Rick Smith - Chief Executive Officer Dan Behrendt - Chief Financial Officer.

Steve Dyer - Craig Hallum Mark Strauss- J.P. Morgan Greg McKinley - Dougherty Glenn Mattson - Sidoti & Company.

Good day, ladies and gentlemen. And welcome to the TASER International Inc. Q1 2014 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) I would now like to turn the call over to your host for today’s conference, Mr. Rick Smith, Chief Executive Officer. Sir, the floor is yours..

Thank you, and good morning, everyone. Welcome to the TASER International first quarter 2014 earnings conference call. Before we get started, I am going to turn the call over to Dan Behrendt, our Chief Financial Officer to read the Safe Harbor statement..

Thank you. Statements made on today’s call will include forward-looking statements including statements regarding our expectations, beliefs, intentions 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 on current information and expectations regarding TASER International Incorporated.

These estimates and statements speak only as to the date which they are made, are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict.

All forward-looking statements that are made on today’s call are subject to the risks and uncertainties that could cause our actual results to differ materially. These risks are discussed in our press release we issued today and in greater detail in our annual report on Form 10-K for the year ended December 31, 2013, under the caption Risk Factors.

You may find both of these filings, as well as our other SEC filings on our website www.taser.com. With that, I will turn it back over to Rick Smith..

Thank you, Dan. As a reminder, we are going to be accepting some questions via Twitter during the Q&A portion of the call, which can be submitted using the hash tag TASR_EARNINGS, again that hash tag TASR_EARNINGS. To follow our updates on Twitter during the call follow the account at TASER_IR, this is at TASER_IR.

We’ll be posting graphics and commentary during the call. For those of you without Twitter all updates and graphics stream directly to our Investor Relations website at investor.taser.com. I’m eager to share with you our investors the results of our hard work from the first quarter on today’s call.

First off, we grew revenue 18.9% to $36.2 million, compared to $30.4 million in the first quarter of 2014. This marks the ninth consecutive quarter of year-over-year topline double-digit growth. We also made historical record in international revenue, recognizing $10.6 million on a consolidated basis.

Workings in the EVIDENCE.com & Video segment on the third quarter in excess of $5 million. We continue to work hard to aggressively grow topline and we are excited to continue to share our progress and successes throughout 2014. I will review the progress in each of TASER’s three core strategies today.

Those strategies being, number one, international expansion, number two, CEW or weapons upgrade, and number three, gaining dominate market share in the cloud computing and wearable technology space for public safety. I’ll start by discussing the traction that we are seeing internationally.

We are seeing the results of our investments start to pay-off of smart weapon upgrades in our primary focused territories. Further, we are seeing growing interest internationally for AXON and EVIDENCE.com products.

The London Metropolitan Police arguably the most influential law enforcement agency in the world and certainly outside of United States will be rolling out a 500 unit pilot program of our cameras and EVIDENCE.com, which TASER won after a competitive bid process.

We are looking forward to working with the London Met, make sure the pilot goes well and that we can extend the program with them. One thing to note is that this is basically an unpaid trial with no associated revenue. These successes are the results of hard work as we are bring TASER experience to our international customers.

One way of doing this is to what we call technology summits which have been tremendously successful here domestically. Through these tech summits, we bring in technology leaders to speak about the rise of cloud and internet technologies and wearable, and how it is going to change the way this leasing is done.

It reiterates that we are here to be thought partner for our customers as they enter this new technology age increasing. Internationally, we have localized this tech summits bringing in local experts and studies to continue the technology discussion.

We think these are very valuable tool in driving not only international success but success in the EVIDENCE.com & Video segment specifically. We are continuing to invest in other ways as well. We are very excited to announce the hire of Ron Brandt as our new Vice President of International Product and Services.

Ron was the former Chief Technology Officer on major projects at T-Systems. He brings a wealth of experience in deploying major cloud-hosted systems into large international organizations. We believe his skills, his strategic insights will be key in winning large international agencies with EVIDENCE.COM.

