Welcome to the Q2 twenty twelve TASER International and Corporate Earnings Conference Call. My name is Dawn and I will be your operator for today's call. At this time, all participants are in a listen only mode. Later, we will will conduct a question and answer session. Please note that the conference is being recorded.
I will now turn the call over to Rick Smith. Mr. Smith, you may begin.
Thank you. Welcome, everyone. Appreciate you joining us this morning. Before we get started, I'm going to ask Dan to read the Safe Harbor statement.
Thanks, 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 TASER International extends 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 law enforcement markets, expansion of product sales to the private security, military and consumer defense markets, growth expectations for new and existing accounts expansion of production capability new product introductions product safety and our business model. We caution these statements are qualified by important factors that could cause actual results to differ materially from those reflected by the forward looking statements herein. Such factors include, but are not limited to, market acceptance of our products, establishment and expansion of our direct and indirect distribution channels, attracting and retaining endorsement of key opinion leaders in the law enforcement community, the level of product technology and price competition for our products, the degree and rate of growth of the markets in which we compete and the company demand for our products, potential delays in international and domestic orders, implementation risk of manufacturing automation risks associated with rapid technological change execution 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 allegations of injury and deaths and the negative impact this could have on sales product quality risk potential fluctuations in quarterly operating results competition negative reports concerning TASER devices uses financial budgetary constraints of prospects and customers, dependence upon sole limits to our 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 detailed in the company's filings with the Securities and Exchange Commission.
And with that, I'll turn it back over to Rick Smith.
Thanks, Dan. Okay. As I'm sure everybody has seen by now, this morning we reported Q2 sales were up $7,000,000 or 33% year over year coming in at $28,200,000 Perhaps even more importantly, if you look at the cash generation of the business, we generated $9,700,000 in cash from operations. Of course, if you do the math on that, we were generating cash at an annualized rate in the second quarter of $0.73 per share. Operating income came in at $6,100,000 If you go back and touch on the cash as well, again, I'll point out the obvious that was inclusive across the entire business.
If you look at the core EPD business, which has been funding our investments in the new video business, obviously that number is significantly higher in the core business, if you look at it on a standalone basis. Margins improved year over year, although they declined slightly sequentially. It came in at 58.5% compared to 57.8% last year. And of course, if you look at our core ECD business, 63.7% gross margin, a number we're very proud of. Again, we break this out, so that it helps us as a management team, you as investors to monitor how well we're managing our core business, so it doesn't get obfuscated by the investments that we're making in the new business.
Revenues in the ECD business increased 8% sequentially from twenty four point eight million dollars to $26,900,000 And in the core ECD business, operating income was $8,600,000 dollars So we're running a 32% operating income in the core ECD business. Revenues in the video business increased 47% sequentially, although albeit from a small base of $884,000 in the first quarter to $1,300,000 in the second quarter. That growth was really driven primarily by TASER CAM and the new TASER CAM HD as the Axon Flex didn't ship until late in the quarter. If we look at the SG and A expenses coming down as a result of a continued focus on efficiency and cost control, research and development also decreased by $800,000 to $2,000,000 I'm sure people are wondering, is TASER investing sufficiently in research and development? And I would tell you the decreases are really about this continued streamlining of our research and development efforts.
We are more efficient than we've ever been. This is largely attributable to reduction in professional consulting fees. Basically, some of the bulge resources when you have to go out and bring in external consultants when you're finishing up major projects. So I'd say at this point, we're innovating at a much more efficient and better pace. And we've also moved to an OEM model looking to in source technology from other providers rather than building it ourselves.
For example, if you look at the Axon Flex, in our partnership with Look See, we were able to buy the major components of the Axon Flex and then only focus on engineering that is required to customize for our marketplace. It's a far more efficient and faster way to get to market than if you look at the previous Axon Pro product we developed, where we developed the computer, the communications hub and the camera all from the ground up in house. That's a longer, slower, more expensive way to develop products. So I'm very proud of what we've accomplished in our R and D segment. Again, I'd say we're getting better, we're doing more with less and we believe that we are right sized in terms of how we're approaching R and D.
