Rick Smith - CEO Dan Behrendt - CFO

Steve Dyer - Craig Hallum Capital Mark Strauss - JPMorgan Peter Mahon - Dougherty

Good day, ladies and gentlemen, and welcome to the Quarter Three 2013 TASER International, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session with instructions to be given at that time. (Operator Instructions) I would now like to turn the conference over to your host for today, Mr. Rick Smith, Chief Executive Officer of TASER International. Sir, you may begin.

Thank you and good morning to everyone. Welcome to our third quarter 2013 earnings conference call. Of course before we get started, I am going to turn the call over to Dan Behrendt, our Chief Financial Officer, to read the Safe Harbor statement.

Thank you. Statements made on today's call will include forward-looking statements including statements regarding our expectations, beliefs, intentions, and strategies regarding the future, including statements around projected spending. We intend that such forward-looking statements be subject to the Safe Harbor provided by the Private Securities Litigation Reform Act of 1995. The forward-looking information is based upon current information and expectations regarding TASER International, Incorporated. These estimates and statements speak only as to the date in which they are made, are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. All forward-looking statements that are made on today's call are subject to the risks and uncertainties that could cause our actual results to differ materially. These risks are discussed in our press release we issued today and in greater detail in our Annual Report on Form 10-K for the year ended December 31, 2012, under the caption Risk Factors. You may find both of these filings as well as our other SEC filings on our website at www.taser.com. And with that, I'll turn it back over to Rick Smith, our CEO.

