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Axon Enterprise, Inc. (NASDAQ:AAXN)
Q4 2018 Earnings Conference Call
Feb. 26, 2019, 5:00 p.m. ET

Contents:

Prepared Remarks:

Operator

Good afternoon. My name is Cheryl, and I will be your conference operator today. At this time, I would like to welcome everyone to the Axon Report Q4 and Full Year 2018 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question and answer session. If you would like to answer a question during this time, simply press * then the No. 1 on your telephone keypad. If you would like to withdraw your question, press the # key. Thank you. Luke Larson, President, you may begin your conference.

Luke Larson -- President

Thanks, Cheryl. Good afternoon to everyone. I’m Luke Larson, the President of Axon. Welcome to Axon’s Fourth Quarter 2018 Earnings Conference Call. Joining us today are CEO and Founder Rick Smith and our CFO Jawad Ahsan. Before we get started I want to give my mom a birthday shout out. And now I’ll turn it over to Andrea James, our VP of Investor Relations to read our Safe Harbor Statement.

Andrea James -- Vice President of Investor Relations

Thanks, Luke. Good afternoon. This call is being broadcast online and is available on the investor relations section of the Axon Enterprise website. You can find our reported results and our quarterly shareholder letter, excuse me, which is available at investor.axon.com and on the SCC website.

Today’s call will include forward-looking statements, including statements regarding our future expectations, beliefs, intentions, or strategies, and projections for future revenue growth and profitability. We intend that all forward-looking statements be subject to the Safe Harbor provided by the Private Securities Litigation Reform Act of 1995. Axon’s forward-looking information is based on current information and expectation. Our 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 actual results to differ materially. These risks are discussed in greater detail in our annual reports on the Form 10K and our quarterly reports on the Form 10Q under the caption risk factors. You may find these filings as well as our other SCC filings at investor.axon.com or at SCC.gov by searching for filings under the AAXN kicker.

Okay, turning the call over to Rick.

Rick Smith -- Chief Executive Officer and Founder

Thanks, Andrea, and welcome, everybody. 2018 was a record breaking year. We drove topline growth of 22%, and the bottom line grew more than twice as fast, with adjusted EBITDA up 53%. We raised $234 million in the following offering, turning our balance sheet into a fortress. We acquired VIEVU and as a result accelerated the largest police department in the United States onto the Axon network.

We released a completely redesigned fleet in-car video system that’s vying for market dominance. We released several groundbreaking software features, including Axon Citizen, and we’ve booked $389 million in business in the software and sensor segment, which is up 34% year-over-year. We also finished the year with a stellar Q4 for every product line. We had a record quarter for Taser, record quarter for software and sensors, record quarter for international revenue, and a record quarter for total company in bookings, including a record quarter for fleet. And of course in the last month of the year we began shipping the all-new Taser device. Taser 7 connects to our software network.

We’re excited about the momentum and initial customer response on the features and offerings in the Officer Safety Plan 7, or OSP7, which bundles our next-generation body camera, Axon Body 3, with Taser 7 and with free Axon records for five years. We announced that at the IECP conference, which is the International Association of Chiefs of Police, last October to time it for the 2019 procurement cycle, and we expect healthy attach rates in the back half, especially once AB3 starts shipping.

We’re seeing great customer response to the Taser 7 premium certification plan. Our major city agency customers, in particular, view it as a significant upgrade over the X2. Demonstrating this for the first time in the history of Taser, customers are demonstrating a willingness to upgrade earlier than five years, which is a statement to the utility and quality of the product and its value proposition. In order to facilitate customers who wish to upgrade weapons less than five years old, we offered a pro-rated trading program. Products for trade-ins of weapons less than five years old accounted for some of the margin compression in the quarter, but in my opinion it’s a very strong indicator that customers really do want to take advantage of the new features in Taser 7 and they don’t want to wait for their old weapon to hit end of life.

I personally want to thank the 76% of voting shareholders who approved our exponential stock performance plan earlier this month. It has brought new energy to the work force, and, of course, we’re excited that it drives total alignment between shareholders, the executive team, and every US employee. We still have some work to do to roll it out internationally. We have lawyers and accountants that are working on that now. Our first operational milestone is either $710 million in revenue or $125 million in adjusted EBITDA, and I can tell you we are laser-focused on hitting those first goals and beyond. It’s encouraging as CEO to have our employees thinking and making decisions just like long-term shareholders.

That’s all for me. Luke?

Luke Larson -- President

Thanks, Rick. The year is off to a strong start with several key wins. We look forward to welcoming the Swedish Police Authority onto the Axon network. That’s the first European nationalized police force to deploy Axon body cameras and go on the Axon network. We also received notice a few weeks ago that the Phoenix City Council approved a $5.7 million contract with Axon Enterprise to provide 2,000 body cameras for the department and Evidence.com. We have a few more wins up our sleeve for both Taser 7 and body cameras that we look forward to announcing in the coming days and weeks.

Some of you who have been with us for a while know that in late 2017, early led by our new CFO Jawad, we pivoted our company culture to focus more on driving profitability. It was important for us to demonstrate leverage on the body camera business after years of heavy investment. So one year ago I stood up in front of the company, and I declared that I’d shave my head if we hit our 2018 EBITDA goals. So it’s with mixed feelings that I share with the team, or share with everyone that the team rallied, and we did indeed hit those goals. In fact, we exceeded them, even accounting for about a $10 million related loss with association of acquiring VIEVU in May. And so several employees took turns shaving my head on stage during our annual company kickoff, which we privately broadcast to Axon offices all over the world. It was a pretty great moment for almost everyone except my wife. I also got a heck of a sunburn at the Phoenix open.

And I’m sharing this with all of our shareholders to let you know just how committed I was to driving this metric, and the tone echoed throughout the organization as evidenced by weekly reviews of our expense structure. And of course I recognize that even as we demonstrate successful annual leverage, Axon remains in a period of under-earning while we invest in major growth opportunities. We feel great about our 2018 performance, where the cost controls we began implementing in late 2017 cleared the way for us to acquire VIEVU and make the right decisions for our customers and for the long term, still meeting our full year profitability targets.

