Axon Enterprise Inc (AXON) 2005 Q2 法說會逐字稿

Good day ladies and gentlemen, and welcome to the second quarter 2005 TASER International conference call.

My name is Michelle, and I'll be your coordinator for today. [OPERATOR INSTRUCTIONS].

I would now like to turn the presentation over to your host for today’s call, Mr. Rick Smith, Chief Executive Officer.

Please proceed, sir.

Good morning, everyone, and thanks for taking the time to participate in the TASER second quarter 2005 conference call.

Before we get started, I'm going to turn it over to Doug real quick for some of the legal notations.

Thanks, Rick.

Certain statements contained in this presentation may be deemed to be forward looking statements as defined by the Private Securities Litigation Reform Act of 1995.

And TASER International intends that such forward-looking statements be subject to the safe harbor created thereby.

Such forward-looking statements relate to expected revenue and earnings growth, estimations regarding the size of our target markets, successful penetration of the law enforcement market, the expansion of product sales to the private security, military, and consumer self-defense markets, growth expectations for new and existing accounts, expansion and production capability, new product introductions, product safety and our business model.

We caution that these statements are qualified by important factors that could cause the actual results to differ materially from those reflected by the forward-looking statements.

Such factors include, but are not limited to; market acceptance of our products; establishment and expansion of our direct and indirect distribution channels; attracting and retaining endorsement of key opinion leaders in the law enforcement community; the level of private technology and price competition for our products; the degree and rate of growth of the markets in which we compete, and the accompanying demand for our products; potential delays in international and domestic orders; implementation risks of manufacturing automation; risks associated with rapid technological change; execution and implementation risks of new technology; new product introduction risks; ramping manufacture and production to meet demand; litigation results from alleged product related injuries and deaths; media publicity concerning product uses and allegations of injuring and deaths and the negative impact this could have on sales; product quality risks; potential fluctuations of quarterly operating results; competition, financial and budgetary constraints of prospects and customers; dependence upon sole and limited source suppliers; fluctuations in component pricing; risks of governmental inquiries, investigations and regulations;

TASER product tests and reports; dependence upon key employees; employee retention risks; and other factors detailed in the Company’s filing with the Securities & Exchange Commission.

Rick?

Great. [I'll just launch into it this morning.] Of course, before the call we took a quick look at some of the reports from the media and the marketplace about our results.

And I was a little bit disappointed to see a lot of headlines focusing on our results being down from last year.

As everybody I think knows, we have been in an extremely challenging environment this year.

But, to me what is very encouraging is it appears we've been able to stabilize the core business and we saw 29% increase in revenue over the first quarter, in a very challenging environment.

And I think that bodes well overall for the future of the Company that again, we've seen some stabilization and we're setting the base to be able to move the business forward again.

Other things of note for the quarter; most importantly, I think, we need to look at foreign sales.

As we've talked about for years, foreign sales have a very long gestation period, on the order of years. [Hopefully] they'll begin to develop.

Foreign sales were $1.7 million in the second quarter and they were more in the first half of this year than all of last year.

International sales were up significantly, led primarily by the United Kingdom, widely recognized, I would say, as one of the most conservative police forces in the world, with some of the most thorough and rigorous testing.

They've now completed their testing of the M and X26.

They found significant safety margins.

They tested in the presence of seven different types of narcotics.

Those tests are available, if you look at our press release, you can click and download them.

And in addition to the growing sales there, we also see the significant potential for future expansion.

Currently, TASERs are limited to firearm officers in the United Kingdom, however, a recent vote by one of the largest unions in the UK found 95% of police officers voting in favor of every officer getting a TASER.

We think that's a pretty good indication of strong grass roots support.

Also, we saw continuing orders from the military, at $1.4 million coming from the Department of Defense, on the heels of the release of the Full Human Effect Center of Excellence testing of the TASER.

That report is also downloadable from our website or from the website listed in our press release.

The one thing that's important about this order, it is our belief that this order was primarily for training use, which is always a solid indicator that when agencies are training lots of people, that bodes well for future sales opportunities.

Also, we complete construction, moved into our state of the art, 100,000 square manufacturing and corporate headquarters.

For those of you who've been here, you'll realize what a powerful tool this is for us in terms of increased productivity.

We have vastly improved R&D facilities, vastly improved warehousing and manufacturing facilities, and we have an onsite training academy.

In fact, the courses that we have announced so far at our training academy here, have all been booked up.

The first ones were booked up, I believe, within 24 to 36 hours of announcement.

So, we're seeing a strong response.

And we believe the more customers can come and see what this Company's all about and see the technology as we build it and the technology and security in our own facilities, that'll be great for our customer relationships.

I should also point out that the building is a great investment for us.

It's a key asset and it represents significant savings over renting.

Even if you account for the depreciation and the cost of capital, it is significantly less than if we had just leased regular office space up in the area that would not have been nearly as useful for our business.

We also saw the release of more studies.

A Human Cardiac Safety Study was released in the Academy of Emergency Medicine.

This is an independent study conducted by, I believe, Dr. Ted Chan, out of San Diego, one of the foremost-recognized experts in the area of in-custody deaths, positional asphyxia and those topics.

This was the first fully documented and published human study, where they found the TASER did not have any adverse cardiac effect.

That is also available for a complete download at the website listed in the press release.

And the Canadians wrapped up their national study, which again, was extensive, as we've come to expect from the Canadians.

They did a very thorough job, with many physicians, police experts.

And that study, again, in support of the overall utility of the TASER.

Although again, none of these reports find the TASERs are risk-free.

But, they are among the safest force options and they save lives and reduce injuries.

Also, the release from the Wisconsin Department of Justice.

