Luke Larson - President Dan Behrendt - Chief Financial Officer Rick Smith - Chief Executive Officer and Founder

Steve Dyer - Craig-Hallum Mark Strouse - JPMorgan Jeff Kessler - Imperial Capital Glenn Mattson - Ladenburg Thalmann David Burdick - Dougherty & Company George Godfrey - CL King

Good day, ladies and gentlemen and welcome to the TASER International Third Quarter 2016 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call may be recorded. I would now like to turn to your host for today’s conference, Mr. Luke Larson, President. Mr. Larson, you may begin.

Thank you and good afternoon to everyone. Welcome to TASER International’s third quarter 2016 earnings conference call. Before we get started, I am going to turn the call over to Dan Behrendt, our CFO to read the Safe Harbor statement.

Thank you. This call is being broadcast on the Internet and is available on the Investor Relations section of the TASER International website. Please note that the earnings press release as well as supplemental materials including our key operating metrics are available on our website. Today, we will open the call with prepared remarks. We will follow the prepared remarks with our standard live question-and-answer session. Statements made on today’s call will include forward-looking statements, including statements regarding our expectations, beliefs, intentions or 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 Inc. 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 risks and uncertainties that could cause our actual results to differ materially. These risks are discussed in a press release we issued today and in greater detail in our annual reports on Form 10-K and the quarterly reports on Form 10-Q under the caption Risk Factors. You may find these filings as well as our other SEC filings in our website, www.taser.com. And with that, I will hand the call over to Rick Smith, our CEO and Founder.

Thank you, Dan and good afternoon everyone. I have the distinct pleasure of once again being able to report great results that are the result of tremendous work by just a fantastic team of people that I am blessed to work with. We had a tremendous quarter, with strong domestic and international revenue growth across our Axon network of connected devices, applications and people, a network which now connects over half of the major city police departments in the United States and dozens of the major prosecutor offices. Our results reflect the continued strong demand for our range of technology solutions and reinforce our belief that our vision and strategy continue to resonate with our customer base. In the third quarter, we expanded our major city presence with wins in Cincinnati and Atlanta, an agency which we won back from a competitor, where the agency had initially selected a competing body camera and yet ultimately saw this was much bigger than body cameras and they saw the value in joining the Axon Network. Since Q3 of last year, we have added 12 major new cities on our Axon platform and we now have an active presence in 35 of the 68 major U.S. cities. Our pipeline remains stronger than ever and we are optimistic about our outlook for the rest of this year and into 2017. Our customers value the advantages of our platform, including cost savings, intuitive features, proven reliability, the ability to scale and peace of mind. Most importantly, the value of our network of people, devices and apps continues to grow in value as we add more people and technology into the ecosystem. I am excited to report that we shipped over 30,000 cameras in the quarter, which to put it into perspective is approximately equal to the number of cameras we shipped in the first three quarters of 2015 combined. The strong camera shipments, along with our push to realized contractual milestones and fulfilled terms on held revenue, led to a 51% sequential increase in annual recurring revenue from $21 million to $32 million. In 2016, we have executed on establishing a strong beachhead presence in our focused Tier 1 international markets. We now have several major accounts in the UK, including the three largest agencies in the UK in the National Rail Police. We have major accounts in Australia and several active trials in Canada. We are pushing deep into our current Tier 1 markets. In the third quarter, international revenue was $11.3 million or 16% of our record $71.9 million of consolidated revenue. We are coming off another strong showing at the IACP, the International Association of Chiefs of Police held in San Diego, where we had over 3,000 visitors to our booth. Our virtual reality experience gave officers a unique 360-degree immersive view of how the Axon Network of people, devices and apps enables them to go with confidence from the field to the courtroom. We also announced our all-new point-of-view Axon Flex 2, a camera with unmatched durability, best-in-class HD retina low-light image quality and enhanced wearability. The Flex 2 is the first wearable camera that has the polymer molded directly around the electronics encasing them in a solid brick of protection from abuse and weather. We know how tough cops are in equipment and the Flex 2 takes our durability up another notch. We have also increased the retention strength by over 300% while improving the user interface of all of our mounting options. This is one of our critical differentiators for the Flex product line. And of course, we have extended our industry-leading retina low-light capabilities to full 1080P HD video and yet we still remain – retain the ability to buffer video for a full 12-hour shift, even in 1080P. Customers love the new Flex 2. And initial shipments are expected in December with full production ramping in early 2017. During IACP, we laid out our vision to reboot the entire enterprise software ecosystem of public safety built around video and multimedia at its core, phasing out paperwork and labor-intensive manual data input, but automating data collection through our sensors and our apps. We see this as a breakthrough capability only possible with our network of devices, apps and people. We are uniquely positioned to extend the concept of body-worn video. From today, it’s something that protects an officer – an individual officer in high-profile cases to a capability that automates the entire process of gathering, analyzing and acting on information in every incident of every kind. We see an opportunity to expand our current offerings on the Axon platform with the addition of a next generation records management system, or RMS. RMS is the central technology hub of public safety, including law enforcement, fire safety and medical emergency response. RMS systems are typically – they are just simple digitizations of the same paperwork driven workload of the last 100 years. We think multimedia information is far richer and far more compelling and can actually be far more efficient to gather and analyze. Just as smartphones with apps like Twitter, iMessage, Facebook and Snapchat have changed the way that we all communicate in our personal lives we believe wearable cameras with the Axon Network can revolutionize the backbone of public safety information infrastructure. And we are well along on the hardest part, which is building the network, getting the nation’s leading law enforcement agencies on the network platform. And they are now deploying over 100,000 of our camera nodes. Now, we can leverage this unique network to replace the outdated manual information systems that are prevalent today. Now another key development that’s moving us forward in this strategy around our creation of this rich, hardware software ecosystem was the addition of Todd Basche to our management team. Todd has a long history of innovation both as an entrepreneur, where he helped create the category for personal portable scanners and as an executive. While he was at Apple working directly with Steve Jobs, Todd proposed consolidating a number of different software products into the iLife suite, which included iTunes, iMovie, iPhoto etcetera. Jobs approved the project and appointed Todd to lead the effort. Now, as we discussed our strategy with our customers, we sometimes use the analogy that we are building something very similar to the Apple ecosystem, only we are building it for public safety rather than the consumer market. What a wonderful advantage we now have to have one of the leaders of the Apple transformation bringing that DNA into our executive team and into our product development programs. Todd has only been here for a few weeks, but I can tell you, I am having a ball working with him. His creativity, imagination and operational rigor are going to add tremendous value to our company. And I hope you, as our shareholders, can understand how excited I am to have him on board. We are going to do great things together. Todd, if you are listening, welcome aboard, man. Alright. As the next step in our evolution, we have started development of this cloud-based alternative to digital RMS, which I talked about. Now, the domestic addressable market for RMS includes all law enforcement, including both patrol and non-patrol officers, both sworn officers and civilians of all public safety, including fire and emergency medical services. As a result, the RMS market is more than double the size of our current addressable market which was primarily patrol officers. RMS represents an extension of our Axon platform and customers would also pay a monthly service fee for this new service. We believe that TAM, or the total addressable market, for RMS will more than double the TAM of this – that we have today for our current digital evidence management solutions. We have informed our customers that we will preview the Axon RMS solution at our user conference in June of 2017 and we had very strong interest from agencies interested in joining us as development partners as we develop this customer driven technology platform. We look forward to updating you on our progress on this exciting program in 2017. Now, we have gotten some questions about the long-term model that we published at our last Analyst Day. We remain very bullish on our model and our ability to build a large, sustainable, sticky and profitable business in our Axon segment. With the addition of RMS, which more than doubles the total available market, we see even more growth opportunity to build our business with high margin sustainable solutions. Before turning it over to Luke Larson, our President for additional details on the quarter, I would like to say a few words on today’s announcement that our CFO, Dan Behrendt, will be transitioning from TASER in the first half of 2017. Dan has been a tremendous contributor to the organization in his time with us. He has brought financial discipline and focus to the organization through several major inflection points in our development as a company. I want to thank him for the critical role he has played and the dedication he has demonstrated throughout. I also want to thank him for agreeing to stay on Board through Q4 reporting and filing the 10-K as we navigate this transition period and identify someone to fill the big shoes that Dan will be leaving behind. Dan, thanks for all you have done and for being a good friend to me and to the company and a good steward for our shareholders over the last 12 years. And with that, I am going to turn it over to Luke.