We are excited to welcome Ron on the TASER team and look forward to sharing the successes of his team in the future. Also a significant announcement is our plan to open a new European headquarters in the Netherlands.

We will be extending our direct sales team abroad through this office and plan to have an up and running in the second half of this year. In summary, the results internationally have been strong for two quarters in the row now and while this market is still very depended on large deals. It can be quite lumpy in nature.

We have a strong outlook for the remainder of the year. Attraction in the EVIDENCE.COM & Video segment continues to accelerate as well, as we saw EVIDENCE.COM and AXON bookings saw its third consecutive quarter of bookings over $5 million.

EVIDENCE.COM & Video segment GAAP revenues in the first quarter grew 52.6% to $3.7 million compared to last year’s first quarter.

We think this is evidence to sustain power of our cloud-based and wearable electronics business, and while we don’t expect this group to always be consistently up and to right during the -- especially during this early stage, we are very excited about the continued strength of bookings in the recent quarters.

Within the Board, there were several notable deals including the follow-on order from Fort Worth.

These large follow-on orders were perhaps most important indicator of success, showing the large agencies are seeing great value in the system, Fort Worth did an initial paid trial with 50 cameras then in this quarter, they subsequently expanded their deployment from 50 to 400 cameras.

They heavily testing and using initial deployment of 50 cameras, Fort Worth saw the benefits of wearable technology and ease of managing (indiscernible) through EVIDENCE.com. These large agencies understand the efficacies of large scale digital evidence management and know that it is not just about buying a camera.

As a result they are choosing the AXON and EVIDENCE.com as a complete system.

We are working hard to continue to demonstrate law enforcement professionals at EVIDENCE.com use technology that will make the administrative type of law enforcement far more user friendly, cost effective and efficient, as well as reducing litigation cost for tax payers and providing accountability to the public.

We spoke about technology-focused event that we have been hosting and we are finding large agencies from the major cities are attending in disproportionately high numbers. We find this to be incredibly encouraging that the discussion of moving towards the cloud is really here to stay and its accelerating.

The focus is to continue to invest these initiatives to aggressively drive topline growth and become the standout leader, as well as the thought leader in this field. As an update to the progress was next-generation products team.

They have been -- they have completed some really interested research in this field with our customers to define what the next prospects should be for product development. The team has also established a real technology center of excellence within the company. We have significantly extended our software development talent.

We expanded our Seattle office as a result. We have now more than 25 employees working on that team today. Seattle is hard better talent and really look forward to continuing to growth that team in 2014, accelerating our development efforts. As I just mentioned, large agencies are moving faster than anticipated towards our solutions.

Large agencies are highly educated and require more sophistication and features than the small agency does. Our next-generation product team is working hand to hand with these larger agencies to develop the features necessary for them to get up and running on our systems smoothly and effectively.

So although team is prototyping options for new products, they are also very hard at work making sure the experience our customers get today ensures these customers are there for the long haul and that we continue to provide a great experience when it comes to verbal technologies and cloud solutions.

We will continue to update on the teams accomplishment as we move through 2014. We see 2014 as the year the things are going to move forward at full throttle with EVIDENCE.com solidifying market share. We are out to grow on this space and to grow it fast.

The recurring subscription revenue opportunities created very high potential life time value for every customer. Further, EVIDENCE.com festival becomes natural customer for future cloud-based products. The more services each customers are using more likely they are to adopt additional services from our virtual cycle.

We are adding capabilities with one integrated platform, it’s easier and easier largely going out to outside the vendors. In this virtual circle the lifetime potential of every customers far more significant. At the front end of this business, there is a high level of investment required with revenues being deferred over the length of the contract.

There is an inherent loss period until a critical massive customers is achieved. Our philosophy and breakeven in investment is as long as the business is growing and the size that our product is going to work we continue to invest. If the growth in the business slows then we can pull back on our investments.