Turning to 2019, I’m laser-focused on three primary execution items. The first is ensuring that Taser 7 is the most successful Taser rollout ever, and it’s being very well-received in the market. The second is launching our next-generation body camera, Axon Body 3, midyear, which is our first LTE-connected camera. This is great timing. The launch of Axon Body 3 coincides with the rollout of the first dedicated first responder cellular networks by AT&T First Net and Verizon, both of which are Axon partners. And third, we’re extremely focused on delivering the Axon record software product to our launch partners.

Double clicking on the third one, let’s talk about what a successful Axon records rollout looks like. We need to nail the product, and we have the right team in place to do that. We also need to really succeed in our early deployments. 2019, the key goal is to gain a foothold and delight our early launch customers. We also want to sell Axon records through our Officer Safety Plan 7, bundled with the Taser 7 and Axon Body 3, so customers are set up for the full Axon experience.

We’re feeling really great about 2019, and now I’ll turn over the call to our CFO Jawad.

Jawad Ahsan -- Chief Financial Officer

Thanks, Luke. I’ve never felt better about how the company is positioned for growth. We’ve proven we can execute. In 2018, we did what we said we’re gonna do, despite a pretty substantial headwind from VIEVU and one of their large domestic customers. We have terrific momentum on our topline driven by investments in our products and teams, with international picking up and the fleet business vying for market leadership.

I also feel great about having more than $800 million in total company backlog and the fact that annual recurring revenue for software has crossed $100 million in 2018. Axon records and dispatch are right around the corner, and we feel good about records coming online and contributing to bookings in 2019. On the bottom line, this is the first year in our company’s recent history that we hit our profitability goals, and we expect that to continue going forward. I’m very proud of the team for embracing a new level of financial discipline.

Turning to the balance sheet, our strong cash position gives us an incredible amount of resilience. In 2018 we generated $64 million in operating cash, up from $18 million a year ago. That combined with the following offering gives us about $350 million in cash, which puts us in a strong position to flip the switch on selling Taser subscriptions. Equally important, we have the financial muscle to continue investing in our four strategic growth areas to drive ongoing innovation in market leadership.

The guidance we’re providing today reflects strength on both the top and bottom line. As we look at 2019, we expect momentum to build throughout the year, Q1 sales reflecting a more modest growth rate relative to the back half. We will continue investing for growth with increases in R&D as a percentage of sales throughout the year. We plan to partially offset that by reducing SGNA as a percentage of sales. SGNA as a percentage of sales dropped from 40% in 2017 to 37% in 2018, and we expect to further reduce that in 2019.

Our teams are incredibly excited about our success in 2018, and they’re highly motivated to keep the topline growing and maintain the operating discipline needed to drive bottom line results. And with that, operator, let’s turn to questions.

Questions and Answers:

Operator

To ask a question, please press *1 on your telephone keypad. The first question comes from the line of Mark Strouse of JP Morgan. Please go ahead. Your line is open.

Mark Strouse -- JP Morgan -- Analyst

Yeah, thanks, everybody. Thanks for taking my questions. So, Jawad, I think you’ve done a pretty good job of laying out the...kinda the one-time items that were weighing on margins in 4Q, but just question for the guidance. How should we think about the, I guess call it one-time items associated with VIEVU and their large contract that they had? Are there any more expenses that we should expect here in the first half of 2019?

And then kind of a quick follow-up to that is your guidance kinda points to EBITDA margin expansion a bit below your kind of long-term targets that you’ve talked about, you know, over the last year or so. I guess how should we think about that longer term? Are you kind of stepping away from those targets, or can you reiterate those?

Jawad Ahsan -- Chief Financial Officer

Yeah, great question, Mark. I’ll start with the VIEVU one. So, look, VIEVU was diluted. We knew that when we acquired the business, and when we had the issue that one large customer domestically ended up being more of a headwind than we’d counted on, and we’re still working very hard to get that business integrated and to rationalize some of the duplicative costs and to make sure that it’s no longer a headwind going into 2019. And we’re certainly not going to see the level of diluted costs that we saw last year earned in 2018. We are expecting still in Q1, I would say, see some cost as we continue to, you know, just rationalize some of the cost base there, but it’s gonna be an order of magnitude less than it was in 2018.

And then on your second question, you know, that’s also a good question. What we’re looking to do very much is still to drive leverage, and we’re not stepping away from our guidance but we are just again facing this headwind from VIEVU. And also part of what you saw in our Q4 results was that the Taser 7 ramp costs ended up being higher than we were expecting, and we’re expecting to see a little bit of that in Q1.

Mark Strouse -- JP Morgan -- Analyst

Okay, that’s helpful. Thank you. And then you’re mentioning or I guess you’re kind of highlighting adjacent markets more in the press release. Can you talk about the incremental expense associated with that that’s kind of baked into your 2019 op ex? And then if there’s anything high level that you can share to kind of help investors frame the addressable markets for those, that would be helpful. Thank you.

Luke Larson -- President

Yeah, Mark. I’ll handle the first part of that question. In terms of growing op ex to support additional markets, we actually have several key members of our team that are working on new market expansion, and one of the great motivations for them, we actually had quite a few senior individuals on our customer-facing teams opt into the XSU plan. And so they’re working overtime to figure out how to open up these new markets. So we don’t see any great op ex adds there. I think this is -- We’re gonna continue to drive leverage in SGNA and still be able to open up some of these new markets.

In terms of the focus of those markets, we really see an opportunity in what we would call very adjacent markets like EMS and fire, and we have teams talking in those. They’re not quite as big as the law enforcement market. We also have had some interest from additional markets as well. I’m actually gonna kinda keep that pretty tight-lipped for now, just because we don’t wanna release any competitive intel.

Mark Strouse -- JP Morgan -- Analyst

Okay. Understood. Thank you very much.

Operator

Your next question comes from the line of Will Power of Baird. Please go ahead. Your line is open.

Will Power -- Baird -- Analyst

Great. Yeah, thanks for taking the question. Maybe first just coming back to the 2019 revenue guidance and the expected build through the year off of Q1. I guess I’d just be interested in the visibility into the second half, kind of the key drivers. I guess Body Camera 3 is part of that, but any reason why Taser 7 wouldn’t continue to build off the Q4 level through the first half and then I guess continue to build in the second half? So just trying to understand the visibility of that second half improvement in revenue.

