Good day, ladies and gentlemen, and welcome to the TASER International Incorporated Fourth Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host for today, Luke Larson, President. You may begin.

Thank you, and good afternoon to everyone. Welcome to TASER International’s fourth quarter 2016 earnings conference call. Before we get started, I’m going to turn the call over to Arvind Bobra, our Director of Finance to read the Safe Harbor statement.

Thank you, Luke. 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 forward 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. 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 the risks and uncertainties that could cause our actual results to differ materially. These risks are discussed in our press release we issued today and in greater detail on our annual reports on Form 10-K and quarterly reports on Form 10-Q under the caption Risk Factors. You may find these filings as well as our other SEC filings on our website at www.taser.com. With that, I will now hand the call over to Rick Smith, our CEO and Founder.

Great. Thank you, Arvind, and good afternoon to everyone. Before we begin, I’d like to share some news on the TASER team. As we announced last quarter, Dan Behrendt, our CFO, will be transitioning out of TASER after filing the company’s 10-K for 2016. On January 31, Dan was hit by a vehicle while he was cycling. And following the accident he was hospitalized for an extended period of time. Since the event, Dan has not been able to act in his CFO capacity, and he will likely not be returning. We are thankful that he is now been released from the hospital, and he is now recuperating at home and is expected to make a full recovery. Dan has been colleague and friend for 12 years, and we wish him a speedy recovery and success in his future endeavors. We are in active negotiations with a strong candidate and look forward to announcing the appointment of a new CFO in the coming weeks. In the interim, [Maurie Mesanga] [ph], our Controller has been acting as Principle Financial Officer. Maurie and Arvind, along with the entire finance team, are doing a wonderful job ensuring a seamless transition, and that’s in reference to Arvind Bobra, our Director of Finance. And now, turning to our business, our fourth quarter represented a really strong finish to a tremendous year. In 2016, we booked $254 million on our Axon platform, an increase of 88% over the prior year. We now have over half of the major U.S. city policy departments on the Axon network. We grew our weapons business by 25% over 2015, shipping nearly 130,000 weapons and 2 million cartridges to our customers. We launched two new industry-leading cameras the Axon Body 2 and the Axon Flex 2. We also began rolling out…

Thanks, Rick. We had an exceptionally strong fourth quarter and full-year 2016, and I am proud to share the highlights of our accomplishments. Revenues came in very strong at $82.1 million with international sales contributing $18.6 million to the total. Our other key metrics also showed continued strength within the quarter. Bookings on our Axon platform were a record $72.5 million in the fourth quarter, an increase of 62% compared to the fourth quarter of 2015 and up 26% sequentially from the third quarter. It is important to note this number exceeded the bookings of Q2, which included the very large LAPD order, yet, without any similar singular large events. We see the achievement of this milestone without any outliers as strong evidence of the general momentum of this business unit. Annual recurring revenue in the fourth quarter was $40.2 million, an increase of 26% from the third quarter as we converted over 17,000 seats to paid seats. In the fourth quarter, we booked approximately 21,400 incremental new seats on our Axon platform. That brings our cumulative total booked seats to 132,000 since inception and represents 19% growth sequentially. Operating income in the TASER weapons segment was 36.1% in the fourth quarter of 2016, down from 38% in the third quarter. The slight decrease was driven by higher research and development expense, as well as end of the year physical inventory adjustments. Our last metric, the ratio of lifetime value of a customer to the customer acquisition costs in the third quarter was 6X up from 4.9X in the prior quarter on higher bookings. We view this ratio as one of the key operating metrics used by management to evaluate the effectiveness and validation of our strategy, as we invest in the customer acquisition, and should be noted that this…

Thank you. [Operator Instructions] And our first question comes from Mark Strouse of J.P. Morgan. Your line is now open.

Thank you very much for taking the questions. Dan, if you’re listening, best of luck. Wish you a speedy recovery. So, guys, just wanted to talk about the timeline for new offerings here. I understand Fleet in 2Q, and you’re going to introduce RMS at the user conference. But when can we expect RMS and a bigger presence of the AI to be commercially available?

I think those will be - AI would be late 2017 and RMS would really be 2018 revenue.

Okay, okay. And then with the OpEx, I understand all the color there. Thank you very much for that. Just long-term though, are we still expecting - I think in the past you said that you expect bookings to outpace the growth in OpEx. Is that still your target?

Yes. Just to add a little more color there, specifically I think it’s important to add a little context around the fourth quarter. A majority of the increases relate to our cost structure to support the accelerated growth. So in Q1, we expect a 4% to 6% sequential increase in operating expenses. We’re not providing guidance past Q1. And I would just want to reiterate the largest drivers of these cost are going to be towards quota carrying sales rep as well as engineers developing net new revenue streams for our business.