You all remember, early in the year when there was announcements that Wisconsin DOJ was looking at TASERs.

The media put a lot of attention on it when it looked like a bad thing.

Well, the story came back after they investigated all the facts about TASER.

They supported it and now the Wisconsin Department of Justice is making TASER training--Tom, I believe it's a requirement now for every new recruit in the State of Wisconsin?

That is correct.

Part of the State mandated program and they've placed it at the same level as pepper spray.

Now, I should point out again, the TASER, we've had a lot of questions about policy issues and I need to be real clear.

Manufacturers do not set law enforcement policies.

That is for expert groups, such as the Wisconsin Department of Justice, to determine where this fits in their use of force continuum.

But we've seen many of them concluding that the TASER is a viable force option that saves lives, reduces injuries and belongs low on the force continuum.

Now, on the heels of these studies, we can now announce that we've had significant support resolutions or studies from the Major Cities Chief's Association, the Major Country Sheriff's Association, the National Sheriff Association, the Law Enforcement Alliance of America, the Georgia Association Chiefs of Police, the International Association of Chiefs of Police, the State of Wisconsin, British Columbia, the Police [Homeblades] Commissioner, the Florida Sheriffs and over 1,700 agencies that are deploying our weapons today.

So again, each one of those, of course, has their own particular twist, but overall these agencies have been supportive and they recognize the lifesaving benefits of the technology when used properly, with properly trained police officers.

And, to wrap up on that topic, you all probably saw our news release yesterday, that the Major City Chief Association, representing 57 of the largest cities in America, along with the Major County Sheriffs, representing the largest counties, the National Sheriff's Association and the FBI National Institute, passed a resolution supporting the use of electronic control devices, including the TASER and they concluded "the utilization of electronic control devices should be placed on a scale of force at active resistance level.

There are literally hundreds of documented cases where the utilization of electronic control devices against violently resisting subjects has prevented injuries, both to suspects themselves, as well as to officers and innocent bystanders or victims."

Again, we think that's critical support from the groups representing some of the executive leadership of this country's law enforcement.

And finally, before I turn it over to our next speaker, you also saw we had a significant win in the courts in Madera.

We had a wrongful death case that was dismissed.

We were granted all of our key elements in our motion for summary judgment.

And we'll talk more about litigation today.

As you've probably heard us say before, we don't think the headlines that are out there are accurate.

A lot of the lawsuits that have been filed against the Company are based on headlines, not on facts.

And what they will find from us is rigorous, intensive, aggressive defense.

And we're very encouraged with this first--well, it's actually our second wrongful death case having been dismissed, following on the heels of the [Deloskia] case.

And we intend to defend them all.

And with that, let me turn it over to Kathy, to talk about our operations.

Tom and I have been primarily focused on dealing with the external issues for the Company.

Kathy's really taken on a leadership role in addressing and staying focused on our internal operations.

Kathy?

Good morning.

As you saw in our financial statements, our operating results in Q2 improved over the first quarter of this year.

In a quarter-over-quarter comparison, direct labor decreased by 1.9%, direct materials decreased by 1.3% and scrap declined by more than 50%, or $400,000 during the quarter.

Our indirect cost to manufacturing increased during Q2, due to expenses associated with our move and bringing new manufacturing lines and systems up.

During the quarter we also installed tooling and equipment used by line operators to aid in line efficiencies.

This increased our operating costs by $50,000 that we will not see in Q3.

Depreciation expense also increased in manufacturing, due to the new equipment capitalized as part of our move to the new facility.

During the first half of the year, operations added approximately 880,000 in new production equipment, test equipment for our manufacturing engineers and fixtures required to run the new line.

In addition to our financial improvements, we also made strides in organizing and streamlining our overall operations, began the implementation of lean manufacturing practices during Q2.

Our manufacturing team, led by our manufacturing manager, implemented single piece flows on four of our lines, increasing our throughput by more than 40%.

We intend to expand these methodologies to capitalize on efficiency improvements throughout the remainder of 2005.

We also completed the development of a new software application designed to improve our customer return process.

Because many of the returns we receive are easily repaired by the end user.

An electronic troubleshooting guide was posted on our website.

It's an interactive program, allowing customers to work through common user issues and prevent downtime caused by unnecessary returns.

And our Quality Assurance Department, led by the VP of Quality, kicked off our ISO 9001 program.

As we move forward in 2005, our primary challenges and operations are to further reduce the cost of our product and to reduce our inventory.

In Q1 and early Q2, inventory grew dramatically, due to purchase orders placed in Q4, in anticipation of 2005 growth.

Our team is working to reduce these and continues to work with vendors on developing just in time and lean practices in our inventory control model.

With that, I'd like to turn the call over to Doug Klint, to provide our legal update.

Thanks, Kathy.

Before I discuss litigation, I would like to inform our stockholders that our annual shareholder meeting was adjourned until August 15th, 2005, since we did not have a quorum present at the April meeting.

Our stockholders will be receiving a new proxy card in the mail and I would encourage everyone to vote and return their proxy cards.

In addition to vigorously defending lawsuits filed against the Company, we will also pursue legal action against those responsible for making false and defamatory statements about our products.

Accordingly, we've recently filed litigation against the Gannett Company, the parent company of USA Today and the Arizona Republic, for libel, false light invasion of privacy, injurious falsehood and tortious interference with business relations.

This lawsuit is partially based on a news story published on June 3rd by the USA Today, which was grossly inaccurate and mischaracterized the power output of the TASER device by a factor of 1 million.

This article is especially outrageous, since less than one month prior to this article being published, our President met with their editorial board and presented them with all the correct information.

