Luke Larson - President Andrea James - Vice President of Investor Relations Rick Smith - Chief Executive Officer and Founder Jawad Ahsan - Chief Financial Officer Josh Isner - Chief Revenue Officer

Yuuji Anderson - Morgan Stanley Scott Berg - Needham & Co. Keith Housum - Northcoast Securities Charlie Ehrlich - Robert W. Baird & Company, Inc. Jeremy Hamblin - Dougherty & Company LLC Jonathan Ho - William Blair & Company Mark Strouse - JPMorgan Chase & Co. Ryan Sigdahl - Craig-Hallum Capital Group LLC George Godfrey - CL King & Associates, Inc. Glenn Mattson - Ladenburg Thalmann

Good afternoon. My name is Christine, and I will be your conference operator today. At this time, I would like to welcome everyone to the Axon Enterprise, Inc. Reports Third Quarter Financial Results. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Luke Larson, President, you may begin your conference.

Good afternoon to everyone. I'm Luke Larson, President of Axon. Welcome to Axon's third quarter 2018 earnings conference call. Joining us today are Axon's CEO and Founder Rick Smith; and our CFO, Jawad Ahsan. Before we get started, Andrea James, our VP of Investor Relations, will read the safe harbor statement.

Good afternoon. This call is being broadcast on the Internet and is available on the Investor Relations section of the Axon Enterprise website. During our call, we'll be making references to our reported results, which you can find by reading our quarterly shareholder letter which is available at investor.axon.com and on the SEC website. 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 revenue growth and profitability. We intend that such forward-looking statements be subject to the safe harbor provided by the Private Securities Litigation Reform Act of 1995. This forward-looking information is based upon current information and expectations regarding Axon Enterprise. These estimates and statements speak only as of the date on 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 greater detail on our annual reports on the Form 10-K and our quarterly reports on the Form 10-Q under the caption Risk Factors. You may find these filings, as well as our other SEC filings at investor.axon.com or at sec.gov and searching for our filings under the AAXN ticker. Okay, turning the call over to Rick.