We’re managing our EVIDENCE.com & Video business with aggressive investment to drive top-line growth and seize maximum market share now as the market is forming. We continue to believe the biggest we could make would be to under invest in creating market share now.

The TASER Weapons business continues to execute and show strong results, delivering revenues that were up 16% to $32.5 million year-over-year. The first upgrade continues, but starting 2014 we are introducing incentive to promote the TASER insurance plan in conjunction with customer upgrades.

The normal trading credit for the first quarter was $85, plus an agency signed for cap, again TASER service plan, they would receive an additional $100 credit per unit. In the second quarter, this is $75 for upgrade. But the additional $100 for signing up for taps is the same.

And to refresh your memory the TASER insurance plan a lot of agencies do make equal installment payments over the period of a 5 year contract. At the end of that contract period, the customer receives a new weapon.

Along the life, customer realizes other benefits as well including white glove, customer service plan and full warranty coverage and onsite test.

We are passionate about helping our customers’ budget for their future CEWs and their program, capitalize our customer having predictable and manageable expense that is now consistent during the contract period and results in an upgrade 5 years from now.

So we sell (indiscernible) locking upgrade in five years and the customer receives both savings and budget predictability. It’s a real win-win.

We still believe there lies a large opportunity ahead to upgrade agent weapons as well as to sell more in to those agencies that don’t CEW on every opposite, In our north America weapons business which is in a more mature phase than our spa business we are focused on operational and driving long-term profitable growth.

Income from operational were up in business increased to 29% of revenue in the first quarter compared to 24% in the prior year. To wrap up before Dan goes over to financial results in greater depth, exciting things continue to happen here at TASER and I am looking forward to sharing more success in the coming quarters ahead..

Thank you. As Rick indicated, first quarter consolidated sales were $36.2 million, which represent 18.9% increase from the first quarter of 2013. The increase in sales was primarily driven by the continuation of the upgrade cycle with agencies upgrading to the newer X26P Smart Weapons, which contributed $7.9 million in the first quarter.

AXON Cameras and EVIDENCE.com sales also grew by $0.8 million to $2 million in the first quarter. Sales of TASER (indiscernible) contributes $2.5 million in the first quarter result from the large international order that were shipped during the quarter.

The X26, CEW declined 1.1 million as expected as agencies moved to the new smart weapon platform but we still have some international and federal customers that continue to buy legacy products while they get the newer X26 platform approved for purchasing their markets.

Gross margin for the first quarter was $22.2 million or 61.4% of revenue, which is up from $18.5 million or 60.6% in the prior year.

A sales of increased would continue to benefit from higher operational leverage due to price increase instituted at beginning of 2014 and more sales being sold directly to the end user rather than to distribution channels we’ve also realized higher average prices on a products also the improving gross margin.

Although service revenue has increased quarter-over-quarter, the cost of service delivered decreased $0.2 million the quarter compared to the prior year due to the continued benefit fro the completion and depreciaton relate t to the capitalization of Evdent.com software which was running $300,000 previously.

In EVIDENCE.com & Video segment revenues increased 1.3 million and 3.7 million for the first quarter of 2014.

Loss from operational at EVIDENCE.com & Video segment actually worsened to $4.6 million from a loss of $1.5 million in the first of 2013 largely due to the increased investment in research and development activities as well as additional sales reps and additional market expenses for the AXON and other EVIDENCE.com products.

We expect the currency levels of spend to continue to increase through 2014 as we work to gain market share and aggressively grow the top line as well as invest in new products and features. Sales, general and administration expenses were 13.7 million in the first quarter compared to 11.2 million in the first quarter last year.

As a percentage of sales SG&A expenses were 38% of net sales in the first quarter of 2014 compared to 36.7% in net sales for the first quarter of 2014.