So with that, I'm going to turn over to Dan to take us through the financial results in greater detail. Great.
Thank you, Rick. So as Rick said, revenue for Q2 was $28,200,000 This is up approximately $7,000,000 or 33% over the prior year. The increase in sales versus prior years was driven by the continuous option extension of the upgrade program for the X2 electronic control device as well as a significant order we got during
the quarter from
Brazil. The one of the bright spots for the quarter was is the North American law enforcement market continues to be strong, mostly driven by the upgrade cycle to the new X2 device. North American law enforcement sales are actually up 39% year over year. This follows a 25% year over year improvements in the fourth quarter of last year and the first quarter this year. So we've got three quarters in a row of significant growth, almost completely driven by the adoption cycle of the new X2 device.
Gross margin for the quarter was $16,500,000 or 58.5% of revenue. That's up 70 basis points from 57.8 in the prior year. This is actually the fifth consecutive quarter of gross margin improvement. We continue to see the benefit from the higher operating leverage in the business as well as the favorable product mix. The SG and A expenses of $8,400,000 in the second quarter versus $9,100,000 in the prior year.
The reduction in SG and A expenses were driven by the continuous continuing cost controls in the business. SG and A as a percentage of sales was actually 28 I'm sorry, 29.8% of net sales in Q2 of twenty twelve. That compares to 42.8% in the same quarter of last year. We've got a if you sort of look at our history over the last four quarters, we've kind of ranged from this sort of low watermark of $8,400,000 all the way up to $10,300,000 over the last four quarters. We are going to be making some strategic investments in France and Brazil along with some new hires.
So we do expect that SG and A expenses will tick up a little bit in the second half of twenty twelve, but still within the range of what we've seen over the last four quarters. And we are continuing to focus on those cost controls. Research and development expenses of $2,000,000 for the second quarter, which were favorable by $800,000 compared to the twenty eleven second quarter, again due to the continued cost controls as Rick mentioned. We've seen mostly the biggest drivers there are the reductions in outside consulting costs as well as some headcount reductions we've taken over last year. Again, similar to SG and A, we do expect R and D expenses to tick up a little bit in the second half as we make some critical hires to drive that business going forward.
But we're focused on a continued cost control. So we don't expect it to get significantly up from sort of the range we've been over the last four quarters. Adjusted operating income, which excludes the impact of stock based compensation charges, depreciation, amortization and litigation judgment expenses was $8,400,000 in the second quarter of twenty twelve. This is actually a $7,200,000 increase from the adjusted operating income of $1,200,000 in the second quarter of twenty eleven. The GAAP income from operations for the quarter was $6,100,000 This compares to a GAAP loss of $5,000,000 in the second quarter of twenty eleven.
Again, the second quarter of twenty eleven was impacted by a number of sort of significant one time items. We had the Turner judgment, protector impairment last year and also the impairment in some of our assets for e.com data center. So that was a driver for the loss of last year. But again, we're even on adjusted basis significantly over the prior year. Net income for the second quarter of twenty twelve was $3,400,000 or $0.06 per share on both the basic and diluted basis compared to a loss of $2,300,000 or $0.04 loss on a basic and diluted basis in the second quarter of last year.
We finished the quarter with $23,200,000 worth of cash, cash equivalents and short term investments. It's actually a decrease of $3,300,000 from the year end cash levels, investment levels. But the biggest driver there is the buyback of stock. As we announced on April 25, the Board of Directors authorized the $20,000,000 buyback of stock. We actually purchased $16,100,000 worth of stock in the second quarter and that was offset by the operating cash flow.
So the cash came down slightly, but again the significant cash generation in the business is funding that buyback in stock. Accounts receivable of $14,700,000 are up actually 2,900,000 from the prior year end, again due to increased sales in the second quarter of twenty twelve versus the fourth quarter of twenty eleven. Inventory at June 30 is $10,500,000 This is actually down $1,000,000 from the prior year end balance. Decreases attributed reductions in finished goods due to the strong sales in the second quarter. The total assets for the business at June 30 were $97,800,000 As we move on to the liability side of the balance sheet, accounts payable of $3,900,000 is actually down $600,000 from the year end balance due to some timing of some check runs and just purchasing activity versus the fourth quarter.