Thanks, Dan. As a reminder we are going to be accepting some questions via twitter during the Q&A portion of the call, and you can submit those using the hash tag #TASR_EARNINGS. To follow our updates on Twitter during the call follow the account at TASR -- I'm sorry, @TASER_IR. So again our accounts to follow would be @ sign @TASER_IR. We will be posting graphics and commentary during the call. And for those you without Twitter all updates and graphics will stream directly to our Investor Relations website at investor.taser.com. I'm so excited to share with you, with our investors the results of our hard work and many exciting new announcements from the past three months on today's call. First off, we hit a historical record in our revenues this quarter recognizing $35.2 million on a consolidated basis. This marks the seventh consecutive quarter of year-over-year top-line double-digit growth. I'm truly proud of our team and I think that we continue to be positioned for strong growth moving forward due to the continued upgrade cycle and the exciting momentum in the EVIDENCE.com and Video segment. Specifically, our TASER Weapons business delivered revenues were up 16.8% to $31.6 million year-over-year. In our EVIDENCE.com and Video segments, the revenues there grew a 111.5% to $3.6 million compared to last year's third quarter. Our international business made up approximately 11% sales in the quarter. Asides from the phenomenal top-line growth, we've been very busy launching several new initiatives that we previously announced. These initiatives were all very customer focused and in an effort to continue to grow the EVIDENCE.com and Video business. : We're hearing immensely positive feedback from customers who fit these market segments. Perhaps even more impressive is that we were reentered into several bid processes that we've previously been shut out of, when we are offered only the Flex point-of-view cameras. So while we still believe that the point-of-view is the best type of camera for law enforcement officers, we think that we now have the product suite to really sweep the overall market. With this quarter being AXON Body's first quarter in the market, it sold almost 780 units, proving that by launching this product we are filling a much desired market niche. We've been very busy shipping this product for revenue, and so we're actually backed up on getting some trial units out to customers. So it's been a pleasant surprise at how well received AXON Body has been. Second, we revamped our entire pricing structure for EVIDENCE.com and Flex to become more transparent with varying tiers of service to drive adoption into every niche of the law enforcement market. As we went over on the pricing update call a few weeks ago, this was an aggressive move to change the sentiment that on-officer video will be on every officer in 5 to 10 years to on every officer within two to three years. Our new pricing model was designed in extensive consultation with our customers over the past six months. We previously were using a fairly complex pricing model, which required custom quotes and negotiation with every customer. This allowed us to experiment and to iterate around pricing while we dialed in what we believe would be the optimal pricing model in order to scale the business. We believe we now refined our business model and we've now published this new pricing model to enable faster market adoption. The new pricing model is designed to accelerate the sales process by, first, eliminating the perception in our products or services are expensive; second, eliminating any sense of customer uncertainty about future costs; and third, creating tiers of service to fit different customer segments to maximize both penetration and profitability. The new pricing brings Flex to an extremely affordable price of $499 per camera in comparison to the previous price of $950 per camera. But we've also debundled the service from the initial purchase. The agency now has the option of buying the service at varying levels starting at $9.95 per month up to $49 per month, that's per license. This lets the agency buy only the feature set that it wants. And simply put, we believe that we now have the best products at the lowest prices positioning us for in faster sales wins absent lengthy negotiations. Third, we officially launched the EVIDENCE Mobile app with my.evidence.com site for individuals. This allows individual officers to utilize the apps before their agencies deploy EVIDENCE.com, which creates a low friction way to introduce our services into the market. This free app provides another means of evidence capture including still pictures, notes, videos, and voice recordings. This app then pairs seamlessly with the agency's EVIDENCE.com account to store all relevant data in one place regarding a case. During the International Association of Chiefs of Police Conference we had several hundred officers sign up for the app. And based on early customer reactions we believe law enforcement is realizing importance in benefits of mobility in their field. Agencies are further saying that they can cut a lot of cost out of the process if they have integrated evidence management system such as EVIDENCE.com and EVIDENCE Mobile. And finally, we announced the acquisition of the Familiar, Inc. team. We felt that this is teams experience was developing beautiful digital, video, and photo interfaces for mobile devices fits seamlessly with TASER's vision for the future of our EVIDENCE.com and Video business. Many of our customers have asked why it is that consumer applications are so much more user-friendly than enterprise software. In fact, there is a broad trend towards the consumerization of IT, where professional users in many industries are demanding consumer type ease of use in enterprise solution. And this is exactly why we acquired Familiar because this team knows how to make great, easy-to-use apps in the consumer space and we want to bring these great user experiences to our law enforcement customers. The Familiar team will be spending the next quarter researching the various adjacent technologies in law enforcement before diving into development. One of the advantages of our acquiring of functioning team is that we can immediately put them under project that will create new revenue streams down the road. I want to be clear we are not deploying the Familiar team simply to augment our existing engineering resources on our existing EVIDENCE.com product. We are signing them to develop our next-generation mobile and cloud service offering, the first extension into our platform strategy. We look forward to updating you on our next generation products in the coming quarters. And again, welcome to the Familiar team. To top off all these exciting announcements in the third quarter, we just ramped up the International Association Chiefs of Police Conference in Philadelphia, where we were actually presenting our booth as the EVIDENCE.com booth rather than TASER booth. And this has generated a tremendous amount of buzz regarding our revolutionary cloud offerings. There are a lot of themes discussed in IACP sessions that mirror the overall macro environment we've been seeing over the past six months to a year. There was a noticeable shift in momentum around both on-officer video and cloud computing. At previous year's conferences, there was considerable skepticism about whether officers would wear cameras and whether law enforcement agencies would adopt cloud based systems. This year that skepticism was largely gone, replaced by a general sentiment that on-officer video is something that most agencies are now planning for in their future. And cloud based solutions like EVIDENCE.com will solve these big data storage and analytics problems better than agencies if you're using older on-premise solutions. Last year, it was noteworthy when an agency indicated they're moving to on-officer video. This year, it was the common reaction. In my opinion, it is no longer a question of if agencies will deploy on-officer video and cloud hosted solutions but rather when and how rapidly they will adopt them, and which technology providers will win in the marketplace. The role of seeing is Video is inevitably come to law enforcement and