Thanks, Andrea. Welcome, everybody. We've got a lot of exciting momentum at Axon. We expect to finish the year strong and believe our latest product innovation set us up for a fantastic 2019. For those of you who did not get a chance to come to IACP in Orlando and fire the TASER 7, I want you to know that it is a game changer. We don't introduce a new weapon every day, so I thought I'd take a moment to walk you through what we really built with TASER 7. We essentially reinvented the TASER weapon from the ground up. We looked at all the factors that can lead to an ineffective use and engineered significant improvements on each of those factors. Throughout human history, lethal weapons have always been the only truly reliable way to stop people. We've gotten to the point now where TASER weapons are getting very close. And as you know, our goal is to make the bullet obsolete. Fundamentally, we believe that society's gun problem is a technology problem and TASER 7 is a big step closer to solving it. We rigorously analyze the reasons why bullets can be more effective and more reliable than a TASER weapon. And we looked at all the technical limitations and then invented ways to overcome those limitations to make the TASER weapon more effective. We completely redesigned the entire cartridge system, spooling the wire now inside the darts, which makes the darts heavier. They retain velocity better. And because we spool the wire out through a nozzle in the center of the dart, we use the drag from the wire on spooling to stabilize the dart in flight. This design keeps TASER 7 darts really stable, whereas historically the wires were folded in the cartridge and the unfolding of the wires actually caused the darts to oscillate, which can cause darts to ricochet off a target depending on the angle of flight at the exact moment of impact. We also designed TASER 7 to hit with more kinetic energy. We have accelerated the dart and the wire all at one time. And so, now when it hits, it has more mass and at higher velocity. The tips of the darts are also now designed to break away on impact, so if you hit somebody at a glancing angle, historically, the momentum of the dart might cause it to bounce at an angle and ricochet off the target. Now, with TASER 7, the tip of the dart will actually break off and stay in the target if the body of the dart is at an angle, where the momentum would have previously carried it away. The dart might ricochet off the target, because of the physics around the dart. But instead of that bounce ripping the tip out, the tip will now stay in, and the system can achieve incapacitation. These designs lead to better clothing penetration, which makes the weapon more effective, especially in cold weather, when people are wearing winter jackets. This is historically been one of the challenging situations, things like heavy leather jackets, and TASER 7 improves performance in these scenarios. We also looked at the way we deliver the electrical charge. And we spend a lot of time thinking about how to maintain the margin of safety of the weapon while improving the electrical stimulation to make it more effective. TASER 7 delivers the same quantum of electrical charge, but in a shorter time period. The shorter pulse creates greater current intensity and makes it more effective at stimulating skeletal muscles, while still maintaining similar cardiac safety. We then increased the number of pulses delivered every second from 19 to 22, which further increases muscular impairment. We call these refinements Rapid Arc, denoting both the more rapid charge delivery and the more rapid pulse repetition frequency. Now, all TASER weapons deliver charge voltage, but at an extremely low current. The strength of the current from these devices is about 3 orders of magnitude below the current you can get from a wall outlet. And we'd remind our new investors, especially the point of a TASER is not to deliver pain, but to deliver neuromuscular incapacitation, by overwhelming and mimicking the brain's own signals to tell the muscles what to do. This is why TASER weapons do not rely on pain compliance like a traditional stun gun. So we preserve the same margin of medical safety, at the same time we optimize the pulse delivery to achieve better incapacitation. We also designed a new feature called Adaptive Cross Connect, which gives a whole new meaning to the term smart weapon. The weapon actively measures and optimizes the charge according to the spread with up to 4 darts in play. Now, everything I told you in the last minute or so may sound like abstract technical concepts. But when you see the effect on a human volunteer, you will quickly see why these refinements matter. It is significantly more effective. So to a layperson looking at a TASER 7, they might see, well, it's a weapon that fires 2 sets of darts, and wonder what makes it so different from the X2 or previous 2 shot weapon. And the answer is everything. Everything is under hood that makes it more reliable and more effective. I have not seen as much excitement about a new TASER weapon, since the X26, which we introduced back in 2003. Customers who've seen it absolutely love the new TASER 7. I believe TASER 7 creates a super compelling upgrade proposition for every existing TASER customer, which effectively resets our ability to drive a whole new upgrade cycle. And plus, there are some really important convenience factors. The dock-and-walk capability makes it super-fast and reliable, so you can integrate your TASER 7 into Evidence.com, and you never even have to think about it. Just swap your batteries once a month and we move the data in the background. TASER 7 also drives the concept of TASER as a service. We're seeing proof points of early adoption with several major agencies that are field trialing TASER 7. And two major agencies are already committed to full deployment. Also exciting, after some period time of capturing data about TASER, we'll be able to start surfacing up insights to officers and their managers inform officer performance and help them perform better. So, well, TASER 7 is really a fantastic product and customers love it. So with the new Axon Body 3, which you'd probably read about. We're going to talk more about Axon Body 3, as we bring it to market in the middle of next year. But it's our first real time connected body camera with LTE built in. Also exciting as Fleet 2, which we just announced in June and we're already shipping the customers. Fleet 1 was our disruptive entry into the in car market and Fleet 2 has been racking up competitive wins and sets us up to extend our leadership inside the vehicle. So our product teams are really on a roll, and if any of them are listening right now, I want to thank you guys for the amazing and hard work you're doing. These new products are a bridge to keep growth momentum going, while we scale up Axon records. All of our new hardware products drive software revenue, because we're really driving about to have connected devices and the software to manage it all. Speaking about Axon Records, we're making Axon Records core functionality free for agencies to sign up for the new TASER 7 Officer Safety Plan and we're making it free for the full five-year period. By core functionality, we mean basic reporting functions so after an officer shows up at a scene and performs an action, the officer then fills out an incident report about what happened. Our mission is not just to make the incident report a little bit better. Our mission is to make that entire manual form filling process obsolete. So our goal is to disrupt the entire manual data entry process and that's why we chose to do a strategy to maximally reduce the friction of market adoption. We see the real value records is in the data, not in the form filling software. We have the largest data set of public safety we're out over 40 petabytes, that's 40 million gigabytes. Aggregating the text records in the same system as the video, means, that we can create a uniquely powerful training set for our AI team to build out the models that extract the incident report right from the video. Freeing officers from typing in data will be something on the order of a magnet - one order of magnitude more valuable than the best form filling software could ever be. So we're streamlining our pathway to that future. Now speaking of software, we're thrilled to report that our annual recurring revenue in the Software and Sensors segment has surpassed $100 million in the quarter. We all knew it was coming, but it's a milestone worth highlighting, because it underscores our leadership in developing cloud software for law enforcement. To be clear our annual recurring revenue of $102 million refers only to software warranty revenue, it does not include hardware in that number. The way we approach the market and strategy - our strategy is to identify where the market is going and then look at what we can do to accelerate existing trends in a way that creates a unique customer value and a competitive advantage for us. We've been successful doing that today, and we're excited to keep that going. And with that, I will now hand off to Luke.