This litigation was filed in order to hold Gannet accountable for irresponsible journalism.

We have developed a comprehensive litigation strategy for defending the lawsuits that have been filed against the Company.

These claims are covered by our product liability insurance and we have a policy of not settling, and vigorously defending these lawsuits.

We are coordinating the dispense of these lawsuits among our outside counsel, by sharing discovery, expert pleadings and tactics, in order to improve efficiencies and reduce litigation costs.

There has been no credible evidence [OPERATOR INTERRUPTION] in the summary judgment in the Torres versus Madera litigation.

I'll now turn the call back to Rick.

I think it's real important to point out that Doug has done a great job of putting together a focused legal team.

We have a national litigator that is coordinating our defense on all these cases, so that we're learning from each case, and we're building our expertise.

Obviously, we already have access to the world's experts in TASERs, but now we have [OPERATOR INTERRUPTION] point.

And we've been bringing those experts to bear very aggressively in the cases that we've seen.

And what you can expect to see from Taser International is when we get a lawsuit based on headlines and unsupported allegations you can expect a focused fact based response.

We sill seek remedies in cases that are not supported such as the [Delocia] case in Florida, where we went for sanctions against opposing counsel.

I believe, Doug, is that an accurate representation?

That is accurate.

At that time the case was dismissed.

We have multiple motions for summary judgement pending.

We have more in preparation and we are prepared to carry these cases through litigation.

Because, as you know, if people have reviewed the facts all the independent reviews we have talked about, we feel very strongly the facts are on our side.

And we are going to continue to defend our revolutionary, life-saving technology, because it is the right thing to do.

And we intend to win.

With that, let me turn it over to Dan and talk a little about our financial results.

Thanks, Rick.

First I'll review the second quarter results.

Sales for the quarter were 13.2 million, which were down 3.1 million from the prior year.

We did have sequential improvements due to overseas sales, with export sales totaling 1.7 million for the quarter.

This is an increase of .7 million.

We also enjoyed increases in our military business, with sales increasing 1.4 million over the first quarter of 2005.

Gross margins for the quarter are 63.5%, compared with 66.6% the prior year.

This is an improvement over the first quarter of 2005, due the lower scrap, increased labor efficiencies and other operating improvements.

These improvements were partially offset by decreased leverage of our indirect manufacturing expenses, due to lower sales levels in 2005, versus 2004.

SG&A expenses for the quarter were $7.5 million.

This is up $4.1 million from the prior year, and 2.2 million from the first quarter of 2005.

Increases over the first quarter were driven by expenses for legal services, public relations and crisis management, which were up 1.4 million.

The second quarter also traditionally has higher SG&A expenses than the first quarter due to costs associated with the annual meeting; including the printing and mailing of the proxy and the annual reports, and our annual tactical conference with our users.

These expenses drove about $400,000 of the increase over the fist quarter.

Hey, Dan, I'd like to interrupt for a second.

As I understand it, we had significant increases in the overall cost of printing our annual reports, because of the shear number of shareholders.

That’s true, Rick.

We printed actually over 100,000 annual reports this year, which is over four times what we printed in the prior year.

So there is certainly a [inaudible] over the prior year as a result of that.

Finally, the cost associated with implementing Sarbanes-Oxley, drove about $300,000 of the increase over the first quarter.

The Company continues to increase its investments in research and development, with R&D expenses up $139,000 from the prior year.

Interest income is a good news item for us, that’s up $293,000 over the prior year, due to higher cash investment balances and better investment choices.

Net income for the quarter was $509,000, which is down 4 million from the prior year, driven mostly by the higher SG&A and R&D expenses.

EPS for the second quarter is $1.10, both on a basic and diluted basis.

Year to date, our sales are 23.4 million, which is 6 million off of the prior year.

However, as I mentioned, we are encouraged with the sequential sales increase over the first quarter.

Gross margins for the six months were 60.1% versus 66.1 % in the first six months of 2004.

The degradation in margins were driven by higher scrap, and lower labor [utilization] in the first quarter of 2005, and decreased leverage of our indirect manufacturing costs due to lower sales levels.

We did make significant improvements in scrap and labor efficiency in the second quarter of 2005, as Kathy mentioned earlier.

We will continue to work to improve our gross margins going forward.

On a year to date basis SG&A expenses were 12.7 million.

This is up 6.8 million from the prior year.

Increases over the prior year were driven by legal services, public relations and crisis management expenses, which were up 3.8 million.

Accounting fees, investor relations expenses, including cost associated with the printing and mailing of our annual reports and proxy statements, and the cost of implementing Sarbanes-Oxley, drove another $900,000 of the increase.

Year to date R&D expenses were $698,000, which are up $218,000 over the prior year.

Year to date interest income of $546,000 is up $453,000 from the prior year, again due to higher cash investment balances and better investment choices made this year.

Year to date net income is [677 million].

This compares to 8 million in the prior year.

This, again, has driven the lower gross margin and higher SG&A cost.

But year to date, our earnings per share remains $1.10, on both a basic and diluted basis.

You meant, $677,000 there.

That’s right, that’s right.

From a working capital standpoint, accounts receivable were $6.5 million at 6/30.

This is up from the first quarter, due to higher sales, but still 1.9 million lower than the year-end balances.

And our days sales outstanding remain under 30 days.

Inventory at 6/30 was $9.2 million, this is up slightly from the first quarter, and up 2.3 million year to date.

As Kathy indicated, we are taking steps to manage the inventory and expect this number will decrease over time.

Accounts payable and other current liabilities were $7.4 million, which is down 2.8 million year to date, driven mostly by the lower AP, as the Company had some large invoices related to the construction of its new manufacturing headquarters facility at year-end.