Compared to the prior year personal expenses increased 0.5 million as a result of strategic hires that we made over the last year primarily in customer facing role such as sales representatives, caller sales, customer service and account management, field services, but also incremental administration functions.

Commission expense also increased in the quarter without the high sales in the quarter increased number of sales reps in the field and a greater percentage of our sales being conducted directly through our sales box versus through distribution.

Sales and marketing expenses increased year over year due to tradeshow expenses associated with TASER-hosted technology summit as Rick talked about earlier, as well as other customer facing events in order to continue contribute the benefits of our products to wider number of customer.

In the first quarter we did settle turner case for 3.4 million which is a $2.1 million savings from the $5.5 million judgment that was a vacated on a field. Insurance will pay 2.7 million and stays responsible for the remaining $0.7 million. The $0.7 million is included in the first quarter SG&A figure.

We expect to see elevated strength in SG&A continues through 2014 as initiative to grow top line internationally as well as the EVIDENCE.com and Videos are executed and further infrastructure put in place.

Research and development expense were 3.6 million for the first quarter of 2014, an increase of approximately 1.69 million compared to the first quarter of 2013. As forecasted last quarter the increase is primarily due to additional personnel expenses related to EVIDENCE.com & Video segment development initiatives.

Earlier as we indicated on the class the team is finalizing plans around the involvement so as a result of that we did not capitalize any of the expenses incurred during the quarter. As we begin development initiatives expenses will be capitalized until the product launches.

However, given the newness of these initiatives company cannot be certain of the exact timing of capitalization, but we will be capitalizing some of the costs associated with the new product development.

With addition of the similar team, as well as expand hires in other research investment in EVIDENCE.com & Video segment, we continue to expect increase from these levels. The investments are being made, accelerated both and sales of adjacent technologies as well as new products.

Adjusted EBITDA which excludes certain items as detailed in our press release were 7.2 million for the first quarter of 2014 compared $7.7 million in the first quarter of 2013 with the decrease be driven by higher R&D and SG&A expenses in 2014.

Income from operations were $4.9 million in the first quarter of 2014 compared to $5.3 million in the first quarter of 2013. Net income for the first quarter was $3.4 million or $0.06 per share on both basic and diluted basis, which is basically in line with last year’s results as well. Income taxes were $1.5 million in the first quarter.

Effective tax rate for this first quarter is 30.6%, which is unusually low. The company’s tax rate in Q1 was reduced by set of stock option deductions for disqualifying dispositions of set of stock option exercises in the quarter. Excluding those benefits which are difficult to forecast, our effective tax rate would have been approximately 39%.

And we continue to think that’s a good number to use for the remainder of 2014. Moving onto the balance sheet. In the first quarter of 2014, the company’s generated $4.3 million of operating cash flow, which we drove our cash balances up to $77.5 million for cash, cash equivalent and investments.

Accounts receivable of $20.5 million were down $2 million from the year balances due to timely collections. Inventory actually grew $2 million to $13.3 million for the prior year balances due to increased stock of raw materials anticipation of 2014 sales.

Our investment in property, plant and equipment of $18.4 million is actually down $0.6 million from the year balances, basically driven by depreciation expense of $1 million, offset by new CapEx in the quarter of $0.4 million.

CapEx is primarily for production equipment as well as some computers and some other investments in technology around the expanding of employee base. Accounts payable of $7 million which is approximately up $0.8 million for the year balances, just driven mostly by that increase in inventory.

Total deferred revenue of $21.5 million has actually increased $1.3 million for the year end, primarily due to the upgrade program which -- with X26P and X2 which includes an extended warranty.

We also had the sales of the AXON cameras since that cost solution has also contributed $0.4 million to that increase as we deferred revenue related to those deals. We’ll recognize again over the service period. Total liabilities of $41 million and the company’s best quarter was $123.8 million of stockholder’s equity.