Accrued liabilities of $6,600,000 are actually down $1,100,000 primarily due to the litigation judgment expense reversal of $2,200,000 that we took last quarter relating to the Turner case. The total deferred revenue line on the balance sheet of $9,200,000 has actually increased $1,300,000 from the twenty eleven year end levels. This is due to a number of factors. The increased sales of the X2 are driving that because of a number of the extended warranties that are purchased with that X2 trade in program as well as we sell more flex units. We do defer roughly between 5060% of the flex sales to reflect the fact that it does come with an e.com service and will be recognized in that Evans.com service over the service life, which is anywhere from one to three years.
So you'll see that that's for revenue line tick up as we see further traction both the X2 trading program and the increase in our flex sales over time. The total liabilities are $22,500,000 and we finished the quarter with $75,300,000 stockholders' equity. Again, that's down a little bit from the year end just driven by the stock buyback that we executed during the second quarter. Continue to have no debt on the balance sheet and have plenty of liquidity to fund both R and D efforts and sales expansion efforts internationally. As we move on to the cash flow information, the company had cash provided from operations of $9,700,000 during the second quarter of twenty twelve.
And for the six months ended June 30, we've generated $13,400,000 of cash from operations. The cash used for used by investing activities for the six months ended June 30 was $1,000,000 compared to $11,600,000 in the same period last year. Again, the cash usage this year is really driven mostly by the purchasing property and equipment mostly some computers and also some of the production equipment for some of the new products we've launched this year. Cash used in financing activities was $15,700,000 for the six months ended June 3032 compared to $12,500,000 used in the same period of 2011. Again, the biggest driver there is the repurchase of $16,100,000 worth of the company's stock during the quarter.
We did purchase approximately 3,100,000.0 shares during the June 30 quarter. We ended the quarter with $18,000,000 in cash and $5,200,000 in short term investments for a total of $23,200,000 of cash and investments. We still feel very confident in the strong liquidity position and the ability to continue to invest in the business. And then with that, I just want to move on to sort of the sales statistics for people modeling the business here. For the second quarter, we actually sold 11,292 of the X26 ECDs.
We sold 8,338 of the X2 ECDs. That's up sharply from the first quarter. M26s, we sold seven ninety units. We sold 25 of the X3 product, 2,708 C2 units and 2,351 TASER cans again that's up pretty sharply from the first quarter as well. And then for cartridge sales, we had 364,104 cartridges sold in the quarter.
Again that's comparable to the first quarter, but we're seeing a pretty strong year in cartridge sales so far. And with that, I'll turn it back over to Rick Smith, our CEO. Okay. Thanks, Tim.
Okay. Before we wrap up, I want to revisit our three core strategic foci that we've talked about in the last several conference calls. And those areas of focus are number one, upgrading our installed base of ECDs that are greater than five years old number two, accelerating the penetration of our video and cloud business and number three, expanding international sales. So first, let's talk about the X2 and expanding our installed base. I saw a number of significant orders this quarter.
One of the more important ones was we in Australia, Seven Seventy Five X2 ECDs. The international markets tend to take a longer time period to approve new approve new products. So we're delighted to see Australia being the first country to move in a significant way to the X2 and also four seventy five Caser CAM HDs. It was also a strong quarter for state patrols. Oregon State Patrol went full deployment with four fifty four X2s, North Carolina Highway Patrol with four twenty two X2s and the Ohio State Patrol upgraded from L26s to X26s with four eighty five units.
We also saw in the municipal area some strong PAX tube purchases, two fifty units going to Manchester, One Hundred And Sixty Two units going to Las Vegas beginning their transition. Obviously, that's a very large department, I believe over 3,000 officers. So this is hopefully the start of a larger transition. We also had another large agency purchase 2,500 X2 units. That agency for operational security reasons asked us not to disclose who it was, so we're not going to.