On a cash flow basis, on 6/30/05, the Company had cash and investments of 44 million.

Operating cash usage was $800,000 on a year-end basis.

This was driven by increases in inventory and lower AP and other accrued liabilities, which is partially offset by lower AR balances.

The Company had net cash generated from investing activities, as investments which matured during the year more than offset new investments in CapEx.

Year to date our CapEx was 5.6 million.

This is driven mostly by the investments the Company made in the new manufacturing headquarters facility of roughly 4 million.

The remainder of the CapEx were driven by investments in production equipment, computer equipment and furniture and fixtures.

Cash flow from finance activities was $400,000 and was driven by proceeds from the exercise of stock options.

Last, I would like to talk about headcount, headcount at 6/30, was 226 people.

This is down 14% from the headcount we had at the end of the first quarter.

With that, I would like to turn the call back over to Tom Smith, our President.

Thank you, I am going to talk about the sales and about what the future of the Company is and where we are going.

I think it is also interesting to note that as we continue to go through difficult times, in terms of the bias and obviously, negative media reports that continue to focus attention on this life-saving technology, we are now approaching 8,000 agencies either testing or deploying our technology.

During the quarter we added 133 new agencies that are now fully deploying our technology, bringing the total to 1,735 police departments in the United States that now have one TASER on every officer, or 22% of our current customer base now providing this technology to every officer on their police force.

During the quarter of Q2, we sold 10,238 of our X26 model law enforcement units to police and military.

We also during that same time, sold 1,847 M26 units, our field proven product that came out in 1999.

During the quarter we also sold 256,560 air cartridges.

That brings a total of over 150,000 law enforcement and military personnel, in the United States and around the world, now carrying TASER technology to save lives and reduce injuries every day.

Obviously, during the first half of the year, we faced over 20 different States that introduced various forms of legislation, with the vast majority of that legislation being knee-jerk reaction to negative or misinformation being put forth, and reacting to these headlines.

And we were successful in defeating a lot of those knee-jerk reaction bills.

But at the same time, working with local consultants and local experts to help provide thoughtful legislation and education.

In fact, in the state of Arizona, we announced earlier this quarter, that a bill was passed that helped provided increased penalties if this technology is misused.

It also helped require registration systems, so that people have to be responsible for their actions with this device.

I believe, and the Company believes, this is the technology that needs to be made available for people who want to be able to defend themselves.

And this obviously, has proven itself in the law enforcement and military markets, and as we continue to advance and go into the consumer markets.

It is not a new market.

We have been out there for 11 years, selling to consumers.

It’s just different technology that’s not being made available.

Obviously, we have spent the first half of the year very, very focused on protecting our law enforcement markets, providing an educational campaign to educate people to work with local legislators and elected officials to provide accurate, factual information, so that they can put forth thoughtful legislation on allowing this technology to expand.

Rick mentioned earlier, the state of Wisconsin.

It is amazing the amount of coverage just the initial inquiry received in the media.

And when the actual facts came out, there was very little, to almost no coverage of the important result.

And again, you are going to see a trend as I continue to go through this.

When experts in law enforcement and police use of force get an opportunity to take time and look at this technology, they see the value of it, they understand how it is saving lives and reducing injuries and they continue to come back and support the technology.

In the state of Wisconsin, they convened a panel of over 20 experts with several hundred years of use of force expert knowledge, that were able to evaluate this technology, to accurately hold forums throughout the state and provide factual information and input.

And then come back with recommendations.

Where Rick mentioned earlier that all cadets going through training in the state of Wisconsin now, will be trained in the use of the TASER technology.

It also recommended putting in at the same level, pepper sprayer or active resistance, keeping it down to a point where it can end these confrontations before they ever escalate to require lethal force.

Which is why we are seeing the dramatic reduction in injuries and overall use of force at agencies that have these on every officer.

I think that is a very, very powerful statement.

And even this morning, there was an article that came out in Des Moine, Iowa that talked about agencies in the local area getting together and putting together similar recommendations of using this to protect one's self from being injured or an officer from being injured.

And to continue to put forth this technology, because the experts in use of force, that is not our role, the experts in use of force, which is the law enforcement community around the world, see the value of this technology.

They are the ones that are going to implement the good policies, good training for the effective and controlled use of this technology.

During the quarter we also attended 18 different trade shows and conferences, including the US Conference of Mayors.

Again, I mentioned earlier about educating the legislators and the elected officials, so that they understand this technology.

We continue to travel to put out an educational campaign to make sure people understand how this product works.

We also held our annual tactical conference during the quarter.

We had over 200 attendees, from many agencies around the country, get together for a several-day conference to discuss what’s working with the TASERs, how it’s benefiting their agencies and any issues or concerns they may have.

And at the end of that conference, we hosted a policy forum, where these officers were able to get together and discuss and talk about the various issues that we have been facing, obviously, in addition to the response from the media.

And we held a press conference with a member from the ACLU and the John Jay School in New York, to talk about some of the discussions that occurred during this policy conference, to again, put forth thoughtful and well thought-out recommendations.

Rick mentioned earlier, we also had the US military order of $1.4 million.

This is a follow on order that was following, again, the release of a study where people have taken the time to thoughtfully and carefully examine the benefits this technology provides.

And it showed the continued pattern of the military following orders this year, in addition to what they ordered last year.

Rick mentioned the Canadian report.

Again, following the publication of that report, we saw additional orders start to come in from Canada, where they had actually delayed some orders until that report was finalized.

So again, the pattern here, people that have taken the time to study this, to look at it, and the experts who evaluate it’s benefits, then you are seeing the reports come out.