Companies continue to have no long-term debt other than the capital lease and continue to have funding liquidity in cost and the strong cash flow engine in our core business to fund our sales, R&D efforts and operations in the future. As we move onto selective information for cash flows.

The company had cash provided by operations of $4.3 million during the first quarter of 2014. Net cash used in investment activities for the three months ended March 31, 2014 was $12.3 million compared with cash provided $1.2 million in the same period last year. The net use of cash is driven by purchases in investments made during the first quarter.

Cash provided by financing activities was $10.9 million during the first quarter compared to cash used in financing activities of $3.3 million in the same period last year. The net cash generation was driven by proceeds from employee option exercises of $7.3 million as well as excess cash benefits from stock-based compensation of $4.7 million.

As we stated in the last quarter, we’ll leave more -- to leave more time for Q&A on the call, we started including the unit sales statistics in this press release. To wrap up, our continued investment in the business because we are serious about executing on our strategies and providing top-line double-digit growth consistently.

We feel these investments are necessary to continue solidify our market condition in the video business. Investigating involves the revenue producing opportunity and to continue to grow internationally. So we can provide long-term value for our shareholders. And with that we’ll take questions from the audience.

If you could go ahead and make the announcements for the questions, that would be great..

(Operator Instructions) Our first question comes from the line of Steve Dyer with Craig Hallum. Your line is now open. Please proceed with your question..

Thanks. Good morning guys..

Good morning Steve..

I think in the past you have given a metric just regarding the percentage of five plus year old handles in the field that you have thought have been upgraded at that point.

Do you have that sort of updated?.

Yeah. Steve, it’s become difficult to track that. I think we still feel like there is a majority of weapons out of five years still remain to be upgraded. And that number continues to grow. But we don’t have that exact percentage.

It’s been tough to track because of the -- as we’ve reduced the trading price, we have a number of customers that are just going through that upgrades without actually trading into old weapons. So it’s been become difficult to track that.

But we still think that a majority of the weapons in the field that are over five years old remain to be upgraded..

Okay. In the international business, obviously, it was great to see again this quarter but I think if you back it out at employees that the North American business was actually down year-over-year which seems unusual at this point in the upgrade cycle.

Anything kind of one time there that we should look at whether it was big order that slipped or was done last year, I don’t know if there was anything in particular last year that would have driven that?.

This is Rick. I think in the general there is a -- the first quarter tends to be a little bit seasonally weak compared to the fourth quarter. And the second quarter is just based on budget cycles. So I don’t know if there was anything particularly that standout as I can sort of typical seasonality..

I think, it’s just -- as you know, the business is sort of subject to a little bit of lumpiness driven by larger deals and that deal flow quarter-to-quarter can certainly have an impact.

But we still feel like the -- North American business has been driven a lot by the upgrade and we continue to see finding of plenty of them continue to see that contribute..

Okay. Moving over to the video business, I know that the actual video service revenue was flat quarter-over-quarter and actually declined from Q3. And maybe I guess, what I would assume is in that, there is a lot of, kind of, the cloud service revenue which I would expect to be modestly growing as you get more people on the network.

Is there something else in there? Is there a reason why that number wouldn’t be more linear?.

Yeah. This is Rick. In the first quarter, we spend a lot of quarter, just sort, of scoring up to the basket as you’d say given our feet under as getting a lot of the agencies last year really scaling up and running because we don’t really recognize the service revenue until these agencies are alive.

A lot of the larger and more recent orders are either getting get live or very late in the quarter or during the Q2. So it was mostly just around your execution in making sure that our existing customers were having a lot of success as we continue to build out our capabilities to bring these larger agencies online..

But why would that have been down call it from two quarters ago.

I mean, just regardless you think you’d have more agency sort of on the system and up and running now than you did in Q3?.

This can also include some of the professional services that we build on bringing agencies life. So, a net decline that was most likely that we add some larger professional services in the prior quarter..