Thanks Rick. We had an exceptionally strong third quarter in 2016 and I am proud to share the highlights of our accomplishments. Revenues came in at a record $71.9 million, with international sales contributing $11.3 million to the total. Our other key metrics also showed continued strength within the quarter. Bookings on our Axon platform were $57.5 million in the third quarter, an increase of 56% compared to the third quarter of 2015, but down sequentially due to $20.5 million LAPD booking in the second quarter. Annual recurring revenue in the third quarter was $32 million, an increase of 51% from the second quarter as we converted over 22,000 booked seats to paid seats. Our active paid seat count increased as we shipped over 30,000 total cameras in the quarter and worked through our Axon Body 2 camera backlog. In the third quarter, we booked approximately 15,600 incremental new seats on our Axon platform. That brings our cumulative total of booked seats to 110,600 since the inception and represents growth of 16% sequentially. Operating income in the TASER Weapons segment was 38% in the third quarter of 2016, up from 33.2% in the second quarter. The increase was driven by record revenues in the segment and manufacturing efficiency. The ratio of lifetime value of a customer to the customer acquisition cost in the third quarter was 4.9, which was up slightly year-over-year and is a reflection of strong bookings resulting from our investments. On a sequential basis, it was down from 2016 second quarter, which benefited from higher booked seats related to the LAPD award. I am really excited about the momentum we have in all parts of our business. For our TASER Weapons, we are seeing broader adoption and deeper penetration both domestically and internationally. Our TASER payment plan programs, TASER 60 and the Officer Safety Plan, are helping accelerate sales domestically and increasing our warranty attachment rate. Our growing installed base of weapons is helping drive cartridge sales, which is a source of recurring revenue for TASER, though not reflected in our ARR metric. In the Axon segment, customers continued to resonate with our current product offering and the vision of the future. As we expand into additional solutions for law enforcement and bring them onto our platform, this creates enormous value to our customer base. Internationally, we continue to win major accounts on our Axon platform in our Tier 1 focus markets. In Australia for example, we have won two key counts with Queensland and the Northern Territory. We have several active trials in key accounts in Canada, Australia and in the UK. We continue to welcome new agencies to the Axon platform. During the period, we announced major city wins in Cincinnati and Atlanta. Atlanta was an especially meaningful win for us because they had previously chosen one of our competitors. However, the city realized the need for a full end to end hardware-software ecosystem and have now decided to join the Axon network. Following the close of the quarter and earlier this week, we received notice that we were awarded the Seattle Police Department body cam and digital evidence management contract. So there had been some noise in the market of late around less well-established competitors trying to blunt our momentum and gain market share with lower priced offerings. The recent Seattle PD win is a great example of the strong customer acceptance of TASER and the demonstrated performance of our platform as a key differentiator. In our press release on the Seattle award, we linked the preliminary and final scoring of our product versus our competitors. And the initial scoring, based on written evaluation, TASER was virtually tied with two other competitors, as with most large agencies, though. Seattle PD opted for a thorough product testing of the full hardware and software solution and also was made aware that certain competitor capabilities were not yet developed. After thorough testing and review, we received the highest score by a wide margin and were subsequently awarded the contract. This is very noteworthy and indicative of the real value of the platform. Time and time again, agencies that undertake field tests recognized the superiority of our offering. When our customers trial our products in the real-world situations, difference between us and the competitors is clear between how our full solution stacks up to the commodity camera offerings of our competitors. This is a testament, in part, to the time we spend with our customers to best understand their needs and then innovate and expand the platform feature set to meet their requirements. When field tests have been conducted as part of the process, our win rate stands at nearly 100%. Price is often a consideration and we work with our law enforcement partners to ensure that we are responsive and competitive. But time and time again, field tests provide agencies with the assurance that they will be purchasing a vastly superior experience with TASER and that others simply cannot deliver at scale regardless of how they price their body cameras. I am really happy about the progress we have made in 2016 and we expect to close out the year strong with lots of momentum to carry us into 2017. And while it’s too early to discuss any financial expectations for the coming year, I am excited about shipping full deployments of Axon fleet, continuing to consolidate the major cities on our Axon platform, adding new customers on our TASER payment plan and growing international bookings and revenue and developing our record management system on the Axon platform. And now, I will turn the call over to our CFO, Dan Behrendt.

