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Axon Enterprise, Inc.  (NASDAQ:AAXN)
Q3 2018 Earnings Conference Call
Nov. 06, 2018, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon. My name is Christine, and I'll 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.

Luke Larson -- President

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.

Andrea James -- Vice President of Investor Relations

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 in 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 by searching for filings under the AAXN tickr.

Okay. Turning the call over to Rick.

Rick Smith -- CEO & Founder

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. 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 analyzed the reasons why bullets can be more effective and will be more reliable than the TASER weapon. And we looked at all the tactical 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 used to 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 the 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've 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 in ricochet off the target. Now, TASER 7, the tip of the dart will actually break off and stay in the target, if the body of the dart is it in 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 and the system can achieve incapacitation.

This design lead to better clothing penetration, which makes the weapon more effective, especially in cold weather, when people are wearing winter jackets. This has historically been a one of the challenging situation, things like heavy leather jackets and TASER 7 improves performance in these scenarios.

We also look at the way we deliver the electrical charge and we spend a lot of time thinking about how to maintain the marginal 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 make it more effective with 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 volted, but at an extremely low current. The strength of the current from these devices is about three orders of magnitude below the current you can get move all out with. And we would remind our new investors, especially, the point of the TASER is not to deliver pain, but to deliver neuromuscular incapacitation by overwhelming mimicking the brain's own signals that 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 four darts in play.

Now everything I've told you in the last minute or so may sounds like abstract, technical concepts. But when you see the effect on the human volunteer, you'll quickly see why these refinements matter. It is significantly more effective. So to a lay person looking at a TASER 7, they might see, well it's a weapon that fires two sets of darts and wonder what makes it so different from the X2 or previous two shot weapon? And the answer is, everything. Everything is under the hood that makes it more reliable and more effective.

I have not seen as much excitement about our 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 convenient factors. The dock and walk capability makes it superfast and reliable. So you can integrate your TASER 7 into Evidence.com and you never even have to think about it to swap your batteries once a month and we move the data in the background.

TASER 7 also drive the concept of TASER-as-a-Service. We're seeing proof point 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 time -- a period of time of capturing data about TASER, we will be able to start surfacing up insights to officers and their managers to inform officer performance and help them perform better. So while TASER 7 is really a fantastic product and customers love it. So is the new Axon Body 3, which you 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 is Fleet 2, which we just announced in June and we are already shipping to 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 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 Record. All of our new hardware products drive software revenue, because we're really driving adoption of connected devices and the software to manage it all.

Speaking of Axon Record, we are making Axon Record core functionality free for agencies who sign up for the new TASER 7 Officer Safety Plan and we're making it free for the full 5-year period. By core functionality, we mean basic reporting functions. So after an officer shows up at the scene and performs an action, the onsident build 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 -- strategy to maximally reduce the friction of market adoption. We see the real value in records is in the data, not in the form filling software.

We have the largest dataset in public safety and we're now at 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. Training officers from typing and data will be something on the order of a magnitude -- 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 are thrilled to report that our annual recurring revenue in the Software & 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 and developing cloud software for law enforcement. To be clear, our annual recurring revenue of $102 million refers only to software and warranty revenue. It does not include hardware in that number. The way we approach the market and our strategy is to identify where the market is going and then looking at what we can do to accelerate existing trends in a way that creates unique customer value and a competitive advantage for us. We've been successful doing that to-date and we're excited to keep that going.

And with that, I'm going to hand off to Luke.

Luke Larson -- President

Thanks, Rick. I think there are three key themes to this quarterly update. They are, 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 in sales pipeline. In particular, in the last decade that I've been at the Company, TASER 7 was 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 features 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 this 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 a 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 of it and shared it online. It was viewed over 6 million times to one has friendly asked me to remind you that the OneRepublic concert with 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'll 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 to update you on is a recent incident, we had with the major customer. Our VIEVU LE5 Camera overheated and no one was hurt, but this did attract some press. You'll recall that we acquired VIEVU, a 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 this success. Every new customer on that network benefits to others.