is coming fast. The New York City judge ruling is just one example of that. We're seeing and hearing increasingly more conversations around this and policy makers are working hard to make sure that they're prepared for this momentous change in policing. The Police Executive Research Forum, one of the most respected thought leaders in public safety, held a session last month dedicated entirely to the topic of officer-worn video. In this session, leading chiefs indicated that they plan to implement body worn video in the near future. The IACP also reported over half of police chiefs surveyed indicate they're deploying or actively considering cloud solutions in the near future. The United States CIA recently awarded a cloud based contract to Amazon web services to fill their next-generation data storage or data center. And I think that's been an incredibly good development as far as for state local law enforcement agencies, seeing an agency such as the CIA selecting Amazon as their data provider. All these macro trends help our customers to get used to this paradigm shift to cloud based evidence management and storage. We're really seeing some of the larger agencies in the U.S. embrace this technology wholeheartedly. We've talked about Albuquerque in the past. But it is truly a great example as they are now the world's largest on-officer video camera -- I'm sorry, the world's largest officer-worn camera deployment to our knowledge. This is a large city that's under a lot of scrutiny from the public. They initially launched with a competitor's body camera and then transitioned their entire agency to the AXON product line. We're seeing agencies utilize our crowd funding to purchase cameras and we're seeing City Counsels leave the charge in some cases. We're seeing agencies removing car systems in preference for body-worn cameras, a seismic change in our opinion. The large agencies understand the intricacies of large scale digital evidence management and know it's not just about buying a camera anymore and subsequently they're choosing AXON and EVIDENCE.com. All these factors give us confidence that we're on the edge of something big, something that our bookings figure of $5.8 million in booking this quarter strongly reflects. All these internal and external events are indicative that we're at the edge of a tipping point with the entire EVIDENCE.com and Video business. We see 2014 as the year that things are going to be moving like speed and TASER and frankly our competitors are going to be defining and solidifying their relative market share. In light of these market dynamics, we feel that now is the time to invest to make and make this happen and happen in a big way for the company and for our shareholders. We are out to own this space and to grow it fast. We see the opportunity to create a central file hosted technology ecosystem for the public safety sector including both our current EVIDENCE.com offering and future products and services such as we'll be building with the Familiar team. The recurring subscription revenue opportunities create a very high potential lifetime value for every customer. Hence, we believe the biggest mistake we could make would be to under-invest in driving market share right now when the market is forming. We've already begun to make some of these investments during 2013 in functions such as account management and field services. This quarter, we deployed additional sales representative for the EVIDENCE.com and Video team effectively doubling our manpower in each region in order to reach mid-tier customers at a deeper rate. Telesales continues to be one of our most successful programs with the small agencies and our senior sales representatives are laser-focused on the big name agencies in the U.S. We hope to be able to share this team's successes again in the fourth quarter with you. Last year, we began breaking out reporting by segment for both the TASER and the EVIDENCE.com business. This is a useful tool both for investors and for our management team since these two business units are at different levels of maturity and market development. We are managing our EVIDENCE.com and Video business with an aggressive investment to drive top-line growth and seize maximum market share. Again, given the recurring revenue model and inherent advantage we will have in selling adjacent services in the future to every customer. We believe the right strategy here is to focus on driving market adoption and garnering a dominant market share. With the addition of the Familiar team as well as planned hires and other research investments in EVIDENCE.com and Video segment, we expect R&D expenses will increase over Q3 2013 level by approximately $750,000 to $1.25 million per quarter starting in the fourth quarter of 2013. In our TASER Weapons business, which has been a more mature phase, they were focused operational excellence and driving long-term profitable growth. The segment reporting will allow our investors to track our progress and our execution discipline in both segments more clearly. In regards to our core TASER Weapons business, the upgrade cycle continues to expand for us. As of September 30, 2013, we've upgraded approximately 14% of our installed base. In the third quarter, we upgraded over 8,000 units, which is the highest number of units in any quarter to-date. We also believe that there are some agencies who are proactively upgrading their units outside of our trading credit program and thereby they're not making it into our metric. To complete the primary order with actually an upgrade, they've committed to upgrading their entire fleet of weapons and in the quarter we realized about half of that, 2,200 units. We think that the upgrade program continues to be successful in encouraging agencies to move to the Smart Weapon platform and the declining trading credit has been a valuable experiment for us. In Q4 that credit steps down again to $100. We've not yet announced a program for 2014 but we think we will continue to have some form of a program given the success of the current one. I'd also like to take minute to discuss the current state of the business in regards to defensive products and commercial litigation. As some of you may remember, in September, 2009, we issued a comprehensive set of new warnings around our TASER Weapon. The large majority of our litigation has been on the premise that we had failed to properly warn of the risks associated with the operation and use of our products. Since the rollout of those new warnings in 2009 the rate of new cases presented to the company has significantly declined, two years ago we had 55 pending cases. Today, we're down to just 23. In the third quarter we did not have a single new case filed against us. We have had eight consecutive quarters where dismissals have outnumbered new cases served. We think that this is a testament to the strength of our defense and legal team. That being said, we do have some cases still pending that are from the pre-2009 era. We are aggressively litigating these cases, but this comes at a financial cost to us. This quarter, for example, had expenses related to the cost of defense of commercial and product litigation $2.2 million higher compared to the same period in the prior year. We've implemented measures to mitigate this cost through in-house attorneys in defense, but simply put defense is not something that we take lightly. The good news, we're in the final stages of litigating the remaining pre-2009 cases over the next two to three quarters. Accordingly, we expect our litigation expenses to remain in this elevated range for another two to three quarters. On the bright side, we're very happy to share that we expect these expenses to trend downward in the second half of 2014 as we bring the pre-2009 case load to conclusion. We expect to see significant reductions in legal and litigation expenses from the second half of 2014 going forward. This has the opportunity to significantly further improve profitability in our TASER Weapons business unit going forward from the middle of next year. To wrap up, before Dan goes up with the financial results in greater depth, I'd say exciting things are happening here at TASER and we think this is just the beginning. Dan?

