Good day, ladies and gentlemen, and welcome to the Q3 2012 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 listen only mode. We will conduct a question and answer session toward the end of this conference. If at any time during the call you require assistance, please press star zero and an operator will be happy to assist you. 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 am going to hand over to Dan Behrendt 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. TASER 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 accompanying demand for our products, potential delays in international and domestic orders, implementation risk and 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, risk of government investigations and regulations, TASER product tests and reports, dependence upon key employees, employee retention risk, and other factors as detailed in the company's filings with the Securities and Exchange Commission.
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 being 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 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 $28.8 million were an increase of 18% over prior year, and the business generated $9.9 million in cash from operations. Our ECD business segment, 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. Obviously, they're in two different phases.
The ECD is a very strong and growing cash generation segment of the 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 from the second quarter, although the second quarter is typically a seasonally stronger quarter. 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 ECD margins, gross margins, came in over 64%. Again, our operations and manufacturing teams 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 from $1.3 million to $1.7 million in recognized revenue, growing 65% year-over-year.
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. As such, we defer those revenues and recognize them as the service is delivered. With that, I'm going to turn 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 $28.8 million, which is up approximately $4.4 million or 18% from the prior year. The increase in sales versus the prior year is driven by the continuous adoption 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 over the same quarter of 2011. This follows a 39% and 25% year-over-year improvements in Q2 and Q1, respectively. Review of the pipeline for ECD segment has continued to be strong as we go into the fourth quarter. Gross margins for Q3 on a consolidated basis were $16.8 million or 58.4% of revenue, which is up 470 basis points from the 53.7% in the prior year.
We continue to benefit from a 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&A, as we see variable selling expenses due to paying distributors a commission on their sales versus having them 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. The cartridge margins are slightly lower than the ECD margins. It was good to see strong gross margin performance, even with 34% coming from cartridges. SG&A expenses for the quarter were $9.5 million. That was basically 33% of net sales compared to 38.9% of net sales in 2011.
Sequentially, SG&A increased 13.5% from the $8.4 million in the second quarter of 2012. In addition to the strategic investments we're making back in the business, we had several one-time events totaling $190,000 that are 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. 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.
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 of Chiefs of Police show, both occurring in Q3. We're starting to see a return and increase in SG&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 million for the quarter. 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 expenses were $2 million for the second quarter, which was favorable by $0.4 million compared to 2011, due to continued cost containment efforts in R&D. Specifically, we've seen a reduction in consulting and professional fees in R&D. The adjusted operating income, which excludes the impact of stock-based compensation charges, depreciation, amortization, and litigation judgment expense, was $7.8 million for the third quarter of 2012. The adjusted operating income effectively doubled from the same period last year. As we move on to the GAAP income from operations, those were $5.3 million in the third quarter compared to income from operations of $1.2 million for the third quarter of 2011.
Net income for the quarter was $3.7 million or $0.07 per share on both a basic and diluted basis, compared to net income of $1.1 million 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 are somewhat of a one-time nature. As you know, every year a company files its tax returns. In the third quarter, 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.
Between the tax rate reduction and the true-up to the prior year return, we had about a half a million dollar benefit of about $0.01 a share just on the income tax line. As we move on to the balance sheet, the company did generate $9.9 million of operating cash flow in the quarter, which led to having $29.1 million of cash equivalents, and short-term investments on the balance sheet. That's despite the fact that we continued to do the buyback this quarter, we feel very good about the cash balances. Accounts receivable of $14.6 million are up $2.8 million from the prior year-end due to an increase in sales in Q3 of 2012 versus the fourth quarter of 2011. Inventory at $10.4 million is down $1.1 million from the year-end balances. We continue to manage our working capital very effectively.
Investment in property equipment of $22.7 million is actually down $4.2 million when compared to the year-end balances. Basically, that's mostly driven by depreciation expense. We've got depreciation of approximately $5 million, offset by some new purchases of equipment, about $989,000. 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. We have done some operating leases this year, which has helped in the capital expenditures as well. Accounts payable of $4.3 million are down $0.3 million from the prior year-end due to just timing differences in check runs.