That’s right. Okay. I noticed you broke out XREP and I don’t recall and all the time I have covered the company, you guys breaking that out and it was a very sizable number.

Any color around why that was the case this quarter?.

Yeah. Actually that represented a single large international order for the XREP products. So it’s a -- as you correctly point out, it’s not a product we talk about a lot but it’s a product we continue to sell internationally and we had a large international order that was shipped in Q1.

It’s certainly one of the contributors to that record sales for international this quarter and just because it was such a large amount, we didn’t want to, sort of, jam in into other to make other look unusually large. So we did break it out..

Yeah. Okay. And the last question for me and I’ll hop back in the queue. SG&A, it sounds like $700,000 or so of legal settlement in there, as well as some tradeshow stuff that maybe sounds like it won’t be recurring. So, I know it’s going to be an elevated level of spend.

But would you expect to spend in SG&A to be kind of lower than that $13.7 million number on a quarterly basis going forward by some amount?.

There is certainly, the 0.7 in legal is certainly kind of, on a normalized basis, we were closer to $13 million. But from that level we will continue to make investments to grow both the international businesses as well as the video business.

So in some respect, I think the unusual items will be replaced by just sort of normal spend as we increased our customer-facing roles for both video and international..

Okay. Thanks, guys..

Thank you..

Thank you. Our next question comes from the line of Paul Coster with J.P. Morgan. Your line is now open. Please proceed..

Yeah. Good morning. This is actually Mark Strauss on for Paul. Thanks for taking the questions. Going back to -- and just following upon on Craig’s question on the international sales. We were kind of bumping along in the lower single to mid single-digit millions.

In the last couple quarters, we’ve been north of 10 here and obviously understanding there's a lot of lumpiness in the business quarter-to-quarter.

Can you think this is kind of a more sustainable level now, or do you think that’s obviously the target but there were some one-time things in the last couple of quarters and more sustainable in mid single-digit millions?.

Yeah. It’s a good question. I think certainly, I mean, that’s one of the track that’s making out things within international sales as they tend to be larger deals in general. Our average ticket size international is about 10 times as big as our average domestic orders.

So it tends to be lumpy as a result, but at the same time I think we’ve certainly been investing heavily over the last couple of years to grow the international business. I think we are seeing some of that payoff at these higher levels. You are right.

Some of this is, whether we are going to have $10 million a quarter consistently is absolute normal, it kind of remains to be seen. But certainly as Rick said earlier on the call, we feel good about the international business in general. We’ve got a good pipeline there and we expect to grow that part of the business year-over-year..

Okay. Thanks. And then it’s been about a year and half since you had your Analyst Day and you provided the 2017 targets.

Just wanted to see if there is any update to that or at least on the video business? Just if there's kind of a wide range for that 2017 target and I guess what you are tracking versus your upside?.

I think we are tracking pretty well certainly on the topline. We are tracking well. I think we fell still very comfortable sort of the topline projections for the video business and certainly in the base case as we -- certainly is looking pretty solid and we are tracking well to that base case now.

And I think the pessimistic case is looking more pessimistic with last three quarters of results. But as far as the topline, I think we still feel pretty comfortable with the topline from that presentation..

Okay. That’s it for us. Thank you very much..

Thank you..

Thank you. Our next question comes from the line of Greg McKinley with Dougherty. Your line is now open..

Yeah. Thank you.

The TASER Assurance Plan, can you give us a sense for how significantly that has been used by customers to date, how many devices have been sold under that program?.

Greg, this is Dan. It’s pretty -- in that sense, it would be little bit lumpy but it is certainly an area that we really have a focus on at TASER. The ability to sort of make the purchases at TASER technology would be more of line item and the budget would be pretty consistent every year.

It is certainly something that’s beneficial for our customers and long-term would be beneficial for us as well. The ability to also lock in the next upgrade is attractive for us and for the customers, it takes away sort of the challenge of finding that budget dollars for capital, another capital purchase in five years.