Thanks, Rick. I think there are three key themes to this quarterly update. There that we've got strong product development momentum, we're seeing an exciting 2019 sales pipeline and we continue to focus on driving margins, leverage and profitability. Let me give some more color about our product momentum and sales pipeline, in particular, in the last decade that I've been at the company TASER 7 with the most successful product launch that I've ever been a part of. The International Association of Chiefs of Police Conference is a big deal for Axon, it's one of the two major marketing pushes we have each year, the other being Axon accelerate, which is our user conference. At this year's IACP, we had close to 3,000 customers visit our booth, which featured the ability to fire the new TASER 7 as well as sample our new virtual reality empathy training. At IACP, we put 2,500 chiefs through the shooting experience. The new TASER 7 features were incredibly well received, and I'm confident in saying that this offer creates certain demand for a compelling upgrade cycle. Our sales team are also pretty excited, they haven't had a new TASER to sell in several years, so we think we're well positioned for incredibly strong 2019. We also had more than 2,500 guests attend a party for TASER 7 and Axon Body 3, where we unveiled the product followed by a concert from the band OneRepublic. Our marketing team made an incredible tribute video that was played by the band and a chief took an iPhone video it and shared it online it was viewed over 6 million times. Jawad has friendly asked me to remind you that the OneRepublic concert was sponsored by Verizon. Our partnerships with both Verizon and AT&T for FirstNet also sponsored portions of our IACP presence that were hugely synergistic, because they're building a nationwide LTE network dedicated to first responders and we are the market leader in connected devices that can communicate over those networks. We believe, we will see an inflection point next year in reliance upon those networks and Axon Body 3 is perfectly timed to leverage that inflection, starting in the back half of next year. The other thing, I'd like that update you on is a recent incident we had with a major customer. VIEVU LE5 camera overheated and no one was hurt, but this still track some press. You'll recall that we acquired the VIEVU of competing body camera provider in May of this year. I'm pleased to say that we've reached a resolution with the large customer in question that customer will accelerate their transition from VIEVU cameras to Axon Body 2 cameras and Axon Evidence. The transition may result in some incremental Q4 expense, which Jawad will discuss but overall this is an excellent long-term development for Axon to accelerate that major customer moving over to the Axon Network. Axon is proud to join forces with agencies to make their body cameras a success. Every new customer on the network benefits to others. Now, I'll turn the call over to our CFO, Jawad.

Thanks, Luke. We feel great about delivering another quarter of solid performance, but more importantly we feel confident about the underlying strength of the business. Our strategic direction and ability to drive meaningful growth going forward. At our Analyst Day, one year ago, we projected a three to five year of CAGR of 16% to 20% revenue growth with continued margin expansion and today we feel very confident about that trajectory. As we approach the final months of the year, we're tracking to hit the midpoint of our revenue guidance. Q4 is typically our strongest weapons quarter, but this year we have a lot of customers trialing TASER 7 for shipment in 2019, so weapons will be lighter than usual and we expect software and sensors to carry most of the growth. You heard the level of enthusiasm from Rick and Luke around product innovation, particularly the ability to drive substantial volume and margin from TASER 7, which sets us up really well for 2019. We expect a modest contribution from TASER 7 in Q 4 with a more significant ramp next year. Our 2019 sales pipeline looks strong. In addition to TASER 7, we expect growth to be driven by full-year of shipping Axon Fleet 2, which is proving popular with customers, international expansion and several points of Axon Cloud SaaS growth. Before we go to Q&A, I want to expand on one of the points Luke mentioned regarding a large domestic VIEVU customer that's accelerating its move to the Axon platform. We may have some cost absorption associated with this move in Q4, we're actively working to minimize the impact to our Q4 P&L. But we believe, we can absorb a material amount of expense and still produce adjusted EBITDA margins for the full year within our guidance of 14% to 16%. For the long-term, moving VIEVU customers over to the Axon network is a great outcome and provides us with opportunities to deliver even more value added services to these customers. Thank you all for dialing in today. And with that, I'll turn it back to Andrea.

Thanks, Jawad. Just really quickly before we go to questions, I want to remind you last quarter we had said that in the spirit of being scrappy, we're going to ask most of our investors to listen via webcast and save the conference call line for those asking questions. It's actually thousands of dollars' worth of savings per year. So I just want to thank those of you who are listening via webcast today for doing your part and helping us stay scrappy. Operator, let's go to questions.

Thank you. [Operator Instructions] Your first question comes from the line of Yuuji Anderson from Morgan Stanley. Your line is open.

Thanks for taking my question. On the large customer transition off of VIEVU, outside of the plan replacement there, were there additional body camera rollouts that were originally slated for Q4? And if so, is there a delay there in that rollout, because of this activity that's now built into guidance?

Yeah, so this is Rick. So we, obviously, went back and met with the customer there. This is creating a little bit of a delay in the program. And that there was a shift, the decision to accelerate over to the Axon body cameras, obviously, it takes a little bit of effort to pivot the supply chain and to make that happen. So it will push out, I think by the end of February is the goal now to get the complete rollout done.

Okay. That's very helpful. And then my second question is sort of just broadly on body camera deployments. In anticipation of Body 3, are you seeing customers pausing before that? And can you just remind us broadly how you're handling expected replacement activity before the slated launch? Thanks so much.

Yeah, so the majority of our body camera customers buy on one of our service plans, where they get TAP upgrade. And so that allows them to transition to the latest body cameras. So we haven't really seen any kind of blip in demand through Q4. And we expect this to be strong right up until the launch of AB3.