Yes, and I would just add in general, we believe bookings can continue to outpace or at least match the spend rate. Now, again, maybe bounce around little bit quarter to quarter, but we’re really keeping a close eye on how we’re spending, how we’re investing, so we’re building something that’s long-term will be very profitable and defensible.

Got it, okay. And then just one more quick one if I can. Just pricing of Evidence.com, are you seeing any shifts either towards the low end or towards the high end of your pricing scheme? What are we seeing over the last quarter? Thank you.

Mark, that’s a great question. And I think coming out of Q4, there is a lot of questions around pricing pressure in regards to the NYPD deal. And we really pointed analysts to the Seattle deal as a good proxy. I would say, the other large deals that we announced on the call today would be kind of in that similar vein as Seattle. And we still feel really confident in the price structure that we have.

Got it. Okay. Thank you very much.

Thank you. And our next question comes from Steve Dyer of Craig Hallum. Your line is now open.

Thanks. Good afternoon, guys. On the weapons side, based on the units and the revenue, the implied ASP appears to be very higher or - either that or there was a one-time sort of other piece of revenue that fell in that. Any - or maybe it’s just the way that that TASER 60 is recognized. But any sort of commentary on that? It looks like about $6 million of upside either came from higher ASPs or something one-time in nature.

Yes. I would say - I would just talk to two items there. Approximately 20% of the Q4 deals came in from TASER 60 program. And then, we also had a strong international quarter, which is going to have a slightly different ASP than the domestic deal.

Okay. And just to kind of refresh, the TASER 60 revenue is recognized upfront and it’s the cash flows that come ratably over the five years, is that right?

That’s correct except for the warranty. So we recognize the TASER handle and the cartridges that are delivered, and then we spread the warranty at over time. But the cash flows do come in like you said.

Okay. On the Axon side, gross margin as you noted on the hardware side was basically zero. If you backed out, I guess, could you give us little more color on the one-time issues whether it’s end-of-life inventory adjustments, et cetera? If you back that stuff what would gross margin have been sort of versus previous quarters?

That’s a great question, Steve. I don’t know that I have the number off the top my head. I would say, the biggest two reasons were kind of deal mix in combination with some inventory write-offs for Flex 1 as well as end of year inventory adjustments. We do feel pretty confident that we are going to see margin expansion there especially the original cameras that are sold in are often discounted. And the next cameras that comes through will see a higher ASP, so we think that’s going to drive up the margin.

Okay. And then we are probably far enough along into this cycle that you’re starting to have some Axon deals come up for renewal. Any color around, I guess, renewal rates are sort of the tone you get when you go back sort of for the second or for the renewal of that contract?

It’s still not a big enough sample size, but we are going to give the exact data on it. But that’s a great question, Steve, and I would say we feel really, really confident with having a very low churn rate. And actually, we are seeing just a lot of moment in these kinds of bundled deals with things like OSP and tightening the integration with our TASER line of products with offerings like Signal. And so, we feel really confident in a low churn rate.

Okay. And then I just want to make sure that I’m clear on the OpEx increase here. It was $40.3 million in the quarter, but that included some severance and then subsequently you made a couple of acquisitions. So, I mean, should we just think about the $40 million in add 4% to 6% sequentially?

Yes. That’s correct.

Okay. And then presumably that will grow at some level sequentially after that or do you feel like you’re getting to the point where most of that fast growth is behind you?

Yeah, we are not really going to provide annual guidance at this point. As Rick said, we are still putting together the plan to monetize these acquisitions. And so, I think as more information comes to light, we’ll communicate that at our user conference in June, and have more information at our investor events that we are going to hold once the CFO joins.

Got it.

Yeah, I would add on that as well. Last year we provided some expense guidance, but then the business frankly grew significantly faster every quarter. The bookings numbers in particular were well above what we were expecting. And we were calibrating every quarter to the bookings, opportunities in front of us. So we ended up making so many adjustments to the annual number, that I think at this point we felt the most productive approach was to give you some guidance on Q1; and just let you guys know that if we see the opportunity to keep growing the business, we are going to keep making those investments. But we tend to give little more color I think quarter-to-quarter based on how we are seeing the business continue to grow. How Fleet gets accepted is going to be really a significant opportunity for us. And that’s where some of the investment in the fourth quarter came in, adding the right roles and people to be able to support the whole new implementation of rolling out in-car video and then the international space. So we’ll continue to calibrate relative to the bookings level.