Jawad Ahsan -- Chief Financial Officer

Yeah, we’re expecting Taser 7 production to be fully ramped by about the midpoint of the year, and so what we’ll see is a pickup in revenue in the second half. And then what’s gonna happen is there’ll be sort of a force multiplier effect with AB3. A lot of those upgrades are all coming up in the back half of the year, so T7 being fully ramped as well as AB3 upgrades in the back half of the year are gonna lead revenue to be -- The profile looks heavier in the back half of the year.

Will Power -- Baird -- Analyst

Okay. And then, you know, among the four key kind of strategic growth drivers that you talked about in the presentation or the release, you talked about records already and pushing for bookings and key customers later this year. I guess I didn’t hear much more on dispatch. I guess I’d be curious, you know, what you’re thinking there and time from here.

Luke Larson -- President

Yeah, why don’t we have Rick take that question?

Rick Smith -- Chief Executive Officer and Founder

Thanks, Luke. Yeah. Dispatch, we are not releasing a lot for competitive reasons on that point. It’s an area we’re pretty excited about. Stay tuned for some calls later in the year, and we’ll provide some more details on it. But for now we’re keeping that one fairly close to the vest.

Will Power -- Baird -- Analyst

Okay. Thank you.

Operator

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

Jonathan Ho -- William Blair and Company -- Technology Analyst

Hi. Good afternoon. Can you hear me okay?

Rick Smith -- Chief Executive Officer and Founder

Yep.

Andrea James -- Vice President of Investor Relations

Yeah.

Jonathan Ho -- William Blair and Company -- Technology Analyst

Perfect. So just wanted to start out, in terms of your bookings expectations around RMS, you know, I know you talked about the second half being the opportunity timeframe, but what magnitude of booking should we be thinking about? And can you give us some color in terms of the types of customers you’d be targeting initially?

Rick Smith -- Chief Executive Officer and Founder

Yeah, I can take that one. This is Rick. So most of the early booking actually we expect to be as part of the OSP bundles, the Officer Safety Plan bundles, so we’ve included records in that because we think that the real target market for us are people that, are agencies that are already using the majority of our ecosystem with Taser weapon, the body cameras, and cloud software. So the really play we see as the opportunity there -- Now there is some revenue allocation that is allocated towards records. I’m actually in a different area of the country from Jawad and Luke. Jawad, do we -- I feel we’re not giving any more details in terms of how that revenue allocations is being handled at this time?

Jawad Ahsan -- Chief Financial Officer

No, not at this time.

Rick Smith -- Chief Executive Officer and Founder

Okay. So we really view this as part of the overall enterprise sale, and the reason to include records as a free add-on in that sale is we see the real value long haul is in the data not in the software itself. So fundamentally, records software is form-filling software. It’s the forms and reports officers fill out. And we think that no matter how good your form-filling software is, it will largely be a commodity, and as such when we see things that are commodity our general strategy is to have a more aggressive go-to-market plan. And in this case we decided to make it free in that bundle, and the rationale really is that the really value-add will be in the automation that’s possible by connecting the audio/video stream from the camera to the record management software so that we can begin pre-populating and ultimately, over a five-to-seven-year timeline we believe we can dramatically cut the amount of time an officer has spent filling out forms.

When fundamentally a law enforcement interaction is what my AI team sort of points to as a really great target for machine transcription, because they’re very structured conversations. You know, “Hello, sir. What’s your name? Where do you live? What’s your date of birth?” And with that sort of structured conversation, to be able to extract that information from the audio/video record and pre-populate it into the printed record is something that will be hugely valuable. And to just give you an idea, I talked to one major customer in the US, and they had spent recently something like a $40 million contract on a record management system over a multi-year time period. But that same agency spends around $1.6 billion a year on payroll, and their officers are spending about half their time doing administrative tasks. So the value prescient opportunity is for us to automate that $800 million payroll cost that’s going to non-value-added bureaucratic tasks.

And so that’s where you’ll begin to see -- So you will see revenue associated with records. It’ll largely be a function of allocation against the bundle in the early years, and then where it’ll really kick in is when we add the high-value analytics and AI automation that connects the body cameras to records over the next three to five years.

Jonathan Ho -- William Blair and Company -- Technology Analyst

Excellent. Thank you for the color. And just as a follow-up, when we look at sort of the strengths around Taser 7 and the excitement that you’re seeing in the customer base, can you take about how maybe that impacts OSP? I mean are you seeing other customers that have historically been sort of hardware-only now wanna refresh Taser 7 and look at the broader bundle? Like how does that potentially maybe change that mix?

Luke Larson -- President

Absolutely. Go ahead, Rick. Yeah, we see a great opportunity every time we get in front of our customers to talk about the total Axon solution, and so the strength of our portfolios when all those products are used together, the agencies see additional benefits. And so every time we’re in talking with a customer about any one of our products, we’re kinda highlighting the benefit of the total solution. Over to you, Rick.

Rick Smith -- Chief Executive Officer and Founder

Yeah, I would say, so the Taser 7 definitely, it has a much stronger data integration element to it. Actually just yesterday I was going over with some of our design team, what they did on things like device assignment, which doesn’t sound particularly sexy, or even the returns process, but when your agency is deploying thousands of Taser weapons, having to write down serial numbers and type them into a spreadsheet later versus now we do it with a mobile app where you tap it on the device and assign it to an officer, when you’re doing thousands of these it just dramatically improves the experience. And that’s all part of that integrated software ecosystem, and with AB3 that will pair with your Taser 7 and start to allow things like real-time alerting so that if an officer arms or fires their Taser 7 in the field that alert can be routed to other officers within the agency or administrators in a service we’re calling Aware, which really is to help the agency be better aware of what’s actually happening out in the field.