Yeah, one thing we've learned by including hardware refreshes in our subscription plan, it really does reduce some of the sort of discontinuity that might happen when you introduce a product and people are waiting for the next one, where we did want to introduce AB3 early enough before launch, to have our customers have time to put it in their procurement cycles. And then also we felt this year was a really transformative year for the LTE networks with both Verizon and AT&T FirstNet, really pushing hard to get these mission critical networks live. So we made the conscious decision to go ahead and announce AB3 a little further in advance than we would have been with the normal product launch. But what we are hearing from our customers is for the most part they can buy and get started on an AB2 and just take the AB3 during their upgrade cycle. So we're feeling pretty good about how things will balance out.

Okay, great. Thank you so much.

Your next question comes from the line of Scott Berg from Needham. Your line is open.

Hi, everyone. Congrats on a great quarter and thanks for taking my questions. I have two. Let's start with that large deal on the old VIEVU cameras that you had mentioned. Rick, I just wanted to understand, is there any additional revenue opportunities there? I understand they chose the VIEVU solution over Axon initially, because it was more of a price-driven decision versus functionality. And with the new Axon body cameras is there an opportunity for some uplift there in the revenues? And then secondly, since they're bringing on Evidence.com as a result, is there some, maybe incremental revenue opportunities there?

Yeah, so the way I would characterize this is, right now, this is all about helping an important customer that had a challenging situation. And we're investing in the relationship. So this does not create any short-term revenue opportunities. But we believe one of the things that makes us different is we do not allow programs to fail. And I think that's what we're demonstrating with the customer in question here. For them to go through to buy incremental services are not part of the contract. There are a lot of processes et cetera they would have to go through. And we've basically taken the approach that, hey, we are going to help you meet your goals and get these cameras live. And we're going to focus on making sure this program is successful. And I'm very confident that that will lead to long-term revenue opportunities. But now wasn't the time for us to be having those types of conversations with the customer. We have to help them through a difficult spot. And we think that's the right thing to do. And our history has shown that that pays off in really long-term profitable relationships.

Got it, helpful. And then my follow up would be maybe it's for Luke or Jawad, is on the new TASER rollout, big push of that rollout least from a marketing perspective was to push the Officer Safety Plan and to adopt these obviously via the subscription model is wanted to hear if you had any feedback from customers on kind of that thought process or what the pricing looks like there? And maybe how should we think about those expectations as we go into 2019? Does that actually be a little bit of a springboard to shift more of those sales to the OSP than a [product driven] [ph] sale?

Yeah, so we would expect the majority of the TASER 7 deals to go on a service plan. And we've got two kind of great higher-end offerings with the Officer Safety Plan 7, which is $149 a month. And that includes TASER 7, the AB3, [aware] [ph], and our core RMS offering. And we have an expanded offering, OSP 7 Plus. That's $199 a month that includes all of that, plus some additional software capabilities around performance, CAD RMS integration, AI redaction. And so, one of the great things about going to IACP is oftentimes you would hear customers, their first question is what's the price. I think you know you've got a winning product when they don't even ask about the price. They're just really excited about the compelling features that Rick talked about. And so, we've seen just a really positive response thus far to TASER 7.

One thing I would add as well, so the - in those two sort of different versions of the Officer Safety Plan, the top version of plan also includes some of the really intensive data streaming like live video, et cetera. So those are price points that are significantly up over the $99 to $109, that the Officer Safety Plan has been at historically. And early indications are our customers are seeing the value both between TASER 7 and between the connectivity. When you take a camera and turn it into a live connected sensor, all of a sudden, it's not just something that can help you after the event, it can help you during the event and with real-time information. So for our customers it creates a ton of value and obviously for our shareholders it's a compelling opportunity to continue to drive up ARPU.

Thanks again, very helpful. I'll jump back in the queue.

Your next question comes from the line of Keith Housum from Northcoast Research. Your line is open.

Good afternoon, gentlemen. A question for you on the new product offering with the RMS and the pricing arrangement, I know it's only been out there for about a month or so. And my understanding is the RMS is generally turned over very slowly. With the offer of 5 year free licenses, are you seeing interest in some of the agencies actually willing to accelerate their replacement of the RMS?

I'd say, it's probably early for us to characterize whether we're seeing that big of a shift in the overall market. I would say we have a lot more people asking about records in the context of it being included in the new Officer Safety Plan. So I would characterize it had a generally positive response. But it's early for us to characterize that it's shifted the market yet in a material way.

Got you. If I just follow up on the issue with the large customer, presumably now you're going to have excess cameras in inventory. What's the opportunity to sell those cameras, I guess, to other agencies? And then, are you seeing any pushback from people who are currently using the LE5 model, earlier looking also to perhaps put those back?

