Axon Enterprise Inc (AXON) 2006 Q2 法說會逐字稿

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  • Operator

  • Good day ladies and gentlemen, and welcome to the Q2 2006 TASER International earnings conference call.

  • My name is Tony, and I’ll be your coordinator for today.

  • At this time all participants are in a listen only mode, and we will conduct a question and answer session toward the end of this conference. [OPERATOR INSTRUCTIONS] I would now like to turn the call over to Mr. Rick Smith, CEO of TASER International.

  • Please proceed, sir.

  • Rick Smith - CEO

  • Good morning everyone, and welcome.

  • Thanks for attending our second quarter 2006 conference call.

  • Before we get started, I’m going to ask Doug Klint to read the safe harbor provision.

  • Doug Klint - VP/General Counsel

  • 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 in law enforcement markets, expansion of product sales to the private security, military, and consumer self defense markets, growth expectations of new and existing accounts, expansion of production capability, new product introductions, product safety and our business model.

  • We caution that these statements are qualified by important factors that could cause 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, the 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 product technology and price competition for our products, the degree and rate of growth of the markets in which we compete, and the company demand for our products, potential delays in international and domestic orders, implementation and risks of manufacturing automation, risks associated with rapid technological changes, execution and implementation risks of new technology, new product introduction risks, ramping manufacturing production to meet demand, litigation resulting from alleged product related injuries and death, media publicity concerning product uses and allegations of injury and death and the negative impact this could have on sales, product quality risks, potential fluctuations in quarterly operating results, competition, negative reports concerning TASER device uses, financial and budgetary constraints of prospects and customers, dependence upon sole unlimited source suppliers, fluctuations in component pricing, risks of government investigations and regulations, TASER product tests and reports, dependency upon key employees, employee retention risks, and other factors detailed in the company’s filings with the SEC.

  • Rick Smith - CEO

  • OK, that’s always enjoyable to start off with the legal talk.

  • Let’s talk a little bit about results.

  • In the second quarter we delivered $16.2 million in revenue, I’m quite proud of our team here, delivering 23% revenue growth over the same period of last year, and 17% sequential revenue growth.

  • More importantly, perhaps, operating income at $2.2 million or 13.7% of revenue, that’s a 224% improvement over the prior year and 115% sequential improvement in gross operating income.

  • If we look at operating margins as a percentage of revenue, we improved from 5.2% in Q2 of ’05 to 13.7% in Q2 of ’06, and almost double from 7.5% in the first quarter of this year, to 13.7%.

  • Perhaps the largest event, the most important event of the quarter, was one that is an exogenous event, and that is that the SEC just included, in its entirety, its investigation related to TASER International.

  • This chapter is now behind us.

  • During the quarter we also had several other significant developments, including the release of our first TASER Cam production units, which came late in the quarter.

  • We did a BETA field test, got some great feedback, found some software bugs in particular that we were able to correct before moving into full production.

  • So we accomplished that in the mid-June timeframe, and made initial shipments.

  • We also started to see some movement from some of our larger police customers, with both San Diego and Charlotte-Mecklenburg placing significant orders, as well as the Maricopa County Sheriff’s Office not only placing an initial order, but announcing long term plans to deploy 1,900 TASER Cam devices to become effectively the first full deployment of TASER devices in a major correctional facility, and the first major deployment of TASER Cam units in law enforcement and corrections in general.

  • We also saw some significant international orders coming for the TASER X26, reorders that are building in the international markets, continuing to provide some affirmative feedback that we’re going to continue to see growth there.

  • In particular, one other item was, in Scotland the police called for all officers to be equipped with TASER devices, so we’re continuing to see grassroots support develop in the United Kingdom, Scotland, and in other countries in Europe.

  • Also, importantly, we had 10 dismissals in the quarter of product liability lawsuits, bringing our total to 22 that have been dismissed, or judgment entered in favor in the past 24 months.

  • Doug’s going to provide a little more color as to our legal strategy, and we’re going to talk a little bit more today particularly about the costs involved as it relates to our SG&A.

  • We also had some very favorable rulings from courts affirming use of TASER devices and their relative safety versus other use force.

  • In fact, we had one court issue an opinion they believe “TASER devices protect police officers and citizens from the dangers of hand to hand combat, and from potentially escalating to lethal force”.

  • We also had a significant new study out of the Cleveland Clinic, one of the top heart hospitals in the world that actually showed that cocaine, contrary to popular belief, does not increase the danger of TASER devices.

  • I talked to a few folks who didn’t quite understand the importance of that study, but for those of you who’ve been following the challenge TASER has had over time with some of our critics, some of the groups out there that have been critical of this device, there are many allegations that are made without any scientific support.

  • For example, one of the preeminent ones has been that people that are under the influence of cocaine are more likely to suffer cardiac arrest if hit with a TASER.

  • And corollary to that is that those people believe TASER should not be used against people that are high on drugs.

  • Well our law enforcement customers have always told us that’s a very dangerous policy, because without TASER people that are high on cocaine or methamphetamines or other stimulants are some of the most dangerous people they interact with, and if the police couldn’t use their TASER that would leave them with very few choices, and would escalate the overall danger.