Thank you. So in the third quarter consolidated sales were $35.2 million or 22.3% increase from the third quarter of 2012. The increase was primarily driven by the continuation of the upgrade cycle with agencies upgrade to the new X26P and X2 Smart Weapons, combined this contributed $13.2 million in the third quarter. TASER CAM also had a strong quarter growing $1 million over the same period last year and the AXON cameras and EVIDENCE.com sales also grew by $0.8 million to $1.7 million in third quarter of 2013. Sales of our cartridges declined $1.5 million in the third quarter resulting in some sales promotion this year versus last year, and our X26, the legacy X26 unit declined approximately $0.2 million in the third quarter representing agencies moving to the Smart Weapon platform versus the legacy products. We still have some international and federal customers that continue to buy the legacy X26 product because it's the only conducted electrical weapon that they have proved in their market or application. But we're working with these customers to get them on the new Smart Weapon platform by having them review and approve the new weapons for their purchases. As of September 30, 2013, we have upgraded approximately 14% of our installed base of units over five years old and we clearly -- we still have a large opportunity in front of us with roughly $400 million of future upgrades still to be gone after from the company's perspective. Gross margin for the third quarter was $22.1 million or 62.8% of revenue, which is up from $16.8 million or 58.4% in the prior year. As sales have increased, we've also continued to benefit from higher operating leverage from our fixed manufacturing costs, and also due to price increases that we put in place at the beginning of 2013 as well as more sales being sold directly to end user rather than through distribution channels, we've realized higher average selling prices of our products which also improved gross margin. Further with trading credits stepping down each quarter over the last year gross margin has been positively affected as trading credits have a smaller impact on our gross margins. Although service revenue has increased quarter-over-quarter, cost of service delivered decreased $0.8 million in the third quarter compared to the prior year for two reasons. First, we continue to benefit in the lower cost structure of public cloud based web services versus using our data center in the prior year. And secondly, we realized the benefits from the completion of the depreciation related to the capitalization of EVIDENCE.com software development, which was running $300,000 per quarter previously. In the newly renamed EVIDENCE.com and Video segment, revenues increased $1.9 million to $3.6 million for the third quarter of 2013, and loss from operations of this segment improved to $1.5 million loss from the loss of $2.5 million in the third quarter of 2012, largely due to the reduction in cost of services delivered as well as higher gross margins on the higher product sales. Increased revenue related gross margins in this segment were partially offset by increases in personnel and support expenses made in the current quarter to grow the EVIDENCE.com and Video business. Sequentially, loss from operations for the EVIDENCE.com and Video segment also improved by $1.1 million from $2.7 million in second quarter of 2013 to $1.5 million this quarter. The improvement was partially influenced by the higher product sales in the third quarter of approximately $1.5 million as well as the lower cost of service delivered sequentially at $0.4 million relating to the completion of the depreciation of EVIDENCE.com software development. These were partially offset by increases in R&D. As well in the second quarter of 2013 we did have a one-time benefit from a huge tax refund for Arizona of $0.3 million that ran through the EVIDENCE.com R&D line. Sales, general and administrative expenses of $12.8 million in third quarter of 2013 compared to $9.5 million in third quarter of 2012. As a percentage of sales SG&A was 36.3% of sales in the third quarter of '13 compared to 33.2% of net sales in third quarter of '12. Compared to the third quarter of 2012, personnel expenses increased $0.6 million as a result of strategic hires that we made over the last year, primarily in customer facing roles such as telesales, customer service, and account management, as well as skilled services and also some incremental administrative functions. Our professional, accounting, legal fees and litigation related expenses increased $2.2 million, compared to the prior year primarily due to expenses relating to the defense of product and commercial litigation. As Rick said earlier, the company expects expenses related to the defense product, commercial litigation to stay at these elevated levels for two or three more quarters before trending downwards in the second half of 2014 as we work through the remainder of litigation related to the pre-2009 warning cases. Sales and marketing expenses increased year-over-year due to the higher commissions of approximately $0.4 million, as well as increases in account promotion activities, eCommerce marketing and market development as we look to expand our initiatives internationally as well as in the Video and EVIDENCE.com segment. These increases were partially offset by decrease in trade show expenses due to the timing of the International Association Chiefs of Police Trade Show, which was held in the third quarter of 2012, but in this year 2013 it was actually held just this last month in or this month in October, so it will be a fourth quarter expense for the 2013. Given the traction and the company's experience in our EVIDENCE.com business unit, the company will continue to invest incrementally in customer facing roles and infrastructure to support the growth and, therefore, expect SG&A to remain or increase from this quarter's level until litigation expenses start to decrease in the second half of 2014. Research and development expense were $2.4 million in third quarter of 2013. This is an increase of approximately $0.5 million, compared to the third quarter of 2012. The increase is primarily due to additional personnel expenses related to EVIDENCE.com and Video segment development initiatives. With the acquisition of Familiar team, the corresponding push to move an adjacent technology in law enforcement, we do expect incremental R&D expense starting in the fourth quarter. As our team is researching in doing what the customer works on what will be the next markets to the proper entry, their expenses will be completely charged to R&D operating expense. In 2014 as we start to develop the initiatives, we do expect that some of these expenses will be partially capitalized until the products are launched. With addition of the Familiar team as well as planned hires in other research investments in EVIDENCE.com and Video segment, we do expect R&D expenses will increase over the Q3 2013 levels of approximately $750,000 to $1.25 million per quarter starting with the fourth quarter of 2013. Specific to the fourth quarter our expectation is R&D expenses will grow sequentially by approximately $1 million due to expenses around the Familiar acquisition, as well as some of the increases I mentioned earlier. These investments are being made to accelerate our development in sale of adjacent technologies and new products into our market share for the video segment. Our adjusted EBITDA, which excludes certain items detailed in our press release was $9 million for the third quarter of 2013, compared to $8 million in third quarter of 2012 but the improvement being driven by higher sales in 2013. Income from operations was $6.9 million in third quarter, compared to $5.3 million in the prior year's third quarter. And the net income for the third quarter of 2013 was $5.1 million or $0.10 per share in both the basic and diluted share basis, compared to $3.7 million or $0.07 per basic and diluted share in the prior year. Income taxes were $1.8 million in the quarter. Income taxes expenses for the quarter were actually exceptionally low in the third quarter of 2013 for several reasons. First of all, we benefited from disqualifying dispositions of incentive stock options in the quarter, which reduces our taxable income. We also started applying for credit for the domestic production activities deduction, which has a better -- which actually reduces our effective tax rate. And then, we also had a favorable returns provision adjustment, which was recorded in Q3 of 2013. We do expect our full year effective tax rate before discrete items to be approximately 38.2%. Moving on to the balance sheet. In third quarter of 2013, the company generated $10.9 million of operating cash flow and we finished the quarter with $48.3 million of cash, cash equivalents and investments, which is really impressive considering the fact we bought back $25 million worth of the stock this year. Accounts receivable of $20.1 million, are up $2 million from the year-end balances due to increased sales as well as timely collections. Inventory of $12.3 million is up $1.3 million from year-end. Again, this is attributed to the general buildup of inventory in anticipation of future sales. Our investment of property, plant equipment of $19.3 million is actually down $2.6 million. This is really driven by $3.8 million of depreciation expense, partially offset by $1.2 million of capital expenditures in 2013. The capital expenditures are primarily in production equipment as well as some computer equipment. Accounts payable of $5.1 million is down approximately $1.1 million from the year-end due to the timing of processing invoices and check runs. And we had total deferred revenue of $18.6 million. This is up sharply, up $6.5 million for the year-end primarily due to two reasons. One is the upgrade program with the sales of X26 next year, which includes that extended warranty, which increases our deferred revenue for warranties, as well as the sales of our AXON camera and EVIDENCE.com contributed another $2.5 million to the increase due to deferred revenue on the sales of the future services what we're recognizing over time. Total liabilities of $36.3 million and the company finished the quarter with $92.1 million of stockholders' equity. We continue to have no long-term debt other than capital lease and continue to have plenty of liquidity and strong cash flow entering our core business to fund our sales, R&D efforts, and operations in the future. So we move on to the information on the cash flow. The company had cash provided from operations of $10.9 million during the third quarter. For the nine months ended September 30, 2013, cash provided by operations was $23.1 million. We did have cash used for investment activities for the nine months ended September 30, 2013, of $13.2 million compared to cash provided of $0.7 million in the same year and prior year. The negative use of cash is really driven by the purchases of investments during the time period. Cash used from financing activities was $11 million for the nine months ended September 30, 2013, compared to $19.3 million in the same period for last year. During the nine months ended September 30, the company did repurchase 3,048,166 shares at an average price of $8.17 per share and the aftermarket for total share repurchases this year of 25 million. That outflow is partially offset by the $4.1million of tax benefit from employee stock option exercises as well as $10.2 million of cash provided by the exercise of stock options the employees -- buy the shares at their strike price. As we stated last quarter to leave more time for Q&A portion of the call we've started including some unit sales statistics in the press release for your reference. And with that we'll take questions from people in the queue.