We've - so the incident report that came back showed that this was a battery that was damaged basically with a paper clip being inserted aggressively and puncturing through the wall and the battery cell. We are also making some modifications to make that more bulletproof, so it's harder to do that. But our analysis says it's not a defective product. And I think as we've had that conversation with customers, they're comfortable and they understand as well. I think it was just a bit unique in that the large customer that experienced the issue, it was right in the middle of a transition point. And given the complexities around deploying at scale, and all the issues in a large city that there - the customer work with us and really wanted to accelerate the transition over to AB2. And frankly, our assessment was that that's not a terrible outcome, right. But this sort of shows the value of the system that we built, that we have a major customer looking to accelerate their move over to Axon and the Axon Body 2s. In terms of the - it does free up, we had cameras that were on order that were slated for delivery to that customer. We do believe that there are markets, both U.S. and international, where we can we can sell those cameras. At least that's our current plan. So it's - we feel pretty good about where we ended up, that it sets us up really for long term success.

Great. Thank you.

Your next question comes from the line of Charlie Ehrlich from Baird. Your line is open.

Great. Thanks for taking the question. Just one for me. Is there any change to the margin outlook longer term, specifically in the Software and Sensor segment, given all the growth opportunities and investments around those opportunities? Thanks.

Yeah. Hi, Charlie. No. There are there are no changes at this point time, we're still sticking to our full year guidance also maintain your guidance for the years, as we said. We're going to drive leverage in the business to the tune of about 300 to 400 basis points in margin. We change that earlier in the year to adjusted EBITDA, and with the investments we're making in records and dispatch, we're very excited about those markets and about those products, in particular. So we're going to be walking the line between driving leverage in the business and making investments in this new growth opportunities. At this point in time, there's no change to that.

Great. Thank you.

Your next question comes from the line of Jeremy Hamblin from Dougherty & Co. Your line is open.

Thanks for taking the question. I wanted to just ask about the Axon Cloud revenues, a little bit lower growth in that - in the quarter than we'd seen. I wanted to just get a sense of whether or not, is that a function of just fewer licenses that were activated from your backlog in the quarter? Or what drove a little bit lower growth in that sequentially?

Yeah, we are seeing typically normal growth as we see in that segment, we didn't see anything in the quarter as far as deployments or installs that was out of the ordinary. I'm sort of curious, where you're drawing that conclusion from the growth was lower than expected.

Just in terms of what the run rates of - from Q2 to Q3, and where the run rates had been flowing from let's say Q1 to Q2, or Q4 from last year to Q1.

It's just I'd say, we'd probably want to just take a look, and we did have a conversation with the offline. But there was nothing to caught our attention that was imitating sort of slowdown.

Understood. Just - and then another question I may have missed it. But in terms of international sales in the quarter, what was that as a percent of total sales and then just an update in terms of you reported a really nice large order non-English speaking country. Do you continue to - what kind of progress are you seeing again in those kind of non-English speaking countries in Europe or otherwise just an update there? Thanks.

Yeah. So we've been really pleased with our country managers that are managing APAC, EMEA, as well as the Americas. In Italy, in particular, there was a fairly large trial that has now moved to the next phase of the trial, where they've expanded from what was essentially six major municipalities in Italy to expand that to up to I believe 50 cities in Italy to continue the testing. So that's a key milestone in that market. As we look to 2019, we feel really good about international contributing at the same level that it did this year.

And Jeremy to answer your question specifically, it's through nine months of year-to-date, International was 20% of our overall revenues that's up 34% year-over-year.

Great. Thanks so much for taking the question. Good luck.

Thanks, Jeremy.

Your next question comes from the line of Jonathan Ho from William Blair. Your line is open.

Hi, congratulations on the strong quarter. Can you guys hear me, okay?

Yeah.

Perfect. So I just wanted to get a little bit more detail on the Axon Records launch. Can you give us a little bit more color in terms of what you're hearing, in terms of feedback from customers and maybe you what they're most excited about as they start to test the solution mark?

Yeah. So what customers are really excited about is they were taking a very different approach. To the problem set, which is what we're not building is sort of a product that is optimized, sort of, for going through the RFP box checking exercise. I think, that's what led to a lot of really sort of overly complicated hard new software. The thing that we're really focused on is, just crushing the user experience. But I think they do day-in and day-out. Where it's all about making that officer able to operate efficiently all the way through the chain of those reports getting through approvals, et cetera. And ultimately automating the creation of the police report, so that cops are spending half their time sitting with keyboard type and stuff up. And we're getting just a ton of excitement, in fact, we had one major city that had recently maybe gone through a major RMS, RFP and acquisition process. And we thought they were off the table for a decade, and they were back talking with those already saying this is really interesting if the vision you guys have laid out, if you can deliver on this. We're interested in taking a look at engaging with you, which to me again with a very pleasant surprise to see an agency less than a couple years out of a major RFP process, putting their hand up and saying that interested. So - yeah, it's going to be a lot of fun in 2019, as we start to roll this out know into the marketplace. We feel pretty excited.

Perfect. Just one is also follow up on Fleet 2, just wanted to get a sense from you guys in terms of how that look in terms of the initial reception win rates, it's pretty early, but just wanted to get some perspective in terms of how we're doing on that as well?

Yeah. Fleet 2 has been really well received by the market, we've had several customers comment on just - the ease of use with the cloud connected features, which really differentiates us from these kind of large incumbent burdensome hardware centric options. We've had a really strong performance there, I would expect Fleet to continue to grow as a percentage of our Software and Sensors business and we're taking share from the incumbents and we feel really good about its momentum.