In terms of the upgrades themselves, obviously some of these were new purchases. We like to keep tabs on how much of the installed base is actually upgrading. At the end of Q1, we had upgraded approximately 3% of the installed base of ECDs that are greater than five years old. At the end of Q2, this number had risen from 3.3% to 5%. So we're making some progress there.
This is partially due to the reintroduction of an upgrade program this year. We had an upgrade program last year that sunsetted at the end of the year. We did see a dip in X2 sales in the first quarter. So we revamped a new upgrade that declines in value each quarter starting at $250 and declining to $160 by year end. We believe that helped to reinvigorate upgrades.
Now today, we just announced a new program that we believe could also have a significant impact on upgrades. So this is a new initiative to help our customers transition called the TASER Protection Plan or TPP. The Protection Plan allows our customers to pay for TASER ECDs, accessories and consumables in five equal payments over a five year time period. This program offers two key advantages. First, it allows our customers to avoid the difficult process of getting large singular capital equipment purchase approvals.
Instead, we allow them to use roughly one fifth of that amount of money and break it into annual outlays from their operating budget. This creates a predictable ongoing budgetary line item that can be used to replace after the fifth year to replace or upgrade their ACD units. So basically, if we're able to get an operating line item, obviously in government that's a very helpful thing because once you're there, tendency is makes it a lot easier in year six to just continue that line item, go ahead and upgrade those units with a new extended payment purchase or lease purchase in year six as opposed to once every five or six or longer number of years having to go back for abnormal approvals for capital equipment expenditures. So we believe this will allow for more seamless transition to upgrading over time. And we expect this budgetary dynamic could allow for a much larger percentage of the market to upgrade their devices in a more timely fashion than we've seen historically.
Again, over the past year, we've seen around 5% of the market upgrade to the newer product, 5% of devices over five that are over five years old. Obviously, we can take that 5% up to a greater number and will have a significant impact on the business. Now we only started test marketing this TPP to a small number of agencies over the last forty five days. We've already received our first order from Colorado Springs for 05/25 x two. We do have several other deals in the pipeline now and we're planning a full rollout in the August.
So we're preparing distributor training and all the items needed to scale this program from a small task to a full rollout. I should also point out that we are partnering with leasing partners that enable us to accelerate the payment basically so that we would get paid upfront with the lease partners exercising their core competencies in operating over the term of the lease, which obviously means we can outsource the credit risk and the payments over time. And we can accomplish this due to the way we're structuring these programs without degrading our operating margins. Let's look to our second area now, the video and evidence.com. Very proud to report we've had two full deployments within weeks of shipping.
BART, the Bay Area Rapid Transit Police is up to two twenty units. They started with an initial order of I believe around 160 and then expanded it within a good matter of weeks to a full two twenty and Modesto, California 1 Hundred And 30 1 Axon Flex cameras. The other thing we're seeing that's quite encouraging is the major cities are moving much faster than we experienced with the ECD launch ten years ago. Both Mesa and Fort Worth had 50 units in the field. We have several other major cities that are currently testing and many of them who expressed interest.
So we'd anticipated that we'd see the smaller agencies outpacing the large agencies just due to the dynamics of the purchasing environment. But again, we've been pleasantly surprised as large agencies seem to be moving more quickly. Let me share a couple of customer quotes from agencies that have been testing these out in the field over the last several weeks. These actually just came back in the last week or two. So from a First Officer, I've been a law enforcement officer for nine years.
I've tested several body worn cameras for years now. By far, the Icon Flex rates the best in every category. I personally wear a camera every day on duty and believe that officer warrant video is the wave of the future. And I'm only protect officers from false claims, which it has done for me several times, but reminds people that their actions are being recorded and can be shown to a judge. Often that is enough for them to act differently towards the officer.
I was surprised that I never ran out of battery power or built the camera's recordings even on super long days when the camera was on the entire time, it never failed me. And on traffic stops, they would start getting mouthy then see the camera and stop talking. That's a reaction we have not been able to elicit with this group in the fifty years we've been dealing with them. And finally, just this past weekend on foot patrol, I had someone tell me I looked more intimidating than the six foot five deputy standing next to me because of the camera. From
another officer, I'm
very pleased with the performance of the TASER Axon Flex camera system. I used it on every shift since it was assigned to me uploading hundreds of videos to evidence.com Web site. I found the system is very easy to operate. I found it does not interfere with my performance in any way. And I use the camera in rain and the sun and the heat and the cold.