(Operator Instructions) Our first question comes from the line of Steve Dyer of Craig Hallum Capital. Your line is open. Please go ahead. Steve Dyer - Craig Hallum Capital: I'm just wondering if we could dig into the Video business a little bit. It certainly seems to have kind of blossomed here a lot quicker than anybody expected. Could you give us a little bit of the lay of the land just in terms of your competitive position, how do you sort of see yourself, have you lost any particularly meaningful deals? And if so why would you lose that sort of thing? I think it’s - investors are now sort to a point of believing and now it's just a question of how much of that can you capture.

Yes, well, this is Rick. So the first thing I would tell you is actually the long-term view of this is it's really not a Video business. It's a cloud services business that's being driven with our first major application being on-officer video. So I would say where we -- this past quarter we actually picked up a lot of deals that we were at risk of losing previously and the major thing there was there is just a segment of the market that wants an inexpensive camera, very price sensitive or they just -- they want something to just clip on their uniform and go they don't want to have to run a wire somewhere or wear a camera up on their glasses. It's also quite interesting actually that by introducing the body camera we're able to pull several deals back but actually one of them, a fairly good size one had already gone to bid and specified a competing camera in the bid. And that bid was then kind of pulled back and reworked once they knew that there was now our camera in the market that had the same advantages frankly at a much lower price and would give them the ability to integrate with our back end over the long-term. But the other thing very interesting is of the agencies that wanted - that were looking at the AXON flex previously the vast majority of them stayed with the flex with the perspective view. And so it seems like once the customer understands the advantages of the officer perspective they stick with it. It seems more like agencies that are sort of newer to the concept of video that are likely to be more sensitive around cost or convenience, and then a little less performance sensitive. I would -- of the deals we know of I'm not aware of any large deals since we put the body cam out that have gone away from us. But again, it's only been there for a little while, so there haven't been that many big deals that have closed during that time period. In terms of the competitive landscape I would say we're competing primarily with hardware vendors, folks that sell the camera and they might give away an app to help with some of the data management. I think we're unique in that having to integrate it to cloud services offering although this year at IACP there's palpable shift. No, there was none of this like fear of the cloud sentiment there was a year ago. So we do believe that competitors over the coming year or so are going to look to move more in the direction of having a robust cloud offering. So that's one of the reasons that we think we have unique advantage today and we got to press our advantage now. We're finding customers or this is a very sticky business. Once we get people on the system they love it. And we just got to make sure we win as many deals as fast as we can during this next year when we think we'll continue to have a real advantage. Obviously we intend to maintain that advantage over time but it would be imprudent for us to assume that we're going to be able to maintain the advantage we have today indefinitely. Steve Dyer - Craig Hallum Capital: You mentioned the stickiness of the business. What can you give us in terms of metrics now, it's been period of times since some of the early adapters have been on the network. Any metrics you can share with us as to the stickiness of it?