The independent reports come out that talk about the benefits, followed by the agencies continuing to use this.

Our consumer marketing, during the first half of the year, we have really been focused on protecting our niche market, which is law enforcement, military, providing factual and accurate information.

But we have also continued to provide testing in this market.

In fact, we’ve invested in a TASER tactical vehicle that will be unveiled later this summer.

That we will be going around to begin promoting the technology [inaudible] in different cities, beginning with Miami, next Tuesday.

As we do, again, product education and information campaigns, as we continue to start working within that consumer market for further expansion.

The international market obviously, has been a huge area of focus for us.

As Rick said, there is a long time of gestation of these activities.

In the United States, we have 18,000 agencies that each makes their own buying decisions, each makes there own policy and use of force and training decisions.

Whereas in the overseas market for an entire country, such as the UK, there is usually one body or one entity that will make the decision for the whole country.

Again, following very extensive testing over several years, putting out that report into a combined release that was put forth to the Home Secretary, they announced the acceptance of TASER technology.

And you saw 1.4 million UK orders come in just this quarter.

And that’s with the firearms officers.

Again, the optimistic view here, is the fact that the most conservative police force in the world has reviewed this technology, put forth this technology.

And then the beat officers, the men and women on the street, throughout the United Kingdom, in the largest union, voted 95% in favor of this type of device being made available to them to do their jobs more safely and effectively.

We also have tremendous public support.

I think if you look at the number of polls, informally and formally, that have been conducted here in the US and abroad, we're seeing a high 70-80-even 90 percentile acceptance of the use of TASERs to reduce injuries, to save lives and make law enforcement jobs more safely to be done every day.

France has been a country we get asked about quite a bit.

Obviously, if you follow the international politics, there was quite a governmental change over there, following some votes in the EU.

And we've talked for quite some time about reports that have been done.

We believe several of those reports have been completed internally.

And we are at this time not sure whether they'll ever be made public, but we do know that they have come out very positive.

The Home Secretary in France has talked in several different press releases about advancing and modernizing the French police forces.

And we still see continued use and great opportunity for that country as we go forward.

Singapore has started using this technology, it began in June a field trial, and actually had their first successful use.

We got a lot of publicity in that country.

It will be continuing a test pilot program down there through the end of this year.

And again, we're very confident that they are seeing the lifesaving benefit, the injury reducing benefits of this technology, and that they will be expanding the use as they rollout into 2006.

Again, that's showing that our international sales of over 2.7 million through this year, which exceeds everything we did last year.

Hey, Tom, just to punctuate the perceptics, tell us a little bit about that use in Singapore.

That was a use of a gentleman that was barricaded in a high-rise building.

He was a suicidal case.

Which again, is the niche role where we're basically eliminating a suicide by cop scenario, where an individual was trying to threaten police officers, threatened taking his own life.

And actually, at one point threatened that he had doused himself in a flammable substance, which he had not.

But again, showing that this person was desperate, wanted to end their life and wanted law enforcement to be the ones to take that individual's life.

And they were able to successfully use this, after a very long standoff period that went on for many hours, overnight.

And it ended the confrontations safely and effectively.

I think it's also interesting to note that if you take a look at the TASER technology here in the United States, there was quite a bit of coverage on the 56-hour standoff that occurred on the crane in Atlanta earlier this summer.

That standoff was ended with our technology, with a TASER.

It's interesting to note that in the media when they talk about the successful or the benefits of the technology, they refer to it as a generic stun gun, yet if there's some story that they really want to emphasize, where there may be some controversy or an unfortunate outcome, they start to use the word, TASER.

We are, today, the only device out there.

So, whether you're hearing law enforcement stun gun or TASER X26, that is one in the same device.

And I think that's been one of the misleading things that's been done by the media as well.

That part of our educational campaign in working with [Ed] boards around the country and working with these local consultants and experts to help us provide that accurate information.

I do think it's providing a huge benefit.

Over 150,000 law enforcement officers have it.

We've hit over 200,000 individuals with this technology and we do continue to see a very, very bright future for TASER International as we go forward.

Before we conclude, this is Rick Smith coming back.

I think our shareholders should know what an absolutely kick-ass job Tom has been doing for you.

This guy has not seen his family in months.

You see a news story come out in Birmingham, look who's in the media the next day sitting in Birmingham--Tom Smith.

It's been just incredible.

The number of cities he's been hitting over the past quarter, putting fires out with good information.

And the good news is, we are very successful in general.

We talked about these knee-jerk legislative reactions, we had several States introduce bans on TASERs for either law enforcement or private citizens.

And to date--knock on wood--we've been successful in defeating all those bans.

Because when politicians, just like other people, when they really get the facts, they're able to make informed decisions.

And overwhelmingly, they understand the benefits of this technology.

We're making the world a safer place.

We're saving lives from Los Angeles to Singapore.

And we're going to keep at it.

We're resolute in our mission.

We're firm.

We've been through tough times before.

But you know what?

Tough times and challenges present opportunities.

Every time in the past we've been through this, we've come out stronger.

Can't tell you what the future holds.

You heard Doug with all those legal disclaimers.

But I can tell you this, we're committed to coming out stronger yet again next time.

The last couple of years we were really, you know, handling 150-175% growth is a real challenge on an organization operationally.

And as much as this has been a very difficult time for us, it's given Kathy and her team the opportunity to retrench, to really look at things, to slow down and build our base procedures, start getting ISO procedures in place from a quality perspective.

I think we are better positioned now to handle future periods of rapid growth than we were, had this not happened.

At the end of the day, this has caused us to have access to legislators across the country who previously had no information or no interest in TASER.