So as Rick mentioned earlier, we’ve actually are operating incentive of a $100 per handle right now for people to when they upgrade their current, their last generations CW to the new platforms, which is a $100 incentive for them to upgrade and join TAP at the same time.

Any given quarter, we’ve had quarters where we’ve had thousand units to TAP or little north of a thousand. So it’s still sort of less than 5% of our purchases include TAP but that’s certainly something we would like to see over time increase..

It’s really a bit of a new thought process for some of our customers. I would also add that we are seeing some success frankly with TAP right now in the smaller agencies than in some of the larger agencies just from a market dynamics perspective.

But that’s obviously an area of focus for both our marketing and our sales team to continue to increase the launch rate..

Okay. Thank you. And then just getting back to the North American upgrade cycle, I was looking back over the last couple of years and just adding up the units of electronic controlled devices that have been sold business to the whole company, not just North America.

But going back to 2011, they were 64,000, in ’12, they were 78,000 and ’13 you guys did 92,000. And I think you said, you still think the majority of those five-year device that are still out there and have been upgraded.

Given what you are sensing from the market, are we still in a rapid growth phase for North America on electronic controlled devices with budgets may be loosening up a little bit plus the upgrades, or are we sort of more steady states even though upgrades currently may not necessarily generate significant year-over-year growth like it has in the last few years? Wondered if you can just give us some thoughts on that?.

That’s a good question. I think there is certainly room to continue to grow, although we’ve seen as you know really strong growth two years in a row in the North American part of the business. So part of the challenge is, we are continuing to stay at those elevated levels and then grow from there.

And certainly that we see the opportunity as you mentioned, budgets are gaining little bit, are opening up a little bit that if that installed based continues to age.

So a five year old product two years ago was now seven years old and certainly I think our customers appreciate the fact that this is a key piece of life saving technology and it not only protects life of the officers but also saves lives of the people interacting with.

So they want to make sure that it is time to use that product that it’s going to work and proactively replacing the product is the best way to ensure that and so. I think it is -- we certainly see there is still room. It’s still a ready market for upgrades and we continue to press that message with our customers..

Okay. Thank you. Just getting back to operating expenses for a moment. So, what I think I heard from you is with $700,000 legal settlement that’s non-recurring, so maybe on an adjusted basis G&A was more in that $13 million range. But it will likely gravitate back towards that, that full kind of upper $13 million dollar range as the year progresses.

So please correct me if I’m wrong on that and then from an R&D standpoint, would 3.6 also represent a level from which we will likely be growing or is that more of a run rate basis?.

I think on the first one, SG&A, that’s exactly right. We expect that $13 million is kind of normalized and we will continue to grow from that level.

And R&D, I think will also grow from the three sticks this quarter although there will be some offsets from capitalization of new product development cost but I think overall, we do expect that numbers to also grow from these levels throughout 2014..

Okay. All right. Thank you..

Thanks..

Thank you. And our last question in the queue comes from the line of Glenn Mattson. Your line is now open. Please proceed with your question..

Hi, everyone. Question on North America, it was still kind of a smaller percentage of very large deals in the quarter.

Has the pipeline for large deals generally speaking, are they still out there to work on?.

Yeah. I mean, I think we still have a good pipeline both and really across all three focusers for the business, international, the North American upgrade as well as the video business. So, I think, certainly, lots of large cities that made purchases in the past that remain to be upgraded.

So that’s something that we continue to focus on with our customers..

One thing that obviously -- you just pointed out is we’ve seen a lot of growth being generated in these bottom 80% of the market with our telesales effort that we’ve launched, was about two years ago. And now that’s just continued to be a real growth driver for us.

Again, the first caution is I think, it tends to be a little weaker on the larger deals because they send out more sort of budget cycles as we get in the fourth or second quarters. And now I was trying to think back on the question. Really, I think last year we may have had one or two sort of larger deals in the first quarter than we had this year.