Okay. One last question for me and I’ll hop back in the queue. Inventory was up pretty meaningfully, sequentially almost doubled year-over-year. Anything to read into that, is that just gen-2 Axon backlog or was there any sort of year-end push or pull around that?

Yeah. I’ll take that one. We’ve really been in - at this point, we think it’s most important that we are able to satisfy orders quickly as the bookings have continued to grow. And frankly, earlier in the year we had some times where we felt we were not providing right customer experience. And so, we strategically made the decision that it made sense for us to ramp up some of our finished goods inventory to make sure that we are able to fulfill demand in a really timely fashion.

Got it. Okay. Thanks, guys.

Thank you. And our next question comes from Saliq Khan of Imperial Capital. Your line is now open.

Great. Thank you. Hi, Patrick. Hi, Luke.

Hi.

Hi, just two quick questions on my end. First one being is, if you take a look at the international bookings, there is still a relatively small part of the total bookings. So what do you need to do on your end to make sure that international bookings become a much larger percentage of the total bookings?

Yes. So we see international as a really big opportunity. And what we really see opportunity is to have markets where we can sell our full product suite with both TASER, Axon and the service. Today, we see really, really big opportunities in the UK, Canada and Australia, where I would say we become kind of the market leader in terms of capturing significant footholds, and we’ll continue to drive out full deployments in our offerings there. And then our next big focus is on Continental Europe. And we’re in key discussions. Rick has actually spent a lot of time in Europe and might be able to add a little more color on that.

Yes. So, again, I think we now got to the point where we’ve got really good momentum in our Tier 1 countries. So some of that required investing ahead, acquiring our formal distributor in the UK. And some of these beachhead accounts, we found sometimes getting into a market that we got to be more aggressive on pricing to get a foothold. And then we tend to see pricing return to more normal levels as we start to scale up in each market. So really at this point, what we need to do is just continue to execute really well. We feel great about the team we got on the field. We spent the last two years, really revamping our whole structure going much more with the direct sales force internationally. Now long-term, that’s going to lead better margins and a more reliable customer relationship. The downside of what we’ve seen over the past couple years is that you’ve got to invest in teams of people probably two years ahead of when you start to see meaningful revenue. But we should start to see some - we think that the tier 1 market will become more significant this year that the bookings are going to really start to become material. And then we should start to see some of what we considered in Tier 2 markets, start to place some initial orders and start to get some footholds.

Great. The other question I had was, previously you talked about the Tier 2 market. That market opportunity being roughly about $1 billion and so with little bit over 100,000 [ph] that you guys talked about previously. From the conversation that you had with your country managers, particularly in France, what feedback are they giving you right now regarding either the competition from low price providers that are out there or other reasons why they think that either 2018 or 2019 there could be other things outside of low price solution providers that could serve as headwinds as opposed to what they previously thought?

Yes. I would say the main thing we’ve learned globally is we got to help our customers get to field trials, so that they are actually deploying the products in the field. That is where the game change is. When you’re buying it off of some arcane bureaucratic purchasing process that’s where you get things - like late last year, we had a large U.S. order that didn’t go our way and there was no field trial. So we’re really trying to be frankly aggressive in educating our customers. You can’t buy sophisticated technology with procurement processes that were built 20, 30 years ago for buying belts and holsters and that sort of stuff. So we’re really working proactively with our customers to enable field trials both in the U.S. and internationally. I think that’s our most powerful weapon. As our head of sales like to say, our best advocate is a well-educated customer. And we’re starting to see some real momentum around that where we’re starting to see a shift in perspective where agencies are starting to do some more field trials.

Great. Thank you, Rick.

Yes. Thank you. Good questions.

Thank you. And our next question comes from Jeremy Hamblin of Dougherty & Company. Your line is now open.

Hey, guys. Congratulations on the terrific year and quarter. I wanted to ask a couple questions about the weapons side of the business for 2017. You saw 25% growth year-over-year. Can we safely assume that you expect that business, that segment I should say, to grow in 2017?

We are still expecting growth. 2016 was really a banner year. I think we’re still prognosticating double-digit growth. We do see some opportunities where we could see some upside to that. But I would model it or plan on sort of double-digit - low double-digit growth - it’s not clear that we would be able to replicate the same level of growth we had this year.

No. I understood. And just embedded within that you saw significant acceleration in the second half of the year on your single cartridge sales. In terms of why - what is driving that, is that really attributable to TASER 60, is that partly attributable to field usage on increasing, because you simply have more officers carrying the product. I think…

Yes, Jeremy, that’s a good question. I would say attributable to the three things. You’ve got our service plans that include TASER 60 and the Officer Safety program, overall the strength in the business has reselling more TASER’s going to be selling more cartridges. And then we’ve actually introduced an unlimited cartridge plan as well, where officers can sign up to pay for their cartridges with the predictable line item. And so those kind of three key drivers are where we’re seeing the strength.