Thanks Luke and thanks Rick, for the very kind words. It’s been a tremendous opportunity to work with both of you along with everyone else at TASER over the last 12 years. When I joined TASER in 2004, we are focused solely on our weapons business with annual sales of just under $68 million. Today, we offer a comprehensive cloud platform solution along with our weapons products and combined revenue for the recent quarter was nearly $70 million, which surpasses our full year revenue total in my first year. And then on a trailing 12-month basis, revenue is now more than $240 million. That significant revenue growth and diversification has required the build-out and scaling of our finance capabilities and processes. I am proud to have led that effort as we have established the top notch finance team with the capabilities and resources required to see TASER through its next phase of growth. I look forward to working with the team over the next – over the coming months to ensure a smooth transition. And now onto the results for the quarter, as Luke said, revenues for the third quarter set yet another record, increasing 43% from the prior year to $71.9 million. The increase was driven by a 34% increase in the Weapons segment revenues and the 75% increase in the Axon Video segment revenues. The increase in Weapons segment was driven by growth in both domestic and international sales. Domestically, we are seeing continued success of our TASER payment programs such as TASER 60 and the Officer Safety Plan in agencies of all sizes. In fact, the top three domestic deals – weapons deals in Q3 were all TASER 60 deals. The growth in the Axon segment is driven by the shipment of over 30,000 body-worn cameras as they work through the Axon 2 backlog, as previously anticipated. This drove up an increase in both our hardware revenue and the number of active paid seats, which narrowed the gap between the booked seats and paid active seats. Total international revenues in the third quarter increased 69% from the prior year to $11.3 million or nearly 16% of the total revenue for the period. We saw strong sales in several markets with no single country accounted for more than 25% of our international revenue. We continue to have strong momentum in both Weapons segment and the Axon bookings in our targeted international markets. However, as we discussed previously, due to the procurement patterns and typical size of our international orders, we expect to see some revenue lumpiness from quarter-to-quarter in the international part of our business. On our last call in August, we mentioned that we shipped 10,000 cameras in July we are on track for record shipments in the third quarter. We ended up shipping approximately 30,000 cameras in the quarter more than doubling our previous record of 13,300 cameras set in the previous quarter. As anticipated, we do not see a commensurate increase in camera revenue due to additional discounting initial camera purchases, but the gross margins on the underlying contracts continue to meet or exceed our expectations. As a reminder, over 80% of our contracts include the TASER Assurance Plan feature, under which customers prepay for the future camera upgrades. Future hardware upgrades under the program will have a lower applied discount in the initial capital purchase, and as such, will flow through the P&L at a higher average selling price. Axon segment service revenue grew 78% sequentially driven by the additional active paid seats to the Axon platform and a $1.7 million in catch-up service revenue. The catch-up revenue was due to the recognition of service revenue previously held due to delay in meeting contractual terms and milestones on certain of our contracts. Annual recurring revenue in the third quarter which excludes the impact of the onetime catch-up revenue was $32 million, representing a sequential growth of 51%. During the quarter, we are also able to reduce the delta between our booked seats and active paid seats by almost 7,000 seats. As a reminder, there will always be a delta between the booked and paid seats due to the customer request for stage deployments and the lag of service revenue beginning the month following the shipment of cameras. Camera shipments on new orders remain strong and we expect continued growth in our annual recurring revenue. As we look to our full year 2016 results, Q4 is typically the highest revenue quarter of the year. But given the strength of the Q3 results, the $1.7 million catch-up in service revenue and the shipment of the backlog cameras, we expect that Q4 revenue will be relatively flat with Q3, which we still view as very encouraging, indicative of the momentum in our business. Bookings were up 56% from the prior year, but down $14.5 million from the second quarter due to the $20.5 million LAPD booking in the second quarter, which made for a tough sequential comparison. Excluding the LAPD contract, bookings were up sequentially. Our bookings pipeline remains strong and we expect to see continued wins in both small and large agencies. Future contracted revenues at September 30 were $302 million, an increase of 15% sequentially from the second quarter, which was driven by our strong bookings, which made up of about service and hardware components. Gross margins in the third quarter were 64.8% on a consolidated basis compared to 61.7% in the prior year period. The increase in gross margins was driven by manufacturing efficiencies in Weapons segment and the benefit of the $1.7 million of catch-up service revenue and favorable mix impact with the higher margin service revenue taking up a larger proportion of our total sales. Sales, general and administrative expenses increased to $28.1 million compared to $17.8 million in the third quarter of the prior year. This increase is primarily due to increased headcount, variable compensation and consulting expenses. Additionally, in the third quarter, we had approximately $2 million of non-recurring legal expenses and professional fees. Research and development expenses of $7.4 million compared to $6.5 million in the prior year. The increase is almost entirely driven by increased headcount in our Axon segment. As we mentioned in our last call, we expect our operating expenses guidance to increase by 2% to 3% to end up in the range of $130 million to $132 million for the year. Our strongest sales and bookings growth results in increased wearable compensation, but excluding our non-recurring expenses in Q3 of approximately $2 million and Q4 severance expense, we still expect to stay within our prior range. We are pleased with the results of our investment growth initiatives and continue to do opportunistic investment initiatives that drive customer adoption, broaden our customer reach and expand the offerings on our platform, our message, the one area that Rick highlighted which complements the continued development of our Axon cloud platform solution. In the third quarter, we had approximately $700,000 of other expense related to exchange rate fluctuations between the British pound and the U.S. dollar. Income tax expense for the quarter was $6.8 million for an effective tax rate of 63.9%. We are adversely affected by losses in foreign entities, which we do not currently expect to receive a tax benefit from. Additionally, we recognized unfavorable provision tax return true-up relating to our 2015 tax return filed in September. The combined impact of the foreign entity losses, which we do not currently expect to receive a tax benefit from, and the return provision true-up is approximately $1.5 million or $0.03 per share – $0.03 per diluted share. We expect the fourth quarter effective tax rate to be in the 44% to 47% range. Operating cash flow in the third quarter of 2016 was $11.6 million, a decrease of $7.7 million compared with the third quarter of 2015. The decrease was primarily driven by an increase in inventory, long-term customer receivables and prepaid commissions offset by an increase in accounts payable and net income. As a reminder, as the number of TASER 60 deals increase, we will see an adverse near-term effect on cash from operations, because customers will pay for the weapon over 5 years rather than the entire amount at sell-in. For most TASER 60 customers, weapons revenue will be recognized at sell-in and the warranty revenue will be recognized over the life of the contract. We still believe this is a very attractive tradeoff as it allows agencies to purchase weapons and upgrade their weapons at a schedule with lower upfront cost, while also increasing the warranty attachment rate. One of the things we announced in the Q that we are filing today as we have canceled our Rule 10b-5 share repurchase plan based on the initial success of our TASER payment plan options in order to allow us to have flexibility as we run the business going forward. And with that, I am going to turn the call back over to the Q&A session of the call.