Great. Thank you.

Your next question comes from the line of Mark Strouse from JPMorgan. Your line is open.

Yeah. Hey, everybody. Thanks for taking our questions. So if we can just talk about the shape, I guess, of the revenue curve for the weapons business. If I remember right, you guys had talked about that being kind of a long-term low-double-digit grower. This year-to-date you're tracking around 10% or so. If I'm reading your comments though correctly, I mean, it sounds like there could be some acceleration in that over the next certain period 12, 18, 24 months, not looking for a specific 2019 guidance. But just kind of generically are you expecting that to accelerate near-term?

Yeah. It's a fair assumption, Mark, I think you probably feel the enthusiasm in our voices about TASER 7 and about the new OSP are positively they have been received. So at this point in time, we have no updates to the guidance. So I still say that your assumption low-double-digit growth is a good one? And I would just say that's very conservative.

Okay. And…

Over the contract - I'd just say over the contracts like TASER 7 significantly increases revenue per user, because we're increasing with new software services with the dock, with the end-user certification plan. So not only do we think it obviously could open up new markets with this new capabilities, it can accelerate our ability to go back and installed base, and also significantly raise this revenue per user.

Right. That's great. And then - it's only been a month or so since the seven was announced. But - can you just talk about what you're hearing from recent buyers of the X2 or the X26. And do you think that I believe there is a trade in credit for those customers. And if so just going to talk about it, if you think that's at the appropriate level in terms of drive of those customers.

Hey, Mark. This is Josh Isner. So we have not had any cause for concern in that regard. We feel that our customers are excited about the trading program and our customers always know that we will never let them fail in any way. So we've - this has been kind of a nonevent for those customers and we're doing right by all our entire installed base of weapons.

So that was Chief Revenue Officer, Josh Isner.

Great. All right. Thanks, Josh. Thanks very much.

Your next question comes from the line of Steve Dyer from Craig-Hallum Capital. Your line is open.

Hi, guys. This is Ryan Sigdahl on for Steve Dyer. Within bookings, S&S bookings, can you break out either the dollar value or the percentage representing 10-year contracts?

It's a very small portion. We've signed a few recently, and so we've seen an increase in 10-year deal. But overall, it's still relatively immaterial.

And then maybe just a follow-up on that. Is that primarily at the customer's request, or you guys, I mean, five years has been the standard for a while. And are you guys now actively trying to move these 10-year deals or was it very specific instances with these customers?

There are customer requests and for us to enter into those deals. We've got to be satisfied with the long-term economics of those. So they're very rare and mainly driven by customer requests.

Thanks. And then one more for me, sorry to beat a dead horse here, but with the VIEVU customer that you're talking about. Is this a full transition for that department by February or will they still have some of the LE4s and service and this is just a transition for all the incremental units? Thanks.

Yeah, so they have multiple 1000 units already deployed, and we're going to keep those in the field for the remaining units that were yet to be deployed we're going to transition those two Axon Body 2, and then we would see kind of on their next upgrade cycle those would all on the entire deployment would move over to Axon Body 3.

And then, maybe, I guess, just one follow up on that. Then I'll turn it over. So how difficult will it be them from a back end user standpoint from Evidence.com, to use LE4s with some officers and then some officers using to the Axon body.

Yeah, we're going to make it a success and seamless transition for the customers, who are really kind of partnering on - with them on what's the right way to handle that. And we're very confident they're going to see the benefits of that Axon network, and we're actually delighted that we're going to get the opportunity to rollout that with a AB2 sooner than expected.

Thanks, guys. I hop back in the queue. Good luck.

Your next question comes from the line of Saliq Khan from Imperial Capital. Your line is open.

Hello, this is [Reid Matilski] [ph] on behalf of Saliq Khan. We're wondering with the improvements of TASER 7. How does this rollout coincide with the sunset of the law enforcement agencies existing conductive electrical weapons?

Well, so there's so many agencies who bought the X2 or the X26P, when those where first launched in 2011 and 2012 timeframe. But there's just a ton of upgrade opportunity there. And so having a new weapon. And then frankly, even out agencies that were still using the older X26P, where for whatever reason they had not made it a priority to upgrade those into the current generation of the smart weapons. I believe, based on seeing customer reactions that all of those people are now an opportunity to take TASER 7, it really have the customer sweet spot, while I think it's going to be pretty compelling across the board with a lot of customers that have TASERS that are more than 5 years old. That are really primed for a new device.

Got it. Thank you. And with your service platform push, our TASER weapons are beginning to replace guns and has the total ownership cost for TASER weapon actually cheaper than a gun?