And yes, while they started from a negative position, it's given us the chance to meet with them and to share the information.

And I can tell you, by and large, we are building a lot of support, because people--.

This is simple sell, folks.

We're making the world a lot safer than blowing holes in people or beating the snot out of them with a club.

And it's that simple.

We can try and complicate this thing with all these debates about whether it's 100% risk-free or not.

And I don't know who's claiming it is 100% risk-free, because nothing in life is.

We certainly haven't said that.

But it comes back to basic common sense.

That's why the public, we see 70-80-90% approval polls.

You know, we're going to keep working through it and at the end of the day, we will win.

And I think people need to understand that in a lot of these situations, if not the TASER, then what?

And that's why when the experts get a chance to take a look at this, they continually come back, support the use of this at that level of active resistance to prevent injury to themselves.

These officers don't get paid to get hurt.

They want to go home to their families at night.

I was just with a sheriff from the Florida area, just this past week, and he mentioned to me there were 30 individuals that were home for the holidays this past year, because this technology was available to his officers during 2004.

And those are the kinds of stories that keep driving us and putting us out there on the street to continue to put this technology in the hands of the law enforcement, to make their job safer, to make the community safer and to provide this life-saving, injury reducing benefit to the officers that need it.

And with that, let's open it up to questions.

Michelle, we'll pull on and go to Q&A.

[OPERATOR INSTRUCTIONS] [Chris Azef], SAC Capital.

A few questions.

The first, in terms of Europe, can you talk about that opportunity, the gestation period?

It seems like the UK is finally coming--is coming in, in terms of revenues.

The opportunity in the UK and possibly France?

Yes, and that's a great question.

Again, the UK, if you go back and look at their history, this started really in the year 2000.

When they first got units over there they started the testing.

It is not a quick process, because they're talking about an entire government and an entire country that evaluates this.

So this was several years.

They spent several million pounds studying this.

They went all the way from handling trials, how officers were able to use this in various situations, to firing it in emergency rooms, to see if it had any effect on equipment, to looking in interactions, for example, with other chemical agents that they may be using, to evaluating the Taft--the DSTL and DOMILL, which are part of their Department of Defense.

So, takes a look at the medical implications thing and built a computer model to evaluate how the energy flows within the body and then run those on medically accepted standards for different heart tests, on guinea pig hearts as well as Rick mentioned, seven different drug interactions on sheep heart tissue.

This was a very, very extensive project.

It was multiyear, multimillion dollar program.

Then they put forth the results to the Home Minister, who made an initial ruling on the M26 last Fall, and then followed up with the X26 eight-months later.

After again, they went back and evaluated our newer model and put forth that the risk is very low of a possibly bad outcome, and that the benefits far exceed those risks.

And then we saw the agencies throughout the country start to purchase.

They limited it when they first began this rollout with the firearms officers, $1.4 million in the quarter.

So, it's a multiyear program.

France really got their program started last year.

So we are seeing them continue to go forward.

And I believe over the next, you know, I'm not sure of the timeframe, but here in the future, there's a great opportunity.

And again, it's being decided at that Ministry level, which brought here in the United States would be at the Secretary level.

And that's being done for the entire country.

So, it's a multiyear, expensive process of evaluation.

As those go forward and the programs continue to move forward.

You're seeing the same thing in Singapore on a little lower scale.

The Singapore police, I think that's key to point out.

They traveled to the UK during their study.

They traveled to the United States.

They visited with our facilities.

They visited with several agencies in California.

They did a very, very extensive project as they researched this technology.

Now they have over 100 units out on the street over a trial for six months and within the first 30-days had their first successful use that got a lot of media coverage.

So, I think the international market, we've talked about it for a long time.

We've exceeded all of last year in the first half of this year.

And again, the growth opportunities there continue to be very large.

I mean, you're talking about the UK having over 100,000 law enforcement officers.

France having over 300,000 law enforcement officers.

So again, decisions are being made at a Ministry level for an entire country, with great opportunity as we go forward.

And I don't think you'll see a decision come necessarily overnight that would say we're going to put one on everybody, but you're going to see a staged rollout.

And the UK is an example.

They started with five agencies on a trial.

Then they expanded it to firearm officers.

Now they've got the unions and the government involved in discussing expanding that further, and 95% of the police wanting it.

So I think you're going to see it staged out there.

They have to consider training of all these guys to get them in and get them through a training scenario.

Which obviously, is a huge effort to do on an agency in a country that large, where you'd have to get people in remotely to get them through the training, to get them equipped with the devices.

Just the logistics of that is an enormous process that does take time to put in place.

Okay, great.

And then an operations question.

You mentioned that headcount was down I think 14%.

So, throughput wise and inventory wise, do you have inventory levels where you want them?

And on a throughput basis, how much are you guys producing a day?

And then the final question on the operations is staffing.

When we see the turn, whenever that may be, is it going to be easy to get those employees back?

Okay, let me start there and work the other direction.

We actually did a layoff at the end of Q1 and reduced our direct labor force.

The way that we went through that process was to look at our employee base and the highest level of skill, make sure that we retain those individuals, so we could ramp up very quickly when we need to do that.

We feel like we're pretty well postured, very well trained to move forward.

In terms of our throughput, we did back it down.

We took a very hard look at one of our assemblies that created a lot of scrap for us in Q4 and Q1.

We worked with our counterparts in R&D and Quality to develop new processes to actually completely redesign that assembly.

And it kicks off in Q3 of this year.

So we're pretty excited about that one coming on board.

And in terms of inventory, no, that's not where I want it at all.

We have way too much inventory.

We're working aggressively to try and reduce that over time.