I use it on my motorcycle and a patrol car in daytime and at night. And I've been nothing short of amazed at the performance of the system, the clarity of the picture, etcetera. In closing, I highly recommend the purchase of the TASER Axon Flex Bodyworn Camera by our city, please. So we're obviously delighted to be getting this sort of user feedback. The product is being very well received.
Now new bookings this quarter for the Axon Flex were roughly flat at a little over $400,000 which we attribute largely due to the fact that the Flex did not begin shipping until late in the quarter and most agencies had started shipping earlier in the year, did accelerate total sales in our Video segment up to $1,300,000 from $884,000,000
in the first quarter.
Now let's turn our attention to international sales. We had very solid results $4,800,000 in international sales. We'd already talked about the orders from Australia, which were significant. We also had an 800 x twenty six eight hundred unit X26 order from Brazil. This is important in the Brazil historically been primarily buying the M26.
We believe we'll see some transition to the X26 and even the X2 in Brazil. As mentioned, we have a team that's going in country to set the foundation. They were at the International Association of Chiefs of Police Conference in Brazil this week. They will be located full time in Brazil by the end of the year. I should also clarify, we did announce in Brazil, we put out a press release in conjunction with our distributor and some government agencies down in Brazil that we do plan to invest approximately $6,000,000 in the country.
We've received several questions whether we're writing a check today and this is an immediate expense. The answer is no. This is being funded out of revenues from Brazil over the next several years. Brazil spent around a $3,000,000 a year country for us in revenues. So we expect these investments to come from positive net margins in the country, not a large upfront capital investment.
We're focused on being efficient and growing our business in Brazil intelligently. We're not building a company owned facility in Brazil. Rather, one of our core contract manufacturing partners that already manufacturers some of the more complicated and complex components for us Here in The U. S, they have their own facility in Brazil, which is well established. So we're partnering with that same contract manufacturer in order to do the final assembly of the complete unit in Brazil.
So we will be sending a team of several U. S. Employees to spend the next year in Brazil and help us build out the local team and grow the country over the long term. But again, we expect it to be funded out of operating margin from that country. In Europe, we've also expanded our presence.
We have two employees who relocated from The U. S. To help the team of four that we already had in Europe. They're located in France and Germany. Earlier this month, you saw we announced several significant orders out of TASER Europe.
So we're seeing our investments in greater customer engagement begin to bear fruit. So in conclusion, we've been very pleased with the performance of the company in the first half of twenty twelve. Your employees have been working hard, cutting costs, improving our processes across the board. So all that effort is paying off with the results that we're so proud to report today. We believe the products and programs are in place such as the new TPP payment plan, which will set the foundation for a strong second half of twenty twelve.
However, I should remind you that the third quarter tends to be seasonally weaker than the second quarter and as always it still remains difficult to predict the timing of large orders and the rate of adoption for our newest products. So thanks for taking time to join us today. We look forward to talking with you all again in October. And with that, we'll open it up for a few questions.
Thank you. We will now begin the question and answer session. Our first question comes from Steve Dyer from Craig Hallum. Please go ahead.
Good morning and congratulations on the good results.
Thank you.
So a question on just generally on the phase out of the X26 or I shouldn't say phase out, but it's my understanding that departments have been made aware that essentially five years is the useful life for an X26. I'm just wondering in general anecdotal reaction to that. Do you see that driving upgrade cycles? Are there people just sort of deciding they're going to roll the dice? What's the general reaction to that?
We are seeing that it is helping our customers to sort of get focused on upgrading your technology. The X26 is a ten year old platform. Now we in the current budgetary environment, we've seen many agencies have been putting out their capital equipment purchases, vehicles that they normally replace every three or four years. They're getting several extra years out of them. So we're certainly not seeing across the board that people are immediately moving to upgrade or refresh units that are getting past their useful life, but it's starting to make a difference.