Now I'll turn the call over to our CFO, Jawad.

Jawad Ahsan -- Chief Financial Officer

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 1-year ago, we projected a 3- to 5-year 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 Q4 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 a 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 are 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.

Andrea James -- Vice President of Investor Relations

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 were 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 just want to thank those of you who are listening via webcast today for doing your part and helping us stay crappy -- scrappy. Operator, let's go to questions.

Questions and Answers:

Operator

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

Yuuji Anderson -- Morgan Stanley -- Analyst

Thanks for taking my question. On the large customer transition off of VIEVU outside of the planned 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?

Rick Smith -- CEO & Founder

Yes. So, this is Rick. Sorry about who have been back and met with the customer there. This is creating a little bit of a delay in the program and if there was a shift the decision accelerate over to the Axon Body cameras. Obviously, it takes a little bit of efforts to pivot the supply chain 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.

Yuuji Anderson -- Morgan Stanley -- Analyst

Okay, that's very helpful. And then my second question sort of just broadly on body camera deployments 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.

Luke Larson -- President

Yes. So the majority of our body camera customers by on one of our service plans where they get a task 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 a AB3.

Rick Smith -- CEO & Founder

Yes, the 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. We knew there is a product that people are waiting for the next one, where we did want to introduce AB3 early enough before launch that our customers who are out 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've made the conscious decision to go ahead and announce AB3 a little further in advance and we would have been at the normal product launch. But one very smart customers is for the most part they combined it started on an AB3 just take the AB3 during their upgrade cycle. So we feel pretty good about how things will balance out.

Yuuji Anderson -- Morgan Stanley -- Analyst

Okay, great. Thank you so much.

Operator

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

Scott Berg -- Needham & Co. -- Analyst

Hi, everyone, congrats on a great quarter and thanks for taking my questions. I have two, let's start with that large, large deal on the 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 excellent 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?

Rick Smith -- CEO & Founder

Yes. 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 and question here. For them to go through to buy an incremental services are not part of the contract, there is a lot of processes, et cetera, theyw 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.

Scott Berg -- Needham & Co. -- Analyst

Got it. Helpful. And then my follow up would be, maybe for Luke or Jawad is on the new TASER roll-out big push of that roll-out at least from a marketing perspective was to push the after safety plan into adopt this via -- obviously via the subscription model is -- wanted to hear if you had any feedback from customers and kind of that fall 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?

Luke Larson -- President

So, yes. 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 and our core RMS offerings and we have an expanded offering OSP 7 Plus, that's a $199 a month. That includes all of that, plus some additional software capabilities around performance, CAD, RMS integration, AI redaction. And so we -- 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.

Rick Smith -- CEO & Founder

And one thing I would add as well. So the -- in those two sort of different versions of Officer Safety Plan, the top risen plan also include some of the really intensive data streaming like wide video, et cetera. So those are price points that are significantly up over the $99 to $109. The Officer Safety Plan has been there historically and early indications are 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 kind of value and obviously for our shareholders it's a compelling opportunity to continue to drive up ARPU.

Scott Berg -- Needham & Co. -- Analyst

Thanks, Ian (ph). Very helpful. I'll jump back in the queue.

Operator

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

Keith Housum -- Northcoast Research -- Analyst

Good afternoon, gentlemen. A question for you on the new product offering with the RMS and the pricing arrangement. And honestly been out there for about a month or so and my understanding of the RMS is generally turnover very slowly, but with the offer the 5-year free licenses are you seeing interest in some of the agency is actually beginning to accelerate the replacement of the RMS?

Rick Smith -- CEO & Founder

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 its shifted to market yet, in a material way.

Keith Housum -- Northcoast Research -- Analyst

Got you. And I just have follow up on the issue with the large customer. Prudently now you're going to have excess cameras in inventory, what is 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 looking also to perhaps what was back?