We've redone our MRP system to make sure that we control that on a going forward basis.

So, we have a number of things in place to work that inventory level down and bring in only what we need to convert into finished product.

Okay.

And then final question.

Rick, could you talk about a normal--I know it's not normal at this point, but normal seasonality, what you expect, like Q1, Q2, move on into Q3 and then Q4?

Yes, Q3 is normally our weakest quarter on a seasonality adjusted basis.

Particularly with the export sales becoming more important.

We expect that to exacerbate any seasonality, as the Europeans, the month of August, they're pretty well gone.

And they spend July packing and they spend September unpacking.

I have a lot of respect for that, by the way, not that [unintelligible] there, but they really do slow down in the third quarter.

And we even see that in the United States as well.

June 30th, tends to be an end of a fiscal year for a lot of agencies, so we tend to see a lot of budget year-end purchasing in June.

And that generally means in the third quarter we're going to see some degree of downward seasonality.

As you and I have actually talked about before, predicting this business, it is a book and ship business.

In terms of backlog, it's negligible, rolling into the third quarter.

So, at this point we really don't have a real good beat on what the third quarter is going to look like.

It will come down, I'm sure, to some of the larger agencies that we talked about, the unpredictable big orders that create large fluctuations in sales outcome.

So, overall, I think the message is affirmative.

We're seeing new business stabilizing.

But the third quarter, whether it's going to be up or down from the second quarter, at this point, we just don't know.

But, typical seasonality would be a downward indicator in that prediction.

I think it's also interesting to know, we talked about this earlier, that if you take a look at the business, we obviously had a tremendous number of cartridges during the quarter.

It's our current customers and our current users that have seen the benefits for themselves that continue to go forward with the programs, continually to expand.

We saw an increase in the number of full deployment.

Again, the ones that are on the fence, the new customers out there that maybe haven't started their programs yet, with all of the media attention right now, they're continuing to delay.

They're not going away, per se, but we are seeing them continue to delay.

And I think that what we're looking at and really focusing on are our existing customers, providing that educational information out there, so that we can get the accurate information to the ones that are on the fence.

But again, that does take time to occur.

And there could well be, just from a market sentiment.

You know, I've talked to Chiefs that have told me personally, they said look, you know, in the current environment, I'm not comfortable going to my City Council.

We've got an order pending or we want to upgrade from Ms to Xs or whatever it is.

So, I think there's a fair amount of pent-up demand.

But frankly, if we can clear up some of these issues, most notably the SEC inquiries--we've been working very cooperatively with the SEC in answering their questions.

That's clearly been a big issue on the minds of our customers.

They want to see how that comes out, as do we.

The process has been rigorous.

It's much more stringent, I would say than going through an audit of any other type that we've seen.

It's a very thorough process.

We feel we've been very open in the dialogue.

We've provided a lot of information.

So, I guess what I'm saying there is if we can hopefully bring that to conclusion, we think that that will release a lot of concerns in our customers' mind and there may well be significant pent-up demand that would be released at that point in time.

Great.

Keep working hard, guys.

[OPERATOR INSTRUCTIONS] Dick Ryan, Feltl & Company.

Hey Tom, are there any other--I know you had success in California turning back that legislation.

Are there any key States out there that need to be watched at this point?

California still needs to be watched.

I mean, they all need to be watched.

Obviously, Florida is a key State.

A lot of the State legislators work in the first half of the year and then they take off the second half of the year.

So, what we're going right now, again, is focusing on getting the legislators that we had the various bills dropped on us earlier in the year and they were defeated, to go back, provide the information to them.

But you know, it's obviously the big States that we want to watch.

But, at the same time, we're continuing to make sure that there's none out there that are going forward that we're not aware of.

We had bills passed in Arizona.

We had a bill passed in--.

Favorable bill, by the way.

We supported both the bills in Arizona and Nevada.

They were thoughtful, well thought out.

Absolutely.

So, it's not one, per se.

And that's why we're working with these local professionals, to make sure that we're providing accurate information and we don't have something creep up on us that we weren't aware of.

Okay.

I missed your full deployment count.

What did you say that was?

We are up.

We added during the quarter, 133, to a total of 1,735 agencies, or 22%, roughly, of our existing known customers.

Okay.

So Rick, when you look at the operating expenses, obviously, the legal side is going to continue.

It sounds like the lobbying efforts will continue in some of these key States.

Can you give us a sense where we should think operating expenses would go from if we look at Q2?

Well, you know, the third quarter is probably going to be comparable in scope to the second quarter.

We might see some improvements for things like the printing cost annual report.

The Sarbanes-Oxley work should be a little less this next quarter.

The second quarter was particularly heavy in legal fees related to the--the SEC inquiry was frankly, more intense from the legal perspective, than the litigation we've been involved in.

You know, in terms of the level of man-hours involved in making sure we were being responsive in all the document requests there.

So, it's hard to say when that's going to attenuate.

We also, in the second quarter, invested very heavily in expert witnesses and in preparations for motion for summary judgments in a couple of our legal cases.

I'm not sure I would say that's going to go down in the second quarter.

I think that for the balance of this year, from a conservative perspective, I think this year is the year of heavy investment for us.

And, we're focused on not being profligate with our spending.

We're being very careful.

As you saw, we did a reduction in headcount.

We've tweaked the businesses appropriately.

It's difficult when you go from 20 and 30% sequential quarterly growth, to a 50% drop-off.

You've already placed orders and planned ahead.

We've mitigated those changes to the best of our abilities.

But we see inventory coming up and now I think we're in a position to start chewing that down.

So we are focused on expenses, but we're also focused on--we're not going to be penny wise and pound foolish.