And I’d wrap by saying, you know, to me the most exciting thing coming this year will be Axon Body 3, because I think fundamentally we’re poised for an iPhone moment, meaning when the iPod went to the iPhone, the initial perception’s well my music player now has a phone in it. And now as we look back at it, like, pretty rarely people even use the thing as a phone anymore. It became such a transformatively connected device. We see similar opportunities, and effectively today we make sort of a nuanced Go Pro type of camera. We make a great camera that the officers wear, and they download the information and use it later. Once LTE kicks in, we’ll be able to offer all kinds of real-time services that will sit on top of that hardware platform so the camera becomes something more like an Alexa on your chest as opposed to just a camera you wear to record. And we think that will open up a whole host of really interesting services, some of which we’re already planning for and some of which we think we’ll discover once that connectivity comes online and we’re out in the field.

And by the way, the significant majority of our customers in the US are on a hardware upgrade program, and so they will get Axon Body 3 sort of like clockwork as part of their subscription, which is a really big part of both the customer benefit that they -- We carry them into the future with both hardware and software upgrade features. And it’s great for us, because we can plan our roadmap. We don’t have to sort of plan to indefinitely support the last three generations of cameras. We can move our install base along with us, and that gives us flexibility to move and innovate faster than any of the competitors in the space.

Jonathan Ho -- William Blair and Company -- Technology Analyst

Great. Thank you for the color.

Operator

Your next question comes from the line of Jeremy Hamlin of Dougherty and Company. Please go ahead. Your line is open.

Jeremy Hamblin -- Dougherty and Company -- Vice President

Thanks for taking the questions. I wanted to ask about that, you mentioned the time to rebuild the Taser gross margin. Can you give us a better sense, maybe a more specific timeframe in which you think you’ll get that business back into that 69%, 70% range in the gross margin?

Jawad Ahsan -- Chief Financial Officer

You know, at this point, that’s something we’re gonna see throughout 2019. It’ll successively build. There’s a lot of factors there. Obviously we have the ramp costs that we’re dealing with in Q4, and we’re gonna see that in the first half of the year until we’re fully ramped. And then we’re also still very much, we’re at the point where we’ve got trade-in credits that are in the mix, and there’s the discounting. Although we have changed the incentive structure with the sales team to minimize discounting, there’s still some early leader pricing going on. There’s some trade-in credits. And so what we’re gonna expect to see is throughout the year those margins will build, and hopefully exiting 2019 they’ll be more on a normalized basis.

Jeremy Hamblin -- Dougherty and Company -- Vice President

Got you. That’s very helpful. And then just in terms of you’ve talked about investment, and as we think about our R&D outlook this year, you had a little bit lower number here in Q4. As we think about 2019 and your R&D investments, how’s that gonna reflect, I guess, the new product launches? You know, Axon records coming along. How should we be thinking about that particular line item?

Jawad Ahsan -- Chief Financial Officer

Yeah, yeah. Good question, Jeremy. So you’ve seen we’ve continued to increase our investment in R&D. We’re very excited about the opportunities that are ahead of us. Certainly the markets that we’re addressing today but there are some new opportunities in adjacent markets, and we’re very excited about records and dispatch as well. And what we don’t wanna do is underinvest and miss out on those opportunities, and so for 2019 you can expect that our R&D as a percentage of revenue will be slightly above 20%. So that’s up from about 18% in 2018. It’s up from 16% in 2017. And what we’re doing to help offset that, if you look at our SGNA as a percentage of revenue, that’s coming down. So it was 40% at the end of 2017, about 37% at the end of 2018, and we’ll look for and expect to drive that down even further in 2019, closer to about 35%. And so what we’re very consciously doing is driving leverage in our support function costs and reinvesting those dollars into R&D.

Jeremy Hamblin -- Dougherty and Company -- Vice President

Okay, great. And just a follow-up related to that question, which is, you know, in thinking about records specifically, in terms of the timeframe in which that’s gonna be a revenue-generating product, can you give us a sense in 2020 is that something, an early 2020, in terms of revenue generation, or more the second half of the year?

Luke Larson -- President

Yeah, so as Rick was saying earlier, we’re actually, you know, selling Axon records today bundled in with our Taser 7 OSP offering, but we would see that being a contributor in the first part of 2020.

Jeremy Hamblin -- Dougherty and Company -- Vice President

Okay. Thanks, guys.

Rick Smith -- Chief Executive Officer and Founder

Yeah, and again just to add a little color there. We don’t expect that we’re gonna be selling many standalone deals of Axon records, because where our solution would be particularly strong is in an integrated piece of the Axon ecosystem, which it just so happens the vast majority of major agencies are already on. So you’ll see it showing up in the bundled sales, and we’ll start recognizing revenue as soon as the product is in general availability with features that meet the reverent guidelines that our customers can start to gain utility from those features. So we expect that to happen late this year.

Jeremy Hamblin -- Dougherty and Company -- Vice President

Right. That was really the question of when that product was gonna be recognized as revenue, but I think we got the answer. Thanks, guys.

Operator

Your next question comes from the line of Mike Latimore of Northland Capital Market. Please go ahead. Your line is open.

Mike Latimore -- Northland Capital Market -- Managing Director

Hi, guys. Thanks for taking my question. This is Paul on for Mike Latimore. I have two questions. My first one is like what percentage of your Taser sales were sold under the current plan and as upgrades?

Jawad Ahsan -- Chief Financial Officer

We’re just gonna track that down. We’ve got that in our shareholder letter.

Andrea James -- Vice President of Investor Relations

Thirty-five percent of all weapons sold in Q4-1 are recurring payment plan, and in the US specifically it was 48% of new Taser contracts. And I believe it was almost all T7 was on a recurring.

Mike Latimore -- Northland Capital Market -- Managing Director

Yeah, and my second question is like could you give us a sense of your backlog of [inaudible] suits not yet activated?

Andrea James -- Vice President of Investor Relations

Yeah, we do have that. Generally about 20%. Hold on.

Jawad Ahsan -- Chief Financial Officer

Yeah, it’s about 15-20% of our book seats.

Andrea James -- Vice President of Investor Relations

Yeah.

Mike Latimore -- Northland Capital Market -- Managing Director

Yeah. Thanks. Thanks for answering my questions. Bye.

Operator

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

Saliq Khan -- Imperial Capital -- Vice President

Great. Thank you. Hey, guys. How are you?

Rick Smith -- Chief Executive Officer and Founder

Doing great. Thanks.

Jawad Ahsan -- Chief Financial Officer

We’re good.