Rick Smith -- CEO & Founder

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 battery cell. We are also making some modifications to make that more bulletproof, so it's harder to do that, but our analysis is it's not a defective product and I think as we've had that conversation with customers they are comfortable 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 are -- the customer work with us and really wanted to accelerate the transition over to maybe two. And frankly our assessment was that -- and that's not a terrible outcome, right, that sort of shows the value of the system that we've built that we have a major customer looking to accelerate their move over to Axon and the Axon Body 2. 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 US and international where we can sell those cameras. At least that's our current plan. So we're feeling pretty good about where we ended up that it sets us up really for long-term success.

Keith Housum -- Northcoast Research -- Analyst

Great, thank you.

Operator

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

Charlie Ehrlich -- Baird -- Analyst

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 sensors segment given all the growth opportunities and investments around those opportunities? Thanks.

Jawad Ahsan -- Chief Financial Officer

Hi. Charlie, no, there are no changes at this point in time, we're still sticking to our full year guidance also maintaining our guidance for the out years. 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 watching the line between driving leverage in the business and making investments in these new growth opportunities, but at this point in time. There is no change to that.

Charlie Ehrlich -- Baird -- Analyst

Great. Thank you.

Operator

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

Jeremy Hamblin -- Dougherty & Company -- Analyst

Thanks for taking the question. I wanted to just ask about the Axon Cloud revenues, little bit lower growth in that in the quarter then 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?

Luke Larson -- President

Yes, we are seeing typically normal growth as we see in that segment. We didn't see anything in the quarter. As far as deployments are -- that was ordinary.

Rick Smith -- CEO & Founder

I'm sort of curious where you're drawing that conclusion from that growth was lower than expected?

Jeremy Hamblin -- Dougherty & Company -- Analyst

Just in terms of what the run rates 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?

Rick Smith -- CEO & Founder

Interesting. I'd say we probably would have just take a look at that and maybe we do now have conversation with you offline, but there was nothing t caught our attention that was and getting any sort of slowdown.

Jeremy Hamblin -- Dougherty & Company -- Analyst

Understood. Just -- and then another question, I may have missed it, but in terms of international sales in the quarter as -- 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 see -- 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.

Luke Larson -- President

Yes. 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 continued 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.

Jawad Ahsan -- Chief Financial Officer

And Jeremy to answer your question specifically, it's through 9 months of year-to-date. International is 20% of our overall revenues, that's up 34% year-over-year.

Jeremy Hamblin -- Dougherty & Company -- Analyst

Great, thanks so much for taking the question. Good luck.

Operator

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

Jonathan Ho -- William Blair -- Analyst

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

Rick Smith -- CEO & Founder

Yes.

Jonathan Ho -- William Blair -- Analyst

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

Rick Smith -- CEO & Founder

Yes. I've also -- what customers are really excited about is that we're taking a very different approach to the problems at 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 was led to a lot of really sort of overly complicated hard use software. The thing that we're really focused on is just crushing the user experience for the things 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 reports so that they are spending, half of their time taking the keyboard typing stuff up. And we're getting just a ton of excitement, in fact, we had one major city that had recently made gone through a major RMS, RFP and acquisition process, and we thought they were off the table for a decade and they're back talking with us already, saying this is really interesting if division, you guys have laid out, you can deliver on this, we're interested in taking a look and engaging with you, which to me, again, was a very pleasant surprise to see an agency of less than a couple of years out of a major RFP process putting their end up and saying they're interested. So yes, it's going to be a lot of time in 2019, as we start to roll this out into the marketplace.

Jonathan Ho -- William Blair -- Analyst

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

Rick Smith -- CEO & Founder

Yes, Fleet 2 has been really well received by the market, we 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 burden some 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 & Sensors business and we are taking share from the incumbents and we feel really good about its momentum.

Jonathan Ho -- William Blair -- Analyst

Great. Thank you.

Operator

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

Mark Strouse -- JP Morgan -- Analyst

Yes, hi, everybody. Thanks for taking my 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 -- 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?