So good news is that telesales is really adding some more consistency to our growth and it’s obviously a more predictable because you get a large -- sorry, the large numbers kicks in with that telesales effort. But we do feel very good about the pipeline for large deals for the balance of the year..

And then on the investment in Familiar, have you -- now that that’s kind of being absorbed and work with the team, is there any timeframe as to when you expect some products out of them, is it later this year or more in 2015?.

At this point, we don’t have firm dates. We just really come out of the research base. We’re prototyping a number of sort of different options to continue to iterate and receive customer feedback. One thing, I would tell you, the Familiar acquisition has been just phenomenal for the organization.

It’s created a real sort of center of mass in the Seattle market and just through the Familiar guy’s networks we’ve hired, I think another five to seven really solid people that are coming and really help build out our teams.

So it’s not only affected our ability to generate new products but it’s really improved our overall engineering talent base in our core EVIDENCE.com business as well. So we couldn’t be happier with the acquisition and we’re very excited to see a new firm sort of research phase.

We are now in the prototyping phase and then in the product development and some great new stuff..

Okay. Great. Thanks guys..

Thank you..

Thank you. And we have a follow-up from the line of Greg McKinley. Your line is now open. .

Yeah. Thank you. Just a numbers question I had at the segment level. It looked to me like within video, the cost of product, not the cost of service but the cost of product relative to revenues had gone up quite a bit. Is that -- what’s driven that? Is that more body versus flex or….

That’s exactly right. As you see in the quarter, we had a large number of body camera which are great. I mean we sold. That continues to be a strong driver for video and certainly kind of reinforces that that was a good decision to launch that product.

But that does -- the gross margins on body can be lower than flash is because the average selling price is about half as much on average and as result its got a lower -- its got a higher cost of sales with percentage of the total sales. I think its kind of mix issue..

Thanks. And then, can you give us some more color on the bonding relationships. It sound to me like it was a competitive bit but you also stated it was on paid trial.

So let me just walk through with this, how you end up getting in there and what are the prospects so this actually can turn into a paying customer?.

Yeah. This is Rick. The fact that it’s basically an unpaid trial. Don’t know that really that this is not a super competitive situation. Body cameras, really sort of the concept, the early concept of lot of the work was done in the United Kingdom.

There are some local companies there that they have been supporting a lot of the party cam market in the U.K over the past several years and obviously the one in that is the most influential and sort of major agency, thought leader around the world especially the former influence of great across the former empire.

So it was -- I would say very competitive as far as people working with the Met and the Met looking at the different solutions. So the fact that we’re choosing, I think just speak to the fact that they solve the value of the overall solution, whereas I would say in general, most of our competitors are primarily hardware vendors.

And I think that we’ll uniquely able to coming in and deliver solution which does not require a lot of technical lift from our customers to go and solve difficult IP problem. So we’re very excited about it and we do believe there is a major revenue opportunity.

What we are hearing from London Met qualitatively is that, if this trial goes well that there could be a major expansion of body cameras, out in the London Met. And we think the opportunity to be a very significant financial account for us as well as being in a important thought leadership account..

What is the intended or expected duration of the test before commercialized decision you made. We believe it’s about a year, is what it’s scheduled for..

Okay. All right. Thank you..

Thank you..

Thank you. And with that, I’m not showing any further questions in the queue. I would like to turn the call back over to Rick Smith for any closing remarks..

Great. Thanks everyone for your time. Obviously we’re excited to continue to report traction in EVIDENCE.com, as well as growth and profitability in the core business. And we report to still mitigate our shareholder meeting which is going to be here in May, just a few weeks out.

And if you can make the shareholders meeting, then certainly we hope to hear your voices on the next call. We’ll wait onto our second quarter result. Thank you everyone. Have a great day..

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program. You may all disconnect..