Okay. And then in terms of just a follow-up on that on the international side. You’ve obviously seen some success on body cameras, but in terms of the weapon side of your business. The profitability that you’re getting overseas on your weapons segment. How was that comparing to what you’ve seen in your U.S. markets, in terms of kind of your margin profile?

This is Rick, I’ll take that one. I’d say generally international is somewhat favorable to the U.S. in general.

Okay, guys. Thanks for taking my questions. Best of luck this year.

Yes. All right. Thanks.

Thank you. And our next question comes from Glenn Mattson of Ladenburg Thalmann. Your line is now open.

Hi, question I guess for Luke. The 9,000 unit backlog, I believe it was in the video segment, is that can you talk about how that’s going to flow through as the year progresses?

Yes. So as we mentioned Glenn, good to talk to you. There is a backlog of 9,000 seat today due to at just launching Flex 2, making sure we have good quality. In Q1, we expect to clear some of that, but the bulk of it is going to be cleared in Q2.

Okay. So I’m just trying to think about the guidance for 25% sequential revenue growth, that was the number correct? - 25% year-over-year, right?

Yes. We committed to 15% to 20% for year-over-year for the whole business.

Okay.

Hey, not for the whole year. In the first quarter, I think we are projecting 25% revenue growth for Q1.

Right.

That’s over Q1 of 2016.

Right. I guess in order to get there, I mean weapons has been so strong. A part, I’m guessing due to the TASER 60 program. You have that kind of a significant down quarter and weapons assuming that video as imagine, the service business is not going to be down sequentially, maybe hardware fluctuates a little bit. But I wonder, what’s the thought process behind the drivers of the weapons being down so significantly sequentially?

Yes. So seasonality in our business Q4 is always very, very strong quarter with it. So we believe year-over-year Q1 is going to be up from the previous Q1, but not sequentially the Q4 and that’s just normal business conditions for our market.

Okay. It just seems a little more severe than in previous years the sequential. And then perhaps you’ve been just cautious, and maybe there was some driver in Q4 that was stronger than expected.

Yes, Glenn. International in Q4 was a record for us. And so that’s also going to drive some of our thinking around what we’re communicating for Q1.

Okay. Great. And then the free cash flow was affected this year by the changes in working capital, is that those changes expected to continue to affect free cash flow in 2017, or do they stabilize here of talking about like inventory and receivables growing?

Arvind, I don’t know, if you want to comment to that?

Yes. We would expect free cash flow to be relatively stable. We don’t expect working capital be a significant tap in free cash flow for 2017. Of course, we have some long-term receivables driven by our TASER 60 program, which may see a continued increase in 2017.

Okay, great. Thanks for the color, guys.

Thank you. And our next question comes from Andrew Uerkwitz of Oppenheimer. Your line is now open.

Hey, thanks, gentlemen. I’m not sure if you address this in the comments before. When you do the dash cameras, you start selling those commercially. What’s going to be the accounting treatment for those, will those be similar like an Officer Safety Plan will be more TASER 60 like you walk us through the different pieces there. And then additionally will you package dash camera with Officer Safety or with the weapons introduce the new program?

Yes. So on the accounting, it’s going to be very similar to the body cameras, upfront hardware and service towards license. And then any kind of warranty will spread out over the deal.

And then implementation time for dash cameras, is that long like the body cameras where we could see an implementation over multiple quarters or just the pretty quick introduction?

No, I think it’s going to be similar to the body cameras where you’ll have an agency and they might buy just for example several hundred, but they might rollout that over a couple of quarters.

Got it. Thank you. And then on RMS, I think Rick you mentioned, you can see that sometime in 2018. You could restart to see like a new product offering overall, and how you tackle rolling that out either discount some of these other program to get RMS in there or how do you see selling that into the end markets, once it gets close to being ready.