Jawad Ahsan -- Chief Financial Officer

Yes, that's a fair assumption. Mark, I think you can probably hear the enthusiasm in our voices about TASER 7 about the new OSP positively they have been received. So at this point in time we have no update to the guidance still say that your assumption low double-digit growth is a good one and I'd say that's very conservative. Over the contract -- I'd just say, over the contract life TASER 7 significantly increases revenue per user because we're increasing with new software services, with the doc, with the end user certification plan. So not only do we think it obviously could open up new markets with its new capabilities, it can accelerate our ability to go back and upsell the installed base and also significantly raises revenue per user.

Mark Strouse -- JP Morgan -- Analyst

Right, that's great. Okay. And then I know it's only been a month or so since the the 7 was announced, but can you just talk about what you're hearing from recent buyers of the exterior or the X26? And do you think that the -- I believe there is a trade in credit for those customers. And if so, just kind of talk about if you think that's at an appropriate level to drive upwards of those customers?

Josh Isner -- Chief Revenue Officer

Hey, Mark. This is Josh Isner. So we have not -- 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 anyway. So we've -- this has been kind of a non-event for those customers and we are doing right by all our entire installed base of weapons.

Andrea James -- Vice President of Investor Relations

So that was Chief Revenue Officer, Josh Isner.

Mark Strouse -- JP Morgan -- Analyst

All right, thanks, Josh. Thank you very much.

Operator

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

Ryan Sigdahl -- Craig-Hallum Capital -- Analyst

Hi, guys. This is Ryan Sigdahl on for Steve Dyer. Within bookings, the SMS (ph) bookings, can you breakout, either the dollar value or the percentage representing 10-year contracts?

Jawad Ahsan -- Chief Financial Officer

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

Ryan Sigdahl -- Craig-Hallum Capital -- Analyst

And then maybe just a follow-up on that, is that primarily at the customer's request or you guys, the minimum 5 years has been the standard for a while and are you guys now actively trying to move these to 10-year deals or was it very specific instances with these customers?

Luke Larson -- President

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 are very rare and mainly driven by customer request.

Ryan Sigdahl -- Craig-Hallum Capital -- Analyst

Thanks. And then one more from 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 LE4's and service and this is just a transition for all the incremental units? Thanks.

Luke Larson -- President

Yes. So they have multiple thousand 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 to Axon Body 2 and then we would see kind of on their next upgrade cycle those would all -- of the entire deployment would move over to Axon Body 3.

Ryan Sigdahl -- Craig-Hallum Capital -- Analyst

And then, maybe I guess just one follow up on that, and then I'll turn it over. So how would difficult will it be then from a back-end user standpoint from evidence.com to use LE4's with some officers and then some officers using the Axon Body?

Luke Larson -- President

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

Ryan Sigdahl -- Craig-Hallum Capital -- Analyst

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

Operator

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

Reed Matulsky -- Imperial Capital -- Analyst

Hello. This is Reed Matulsky (ph) on behalf of Saliq Khan. We are wondering with the improvements of TASER 7. How does this roll-out coincide with the sunset of the law enforcement agencies existing conductive electrical weapons?

Rick Smith -- CEO & Founder

Also, there is a -- there is many agencies who bought the X2 or the X26P when those were first launched in d 2011, 2012 timeframe that -- there's just a ton of great opportunity there. So having a new weapon -- and frankly we have agency that we're still using the older X26E where for whatever reason they had not made it a priority to upgrade those into the current generation of smart weapons. I believe based on seeing customer reactions, that all those people are now -- an opportunity TASER 7 it really hit the customer sweet spot where I think it's going to be pretty compelling across the board. We've got a lot of customers that have TASER's that are more than 5 years old, that are really, primed for a new device.

Reed Matulsky -- Imperial Capital -- Analyst

Got it. Thank you. And with your service platform push or TASER weapons are beginning to replace guns. And is the total ownership cost of a TASER weapon actually cheaper than a gun?