This is Dan. I think it's probably similar to the sort of our comments last quarter. I think we're satisfied with renewals we're seeing. Customers that are heavy users of the system are renewing in rates that we're satisfied with. The tough thing is a lot of the sales that we've made over the last year are sort of pay trials. Some of those customers have bought just a handful of units and they may not be ready to deploy video. So I don't want to overly read into just the renewal rates an agency level so we’re trying to develop the right metrics that just sort of share with the market. It's also pretty early, this - I think, as we get into -- into next year I think it's probably more appropriate for us to share [inaudible] we’ll have a little bit more data, but we're satisfied with where we sit today. The people who are utilizing the system regularly are renewing. I think they see the value. I think people that bought a couple of cameras and really aren't utilizing the system much, are probably less likely to renew, but they just may not be quite ready to move to video, but I think we're seeing even some of those customers come back into the fold just due to the momentum and the video market in general. Steve Dyer - Craig Hallum Capital: I'm wondering if you can draw on any parallels with the video business with your early ECD business, which was obviously a pretty controversial idea at the time and then it sort of started to hit a tipping point, any parallels you can draw that can help us sort to see how this plays out.

This is a very insightful question. We're actually talking in the booth at IACP this year it was very reminiscent of the 2002 IACP, which was the year that TASER, the weapons business hit the tipping point. Prior to that, early on there was a lot of skepticism about, we can't use electricity to incapacitate people and these weapons are controversial, not sure this is for us and then 2002 was when I remember just stay in the booth talking with people, it went from sort of explaining why they should even consider TASER devices to all of a sudden every conversation was about, oh yeah we're doing this, we're planning on this, it’s coming next year, we felt a very similar sentiment shift around both on-officer video and cloud which by several years we've been proselytizing it in the booth basically talking to skeptics, talking them through their concerns. Last year, having an agency come up and say they were considering buying a couple of hundred cameras, would have been something that was very noteworthy, we would have been, everybody in the booth would have been talking about that one customer at the end of the day. This year we had probably dozens of conversations with agencies talking about hundreds of cameras within the next year. So obviously there's still a lot of work to be done and I would caution that with big order like Albuquerque made the big difference last quarter so I don't know that we're going to see a smooth and continuous upward sloping adoption curve, there is probably going to be fits and starts along the way. But I think we've now passed –we’re now past the point of no return that on-officer video has been accepted, it's coming. There is very few people that are saying it's not coming. I think the way we look at it now is this who is going to win, what business model will prevail and how fast does this going to happen that's why as we talked about our strategy, it is about accelerating both the market and accelerating our market share. Steve Dyer - Craig Hallum Capital: And last question, I'll hop back in the queue. Some of the other cloud services, I think it would be helpful if you could kind of paint a picture of what those may look like? Police department I think aren't often thought of as cutting edge technologically. So help us kind of think over without giving away too much competitive information, how we should think about other offerings there and how that might look in a couple of years?