Yes. I would say that total ownership is cheaper in two respects. One, with firearms there's a lot of training that's required, training these cops are coming off the streets, and it's really expensive infrastructure. And two, when you shoot somebody, it's really expensive, not just in dollar terms, but in terms of litigation, in terms of officer, post incident a lot of officers end up leaving the profession. So TASER save money and they save lives. Now we're not at a point yet even with TASER 7, it's not yet replacement for a firearm, we're still, I'd say, about a decade away from where it started to think of non-lethal weapons as being a legitimate substitute. But we make a big step in that direction. This is one of the reasons that I think the subscription plan is a really compelling to our customers is, hey, we've got a roadmap to where over the next decade, we're going to outperform even your lethal weapons. And when you go on one of our subscription plans, it basically put them on a program into the future with us, where they know that they're going to get those upgrades as they come available. I've got a number of chiefs tell me that, that's one of the reasons they go with us, is they just they trust us as a technology partner across the whole platform software, sensors and weapons to sort of help them transform their agencies on a continuous basis, where we're rolling out new software, new hardware et cetera. So we're not quite there yet to make simple it obsolete, but we're making progress.

Thank you. And just one last one given the body cams AI capabilities, would you consider partnering with gunshot detection companies to improve detection location of the gunfire?

Sure. I mean, we're open to - we generally purchase from the perspective that we need to be open to - an open platform to collaborate with the entire ecosystem of technology providers, so that our customers they've got a difficult job to do with them worrying about bunch of solid information systems. It's just not where we want them to be. So we're certainly, we've become I think the preeminent cloud software network. And we have open APIs and we work collaboratively with our customers and other tech providers.

Thank you. And thanks for fielding our questions.

Yeah. Thank you.

Your next question comes from line of George Godfrey from CLK. Your line is open.

Good evening. Thank you for taking my question. Do you have the TASER weapon operating margin for the quarter there?

Hold on a second. We will…

And then my follow-on question to that, do you expect the TASER 7 given the higher price point to be margin positive have a come at a higher margin, I believe, 40% was kind of the target range couple of years ago. It seems like, it's down around 30% now. Just curious will that have a lifting effect.

Yeah, we are expecting TASER to lift the margins overall. The gross margins for the quarter for just under 70%. The operating margin is in the shareholder letter. One thing I say is operating margin is not only meaning for the way that we think about margins. With the cross margins for weapons. And software and sensors separately and look at software and hardware at the gross margin level, but below that if it gets a little bit as good a living scramble because we make investments in SG&A across both segments some of the allocations are disproportionately getting TASER and they are software and sensors. We look at R&D by product line, we go into a lot of depth on that SG&A, we budgeted outside that process and also we want to control SG&A. And we've demonstrated that over the course of the year we driven a lot of leverage on SG&A costs, it's lower now as a percentage of revenue that was a year ago, it's part of the reason that we've been able to drive our overall margins up across the business. So for that reason, I'd say, it's not all that meaningful to look at operating margins by segment. But it is in the shareholder letter.

Okay. That's - Jawad, thank you for that that's a nice segue, because that's exactly where I wanted to go is, if I look at the R&D margin 2 years ago it's 10%, a year ago 16%, and now it's 21. And I heard everything you said about being scrappy. But it's more than doubled in two years. And if I look at the SG&A and I realize their stock comp, and amortization, intangibles, and other things in there, but it's only gone from 39 to 38. So it seems like the R&D spend is far outpacing any improvement in SG&A. And so my question is as we go forward from a 21% level what exactly does scrappy mean when it applies to R&D. Thank you for taking my question.

Yeah, great question. So scrappy does not apply to R&D, we're pretty open about that within the company. I'm a big proponent of investing more in R&D. We've targeted around the 20% range. And so, we have some very exciting market opportunities. This is part of what we laid out at our last Investor Day at IACP. There are huge market opportunities ahead of us and we've got to invest to go capture those. And so, we're not going to take our foot off the pedal with those R&D investments. What we are going to do is drive discipline across the business. SG&A, so that it's coming down. You should expect to see us drive further leverage there. But what I'd point to is that, overall enterprise our margins are ticking upwards and will continue to tick upwards over the next few years.

Yeah, I mean, at this point, we've got this incredible asset. And that we've connected two-thirds roughly of the major cities now to the Axon network. And now to take that and begin to scale out with records and dispatch, and all the AI capabilities and analytics we can run on top of that network. All of which gives us the opportunity to build and create additional value streams. So we're all about being scrappy in terms of efficiency and making sure that we're being careful how we spend the money. But we also don't want to throttle our ability to grow well into the future by cutting back on our investments in R&D, Given that we have this really unique competitive advantage, in that we can launch new services right within the same framework that our customers are already using. And we think it would be unwise for us to over focus on short-term profitability and leave those opportunities un-harvested.

Understood, thank you for taking - if I can just slip one more in here, the adjusted EBITDA margin for the year is 14% to 16% percent is the range. And for the first 9 months, you're at 16.5%, so there's a lot of room in Q4. Can you just qualitatively or in some measure, quantify how difficult is it going to be to transition 2000 plus body cameras by February for the large VIEVU customer, because it seems like there is enough wiggle room here that you could absorb a very expensive project. I'm just trying to get an idea of how expensive or complex that task is. Thanks.