Rick Smith -- CEO & Founder

Yes, I would say the total ownership is cheaper in two respects. One with firearms there's a lot of training that's required -- the training need cops are coming out to street 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 us would 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 a replacement for a firearm. We're still -- let's say about a decade away from where you'd start 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 though that I think the subscription plan is really compelling to our customers, it's -- 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 achievements that's one of the reasons they go with us as 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 in a continuous basis where we're rolling out new software, new hardware et cetera. So we're not quite there yet to make it obsolete, but we're making progress.

Reed Matulsky -- Imperial Capital -- Analyst

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

Rick Smith -- CEO & Founder

Sure. I mean we're open to -- we generally purchased from the perspective that we need to be open to -- have an open platform to collaborate with the entire ecosystem with technology providers so that our customers -- difficult job to do and then we're 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 open API and we work collaboratively with our customers and now their tech providers.

Reed Matulsky -- Imperial Capital -- Analyst

Thank you. And thanks for taking the questions.

Rick Smith -- CEO & Founder

Thank you.

Operator

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

George Godfrey -- CLK -- Analyst

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

Rick Smith -- CEO & Founder

Hold on a second.

George Godfrey -- CLK -- Analyst

And then my follow on question to that. Do you expect the TASER 7 given the higher price point to be margin positive and have it 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?

Rick Smith -- CEO & Founder

Yes. We are expecting TASER to lift the margins overall. The gross margins for the quarter were just under 70%. The operating margin is in the shareholder letter. One thing I'd say is operating margin is not only meaningful the way we think about margins, but with the gross margins for weapon and Software & Sensors separately and we'll look at software and hardware at the gross margin level. But below that it gets a little bit scrambled because we make investments in SG&A across both segments. Some of the allocations are disproportionately hitting TASER and then they are Software & Sensors . We'll look at R&D by product line, we go into a lot of depth on that. SG&A we budget outside that process and also we want to control SG&A and we've demonstrated that over the course of the year we've driven a lot of leverage on our SG&A costs. It's lower now as a percentage of revenue than it was a year ago. That's part of the reason that we've been able to drive that 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.

George Godfrey -- CLK -- Analyst

Okay, that's true.Thank you for that. That's a nice segment. Because that's exactly where I wanted to go. Is the (inaudible) the R&D margin 2 years ago it was 10%, a year ago 16% and now it's 21%. I heard everything you said about being scrappy, but it's more than doubled in 2 years and if I look at the SG&A and I realize their stock comp and amortization intangibles and other things in here, but it's only going from 39% to 38%. So it seems like the R&D spend it is far outpacing any improvement in SG&A. 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.

Rick Smith -- CEO & Founder

Yes. 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've got some very exciting market opportunities. This is part of what we laid out in our last Investor Day ITT. There was a huge market opportunities ahead of us and we've got to invest to go to capture those. And so we're not going to take our foot off the pedal with those R&D investments, what we're going to do is drive discipline across the business SG&A so that's -- it's coming down. You should expect to see drive further leverage there. What I point to is that overall enterprise margins are ticking upward and will continue to tick upwards over the next few years. At this point, we've got this incredible asset and that we've connected 2/3 roughly of the major cities now the Axon network and now to take that and begin to scale at out with records and dispatch and all the AI capabilities and analytics we can run on top of that network all 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 and that we can launch new services right within the same framework that our customers are already using. And we think it'd be unwise for us to overfocus on short term profitability and leave those opportunities unharvested.

George Godfrey -- CLK -- Analyst

Understood. Thank you for take -- if I can just slip one more in here. The EBITDA, adjusted EBITDA margin for the year is 14% to 16% 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 the transition 2,000 plus body cameras is by February for the large VIEVU customer. It seems like there is enough volume 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.

Luke Larson -- President

Yes. So this issue, there are developments that are 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 ARM echo will look like into this. And so for that reason, we're unable to determine at this point what the cost are going to be to transition that customer. And we wanted to reserve, we wanted to maintain some conservatism there as far as our Q4 estimates.

George Godfrey -- CLK -- Analyst

Thank you. Appreciate it.