We believe the most important and compelling aspect are the improved safety features of the newer products, which helps give them a more compelling reason to upgrade. And we're certainly hoping that the this new TASER payment plan helps them to do it out of operating budgets and accelerate the upgrade. So it is making a difference. It's not 100% across the board certainly that people are immediately moving to upgrade units outside the useful line.
Have you noticed any difference and maybe it's just too early to say, but in cartridge usage with the X2 versus the 26?
This is Dan. Steve, yes, nothing significant so far. We are because you've got the ability to display the warning arc, we are hearing from the field that they're getting compliance from people to be displaying that warning arc, which they're more likely to do with the X2 because the X26 you have to basically unload the weapon and to display that warning arc where the X2 one of the key features and the key benefits is the fact you can do that while it's loaded so you don't create an officer safety issue. So anecdotally we are hearing that they're getting a lot of compliance from that. We haven't really seen that translate into a difference in the cartridge usage so far.
Yes. I think the dynamics that we would look at in general if we had to estimate it between 1020% of our cartridges that are sold are actually used in the field, 80% to 90% are used in training. So because of the multi shot capability of the X2, we actually see greater numbers of cartridges being fired in training, but we may see less cartridges being fired in the field due to the surrenders. But the net effect, it's too early to say, which direction it nets out.
Okay. That's helpful. And then Dan, how will the revenue be recognized under the new TPP program? Is that going to be a deferred revenue scenario? Or is that all upfront and just the cash flows are deferred?
So it's going to depend on whether we actually sell the paper. This first deal with Colorado Springs are actually partnered with the leasing company. So we'll get paid upfront. So we'll recognize the revenue upfront. If we hold the paper, we will likely end up recognizing it over time.
But for most part, our goal here will be to depending on the deal structure, most of these deals we expect that we won't hold the papers will be recognized in the sales upfront.
And is that the full normal ASP or does the leasing company shave anything off for themselves?
Yes. I mean, there's a little bit of a discount. But as Rick said, we think we can do that and still maintain our normal operating profits because of just the fact that this is driving higher sales than just some of the other considerations as part of the sales. So even though there's a little bit of a haircut we take, the overall profitability of the deal will still be strong.
Okay. And then my last question, I'll jump back in the queue. Gross margins have been really very good the last couple of quarters. Is that and I'm trying to figure out kind of going forward if that's a sustainable level, how much of that is just attributable to the higher revenue run rate versus do we have maybe with the X2 and the Exxon maybe a kind of a permanent shift in mix that's going to take those up some?
Yes. It's a good question. I think that overall certainly the higher operating leverage we have is helping. There's a lot of indirect manufacturing costs that are relatively fixed. So having higher sales levels certainly help in that regard.
I think the X2 has certainly helped in that regard because of the higher ASP versus the X26. With Flex, as we see more adoption of Flex, I think that will be in the near term will be a little bit of a drag just because of the deferred revenue. We're not recognizing we're only recognizing roughly half that sale upfront and then the other half over time. It will kind of normalize over time, but in the beginning because of the deferred deferred revenue component of the flex sales as the axon flex takes off and becomes a bigger part of the business that will those margins won't be quite as strong as the ECD margins.
Okay. Very helpful. Congratulations again.
Thanks, Steve.
Thank you. Our last question comes from Greg McKinley from Dougherty. Please go ahead.
Yes. Thank you. First of all, Dan, I missed the number you gave on cartridge units. Could you repeat that please?
Yes. Sure thing. So we sold 364,104 cartridges in the quarter.
Okay, great. And then can you remind me of the X2 rebate rate currently in effect? What change what reductions if any have occurred? And then how you expect that rebate to sort of bleed off later this year?
Yes. So it was for the second quarter, it was $250 a unit. In the third quarter, it will come down to $210 a unit. So it's we've basically we want to I think a sort of a difference for where we're at year end, we kind of announced the rebates throughout the year. So we want to encourage customers to move as quickly as they can and their budgets allow because the rebate is coming down over the year.
So it's $2.50 in Q2 come down to $2.10 in Q3. And certainly felt that it helped us a little bit in Q2. It created an impetus for certain customers that just were want to move a little quicker to make sure they took advantage of that higher trade in value.