We are not going to risk losing any of these lawsuits because we didn't put forth the strongest case and the best facts that we could.

We're not going to risk losing any of these States.

We've been spending a lot of money on these education campaigns, including lobbying and the legislative consulting and all those issues.

Again, the long-term benefits that I see from it, we're building relationships with people that started with a very negative attitude of TASER and 80-90% of the time we're able to change that attitude, if they've got an open mind.

And I think as we move into next year we'll start to see some of the extraordinary fire-fighting expenses come down.

Doug's really doing a great job.

We're looking at the litigation as a cost of business, as a part of an ongoing business operation.

We thing strategically that settling is just a very poor idea.

We were talking with our National Litigation Council.

He's telling me about a cartoon, about a guy in a boat surrounded by sharks.

He's looking at his buddy saying, well, I guess they're not going to go away by being overfed.

And that's how we look at this situation.

So, we're going to spend the time and money now.

We believe we need to litigate through to completion, so we get good case law to rely upon in the future and deter these types of cases.

So, this year's going to be heavy in expenses.

It's probably not going to be a great year from a P&L perspective, but we think that's--.

We're focused here on winning the long-term.

We're going to be here 3-5-10-years out, the dominant player in non-lethal weapons and we see that as a huge opportunity.

And I think, again, if you look at history, pepper spray went through this 10 years ago.

The collapsible baton went through it before that.

When you're using force on an individual, there's always questions asked and things like that and we're right in the middle of it.

But the fact is, we are here to stay.

We have revolutionized law enforcement forever.

I was at a conference, where they talked in the last 100 years there's been three things that have revolutionized law enforcement; bullet-proof vests, mobile radios and the TASER.

So we are a device that's not going to go away.

We're going to continue to expand this technology, provide innovative solutions to be able to stop people without having to make a life or death decision, and reduce injuries.

And I think that change isn't always accepted well by people.

But we are going to be the leader of that change and we're going to continue to drive that as we go forward.

Say, Rick, in this uncertainty, are you doing anything with the pricing of the devices?

We have not.

No, we have not.

In fact, we think now--as you can see, we have maintained a degree of profitability in extremely adverse circumstances.

Our customers, I think understand the nature of the challenges that we're facing.

We're not seeing significant pricing push back.

I think, frankly, our customers are taking comfort in the financial strength that we've been able to give it through this difficult time.

And we don't see necessarily that that would be the right move for the business or really an option at this point.

And they know that we're standing there with them.

We're working with them closely to defend them in these cases.

And we're continuing to make sure that people are aware that with getting cut in half and with having the battles that we've had to go through, we haven't increased our prices.

The prices have stayed the same and we've done a lot to provide education and support to our customers, as well as to educate the people on who we are.

And there's two last quick answers.

Our customers see the value proposition of our product.

They know that, yes, there's been some litigation related to TASERs.

But I think that if you looked at one of the statements in our press release yesterday from the National Sheriffs Association, the sheriff related that since he put the TASERs in he's had no deputies injured and no deaths.

We're saving a lot.

Doug was just out in Michigan at the Michigan Risk conference.

Doug, talk for a brief second about that, and what the customers are seeing.

Michigan put together a very innovative program a couple of years ago, where their State Risk management authority that represents most of the large municipalities in Michigan, put together a grant program.

They saw the bottom-line benefit of TASER use among their municipalities.

And with their grant program, they would pay up to one half of the cost of any of the municipalities that would buy TASERs.

Well, it's been two years later and they presented statistics at this conference, where the excessive use of force claims went down dramatically.

In fact, they went down to zero last year.

And the cost of defending an excessive use of force claim can be significantly high.

And the fact that they have no reserves at all for excessive use of force claims was just amazing to the participants.

And it really shows the value of the TASER in reducing injuries, not only to officers, but to suspects as well.

And I think you've got to put that in context.

In an agency space, depending on the size of the agency, dozens of use of force litigations each year for large agencies.

And yes, there's some TASER-involved litigation.

What are we involved in, Doug, 20 to 30 claims total?

Yes, about just over 20.

And you know, that's out of 7,800 agencies.

So, that's a fraction of like, you know, less than 1% of the agencies really having an issue, at least which involved us to this point.

So it's that global perspective when you look at the magnitude of the issue and the magnitude of the change, it's overwhelmingly affirmative and positive changes happening.

But, unfortunately, they don't write a lot of the newspaper headlines about all the planes that land safely.

And we've seen that in our case as well.

And as you can tell, it gets us a little ired up.

I think that's good for our shareholders, because we are motivated.

This is religion to us, guys.

We're in this because we're out to change the world.

We're doing it and we're going to keep doing it and we appreciate the support of the thousands of individual shareholders that have joined with us.

We really appreciate the opportunity to work for you and we're going to turn this thing around--or keep it turning around.

I think we've started to see a shift in the winds this quarter.

Okay.

One last question for Dan maybe.

Dan, do you have the number of orders and the average size for the quarter?

Yes, I do, actually.

Number of orders for the quarter were 4,289 orders.

And the average size was $3,054.

Ladies and gentlemen, this does conclude the question and answer portion of today's conference call.

I'd like to turn the presentation back over to Mr. Rick Smith, for closing remarks.

Okay.

Well, we appreciate everybody tuning in.

Again, we invite you to come out.

We're very proud, not only of our products, but of our new facilities here in Scottsdale.

We'd love to have you come out and pay a visit.

And we look forward to talking to you at our next quarterly conference call.

And rest assured, we're focused on the business and there are great opportunities that lie ahead.

Ladies and gentlemen, thank you for your participation in today's conference call.

This does conclude your presentation.

You may now disconnect.

Good day.