Thank you. [Operator Instructions] And our first question comes from Steve Dyer with Craig-Hallum. Your line is now open.

Thank you. Dan, best of luck. You will be missed. Thanks for everything. Great quarter, guys. A couple of different questions. Weapons overall was very strong in the quarter, both handles as well as cartridges. Can you elaborate a little bit more on what drove that? Were there any large one-time orders, especially on the cartridge side? Any more color there whether it was domestic or international, etcetera?

Yes. This is Rick. The – really, the subscription payment plans are really being well received. I think our three largest orders all came in on some sort of subscription plan. And in those, we have bundled together for the customer what they may like is it we are sort of taking a lot of the unpredictability out of the cost. So, we include things like warranty and service, but also 5 years worth of cartridges in many cases or at least in some of those plans. So that can also help drive the cartridge volume. So, it’s primarily domestic, I would say, is what was driving most of that volume.

Got it. And then just from an accounting standpoint, do you actually send out the cartridges right away or is that just you are recognizing the revenue for those and we will send them out as the contract progresses?

This is Dan. Yes, typically, we would be sending the cartridges out with the handles. They have a shelf life that’s certainly the life of the weapon itself, so there is no issue with delivering them upfront.

Okay, great. And then on the Axon side, you obviously worked through a lot of the backlog did you still have some remaining Axon 2 backlog entering Q4 or did you work through all of that?

Yes, this is Dan. We always have a little bit of a backlog just orders received in the last few days of the quarter, but we certainly built up our camera backlog to the point where we are certainly able to meet the demand as it comes in. We don’t have the significant backlog we finished Q2 with.

Okay, okay. I guess, just back on the weapons then. I am wondering, as you kind of think about future growth rates and it seems like you always talked about sort of 10% to 15%ish on a CAGR basis. Does anything changing there or are you pulling some weapons demand from future years forward because of the offer and the terms right now or how should we think about sort of overall growth?