Well, your average police department in the United States has about 50 officers. They may or may not have an IT department. They are maybe subject to working with an IT department, it's over the reports within City somewhere else but there is very little direct relationship or control between the agency and their IT department. What we've generally seen is the systems that our customers are deploying tend to be fairly outdated in terms of the user experience, in terms of the efficiency, I was at a conference in at the IACP where Chief Tom Streicher from Cincinnati talked about a program that based on over $10 million deploying a digital record management system in Cincinnati that ended up being 15 years approximately late in its deployment. They have spent well over their budget, they are -- well between $10 million and $20 million before the thing ever went live and the days went live, there assessment was that the technology was already at least a decade out of date. We hear stories like that all the time. So our customers give you a number of different things. There is electronic ticketing system, there is automated license plate reader systems, there is record management systems with their tax based records, there is jail intake systems, there is booking photos, interview rules, in-car video systems the associated backends, which we're already going after with EVIDENCE.com. There is Computer-Aided Dispatch Systems where you got to be able to locate the vehicles massive to the calls that are coming in. So there is a lot of different systems that our customers buy and we believe that there will be enormous opportunities and we're looking at this from a buy, build or partner perspective that in some cases it's going to make sense for us to partner and in some cases it's going to make sense for us to just build extensions in EVIDENCE.com, but once our customers are managing their users on EVIDENCE.com and once they were managing their digital evidence those are their most precious and core records that you have because the digital evidence is not workflow, this is stuff you collect at the scene, you got to make sure you're protected in such a way that meets the federal rules of evidence and to be able to show that it's not been altered in any way. We believe that becomes really a core system. And by analogy if you look what salesforce.com has done, they entered Corporate America through sales force automation, but they've sent had adjacent offerings like we are sales force customer. We love it, makes our lives easy. We don't have to think about managing a big sales customer relationship management system onsite and we now use their service product offering for customer service. We've gone to work.com which is our HR module et cetera. So we see a similar opportunity for us to exempt from just the digital evidence in the several of the other core systems that takes to on a police agency.

Thank you. Our next question comes from the line of Paul Coster of JPMorgan. Your line is open. Please go ahead. Mark Strauss - JPMorgan: Good morning. This is Mark Strauss on for Paul Coster, congratulations on the quarter.

Thanks, Mark. Mark Strauss - JPMorgan: So obviously the investments on the EVIDENCE.com side are starting to bear fruit. I just want to go so earlier this year when you're talking about the -- I think it was a 10% OpEx improvement or increase. You kind of broke that down into different buckets. I think there was telesales and building out the international footprint of it. Can you just give an update as far as the payoff on some of those investments and how we should think about that spend going forward or is there a reason to invest more in those areas or should we think about or you kind of pulling back on some of those things in favor of the increased EVIDENCE.com spend?

Yes, Mark this is Dan. Yes, absolutely we're seeing, certain investments we're definitely seeing an immediate return for. I think telesales is one of those areas where those are sell funding positions. We continue to see our telesales each quarter increase and we have a disappointed diminishing returns at this point. So we've added significant of those resources and paying off. Some of the other things we're investing in have longer terms payoffs. Things like the investment in international, we're definitely making those investments as we indicated. We haven't seen that translate into sales yet. But we knew going in it's probably 18 months to 24 months cycle before those investments start paying off. So we'll continue to make those investments -- just the investments we're making on customer facing roles in the video segment, things like account management as well as additional outside sales resources as well as implementation services. Those are investments we've made, and in fact we're accelerating some of those investments. As Rick said, we basically doubled our outside sales headcount for the video segment and we'll continue to make those investments to grow that business. As Rick said, its bit of a land grab right now we want to make sure that we don't under resource our investments, especially those customer taking roles. We want to make sure we're in front of every customers that's got an interest in purchasing video products or digital EVIDENCE management solutions and we want to make sure that our ability to win or lose, we don't want that to be dependent on -- under resourcing that. So yes, we do expect we will continue to increase our investments in those areas. I stated the one thing that it's been higher than may be originally planned some of the cost around litigation. But as we indicated, I think we're going to sort of stay at these high levels for a few more quarters and then we expect those to tail off. And some of it it's just due to the timing of cases. It's tough to predict exactly when cases are going to come to trail and when the -- there is just a lot of workflow around that. So I think so far we're satisfied with our ROI and those incremental investments. And I think we will continue to increase them over time to make sure that we can grow that video business as quickly as possible. Mark Strauss - JPMorgan: And then lastly, and completely understand and agree with the investment on the EVIDENCE.com side but just for simple modeling purposes, is there a certain revenue run rate or a date and time that you're expecting that to sort of flip profitable on our operating margin anyway?

I think our focus right now is really to -- in growing the top-line more than just sort of the near-term profitability. One of the great things about -- sort of a cloud business is that recurring revenue stream so that -- for us, the focus is to get as many people on that system right now and the profitability will come with scale but we don't want to run it for the sort of the near term profit, it's really more of a long-term play at this point.

Thank you. Our next question comes from the line of Peter Mahon of Dougherty. Your line is open. Please go ahead. Peter Mahon - Dougherty: Just want to touch on a topic that we really haven't hit on yet and that is the core handle business. That definitely outperformed our expectations. Can you attribute that to a larger volume of smaller sales or have you seen healthy stream of kind of those mid-to-large scale orders?