Operator

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

Glenn Mattson -- Ladenburg Thalmann -- Analyst

Thanks for taking the questions. Operating margin and weapons was 27% by the way was in the release. 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. It's 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 I was wondering -- what the reasoning behind that was if there was some sensitivity around the Officer Safety Plan and the increase price there or anything and just kind of some more concrete evidence about why you're so enthusiastic about the uptake as you look into 2019?

Luke Larson -- President

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 -- 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 carry 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 forward. So to me that's just an incredible data point that's hard to communicate in numbers. But when 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'd actually been talking about those details before we kind of had the final pricing and stuff bundle. So we really wanted to lock in a couple of 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.

Rick Smith -- CEO & Founder

Yes exactly and I would say as well AB3 is going to be a couple of quarters behind TASER 7. So I would expect where we may see it more decoupled sort of TASER 7 program, 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 ship and deliver revenue on the TASER 7. And then this happens fairly regularly whereas we launch new customer, new features or new products that customers will come back and they'll do contract upgrades and rewrite. We just as we pointed out with TASER 7 those customers were obviously showing the product with them much earlier in the process to where the new 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 to go online.

Glenn Mattson -- Ladenburg Thalmann -- Analyst

What's the pricing like when it's sold as a stand-alone have you released that?

Rick Smith -- CEO & Founder

Yes. It -- (inaudible) is typically $60 a month, $60 a month is what we call a certification plan that includes the weapon, that docks, a subscription plan for all the cartridges they need for training, the online training, the BR empathy training et cetera. And then there is a tone -- there's a $40 month plan where they just get the weapon with that docks and then they buy cartridges and training a la cart. So some of the early ones as well I think were on the more basic plan because we hadn't fully flushed out the full certification plan. So we get a lot of this was -- we are in with these customers, while the product was still sort of getting finalized in terms of go to value -- go-to-market proposition, but you pay fees back between $40 and $60 a month.

Glenn Mattson -- Ladenburg Thalmann -- Analyst

Okay. So that's like $500 a year and their 5-year life spans usually right. So that's $2,500 basically is one way to think about it...

Rick Smith -- CEO & Founder

That's right.

Glenn Mattson -- Ladenburg Thalmann -- Analyst

Does that get increase from the $1,200-ish or so that the prior weapon would sell it?

Luke Larson -- President

Yes. (Multiple Speakers) We will have an evidence.com license, it'll be like $7 a month and there are some allocated to the cartridges. But the overall economics are...

Rick Smith -- CEO & Founder

In the number we gave you Luke, it was just take 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, and warranty, and cartridges and training surfaces.

Glenn Mattson -- Ladenburg Thalmann -- Analyst

Okay. All right, great. Thanks, guys. Good Luck.

Rick Smith -- CEO & Founder

Thank you.

Operator

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

Rick Smith -- CEO & Founder

All right for those of you that came out to IACP it was great to see you there, so you get look customers in the eye and take their temperature on our new products. For those of you who weren't, I encourage you to come out to the show next year. Obviously, we're really excited. I think we've now got a lot of a -- lot of opportunity ahead of us. It's all about execution now is rolled 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 for us is better than ever. And thank you to the 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 look forward talking to you then.

Operator

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

Duration: 57 minutes

Call participants:

Luke Larson -- President

Andrea James -- Vice President of Investor Relations

Rick Smith -- CEO & Founder

Jawad Ahsan -- Chief Financial Officer

Yuuji Anderson -- Morgan Stanley -- Analyst

Scott Berg -- Needham & Co. -- Analyst

Keith Housum -- Northcoast Research -- Analyst

Charlie Ehrlich -- Baird -- Analyst

Jeremy Hamblin -- Dougherty & Company -- Analyst

Jonathan Ho -- William Blair -- Analyst

Mark Strouse -- JP Morgan -- Analyst

Josh Isner -- Chief Revenue Officer

Ryan Sigdahl -- Craig-Hallum Capital -- Analyst

Reed Matulsky -- Imperial Capital -- Analyst

George Godfrey -- CLK -- Analyst

Glenn Mattson -- Ladenburg Thalmann -- Analyst

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