Yes. I think we are still really confident in that 15% growth target. I think the service plans are seeing a lot of traction with TASER 60 and OSP. We currently don’t disclose what percentage of the deals, are on those service plans, but that’s something as it becomes a bigger part of our business, we will think through how we communicate that to investors. The other item I would say internationally we still have a lot of opportunity, the need for a non-lethal alternatives is a universal problem and we feel really good about the teams that we are building out in those markets.

If I could add in there as well, Luke, this is Rick, obviously, we have seen some of the larger agencies this year start to expand towards full deployment with LAPD now moving towards putting TASERs out for every officer. But the mayor of Chicago has made comments that they are going to make TASERs available to all their frontline officers. We are hearing rumblings from some of the other largest agencies in the country that idea is really gaining traction in the world that we live in now. Frankly, with cameras everywhere, including the ones that cops are wearing everything that they can do to avoid using lethal force is becoming an imperative. So we see the expansion in the larger accounts and then these subscription plans are helping agencies accelerate their deployments. And we also feel pretty confident that that’s also going to accelerate the upgrade cycle, which if we can take the upgrade cycle from like an 8-year to 10-year proposition, which if you include people who haven’t upgraded, that’s maybe about where we are sitting today, if we can accelerate that down to a 5-year upgrade cycle, that basically doubles the size of the business over a 5-year time horizon in terms of the replacement cycle. So we think between that and the international segments that there is just still so much white space that we are feeling really good about the growth opportunities in the quarter.

Great, that’s very helpful. And then last question for me and I will pass it along, I know you don’t want to talk probably too much about next year, but as we think about OpEx, it’s been a little bit of a moving target and now we sort of seem to be zeroed in on a level, is next year the year you can sort of find some leverage on that, I mean do you feel like you are at a point where you are well staffed and spending to sort of still grow or are there still a lot of things to spend on and a lot of growth in the expenses as well?

Steve, great question, 2016 has been a fantastic year for us year-to-date with revenue up over 30%. We expect to have some tailwind going into 2017 with a lot of our paid seats coming back. We are actually still working through our budgeting process for next year. And I think our philosophy here is as long as we continue to see the opportunity that aligns with our investors, we will continue to build out the core teams that we need to gain the dominant market share.

I would add in a little bit there, too. I would say that especially with things like RMS, we are going to continue to see some growth in R&D to support something that doubles the total available market. And I think given our position, where we are at now with this unique position of having the majority of the market now on our platform is our ability to develop and deploy, frankly a business that could match the size of our current Axon business. And it should be a lot more cost effective than it was to build that first business over the past 7 years or 8 years. That we – we are going to continue to see, I would say, some investment in R&D and then in the SG&A with international opportunities. We are really starting to see some fruit there, right. You are looking at what’s happening in the UK, Australia, in Canada and then we have got some of the non-English speaking countries that do some of the formative work we did over the last year, I think we will start to see next year. So we are continuing to watch things to make sure that the overall revenue growth trajectory of the business is heading the right direction such that the investments we are making are all being looked down on an ROI-type basis. And we will be getting back to you guys, obviously as we get into 2017. We are still kind of fleshing out our model. Frankly, part of what happened this year is the bookings growth in particular and the revenue growth really exceeded our internal expectations. So as the year went along, we were sort of recalibrating spend to sustain and augment the growth. So we are now going through really analyzing 2017, so we can give you some good numbers in the first part of the year.

Got it. Thanks again and congratulations.

Thank you.

Thank you. And our next question comes from Mark Strouse with JPMorgan. Your line is now open.

Yes. Hey guys. Thanks for taking our questions. Congrats on the strong 3Q here. Dan, I would also like to say best of luck and thank you very much for all your help over the years. So Luke, I know you don’t want to get into details, but I just wanted to press here a little bit more on Seattle, so I can appreciate your commentary around quality versus the price based competition, but – from our side of the house here, is it fair to say, generally, that the Seattle contract will be similar to pricing to your other contracts that you have already secured despite the NYPD noise?

Yes. I think Seattle would be a good proxy for how we would handle the majority of major cities. I would like to add a little bit of color just on how we think about NYPD. We think that that’s kind of an anomaly in terms of how they play into the market. It’s drastically larger. We also – with that deal, we think there is still an opportunity for us to come back and win that over the long-term with one of the solutions that we bring to market. And fundamentally, we think the landscape hasn’t changed. Our head of sales likes to say, an informed customer is our competitor’s worst nightmare. And we really believe that when they do these trials, they see the value of the system that we have created, specifically around the value of the workflow and when you start to add in the cost that it takes for them to do these processes manually as well as the exposure that they would have, if they were to have a security breach. In Charlotte, had a major high profile video where they had several groups calling for the release of the video and we worked with Charlotte PD to handle that situation. And I think that’s something that none of our competitors could do is provide that level of security.

We put our security operations team hand in hand, so we were working with the customer, threat monitoring, monitoring network traffic and taking very proactive info set capabilities to help our customers out.

So to just answer your question Mark, we do think Seattle is a good proxy for the rest of the major cities. And final point for me on this is when agencies field trial, we feel very confident in our solution. And then the last item I would say is, it’s just part of our strategy to get them onto our platform and then we can expand the platform with future capabilities like RMS, which Rick talked about in his section.

