TASER International (NASDAQ:AXON) never saw them coming.
Last week, TASER learned that it has just lost a contract to sell 1,000 police body cameras to the New York Police Department. Although worth only a few million dollars over five years initially, the contract has the potential to last as long as 14 years, rise in size to as many as 18,000 units, and generate revenue of up to $250 million, if renewed in future years.
This is what we call bad news for TASER stock. It's also a bit of a surprise.
For years now -- ever since it basically created the market from thin air -- TASER has had the market body cameras to police basically to itself. In fact, as Chief Financial Officer Dan Behrendt told me in 2014, since TASER began bidding on contracts to supply police departments with body cameras, it had "won well over 90% of our competitive situations" and "only lost one."
But the one time TASER did lose, it was to VieVu LLC -- the same company that beat out TASER in NYC.
Who is VieVu?
Privately held when we first wrote about it two years ago, VieVu has since been acquired by the also privately owned Safariland, LLC, which was spun off from British defense giant BAE Systems (OTC:BAES.Y) in 2012. In turn, S&P Global Market Intelligence confirms that Safariland is itself owned by the Maui Acquisition Corp. holding company.
Thus, none of these three companies is publicly traded, or required to publish significant information about themselves or their operations, revenues, or profitability. What we do know about VieVu is that the company focuses exclusively on designing and selling wearable video cameras -- the "LE4" and "LE4 Mini" being its latest models. That's as contrasted with TASER, which to this day gets more than 80% of its revenues from the sale of stun guns.
Also unlike TASER, which offers storage for data generated by its Axon body cameras in-house through a proprietary service called EVIDENCE.com, VieVu has partnered with Microsoft (NASDAQ:MSFT) to use cloud computing to store data generated on Microsoft's Azure Government servers. As a big user of Microsoft software already, the NYPD may have found VieVu's offering of Microsoft-brand storage for data from its cameras to be appealing.
How big a threat is VieVu?
This is the third deal with a top-60 police department that VieVu has signed to date, the others being with law enforcement in Oakland, Calif. and Aurora, Ill. In contrast, CNBC reports that TASER has secured deals with 36 of the 60 largest U.S. police departments, including Los Angeles and Chicago.
Given these stats, TASER investors may be tempted to dismiss the contract as an outlier and an aberration, and not a significant threat. That would be a mistake.
VieVu may not have TASER's reputation, or its leading market position in body cameras -- yet. But it's no stranger to law enforcement, either. Through its history as a BAE division, VieVu's parent company, Safariland, is well known as a provider of body armor for police, as well as a supplier of accessories such as holsters, handcuffs, and flashlights. In addition to any synergies that VieVu can provide a police department through its association with Microsoft, therefore, VieVu's parent also benefits from its ability to cross-sell products to police customers -- synergies that may permit it to cut costs, bid low, and win away more body camera contracts from TASER.
Indeed, this ability to bid low appears to have been a major factor in VieVu's winning the NYPD contract away from TASER. According to media reports, VieVu may have bid as much as 70% below TASER's offered price on the NYPD deal. Competition like this has the potential to whittle away at TASER's 12% pre-tax profit margin, to win contracts and deny TASER revenue growth -- or both.
So what does all this mean to investors? TASER may not have seen VieVu coming last week. Investors in TASER stock can't afford to make the same mistake.