This is Dan again. I think we're seeing across all segments -- strata of the market. We're seeing the sort of the small agencies; they are served by power efficacies to grow. I think that's has been a underserved part of the market. So I think that is -- certainly help to grow the sales to sort of that part of market better than what they're served before through us or through distribution. The large agencies, you've a deal like Houston this quarter for 2200 units, that's a big order for us. And I think the fact they went to City Counsel and requested to upgrade their entire install base over the next several years, with that first purchase being made this quarter. I think it's just indicative of the fact that I think agencies understand the need to upgrade to the new platform. And I think it's -- we certainly it's a big opportunity there, but we're really seeing it across all segments of the market and that upgrade remains a big opportunity. I think now the other thing is we're continuing to see further penetration to market as well where we've agencies that may be didn't have TASERS before or only had a small part of their police force carrying the TASERS are now carrying either buying for the first time or more going to full deployment from partial deployment. So I think we can still have wide space in North America as well even though there national businesses was just supporting this quarter that remains to be an opportunity that's 10 times bigger than U.S. market so it's one we can continue to invest to grow.

I'd add one other thing to that. Just as getting into booth at IACP talking to Chiefs the one other dynamics that's happening is the financial environment is improving and I talked to lot of chiefs who basically said, we spent quite three or four years going through cut after cut after cut and they're now coming out of that and they're saying our patrol cars are worn out -- basically, they are coming into a situation where they realize they're going to have to upgrade a lot of their capital equipment to include TASERs. So I think this market tends to lag as much of the economy. And so while things have recovered the last couple of years I think they're finally starting to come out and we're seeing just some strength there that they're able, they've got the budget availability now to going to upgrade some -- those units that are getting older. So hopefully that will continue and may be even accelerate into next year. Peter Mahon - Dougherty: Sure. And what were telesales in the quarter?

Yes, I haven't disclosed but it was over 10% of our sales again this quarter. Peter Mahon - Dougherty: And then, Dan, I know you talked about a couple of items that impacted taxes on the quarter. Would you mind relisting those and may be quantifying how much of an impact those did have?

Yeah, the two main items were the return provision. We estimate our taxes each year, and then when you follow return, the return can differ from the estimate. We actually had a $425,000 benefit this quarter where our actual tax return had lower taxes than we'd accrued for in the result last year. Putting the domestic production activities deduction, which is a mouthful - by starting to take that that's going to lower effective tax rate roughly by 1%. So because we just put that in place or sort of a year to-date catch up that's worth about $200,000 in the quarter. And then the last thing is with disqualifying dispositions of incentive stock options, the company can deduct incentive stock option expense for tax purposes until the employee had taxable income. So unlike non-bond like stock options, which we deduct over the service period incentive stock options you don’t deduct the expense around that until deploy actually has a disqualifying disposition and paid taxes. So we had some tax relief from that this quarter as well.

Okay, now let's go and take a question that came in from Twitter. The question was how much of a threat does Google Glass pose in the short term and long term future to take this AXON Flex and the body cameras? It's a great question. I have got a Google Glass, we're early explorers, it is a great product, I really enjoy it and we see really our strategy is to enable these consumer devices to be deployed by law enforcement through our fine infrastructure. So Google Glass will be a great option for customers down the road. I would say that I have shown Glass to a number of law enforcement officers. The current iteration of Glass is probably not going to really fit the needs of patrol police officers for a couple of reasons. Probably the biggest one is officers really are very particular about keeping their visual fields distraction free. If they are going into an environment they want to keep their peripheral vision they want to keep their hearing free on both sides and really be able to focus on the threat environment around them. And as again Google Glass is a fantastic product, but having the screen in your visual field can be quite distracting and the vast majority of officers I showed it to said for patrol use or for detective use they would not wear that while doing a sizable job. They would prefer to have a camera that unobtrusive that it does not really come into their visual fields, Frank. They do not want to think about the camera or their computer screens when they are actually in an incident. I would say we are also keeping an eye on what's happening in the smart watch space, the wearable computing. Based on early customer feedback we take that for alerting purposes something on the rest is probably more amendable to law enforcement use case that way they can choose to look at it or not with the vibration type of alert, but not have things popping up in their visual field that could be distracting at critical moments. So we remain excited to see what happens in the consumers space and again actually part of the EVIDENCE.com plan is to enable our customers to use these great consumer technologies seen what they're having to buy and build a bunch of IT infrastructure on site. : We look forward to updating on our fourth quarter progress on our next call in February. And for those if you are interested, I will be appearing on CNBC's Fast Money tonight at 05:30 pm Eastern. So tune in and I will get to chance to talk to more about the great things happening with TASER and EVIDENCE.com. So everyone have a great day.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, you may now disconnect. Have a great rest of your day.