And just to be super clear, the Seattle pricing is consistent with prior contracts. So – and hen one other thing I would add is it’s not just about – your question talks about quality. This isn’t just about quality. It’s really about capabilities. I think fundamentally, what we are competing with are camera vendors selling cameras. The majority of our investments has been around the integrated hardware-software experience. And unfortunately, we had New York and frankly Phoenix PD, both just kind of tested cameras and priced out cameras and like the price of cheap cameras. We are doing everything we can. And frankly, I don’t think those are fully baked yet, where some of the people are asking questions, given the complexity of deploying thousands of cameras, maybe a field trial is in order. And it’s not just again the quality of the cameras, it’s the full ecosystem of information management and sharing. There is a pretty rich enterprise software program on the back end of this. And once we get agencies looking at that, there is no one else in the market that can deliver on it. Now of course, everybody can put together a PowerPoint that says, we are in the cloud and we will do this. And sure, we will have docks that connects the cloud by sometime in the middle of next year if you give us the deal, it’s a whole lot different when people ask to deliver on it. And one of the things that we – our customers will tell you and we take great pride in, our customers do not fail. We do not allow them to fail. And that’s a combination of the investments we made in technology, but also customer service and support and field engineers and sales engineers and training staff. And all of that has to come together for a large scale program to roll out effectively.

Got it, okay. And then just one more and I will hop back in queue here, it’s my understanding that the deployments under the London Met program have begun, were there – are you able to quantify how much of an impact that was, if at all, to 3Q bookings. And then how we should think about those deployments and that the impact of bookings over time? Thanks.

Yes. I think so the London Met was included in bookings. There was a little bit of a small true-up in the quarter. They are a very strategic customer for us, as we have talked about. Some of the dynamics in first mover agencies, beachhead accounts in international agencies, maybe on a more different or aggressive pricing model, but we are not going to shine a lot of visibility on it frankly, for strategic reasons.

Great, okay. Thank you very much.

Thank you. Our next question comes from Jeff Kessler with Imperial Capital. Your line is now open.

Thank you. Thank you for taking my question. And Dan, for the short time we have known each other, congratulations. Of course quickly on – on IACP, did you demo enough video multimedia integration to show that somehow you could get the end user to believe that that upgrade cycle because of greater technology, greater integration that was needed that you got feedback saying that their upgrade cycle might be shortened by – on the services side?

I think the service – we are talking about the service plans increasing the – I am sorry, decreasing the length of the upgrade cycle.

Yes.

That’s primarily on the Weapons side. The upgrade cycle on the camera side is actually kind of built-in, because the majority of our customers on the Axon side actually choose service plans that include automatic upgrades that happen every 2.5 to 3 years. So, that’s kind of baked into the service plan.

Okay.

And so, yes, it’s something like 80% are choosing those plans. So, it’s really that same dynamic we are trying to replicate over in the weapons side of the house. Now we don’t have a lot of data, because those agencies really are just maybe in the next year starting to come up, the first agencies, who went on these service plans 5 years ago. But I would say, as long as we have got compelling new products for them, cops really like weapons. I mean, it’s an important part of what they do and we are pretty confident that what we have identified is the budget cycles have a main impediment, but if we are bringing on compelling new product offerings and they have already got a budget line item assigned to it, yes, we think that really should help accelerate it, but we do – it’s still too early for us to have statistically relevant data on that.

On a real-time basis – on a real-life basis in discussion, how are you getting – how the sales – or how to get your clients to upgrade to RMS, what is the pitch and what is the mechanism by which they are doing that?

Jeff, that’s a great question. So, we have really started these discussions at this year’s IACP about the capability of the ecosystem. We have got a great user conference lined up for next year, where we are really inviting a lot of our existing Axon and Evidence.com customers, actual users of the system to come to that user conference where we will talk to them about the RMS capabilities. And the real benefit that we have is that just the TASER brand strength and the customer experiences they provide, the vast majority of our customers really value the TASER experience that we have created. And I talked with probably over 300 customers at IACP and the general response which was very high was customers were interested in expanding to more capabilities on our platform.

Yes. And really what we are setting up here is a record management system is the core ERP of a law enforcement agency. So, these things have very longer sales cycles and long implementation timelines historically. So, we are beginning the process now of discussions with our customers and frankly getting them the opportunity to be participants in how we are developing and with how we are prioritizing the features of this, but ultimately if you think about it today records and police work are primarily text-based. It’s the cops who need computer typing about stuff. That’s sort of the world of 50 years ago, right? We used to get our news and information reading the newspaper. Now, we are totally transitioned where we are consuming multimedia information, photos, videos, whether it’s Snapchat, or frankly watching a game on TV as opposed to reading a newspaper about a sports game. Similarly, a law enforcement activity or report, when you can show people a video, it is a 1,000 times more informative and more credible and more transparent than anything you could ever achieve with all the time we spent creating paperwork. And so what we basically have announced is a vision that says we are going to use these videos to be your report and we will extract from those videos the information that needs to be searchable and shareable and redefining what a police report is for the 21st century. And I would say that vision absolutely struck a nerve where customers were like, yes, I had one guy I think the Minnesota chief came up to me, he was emotional and he was like I have been talking about this for 10 years. It seems like it’s finally happening. But we are early in the process, where we have the June conference, where we are going to be showing sort of the initial product and helping customers help us iterate on it, but you don’t expect this to be a revenue product in the short-term, but it can be a very large one in the long-term.