Saliq Khan -- Imperial Capital -- Vice President

Perfect, guys. Quick questions for on my end. First one is could you give me a bit more granularity on the Axon Fleet 2, either regarding your expected revenue or the margin contribution? And even more importantly is are you seeing any competitive pressures from the likes of WatchGuard?

Luke Larson -- President

Yeah, so why don’t I start with the back half of your question? We have really seen demand for Fleet 2 and are just really proud of the kind of market’s response and the demand for Fleet. We sell the majority of our Fleet products, just like we do our cameras, where we sell them out of bookings, where they’ll buy on a five-year contract, and then we recognize that over a five-year period.

Rick Smith -- Chief Executive Officer and Founder

Hey, Luke, if I could contribute as well, I would say a couple years ago WatchGuard was the clear market leader in in-car video, and by the way they’re a company we hold in high regard. But I’d say we’ve been quite competitive. Our competing intel tells us they’re down in quarters where we’ve been the market leader on a dollar bookings basis, and we continue to feel that the momentum is heading our direction. So we feel really good about within a year or two of launch, we’ve been able to really become a contender for the No. 1 spot, and we think we’ll only get stronger with time.

Saliq Khan -- Imperial Capital -- Vice President

Perfect. Yeah, just give me -- Go ahead, please.

Jawad Ahsan -- Chief Financial Officer

I just wanna provide some extra color. We shipped about 4,000 units in the quarter, and we’re expecting in 2019 a quarterly run rate to be at or above that level.

Saliq Khan -- Imperial Capital -- Vice President

That’s very helpful. Thank you for that. Guys, two more questions on my end, as well. You may have touched upon the first one, but the Axon Flex sales, I noticed that they had declined roughly 3% year-over-year. Is that because you’re seeing some of the sales be cannibalized by your other offerings, or is there something else going on that I may be missing?

Luke Larson -- President

So at IACP, we announced our Axon Body 3 camera, and so we’ve been working with a lot of our customers on how we would transition them over to the new technology that’s gonna be shipping this year.

Rick Smith -- Chief Executive Officer and Founder

Yeah, and then, this is Rick, I would add in that in general I think we’ve seen the market shifting in favor of the integrated one-piece body camera versus the two-piece. The original concept of Flex was that it would be a head-mounted camera that would track the perspective of the officer, and what we’ve found is just in practice officers really do not enjoy wearing the camera on their heads so they tend to wear it on their shoulders, et cetera. And that ends up really giving you a suboptimal experience because then you have the narrow field of view and it’s not ultimately tracking the officer’s head. So we’re taking -- I’m continuing to see a trend where officers and agencies are just moving toward the more simplified body camera design like both AB2 and now AB3.

Saliq Khan -- Imperial Capital -- Vice President

Yeah, I would envision that as well. Thanks. The form-factor and just ease of use altogether for the AB3, this seems a lot better than what I saw with the Axon Flex. Nonetheless, it’s a great product. Now last question on my end, guys. It’s -- And I know, Rick, you had done a ton of work with this in the past, and I believe you continue to do a lot more of this. If you take a look at the international business, it tends to be a bit different due to the slower agencies that are out there. What have you done over the past year or two to be able to improve the predictability of your international business?

Rick Smith -- Chief Executive Officer and Founder

So the main thing we’ve done is really hiring dedicated sales people in-market, and I think we’ve got a pretty good model of what it takes to open a market. I don’t wanna get into detail here because we may have competitors on the call about how we resource markets, but I think we’ve got it down to where we’re able to replicate that as we go into new markets in a pretty efficient way. You know, we did just come off a record period in international sales, and we do expect the year ahead we could really start to see international continue to blossom really across the world but I think Mainland Europe are areas we’ve got our eye on. You know, I was there in 2015, ’16. It’s been two, three years, and so we’re now starting to see some of those national police forces like we saw in Sweden, and we’ve got some others that are in field trials of both Taser weapons and cameras.

Saliq Khan -- Imperial Capital -- Vice President

Great. Thank you, guys.

Rick Smith -- Chief Executive Officer and Founder

Yep. Thank you.

Operator

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

Scott Berg -- Needham and Company -- Analyst

Hi, everyone. Thanks for taking my questions. I have one and a follow-up. I guess, first of all, I don’t know if Rick or Luke wanna answer the question, but can you give us a sense of what you saw from customers in the quarter that were evaluating the new Taser 7 in terms of their willingness to purchase a subscription? I heard Andrea give the metric that the vast majority of the sales in the quarter on the Taser 7 were subscription, but how about maybe a broader comment on the conversations you had?

Luke Larson -- President

Oh, well, yeah, sure. So when we -- Historically when we were approaching customers, a lot of the early Taser purchases for M26 and X26 were out of, you know, they were out of their discretionary funds, usually kind of chunks of cash that they could spend on whatever they wanted. Now we’ve effectively positioned the Taser as mission-critical gear, so the majority of the agencies, especially in the States, have actually come to us with a poll to put that into their operating budget, which really aligns with our subscription plans. So I would see over the next three to five years, we would expect the vast majority of our US customers to buy on a recurring service plan. Now we do want to keep in mind that they still have some of these discretionary funds and if that’s the way they like to purchase we’re never gonna turn away a PO, but I would see the majority of the customers looking to buy on the subscription plans.

Rick Smith -- Chief Executive Officer and Founder

Yeah, I would add that, as well, Taser 7’s a little interesting in that virtually every sale has a subscription element. Even if they buy the weapon there’s a subscription element for the docks, rechargeable batteries, and software services that they would really need to effectively run the program, even if they bought the weapons outright. So to my awareness, every significant order in the quarter had some subscription element, and in fact I can’t think of one offhand where the customer came and basically said, “No, no. I’m gonna buy the weapons and only do the subscription for the smaller parts.” There may have been some of that, but the tone of the market’s quite different. Whereas three, four years ago, when we started offering payment plans for weapons, I would say the majority of customers would come back and say, “No, no, I wanna buy this the way I’ve always bought it and pay you one time and own it,” whereas now I would say the majority at least of the larger customers where I’m having personal exposure, they’re almost -- Well, they’re all that I’m aware of that I was involved with going on one of these officer safety or certification type plans where it’s a subscription model.