Accrued liabilities of $8.9 million are actually increased $1.3 million due to the accruals from federal income taxes of $2.5 million and some changes in some of our accrued variable marketing and selling expenses of half a million. That's offset by the $2.2 million reversal of the accrual in the Turner case that we took earlier this year. Deferred revenue of $10.5 million is actually increased $2.6 million from 2011 due to increased sales of the X2. The X2 training program includes the warranty. That'll drive a high attach rate of warranties. We actually defer those extended warranties and recognize those over time. 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.
That's also driving an increase in the deferred revenue. As I said, we ended the quarter with $10.5 million in deferred revenue on the balance sheet. Total liabilities are $26.3 million. We finished the quarter with $76.3 million stockholders' equity. As we move on to the cash flow information, as I said earlier, the company had generated $9.9 million of cash from operations in the third quarter. The year-to-date cash from operations is $23.3 million. This compares to $14.6 million 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 $20.7 million. This compares to cash used in investing activities at $7.8 million last year.
Mostly, the differences between us are really just the purchases of short-term investments in the prior year. Some of those were actually redeemed this year, providing some cash. That's why the large change between years. Cash used in financing activities was $19.3 million for the nine months ended September 30th, 2012. This compares to $24.8 million used in the same period in 2011. In the third quarter, the company repurchased $3.9 million or approximately 0.7 million shares this quarter. For the nine months, we've repurchased about 3.8 million shares at a cost of $20 million. We've actually completed that stock buyback that was approved by the board of directors in April. On a cumulative basis, over the last 21 months, we've actually purchased 11.3 million shares or approximately 18.7% of our shares outstanding when the program started.
We did end the quarter with $26 million in cash and another $3.2 million in short-term investments. 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. That's been a very successful program for us. 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 1,617. We sold 36 of the X3s. C2, we sold 2,832. We sold 1,957 TASER Cams. Cartridges, we sold 428,911 cartridges. Again, that was a very strong cartridges 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 an unnamed agency, about 2,500 units. If you sort of consider that large order, the lumpy part of the business, we believe we're continuing to progress well on the X2 adoption and see continued upgrades in the field for the installed base. Still feel good about how that program's working for us. With that, I'll turn it back over to Rick Smith, our CEO.
Great. 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. Our primary effort there is with the X2 ECD. As of the end of the quarter, we've upgraded 6.1% of the devices, the ECDs in the field that are more than five years old. We're continuing to make progress there. That's helping to drive the strong top-line results. We still have 94% of the market to go, 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 525 X2 ECDs. One thing that's interesting 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 a municipal leasing partner, and we're able to offer our customers the ability to pay over the five-year expected useful 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 budgets.
We actually believe that having agencies on these TPP 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 X2s from Indian River County Sheriff's Office for 249, Orange County Sheriff's Office in Florida for 400 X2s, Miami-Dade purchased 200 X2s, and the New Jersey State Police started out with their first purchase with 40 X2s with the high-definition cameras. That's an important one just because New Jersey was the last state to legalize ECDs, and it's important we're starting to see some traction there. Focus one, upgrading the market. We're making good progress there.
Focus number 2, Flex and Evidence.com growing our video business. Again, we're seeing significant traction there. This quarter, we saw Pittsburgh deploy 50 units. Chesapeake deployed 125 with a five-year service contract. Pittsburgh bought a three-year service contract. The Hartford Police Department deployed 42. They're taking advantage of the one free year of Evidence.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 Evidence.com. We're seeing significant growth in our pipeline. Look forward to 2013. As we've mentioned, there is a longer sales cycle of these Flex units and with the Evidence.com because there's many more decision-makers involved in IT, in operations within the police department, in patrol and training, so it leads to a longer sales cycle.
Flex has only been shipping really since late in the second quarter. This was its first full quarter of shipments. We're seeing the results in the increased traction. Particularly, we've been pleased with how fast some of the larger agencies are moving. Seeing Pittsburgh, Chesapeake, Hartford, Fort Worth, Mesa. These are large agencies that typically don't move this quickly when new products are released. 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. Two things really stood out at IACP. One was the continued interest in Flex and Evidence.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 10 years." That's not a sentiment that we'd heard previously. 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. In their survey, reached out to line-level officers, chiefs, et cetera, 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. We're delighted to see the traction taking hold and our pipeline growing.