Yes. At this point, I’d say strategically we haven’t announced anything and probably we don’t want to give too much color, operating in some pretty competitive spaces already with cameras, and so the RMS were new entrant. So we are certainly looking - one of these that, I think if you look at all the new products and services we’re talking about they share two characteristics. One, they increase the value of the ecosystem. They’re more valuable as a part of ecosystem, we’ve already built and make the ecosystem what we have more valuable by adding the new service. And each of them are new profitable, highly profitable product opportunity. So none of these things are big loss leaders, each of them will be able to stand on their own more profitability perspective. And then in terms of how we end up selling RMS in terms of bundling and what we do with fleets in the body camera programs. We tend to be very customer driven looking at what are the hot buttons frankly that matter to our customers, they did make the offers most compelling to them. One of the examples if I just sort of look back to history with body cameras, what we found in lot of cases is that customers really appreciate discounts on the hardware upfront. And we’ve been very successful gaining market share, and I think we’re now going to see the benefits of that is we start to get in to, I think in 2018 - 2017, we’ll start to see the kick-in where customers have gone on these replacement plan. And you’re going to see those second and third cameras, as the hardware goes in it’s going to be much more profitable on the back end, because the way we structured our programs is really catered to the way our customers what they were focused on. So I guess it’s a longwinded way of say, we’re not going to give any more color on it right now, then I could tell you we will apply a lot of creativity based on where our customers see values in bundling them together.

Sure. Understood. I appreciate that answer. Last question, as you guys have done a great job of penetrating Tier 1 cities. How do you see your sales force size? Is it sized appropriately as you approach Tier 2, Tier 3 and maybe even Tier 4 cities going forward to kind of drive that bookings growth?

Yes. I think Andrew, we’re, go ahead, Luke.

Yes. I think domestically, we’ve really built out a strong sales channel, where we got great coverage in all segments to the market. So their sales channel is going to be relatively flat, where we may continue to add additional SG&A cost, should be on kind of post-sales support and implementation, specifically around products like Fleet and RMS. But in terms of our domestic sales force, we feel like we felt just a really strong channel there today and that’s just remained relatively flat.

Great. Thanks, guys. I appreciate the color.

Thank you. And our final question comes from George Godfrey of C.L. King. Your line is now open.

Thank you. Good afternoon, gentlemen.

Thank you.

Just two questions, I mean, I wasn’t clear on the free cash flow from working capital impact in 2017. Historically, working capital has been a net contributor. Do you expect it to be a net contributor or a drag on free cash flow?

Working capital in general?

Yes.

It’s tough to tell. But it generally should be relatively flat. Going into 2017, we have two kind of offsetting factors that we hadn’t had historically. We primarily had the prepayments for the hardware upgrades being a source of cash. But we have that little bit offset by the TASER 60 payment plan. So it really depends on the level of TASER 60 uptake in 2017 that really drive how much working capital we generated, cash in working capital.

Got it. And then my other question, on the fleet camera. Is the pricing of the service component similar to the body camera or is there anything different depending upon the tier that shows in?

George, great question. It’s going to be similar to the body camera.

Okay. And then just to follow up on that. You said you already have some orders. So a two-part question. One is, I guess, there for some departments there isn’t a concern of overlapping services or cost as such an issue that they still feel the body camera on the officer as well as in the car as something they want. And then the flipside of that is, are you still - are you having to educate departments on the value of having two cameras or departments continuing to push back, say, no, we’ll choose one or the other but not both? Thank you for taking my questions.

Yes, let me take that one. I would say, a few years ago I was under the impression that body cameras would obsolete the need for in-car cameras. And it turns out we’re dead wrong. Particularly for the state patrols, we had zero uptake in the state patrols until this last quarter. And now we won three of them and we got a bunch more that are going into testing. And the rationale was really the state patrols felt that they really needed the in-car camera. Frankly, I think it’s just become so much a part of their operating use case. So this is a qualitative statement. But I would say, in general, what we’re finding is not just the state patrols. That once agencies have gotten used to dash cams, I would say the vast majority of them want to maintain dash cams even if they add body cameras. And they typically already have preexisting budgets where they’ve just built it into. When they buy a patrol car, they’ve got budget money there to onset the car with an in-car camera and to allocate money towards the backend. And so we - I mean, we certainly aren’t having to educate them on the need for both. I would actually say, our customers educated us more on their need for both, namely if they’ve already had in-car.

Understood. Thank you for taking my questions.

Yes, thank you.

Thank you. And ladies and gentlemen, this does conclude our question-and-answer session. I would now like to turn the call back over to Rick Smith for any further remarks.

Great. Well, thanks, everybody. I know it’s been a little bit of a long call. We had a lot to talk about. And, man, what an exciting year it was in 2016. As we’ve told you, we’ve been very focused on consolidating the market. We made a ton of progress there. And we’re really excited to continue that momentum this year and with some of the new service offerings we’re bringing out to start to launch some additional revenue streams. So it’s really exciting time to be at TASER. We are delighted to have you shareholders. And we look forward to seeing you all at our shareholder meeting coming up in May. And with that, I wish, everyone a good day and we’ll see you all soon.

Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program. You may all disconnect. Everyone have a great day.