Scott Berg -- Needham and Company -- Analyst

Got it. Helpful. Then my follow-up would be, in your press release you mentioned some incremental investments outside of law enforcement like fire departments, emergency medical, emergency services, et cetera. Can you maybe quantify what those additional investments or those incremental investments look like here in ’19? And then how about any other success stories in your endeavors outside of law enforcement outside of the I think it was the Charlotte Fire Department that was a big one during the year? Thank you.

Jawad Ahsan -- Chief Financial Officer

So I’ll start with the level of investment. You can expect that we’ll make those investments within the guidance that we’ve given for R&D. So we’ve guided north to 20% for an R&D as a percentage of revenue, and that’s inclusive of the investments we’re making for adjacent markets. And at this point, as part of the overall bucket, it’s still relatively minimal.

Rick Smith -- Chief Executive Officer and Founder

Yeah, I would just add there that what we’re mostly focused on is how do we take the same products and feature set we’ve created for law enforcement and find other enterprise users that would want similar capabilities, and in fact this is one where having law enforcement as reference customers is pretty powerful because that’s seen by enterprises as a fairly elite, very data-secure-oriented market where we’re the clear leader. And now we’re looking at how we can parlay that leadership into revenue in other markets, where we do it in a pretty scrappy way.

So just building on what Jawad said it’s not something you will see broken out. It’s not -- These are nowhere near the level investment that we’re making into major initiatives like records, dispatch. This is really taking the major investments we’ve made in building these connected body cameras and now taking those into new markets. So from SGNA perspective, I think these -- Our expectation is that new markets should pay for themselves relatively quickly. There’s not gonna be some huge upfront marketing and launch expense. We’re moving to these markets in a pretty cost-effective way.

Jawad Ahsan -- Chief Financial Officer

Yeah, I actually want to add to that. I wanna give Rick and Luke a lot of kudos here. Previously when we thought about getting into new markets, new products, we made pretty heavy investments, and what we’ve done recently is really shift to this smaller, scrappier mindset. And Rick and Luke have pioneered these delta teams that you’ve heard us talk about where we’ll take very small teams of one to three people and basically have them bootstrap their way into growth, and we’ve done that with our drones business. There’s some other new product categories we’re getting into where we’re doing this, and it’s proving to be -- We are very, very excited about the early returns we’re seeing from these new products, so there’s certainly markets for existing products like body cameras and Tasers that we’re looking for markets outside of law enforcement, but then there are also new product categories that we’re approaching in a small, scrappy mindset.

Scott Berg -- Needham and Company -- Analyst

That’s great. Congrats on the quarter. Thanks for taking my questions.

Rick Smith -- Chief Executive Officer and Founder

Thanks.

Operator

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

Steve Dyer -- Craig-Hallum -- Analyst

Great. Thanks. A question on the Taser. There’s been some question on software and sensors. On the Taser business, yeah, I think you touched on a little bit of the gross margin the other day. Operating margin of 18.5%, Jawad, when you add back, and I know there were some one-time add-backs, but when you add those back what do you feel like a good sort of normalized operating margin the quarter was?

Jawad Ahsan -- Chief Financial Officer

So for Taser we were looking at -- Hang on a second. I’ve got it here. On a pro forma basis...So yeah, I mean, this is part of issue we have, Steve, is that we’re really -- We’re no longer breaking out SGNA by segment, because a lot of our SGNA costs were -- Actually most of our SGNA costs were allocated to Taser, and it wasn’t very meaningful to look at that by segment. And so we look at our gross margins by segment, we look at our R&D by segment, but SGNA we really look at on a consolidated basis. So I would really point you to focus to the Taser gross margins, and that’s something we’re, like we had said, in the short term 61-63%, and we expect that to normalize by the end of the year.

Steve Dyer -- Craig-Hallum -- Analyst

Got it. I guess where my question’s going is is not that long ago, a couple years ago, as recently as that, the Taser business was a mid-to-high-thirties operating margins business, and it’s sort of been gradually declining over the last couple years. And again I calculate 18.5% this quarter on an operating basis, but I realize there were a couple of one-time things playing on that. It’s like I’m just trying to figure out is the Taser business structurally different in any way than it was a couple years ago? Are you pricing different? I mean, I would think if anything more people on a subscription plan would actually be more profitable. But anything going on there that I can make heads or tails of?

Jawad Ahsan -- Chief Financial Officer

Yeah, so, Steve, that’s very perceptive, and what you’re seeing is that the company overall is much different than it was a couple years ago. And a lot of the infrastructure that we’ve added from an SGNA standpoint is servicing the entire company, but all of those costs have been burdened in Taser. So when you look at the Taser operating margins over that period, for sure it’s gonna have degraded, but that’s not really reflective of what’s going on in the Taser business because again we haven’t been allocating those costs to software and sensors, which is why we’re really looking at gross margins by segment and SGNA we look at on a consolidated basis.

But, you know, again, I’ve already given you the guidance for the gross margins on Taser, so it’s taking a bit of a step back as we’re ramping up Taser 7, but we expect that it’s gonna normalize throughout 2019. And we also feel really good about the body camera business. If you take out the costs for VIEVU, those one-time headwinds, we actually, we’re very close to break even.

Steve Dyer -- Craig-Hallum -- Analyst

Got it. That’s helpful. Thanks. I guess one more question on weapons while I have you. Taser 7, is your expectation that the buyers of that product will typically be people who already have Taser devices? Or do you anticipate sort of any new sort of conquest sales from people on that, I guess, going forward? Where do you expect to get that growth from?

Jawad Ahsan -- Chief Financial Officer

You know, I’d like to start with this before I turn it over. So one of the things that I’m very excited about with Taser 7, so a key part of our strategy has been to shift towards a recurring pricing model with the Taser weapons. First, we’ve always talked about the five-year useful life and how that should be a driver of new sales, and then we talked about shifting from Capex to op ex and really being in line with them in the budget.

And for the first time what we’re seeing is demand for the new Taser weapon on the merits of the weapon being very good, so historically for X2, X26P, it’s been the five-year useful life, it’s been the shift to op ex, but now what we’re seeing is people actually want the Taser 7 because it’s so good.