Okay, last question about that and that is the feedback you are getting from customers on this, are you beginning to develop analytics that are going to create the type of user experience that they want? I mean, that’s an obvious question, you are going to say yes to it, but the real question is, is the value proposition that you present how is that going to be reflected in the way – in the suggestions they are giving you to put into this new product?

Got it. So, what we think about it, all the information that we would ever need for a police report is based on what an officer sees, hears and thinks during an incident. Our cameras can capture what he sees and hears and with a little bit of dictation, we can capture what he thinks or what the perceptions were. So, very – really, this is about – our sensor is doing the information gathering into the back end. Now, where we need a lot of customer input is what are the most important features early on and what should the user experience feel like and what do they want to dictate versus what they do want to type and where do you selections and drop-down menus? And this isn’t going to happen overnight where we have this incredible artificial intelligence robot or agent that’s able to watch the videos and write the reports for us. So, there is sort of an element of crawl, walk, run, as we move into the end state, where ultimately we do want to get to where the AI tools that are so rapidly evolving or machine learning and natural language transcription sort of the big data use your buzzword of the day, all these technologies that are rapidly advancing in sort of the core tech industries. For us, it’s the sort of magic here is we don’t – we are not going to develop all those groundbreaking tools, but it’s us mapping them on top of the right user experience that’s appropriate given the maturity of the technology today and developing the user interface that just works for a street cop with minimal training. So, just one quick example, one of the first things we launched is transcription. So, our customers can now mark any video or any segment of the video and say, I want this transcribed. Now in the future, we would love to have a computer do that transcription, but the fact is today computers are not that great at transcription, particularly of sort of messy audio like you would get in a police report. So, that is – we have taken that business process and we have managed that through a partnership, with a partner that has lots of people that are court certified transcriptionists. And in many states, actually if you are going to submit a video to court, you have to have a transcription. Well, now for our customer, that’s as simple as clicking a button. You have to pay for it. We have all the back end of transporting that through court-certified transcriptionists and it will the next day or so magically show up in Evidence.com. So again, this is sort of mapping that what level of things can we do with technology versus people services and then taking that into the future and having a good strategy and good understanding of where the right technologies meet the right customer needs at the right point of maturity.

Okay, great. Thank you very much.

Thank you. Great questions.

Thank you. Our next question comes from Glenn Mattson with Ladenburg Thalmann. Your line is now open.

Hi, congrats on the results for the quarter, guys and Dan congrats on moving on in a great job at TASER. So, I just want to highlight on the weapons outperformance again this quarter. In the subscription plans and how it’s recognized, so you said you are going to recognize 5 years worth of cartridges upfront, but the weapon, the handle itself that gets recognized over time? Is that right?

So typically, we will recognize the handle and the cartridges delivered upfront. There is a couple of different TASER safety plans, one that includes just a few cartridges, one that includes more cartridges, depending on which plan people will record with a hand on the cartridges with the sell-in and then record a long-term receivable. TASER recognized overtime is the warranty.

Okay. It feels – I wonder if the cartridge number is going to be inflated for a couple of quarters and then drop off. And I guess unless there is a big pickup in overall handles, is that kind of how that would smooth out?

Yes. And a lot of it will depend on how many of the TASER 60 programs we sell. I think one of the things we are seeing at least early on is that people are buying more weapons at upfront. So, instead of buying, say a fifth of their arsenal each year for 5 years, they buy them all upfront, because the cash flow impact is the same and they can sort of upgrade their entire installed base at the same time. So – and as a result, we sell more cartridges at that point as well. So, I think it’s – certainly, we will see how it flushes out, but we see this as being just a big net positive for just the weapon segment in total.

Okay. And then – but other than that, you said the three largest deals were on the subscription plan. But I just wonder if those plans would take some time to hammer out and come into the quarter, I think you guys were kind of guiding to just kind of flattish or down after a big front half of the year in weapons, so – but the demand kind of surprised you in the quarter, I guess?

Yes. It’s definitely stronger than we expected. And again, I think that these subscription plans are making a difference. I think they are helping to drive business and helping to make the overall deal sizes a little bit bigger. So again, some of this is potentially buying. Our cash flows maybe are going to be as reflective as the deal size because people are paying over time. And on a revenue perspective, we are seeing just larger revenues because people are gravitating towards these plans and buying more products.

Okay, great. And then – with the comment you made on the flat – I think you said, typically Q4 is a lot higher, but you think it’s been closer to flat to Q3, was that regarding the total revenue or was that one segment, I didn’t quite catch that?

That’s the total revenue.

Total revenue, okay. But that’s minus the one-time catch-up payment, right, excluding that, I mean...?

Yes, we expect – I think the one-time catch-up is one of the reasons we expect it to be relatively flat because we had some items that certainly helped Q3. So we think Q4 will be in line with Q3.

Okay. Alright, great. Thanks guys.

Thank you.

Thank you. [Operator Instructions] And our next question comes from Jeremy Hamblin with Dougherty & Company. Your line is now open.

Hi there. This is David Burdick on for Jeremy. Thanks for taking my question and great quarter guys.

Thank you.

I just wanted to touch on the Axon service revenue growth, it looks like it had quite a big jump of 80% sequentially, just wanted – hopefully, you could provide some more color on that as well as I wasn’t sure if I caught it or not, but could you tell us the active users growth in Q3 by chance?