We look forward to a great 2013 with Flex and Evidence.com. On the international front, we had a strong quarter, coming in at $5.4 million of international sales, representing roughly 19% of sales. The bulk of those sales really coming from within the European sector, where, as you know, we've opened an office in Europe, and we've got a team on the ground there. We're in the process this quarter, we actually have got our team deployed now into Brazil, in South America. We look forward to seeing some more contribution from South America over the next 12 months. Some other things to talk about in terms of our focus on growing the business and just improving our general operating tone here. Dan talked briefly about telesales. That's been a new effort. We really stood telesales up, starting from a zero start in February, March.
They've already sold $5 million year to date. The rate of sales is accelerating, and the charts are all up and to the right. Jeff Kunins, our CMO, had the hypothesis that the smaller agencies in the market weren't necessarily getting the level of service and touch that we could accomplish if we had a dedicated sales team. 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-$4,000 compared to our typical distribution orders, which are more around $20,000. 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've launched two service plans now.
We've 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 5-year time horizon. We've also, this month, announced a new program called the TASER Assurance Plan, or TAP. The difference is the TPP, again, they can spread their payments over 5 years for the devices they're buying now. TAP allows us to target agencies that do have the capital equipment to purchase today, or they may have bought within the last couple of years. What we do with TAP is it's an extended service plan, where they pay in at around $195 per year per handle. For that, we give them a no-questions-asked warranty, extra service, and support, including on-site spares and spare parts.
If anything ever breaks, they're not out of a unit while it's being repaired. At the end of year 5, they receive a free upgrade to, or replacement of the same product, or upgrade to a similarly priced product. Basically, with TAP, that allows agencies who just bought to put in their operating budget that will cover their upgrade 5 years out. In fact, we offer 10-year price protection on this plan, so they can keep going another 5 years at the same price and receive a replacement or upgrade at the end of year 10. 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. We've had tremendous interest conceptually where we floated this in marketing focus groups.
We'll be excited to see what TAP does. 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.
Rather than running our own foundation, which we'd set up in 2004, to make donations to the families of fallen officers, we realized maybe this is better to partner with a larger foundation, that they can focus on the operating day-to-day of the foundation, and we can just continue to do the financial support. We actually felt that this builds more goodwill in the market space by us partnering with the foundation of the IACP. 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, named as, I believe, the TASER Fallen Officers Fund, but being administered and run by the IACP.
The last thing I want to talk about, which you all probably saw in 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 20 years of experience doing some pretty sophisticated software development, running reasonably large teams. What we really liked about his background at Microsoft Research was really focused on relatively small teams with fast time to market and cloud-based solutions. We're excited to welcome aboard Danny. He started just in the past couple weeks here, and we're really excited to have him now leading our software engineering efforts. With that, I'll wrap up and we'll move to questions. 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 2008 and 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. Thanks for being a shareholder. With that, we'll take a few questions.
Thank you. Ladies and gentlemen, if you wish to ask a question, please press star followed by one on your touch tone telephone. If your question has been answered or you wish to withdraw your question, press star followed by two. Press star one to begin. Please stand by for your first question. Your first question comes from the line of Steve Dyer from Craig-Hallum. Please proceed.
Thanks. Good morning.
Good morning.
Could you remind me a little bit about the rebate program, I think that is scheduled to sunset here at the end of the year, what the amount was right now and then, Dan, how that's accounted for?
Sure, Steve. In the third quarter, we still had a rebate in place. It was $210 per unit. That goes down to $160 in the fourth quarter. We haven't announced a 2013 program yet. 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 disposing of 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 of the X2 as a result. 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.
We basically reduce the total sale value by that trade-in credit. It's already reflected in the results in the lower sales value. As those units come back, we'll just offset that accrual. Basically, at the time of the selling, we fully account for that trade-in value.
Okay, that's helpful. Is there any fear, 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? Is your sense more that you need the trade-in credit in order to spur action?
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'll continue to iterate on. I think having, especially when you're talking about somebody with an operational unit disposing of it, 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 trade-in 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. We do believe there's a big market as far as pulling things forward. We definitely want to spur action here. Would those people eventually upgrade?