Luke Larson -- President

Yeah. You know, we think every frontline officer should carry a Taser. It wasn’t that long ago that, you know, Chicago PD had a high-profile incident where they called for a Taser seven times, and they didn’t have one. In the wake of that incident, they really made a push to get them on all frontline officers. So we’re working on filling out every major city, every white space. We believe frontline officers should have Tasers. And then internationally we’re also seeing a big opportunity where historically we’ve seen smaller percentage of forces, just a percentage deploy, and we’re now making strides in positioning, “Hey, this should be carried by every officer.”

Steve Dyer -- Craig-Hallum -- Analyst

Last one for me. Just as it relates to body cams, they’ve been there now for a few years, I’m sure to the point that you’re starting to see some opportunities for renewal. What do you see when those people come up for their first renewals, some of the early adopters on body cams? Is there any attrition to speak of? Or any color there would be great. Thanks.

Luke Larson -- President

Yeah, one of our margin, or one of our metrics for last year was actually on churn and retention. So we’re laser-focused on every deal, ensuring that when they come up for renewal, you know, they stay on the Axon network. We’ve not rested on our laurels. We’re investing in making these products even better and offer more capabilities like the AB3, so both Rick and I are taking an active role in meeting with major cities. This week we’re both gonna be out at different major cities along with our Chief Revenue Officer, not only talking about the body cameras but talking about the entire OSP7 offering with Taser 7 and records. But we feel very confident that we’ve got a sticky solution with the entire Axon offering.

Steve Dyer -- Craig-Hallum -- Analyst

So with all that said, are there any stats that you’re able to share just around any attrition or any renewal percentages, et cetera?

Rick Smith -- Chief Executive Officer and Founder

I’m sorry. Can you repeat that? Your line is really static-y. I couldn’t make that out.

Steve Dyer -- Craig-Hallum -- Analyst

Yeah. I guess what I’m looking for is if some of the early adopters come up for renewal on the body cam -- just any anecdotal or quantitative numbers that you’ve seen back around attrition or renewal or anything like that to suggest that it’s a long-term sticky product.

Jawad Ahsan -- Chief Financial Officer

Yeah. So for the first time -- So last year we changed to our bonus metrics. They were previously all commercially focused, and for the first time last year we introduced some profitability metrics. We also introduced some usage and some -- we had churn as one of the metrics. And it was less than I wanna say a third of a percent. It was practically zero, and we had I wanna say about 20 different accounts up for renewal. And so it’s been a very sticky product.

Actually a lot of what we’re seeing is that the customers don’t even go the full five years. They end up renewing early and adding scope, adding users and scope of work to their contracts.

Luke Larson -- President

Yeah, I would also offer, when they go on the -- when they adopt Axon body cameras, we’re not only offering them cameras. We’re going into their operating workflow where the officer gets to learn the product. They also a-day-in-the-life, they’re docking that in a dock. That’s infrastructure that we actually install on site, and then all of that evidence uploads to Evidence.com, which is now -- we have over 40 petabytes of data on Evidence.com, so to -- We want to continually provide new value to the agencies, but we also have really cemented ourselves in that workflow with the infrastructure that we’ve put in place as well as just the amount of data that they’re uploading to the SAPS system.

Rick Smith -- Chief Executive Officer and Founder

Yeah, this is Rick. Just to put a finer point on it. Of all the agencies large enough to be on my radar screen last year, there was only one that did not renew, and that was not a customer that -- it was a customer that had a small TNE, meaning a small test number of units that they were not actively using, so that’s the sort of customer you’d expect wouldn’t renew if they got a small number and for whatever reason didn’t deploy them. But every significant customer with any decent number of cameras on the network renewed last year. So I should knock on wood when I say that, but we’re very happy that customers are finding utility.

And they’re far -- You know, we saw a lot of customers last year upgrade early because they wanted to add whether it was the Taser 7, whether it’s adding Fleet, or any of the other new features, we’re seeing that is a very common phenomenon. And once agencies do go through adding something onto their contract, it’s pretty universal -- I’m looking at my team here to make sure I’m accurate on this, but most of the time if they’re gonna go through a procurement they want to co-terminate and extend to another five years so they don’t have to keep going through another procurement process. Unless they want to because we’ve created another value prop for them to come in and increase it.

So first line is it’s working I’d say better than I could have anticipated when we got into this business.

Operator

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

George Godfrey -- CL King and Associates -- Analyst

Thank you. Thank you for taking my question. Question one, for you, Jawad. Adjusted EBITDA’s $82.5 million at the midpoint, and I’m just thinking that in 2018 adjusted EBITDA came in at $61 million. Free cash flow was $47 million. So it was 77% conversion rate. Would you expect a similar conversion rate on your adjusted EBITDA in ’19?

Jawad Ahsan -- Chief Financial Officer

Directionally yes. I think it’ll probably -- So what we were generally expecting to see a bit of air pocket or a bit of an impact on cash with Taser 7 because most of those sales are obviously on subscription versus the upfront like book-and-ship model for the previous weapons, but we haven’t seen as much of an impact because we also now have had customers on these recurring deals for some period of time and like there’s, with these -- them making their -- with that base building, it’s less of an impact. So I’d say directionally it’s gonna be about the same. Maybe slightly lower, maybe slightly lower, but about the same.

George Godfrey -- CL King and Associates -- Analyst

Got it. And then second question, more a high level. I read through the announcement again just now for the Swedish Police Authority and taking the Axon body camera. I’m just curious, what -- Your sales pitch is probably very similar across countries, but I’m just curious what did Sweden latch onto or what pushed them over the goal line versus other countries that you’re still having to work through to get them to sign a contract?

Luke Larson -- President

Yeah, so in international, we have a slightly different, you know, sales dynamic. In the States, we’ve got these municipal agencies, so they’re much faster sale cycle. There’s also a lot of now earned comfort with going all-in on the cloud. In Europe, in Continental Europe in particular, we’re still working with some countries on issues around data sovereignty. In some kind of mid-tier markets, they actually have infrastructure gaps, like they might not have access to constant connectivity for like a cloud based solution.