Yes. I will start with the last part. We didn’t say the exact growth. We did narrow the spread between the booked seats, which we disclosed and the active paid seats. We don’t disclose the exact number for the active paid seats. But Q3 was benefited from few things. One is the catch-up service revenue of $1.7 million. So that certainly helped and then the fact that we had a lot of the cameras that we shipped in Q2, were shipped in June. So you saw a lot of those cameras come in through the service revenue in the third quarter along with the 30,000 cameras we shipped in the quarter. So I think that really led to almost a – roughly a 50% increase in the ARR. And as a result, we are seeing that in the quarterly service revenue.

Okay. And then just on maybe the SG&A, on the Axon side, it grew I think 98% while the sales on that sector grew about 75%, I was just wondering why there was such – usually those are maybe a little more connected?

Well, we are certainly continuing to add sales people both domestically and internationally. We are starting to pay attention more to the bookings growth versus the GAAP revenue sales, just because GAAP has to be sort of a trailing indicator. The other thing I would say is that because we – with the much higher bookings we are seeing higher commission and variable selling expenses as well, which is part of what’s driving that as - and then we have got some additional marketing expenses.

Okay, great. And then just on the TASER 60, I know you guys mentioned a few benefits and offers as well as its – it seems like it’s finding some success, just hoping to maybe get a little more color on that as well as maybe just when looking at the cost for your customer, what kind of incremental benefit do they gain by choosing the plan over just maybe a one-time purchase?

I think they get a few benefits. One is they are getting the warranty sort of bundled in. They have got the ability to spread out their cash flows, which I think is important to them. And because of that, they have the ability to upgrade a larger proportion of their installed base at once without having to outlay more cash. So I think that sort of certainly comes with that. I think has really resonated well with customers.

The other thing I would say is any time you are doing a big purchase there is a certain amount of bureaucracy that they have to navigate. And one thing that we are finding resonates well with them is, if you are going to navigate that bureaucracy, go get special one-time dollars. You could spend that same amount of effort to get budgetary approval to put it in your budget and now you are not going to have to go fight that fight every time you want to upgrade your equipment. And there is real benefit to these guys, like great this is one – they can see it can be a future pain point that’s eliminated because they sort of plan for this as an ongoing program, not something you just buy once and then have to deal with it again down the road. And that goes for both of us.

Okay, alright, great guys. Thanks and good luck in Q4.

Thank you.

I think we got for one-time – for maybe one more set of questions.

Thank you. And our final question comes from George Godfrey with CL King. Your line is now open.

Thank you. Just made in under wire, congratulations on a great quarter, two quick questions, the customers that chose the TASER 60 program, can you segment what percentage were Greenfield, new customer buys versus upgrades of existing weapons?

I would say the majority – we don’t have – we are in 95% of agencies across the country. So I would say the vast majority, nearly all of them would have been existing customers. What we do see, especially in the smaller deals, is that when they buy on one of these payment programs, we are seeing a great indicator that they are actually buying more unit handles than they would have if they just bought with a one-time expenditure.

So we could have been selling the weapon to an existing customer, but now they are rolling it out to a larger percentage, so I am making this up 50% of existing offices who had weapons and 50% are all new officers?

Yes, correct. That’s right or they are upgrading their entire installed base all at once versus doing it over time.

Which also really helps the upgrade program since a lot of these guys are like, well I want to – I have got maybe for some years upgrading, I have got 500 TASERs, now I want to upgrade them, but I can only afford to do 100 this year. And we say, great, guess what if you can just put us in your budget, we will give you the 500 now and then un-stick the deal because otherwise, they will think, now we have got to support two different weapons in the field, two different types of training. Here, we can say, look you got a clean program cutoff what’s upgraded all your officers and pay for it over time. And so that deal, otherwise might not happened at all because of the sort of complexity of having a mix fleet of devices.

Right, understood. And then the second question. On the records management system, which sounds very exciting, two pieces. One is after you would show it in the June user conference next year, would you expect GA to be in the second half of ‘17. And then the second part of that is, the pricing, would you price that as a standalone recurring monthly model, augment existing contracts, how does the accounting work on how you roll it out to a customer that has evidence.com and now wants to go with RMS?

Yes. I hate to say this. I think it’s premature for us to comment on either of those, but just at this point, I do know that we would have – it partly depends on how wide and complex the initial version of the product has to be to meet customer requirements. If it turns out that a fairly narrow product that covers the 80% of interactions they have is sufficient, then that’s going to be launched sooner than if they – if what we learn with customers is no, no, no we need to even have these hedge cases covered before we could upgrade to it. And then in terms of pricing, those are decisions we are going to refine based on how the products evolves. So we know that it will be a significant incremental – there are budgets for this today and of some courses from law enforcement, our ultimate pricing, I think is going to turn it – depend on strategically how we can determine the best make that work for customers.

Got it, understood. Great. Thank you very much for taking my questions.

Best of luck.

Thanks, everybody. Obviously, exciting day for us here, I appreciate it. I saw some comments on line back and forth, we have got some shareholders who’ve been with us for a while sort of exuberated today’s results. Delighted we could surprise you with some great results here. But surprised us as well as our customers continue to just really find value in what we are doing together. So everybody have a fantastic holiday season. Happy Thanksgiving, and look forward to talking to you all in 2017.

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program, and you may now disconnect. Everyone, have a great day.