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. 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. Cartridge sales, I mean, look to me like it's the biggest number, maybe on record. Maybe there was one in 2007 that was close. Is there anything in particular that you attribute that to? How do we think about that going forward?
Actually, in the cartridge sales, basically, we did have a special on cartridges this quarter for our distributors that allowed them to stock up. I expect the cartridge sales to probably tail off a little bit in Q4 as a result. We basically 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.
Basically, what we did as part of that is we told the distributors that twice a year we'll run some specials on cartridges to allow them to stock up if they need to. I do expect we'll probably see a little bit of a degradation in those cartridge unit sales in Q4. 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.
You recognize those on sell into the distributor, right?
The reality is, although we have 18 or so distributors, there's only a handful that stock in large quantities. 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. Like I said, I think we'll be back to more normal levels in Q4, but it 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 the benefit of that special. Like I said, the economics are still good for us on that sale. Basically, we increased their prices at the beginning of this year.
Basically when we run the special, it's kind of going back to the prices maybe they had back in 2011. 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.
When was the last one? Was it Q3 also last year?
No, we did it in Q1.
Okay.
We did it again in Q3.
Gotcha.
Well, I guess, yeah, Q1 was really when we introduced the change in the price structure.
Yeah, we gave them basically an opportunity, even to sort of have the old prices for Q1, and then it started in Q2, basically.
Gotcha. Okay. One last question, I'll hop back in the queue. Any sense for when video may break even going forward? It seems to be getting some nice momentum on the top line. How should we think about that from a profitability standpoint?
I think it really is driven by that line growth. We're continuing to focus on it. We do see a situation where we want to sort of grab as much of that market as we can. You do have the sort of the long tail of the Evidence.com, 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 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. We're absolutely committed to getting it to 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'll pay off in the years to come.
Gotcha. Okay, I'll hop back in the queue. Thank you.
Thanks, Steve.
Thank you for your 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? 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. 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? What are the plans for that? Should we expect more buybacks or M&A opportunity?
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, even with the $20 million 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&A, obviously, if we do that, we'll announce that to the broader market when it happens. Right now, we're really just focused on operating the business as efficiently, effectively as possible. I think the cash generation is a product of that, and it's something we'll continue to focus on.
Right. Okay. Now we've got a few months of the TASER 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 TASER Protection Plan, and any financial impacts that you've seen now that you've got some actual evidence there?
Yeah, Mark, this is Dan again. I think it's early. We've had a couple deals already in the first quarter we've announced it, so I think it's good. 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 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. I think it's been good.
It's been well received by customers. It is a little bit early. I think we'll continue to talk about it on the calls as we have deals, and certainly this quarter we had about $1.1 million of our business this quarter was directly associated with these TASER Protection Plan deals. I think that'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 the amount of deals, I think the sales folks find it valuable because it gives them another arrow in their quiver as they have conversations with agencies and make sure that the budget conversation doesn't stop the sale process.
We've seen a number of those where the agency says, "Well, we don't have the budget for it." We go down the TPP route, where they start moving towards approving that, then they end up coming back and saying, "Well, we found the money. Could you just buy it?" We estimate that those deals may have gone cold 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 & Company. Please proceed.
Thank you. 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 a fair amount of revenue upside relative to maybe your announced orders during the quarter. My sense is that's related to the development of this telesales group you've referred to. 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.
Yeah, 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. Having a dedicated telesales 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 market is underserved, we think, and I think the fact that we've sold over $2 million through the telesales, and as Rick alluded to, these average sale is about $3,200, $3,300. It's a lot of small ticket sales, but clearly it's made a difference to our business. We feel that 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 close to double the headcount in the third quarter, but it's been very successful, and we expect that that will continue.
Just as a framework, you did $2 million of revenue this quarter. What was that from this effort a year ago? You said you doubled your headcount. What size of a sales force are we talking about there?
Basically, a year ago, it would've been zero. This is a brand new function.
Okay.
We've got about 8-9 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. There's some other benefits we're getting and some good situational awareness as far as what's happening in the agencies. In some cases, it doesn't result in a sale, but it results in a lead that we can follow up on later. Telesales is starting to create their own pipeline of future deals, just like our regional sales managers are doing for the larger transactions.