And so in Sweden, we have a great kind of reference customer. They’re close to Greater London Metropolitan Police and other big agencies in the UK, and so I think all those factors made it very compelling for them to go onto the Axon network.

George Godfrey -- CL King and Associates -- Analyst

So Sweden is more comfortable with their infrastructure to data connectivity versus say in Italy or Germany?

Luke Larson -- President

In Germany in particular there is a lot of sensitivity around working with German providers for technology and infrastructure. We’ve hired a on-the-ground German customer-facing rep. We’re still in the process of developing the right technology and implementation partners in Germany, and those kind of slow down the adoption cycle.

George Godfrey -- CL King and Associates -- Analyst

Got it. Thank you for taking my questions.

Andrea James -- Vice President of Investor Relations

Operator, before we go to the next question, and we can go a little bit, a few minutes over, I just wanted a quick point of clarification of something that’s been said in the last couple minutes, and it’s pretty clear in the shareholder letter that the gross margin guidance for Q1 and the rest of the year is 61-63% for the whole company, not the Taser segment. So just wanted to make sure that was clear.

Okay. Next question please.

Operator

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

Keith Housum -- Northcoast Research -- Managing Director

Good afternoon. Thanks for the question. Guys, as we’re looking at the Taser 7 acceptance, I know this was about 11% acceptance rate in the quarter and I know that you guys are saying it’s gonna ramp up throughout the year, can you provide a little bit of color on I guess how fast you expect it to ramp up? And do you expect to perhaps exit FY ’19 with 100% Taser 7 sales going forward?

Luke Larson -- President

We wouldn’t expect 100% Taser 7 sales. You know, 20% -- roughly 20% of our business is gonna from international, and that’s gonna be a slower market to adopt Taser 7 as we clear all of their regulatory things that we need to have in place. In the US, we would see, we think the majority of the deals will end the year with Taser 7 being our No. 1 seller. We will have some agencies that may be laggards or have price sensitivity, in which case we’ve got a great offering in the X26P still.

Keith Housum -- Northcoast Research -- Managing Director

Got it. And then, Jawad, if I look at the profitability of a T7 under the subscription plan, I noticed in the release you guys talked about 45% of the revenue being recognized at the time of sale, will it be the profitability at that point in time? It would be the same percentage as a sale or no?

Jawad Ahsan -- Chief Financial Officer

So there are actually, there are two models that we sell the Taser under. One is a $40.00 a month plan and one is a $60.00 a month plan. The 45% is for the $60.00 a month plan. The $40.00 plan actually has more revenue up front. It has about 75% of revenue up front, and that’s because in the $60.00 plan more of the revenue gets allocated to the software components. And so the profitability will depend on the mix of the two plans. But overall what we expect for the entire company is that what we’ll see is that the margins will then start to tick up on the software side.

Keith Housum -- Northcoast Research -- Managing Director

So maybe if I ask the question a little bit differently. So if -- Let’s say the $60.00 a month plan, $60.00 a month, 45% of the revenue is recognized at that point in time. Does that mean if 45% of the cost is also recognized at that point in time?

Jawad Ahsan -- Chief Financial Officer

No. Well, the -- No. The costs for the weapon will be recognized up front, and it will be less revenue than it would see under the $40.00 a month plan. So the margins would actually be less if we have a higher mix of the $60.00 a month plan.

Keith Housum -- Northcoast Research -- Managing Director

All right. I’ll take it offline as well. Thanks. Appreciate it.

Operator

Your next question comes from the line of Glenn Mattson of Ladenberg. Please go ahead. Your line is open.

Glenn Mattson, Jr -- Ladenberg Thalmann -- Vice President

Hi. I know it’s really a recent event, but I’m just curious to see if you guys are hearing anything in the field out there. But, you know, the recent Supreme Court ruling that prohibits excessive confiscation in the terms of asset forfeitures and what that would mean for police budgets going forward and especially in light of the fact that it’s kind of a major price increase for your next -- you know, the current Officer Safety Plan. So if you’re gonna continue to see success with that program, then I guess you’d be taking share from a shrinking budget potentially. So just generally your thoughts on if you’re hearing anything yet or what you think you might hear down the road from that kind of ruling.

Rick Smith -- Chief Executive Officer and Founder

Yeah, so this is Rick. We’ve seen no real impact from it to date. I would say this is one advantage of getting into the annual budgets. The things get hardest hit by those asset forfeiture would be the one-time purchases where agencies, you know, they have an event that leads to some confiscated assets that leads to some money they can buy things with, that’s overall a relatively small portion of their overall budget. And that’s more again just the things that they buy one-off. As our business is become ever more integrated into the line, budget-line items, we’ve become less susceptible to those sort of whims of fate based on what they may or may not have had in terms of confiscations recently. So we haven’t seen much of an impact, and I don’t anticipate there to be much of an impact, especially given the shift heavier to subscription.

Glenn Mattson, Jr -- Ladenberg Thalmann -- Vice President

Okay. That’s it for me. Thanks for color.

Rick Smith -- Chief Executive Officer and Founder

Thanks.

Operator

There are no further questions at this time. I would like to turn the call over to Rick Smith for closing remarks.

Rick Smith -- Chief Executive Officer and Founder

Great. Hey, everybody. Thanks for coming on the call today. Come out and see us at Accelerate, our annual user conference. It’s coming up the end of April and the first of May. We will have segments targeted for investors, so you can come out and see hundreds to thousands of our customers and some of the new stuff we’ll be showcasing as we move into the back half of the year. So thanks, everybody, and have a great day.

Operator

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

Duration: 62 minutes

Call participants:

Luke Larson -- President

Andrea James -- Vice President of Investor Relations

Rick Smith -- Chief Executive Officer and Founder

Jawad Ahsan -- Chief Financial Officer

Mark Strouse -- JP Morgan -- Analyst

Will Power -- Baird -- Analyst

Jonathan Ho -- William Blair and Company -- Technology Analyst

Jeremy Hamblin -- Dougherty and Company -- Vice President

Mike Latimore -- Northland Capital Market -- Managing Director

Scott Berg -- Needham and Company -- Analyst

George Godfrey -- CL King and Associates -- Analyst

Glenn Mattson, Jr -- Ladenberg Thalmann -- Vice President

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