're convinced they need it and it's going to be an ongoing part of the operation, the feedback we've gotten is they prefer to just put this in their operating budget, so it does become something they have to deal with on a sporadic basis.
Yes. Okay. All right. Thank you guys.
Thank you. Thank you
for your question. I would now like
to turn the call over to Rick Smith for the closing remarks.
Okay. Well, like many of you, I was watching the stock this morning and I think we all had a light heart feeling good. Again, I know there's been some pain to get here both operationally for the company and for our shareholders. It's been a hard road. We've been investing significantly.
We appreciate the patience. You've stuck with us. We're seeing some of those rewards now. And you can rest assured that I and the rest of the management team here remain very focused on continuing to run a profitable business generating strong operating results. And we're leveraging the investment we've made in some of these new business segments to start bringing them to the same state of being that we've achieved with our core ECD business, which is solid growth, strong profits, lots of cash generation.
So, look forward to talking to you all after the first year. Have a great holiday season. And thank you one more time for being a shareholder in TASER.
Thank you for your participation in today's conference. This concludes our presentation. You may now disconnect.