Okay. Looking at the numbers a little bit 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? Was that your revenue base this quarter than normal, or why am I maybe a couple million dollars off there?
The service revenue will continue to grow. As I mentioned on the balance sheet, the deferred revenue is the line on the balance sheet that's growing. That service component and we're starting to see the Evidence.com service revenues come through from deals we've done earlier in the year. Every quarter, you'll see more of that previously deferred revenue recognized. We are seeing that. I don't think it would be to the extent of a couple million dollars.
Okay.
I think probably what you're seeing a little bit, Greg, is that because we had more of these drop shipment sales, that we see a higher selling price because we sell at the full MSRP and then pay a distributor a 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. Your realized price per unit is higher then?
That's right.
Okay.
What happens is that offset ends up down in the SG&A line because then we pay a sales commission.
I guess
to the distributor instead of them selling out of their stock, or we sell in at a low price, and then they sell at the full.
Yeah. Okay. That makes sense. 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. 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 environment. It's certainly, I think, better than it was a few years ago, but it's still a tough environment. I think what our sales team is focused, Jeff Kukowski 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's not zero. We just need to make sure that we're a funded priority. If we're a funded priority, we think those are deals we'll continue to get, even in a tough environment. We just need to make sure we're showing enough value in our product offering to just be high on that list of priorities. We believe that maybe at the heyday, the top 10 items got funded, and now it's the top three.
We just need to be in that top two or three priorities, and we think we can have success there.
Okay. Just two last questions. The ECD gross margins, again, remained quite healthy, 64%. Is that represent a good baseline for us to think about that business going forward?
I think that 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. You'll see, there is the ability, you'll have some mix. As you model the business, you have to just be cognizant of the amount of direct business, either we take ourselves or we drop ship and then pay a distributor a sales commission. That'll definitely increase the gross margins, and then you'll see that offset somewhere else.
You saw that drop ship, in essence, offset the higher mix we would've seen from cartridges from a margin standpoint?
That's right. That's exactly right. Normally, if we had a sort of the normal complement of direct deals, we would've seen that margin maybe at a 62% range instead.
Yeah. How big of a mix was drop ship versus where it historically has been?
It's definitely higher. Like I said, we had almost $300,000 of variable selling expenses. That would say that several million dollars more of direct business this quarter versus the prior quarters.
Okay.
It was a pretty big swing. It'd be about 10% more sales direct versus what we had maybe in the second quarter as far as direct business.
Okay. direct overall is roughly?
About a third.
A third, okay. that was up from, call it, 20%, it went to 30%?
Well, actually, it's normally about a third, so it probably went from about a third to about 40%.
Okay. 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.
Gotcha. The TAP program is, let's say you buy a TASER today, for round numbers, for $1,000. You could either buy an extended warranty, which is basically around $300. It's a no-questions-asked five-year warranty. Or we can put you on this new TASER Assurance Plan. What you do there is you pay, it's included for the first year if you sign up for it, so there's no additional payment upfront. At year one, you pay $195, 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 live. That's been a really well-received benefit from the people we've talked to.
Okay.
At the end of year five, we replace that unit with a like unit, a brand-new unit every five years. Basically, the way to think about it, you get to, for $1,000 that you're paying on almost like a prepaid basis, we bundle in-
Yeah
the warranty and other value-added services so we can position it as fundamentally, they get about a 33% discount over what they would get if they bought all the components separately. By getting us on this cadence, they basically get a free warranty and services, and they've paid for that unit. 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.
Yeah.
Absolutely. That's what we heard from our customers. They don't like spending their political capital.
Yeah
To go back and make special requests. 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 that the TASERs are a capability they're gonna need. It's an interesting dynamic. New agencies tend to want to just sort of buy new capabilities and test them out using drug asset forfeiture funds, et cetera, 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 doesn't become something they have to deal with on a sporadic basis.
Yeah. Okay. All right. Thank you guys.
All right. Thank you.
Yeah.
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, 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. We're also leveraging the investment we've made in some of the 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.
Look forward to talking to you all after the first of the 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 the presentation. You may now disconnect.