Yeah, so this issue - their development center is still unfolding. It's going to depend on exactly which cameras are deployed, how many of each are deployed, how much development work is required if any, what the RMA pool will look like [Technical Difficulty]. And so for that reason it's we're unable to determine at this point what the costs are going to be to transition that customer. And so we wanted to reserve, we wanted to maintain some conservatism there as far as our Q4 estimates.

Thank you, Jawad. I appreciate it.

Your next question comes from the line of Glenn Mattson from Ladenburg Thalmann. Your line is open.

Hi, thanks for taking the questions. Operating margin in weapons was 27% by the way. It was in the release. So there's that figure. But I'm curious about the excitement you guys are seeing around the new weapon. I was at IACP also. And certainly there was a lot of excitement around the booth and everything. And that's always the case for you guys. You put on a good show down there as usual. But there is a significant price point. And I think, if I'm not mistaken, the first new deployments that you saw were agencies that just took the weapon and didn't take the whole pricing plans. So I was wondering what the reason behind that was, if there was some sensitivity around the Officer Safety Plan and the increased price there or anything. And just kind of some more concrete evidence about why you're so enthusiastic about the uptake as you're looking into 2019.

So, one of the greatest assets that the company has is our TASER instructor network. And so, over the next year we're going to be rolling out an aggressive campaign to hold these events at multiple cities at a high frequency. Since IACP, I've already been to two of these events, where we have essentially a room full of police trainers. And we talk about TASER 7. And the excitement in the room is palpable in terms of they want this weapon. They want the capabilities. And that's something where it carries through to them, going back talking about officer training, and how this is really going to benefit communities. And that goes a long way when you're getting kind of stakeholders to buy in for it. So to me, that's just an incredible data point that's hard to communicate in numbers. But when you go out and you see literally hundreds of police officers excited for the device, that's giving me a lot of confidence. In terms of those first two deals, we had actually been talking about those deals before we kind of had the final pricings and stuff bundled. So we really wanted to lock in a couple key launch partners. So I wouldn't read too much into them buying on a program. We were just trying to secure them as launch partners.

Yeah, exactly. And I would say as well AB3 is going to be a couple quarters behind TASER 7. So I would expect we may see more decoupled sort of TASER 7 program. So before AB3 really starts going into field trials, which is fine. That's actually in our interest to continue to accelerate and make sure that we're able to shift and deliver revenue on the TASER 7. And then, this happens fairly regularly, where as we launch new customer - new features or new products that customers will come back. And they'll do contract upgrades and rewrite. We just is - as we pointed out, with TASER 7, those customers, we're obviously showing the product for them much earlier in the process to where the new Officer Safety Plans weren't even really fully baked. And we did not want to introduce the additional uncertainty and complexity of AB3 into those projects. There's already enough uncertainty with the TASER 7 weapon. So we focus our sales team on those and getting those across the goal line.

What's the pricing like when it's sold as a standalone, have you released that?

Yeah, it's - the all-in price is typically $60 a month, $60 a month is what we call a certification plan that includes the weapons, the docks, a subscription plan for all cartridges they need for training, the online training, VR empathy training, et cetera. And then there's a $40.00 a month plan, where they just get the weapons and the docks, and then they cartridges and training à la carte. So, some of the early ones as well I think we're on the more basic plan, because we haven't fully flushed out the whole certification plan. So, again, a lot of this was, we are in with these customers while the product was still sort of getting finalized in terms of the go-to-market proposition. But you basically spec between $40 and $60 a month.

Okay. So that's like $500 and a 5 year lifespan usually, right, so that's $2,500 basically is one way to think about it. Is there going to be an increase from the $1,200ish or so that the prior weapon would sell at? And you get the…

Yes, yeah. A good portion of that does go into - yeah.

We will have an Evidence.com license. It'll be like $7 a month and then there is some allocated to the cartridges. But the overall economics are…

And just that's in the numbers we gave you, Luke was just saying. Some of that revenue - that revenue doesn't all come in upfront. A good portion of that is service revenue over the life of the weapon, the warranty, and cartridges, and training services.

Right. Okay, all right, great. Thanks, guys. Good luck.

Thank you.

Since there are no further questions at this time, I will now turn the call back to management for any closing remarks.

All right. For those of you that came out to IACP, it was great to see you there, so you could look customers in the eye and take their temperature on our new products. For those of you that weren't, I'd encourage you to come out to the show next year. Obviously, we're really excited. I think we've now got a lot of opportunity ahead of us. It's all about execution now as we roll into 2019. But a lot of opportunity for us, we just got to deliver on it now. And our mission is stronger than ever and opportunity in front of us is better than ever. And thank you to you shareholders, who've been with us for - some of you for more than a decade. And we'll be back to see you guys with our end of year results. And I look forward to talking to you then.

This concludes today's conference call. You may now disconnect.