Great. It was also $2.50 in Q1. Is that correct?
That's correct.
Yes. Okay. Just getting back to the TASER protection plan for a moment. So you would envision if most transactions occur such as the one that you're doing with Colorado Springs and my sense is that that is how you expect most of these to be handled. On the P and L, we're just going to see revenue and cost of sales and then the leasing company in essence is your direct customer and maybe just a slightly lower gross margin rate, but you'll make up for operating margin just with operating expense leverage on higher volume.
Is that how you're thinking about it?
Yes, that's exactly right.
Okay. And then you wouldn't anticipate holding like long term deferred receivables that you think most of them will be the receivable will be with the leasing company rather than yourself?
Yes. That's the current intent. Obviously, we'll have to sort of see how this plays out over time. We've got a strong cash generation in the business. But for right now, we think it's we'll let the leasing companies do what they're good at and we'll do what we're good at as long as the economics work.
Obviously, if that discount that leasing company wants to take is becomes part where we don't think the economics work, we certainly reserve rights to take that paper ourselves. But for right now, it's what we're seeing is that we can do this and have them be responsible both take the credit risk and also do the sort of recurring billings everything goes through that. And I think that's the model we intend to going forward with and I think it should work. We're talking to a number of different companies, leasing companies and that should help keep it competitive so the rates we sell the paper at remains attractive for us.
Any ballpark guidance on what kind of discount you're going to be seeing on those sales?
Not that I can really say. It's going to depend on each deal. Part of it will depend on the sort of the inferred interest rate that's baked into the lease. Obviously, the lower the rate, the bigger the discount that we'll take. So nothing I can really talk to.
I think overall, like I said, I think it won't change our operating margins
for the business.
So we still feel that even if we do more of these deals over time, we don't think it will be net accretive to earnings.
Okay. Thank you. And then on the video business, I wonder if you can just talk a little bit about how you guys are assessing the performance of the business from a higher level perspective in terms of what do we need to see out of it in order to continue justifying heavy investment back into it? Maybe also give us a framework for what type of annual revenue run rate might need to be achieved before it's no longer dilutive to operating income. So what kind of milestones do you need to be seeing in the next six to nine months where you say, yes, this is something we want to continue to pursue?
Yes. Those are great questions. I think one thing we're going to look at is really just the traction. I think for us, we look if you look at the first quarter results, we actually had a net investment in Video business of about $3,000,000 that's been reduced down about $2,500,000 Obviously, we want to continue to see that work its way towards breakeven and then start contributing. So I think that's we're going to monitor it closely both for the net investment, but we're encouraged by the traction we're seeing.
We're encouraged by the feedback we're getting from some of the early customers. And we're still remain convinced that this can be a very interesting and material part of our business. So I think as long as we continue to feel that way, we think the investments warranted. But we will I think same as you guys will be doing from an investor's perspective. We're going to monitor the performance of that and really want to see that they're continuing to get traction in both the sales and profitability of that business.
Any feel on what video segment to sort of have that segment be a breakeven proposition?
It's tough to answer that because it will sort of depend on how quickly we get there. The good thing about the video business because we're deferring some of the flex sales that will actually help in the future because the cost of running our sort of the infrastructure there's sort of a fixed and variable part of that. So you'll as those deferred revenues start being recognized that will actually help the profitability. So it's a tough thing to model. But certainly, I think that the sort of the best way to look at it will be to sort of see the trends and be able to sort of see predict kind of when we kind of cross that breakeven threshold.
Yes. All right. Thank you.
Sure then, Greg.
At this time, we have no further questions. Do you have any concluding remarks?
Well, Well, I just again, thanks to everybody. Obviously, we really enjoy days like today. It's been a long, long road the last several years to get here. I think we've really tuned up the organization. Any shareholders who would love to like to come take a visit to your company, please feel free to contact our IR department by email at irtaser dot com.
I'd be happy to show you around your company and we look forward to hopefully continued strong performance in the back half of the year and as we move into 2013. And look forward to joining you all again in late October for our next conference call. So thanks and have a great day.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.