  • So it’s very important to note that this study out of the Cleveland Clinic actually found that while cocaine is certainly a very dangerous drug, the way that it impacts the heart it actually makes it less susceptible to electrical stimulation, and using TASER type discharges they found that it actually increased the safety margin by as much as 50% to 100%.

  • It did not decrease the safety margin.

  • What does that mean to our shareholders?

  • Well that study is going to be absolutely pivotal as part of our litigation defense strategy.

  • We have a significant number of in custody death litigation cases, many of which involving toxic doses of cocaine.

  • That study will be absolutely pivotal in our defense.

  • By the way, as I said, it was presented at a heart conference earlier this year, and I believe it just has published now, in JACC, the Journal of American Cardiology and Circulation.

  • Finally, a couple of other items, we’ve expanded our board of directors with two new and very outstanding independent directors.

  • First I’ll talk about Lieutenant General John S. Caldwell, who joined our board.

  • General Caldwell comes out of the Army with a very long and distinguished career.

  • At the tail end of his career he actually was responsible for all Army procurement programs, so we believe he’s going to be very helpful in helping us build expertise in dealing with the Federal military programs.

  • We also added Mike Garnreiter.

  • Mike Garnreiter is a former partner of one of the big five auditing firms.

  • He’s got real expertise in corporate governance, and an accounting and financial expert that we believe adds some real depth to our board as well.

  • Now in addition to the board level hires, we also have made some important new hires here at the company.

  • One that really stands out in particular is George Fenton.

  • George Fenton is a retired Lieutenant Colonel who, when he was in the military, his last tour of duty was as the Director of the Joint Non-lethal Weapons Directorate.

  • He really takes a lot of credit as one of the guys who put non-lethal weapons on the map strategically in the U.S. military.

  • We’re very proud to have him now on board with us, helping us to really build federal military programs.

  • One of his first steps has been developing a senior executive advisory group that will enable us to better understand the military markets for the long term and to develop programs and products that best meet their needs.

  • So we’re very excited about those opportunities.

  • Finally, recently NASDAQ listed TASER on the global select market, sort of the premiere listings in the NASDAQ, something we’re quite proud of.

  • I’d like to sort of end my section, before I hand off to Dan, talking a little bit about where we see the business in the global context.

  • You’ll all recall last year we used the war analogy, that when the SEC inquiry and investigation became public that that could cause a number of significant challenges to the company and as we looked at issues like expenses, SG&A spending, those went up while our top line revenue went down.

  • We believe that was the right thing to do, in terms of we spent very heavily last year and into this year, and we’re continuing to do so, to defend our brand equity and to defend our legal position and our regulatory position.

  • So where do we see those affects at now that the SEC investigation has been terminate?

  • Let’s first talk about top line revenue.

  • We do see the affect diminishing and going away over time.

  • Our customers are regaining confidence.

  • We basically lost 18 to 24 months in the sales cycle, as customers – there was a lot of doubt, there was a lot of reputation damage just when people hear the letters SEC.

  • Now that that’s gone – but it’s not going to return overnight, that takes time.

  • We’ve got to prime the pump.

  • But we are seeing it, you’ve seen it this quarter in the improvement in revenues, and we believe, again, as we move forward there’s an opportunity for further improvement.

  • Now let’s talk about on the expense side.

  • The intensity of the adverse publicity related to the investigation led to several things; first, and explosion of lawsuits frankly, between the fourth quarter of 2004 and the first quarter of 2005 we saw significant impact of those, a significant increase in legal expenses.

  • Now that’s still ongoing, we still have litigation, it’s a significant part of our business.

  • But the momentum, we believe, is really building in our favor in terms of the number of wins we’re getting in court.

  • Doug and his team have also been doing a great job of building our in-house capabilities.

  • We do believe that while the momentum is going in our favor, lawsuits will be a part of our business, and so I’ve charge Doug with creating basically a legal production department.

  • We need to become very good and legal defense, and very efficient at it, and I think we’re doing that.

  • A second area to look at is legislative action at the state and local level.

  • Last year I believe we had 22 states where we had significant legislative action.

  • We were successful, I’d say very successful, in all those states last year.

  • We do see that slowing somewhat now, we’ve seen a lot less adverse legislative activity.

  • From an expense perspective we have not yet been able to completely disengage.

  • We are starting to slow some of that spending, but we’re being very careful not to disengage too quickly.

  • Then finally, in terms of the negative publicity, we have seen some abatement in the negative publicity, the intensity has certainly slowed down a lot from last year.

  • We think this storm, in a lot of ways, has sort of blown over, that the controversy has played itself out in the public domain, and we continue to see very high public approval ratings, and overall the product, we think, is going now into a well accepted phase, where it’s being seen as more standardized police equipment, not necessarily this new and controversial equipment that it was two years ago.

  • So with that we remain very optimistic about the future, we think – I’m very proud of how the team has executed here.

  • We survived a very tough year last year, and we see the sun rising on a bright new day.

  • With that, let me turn over to Dan to give a little more detail on our financials.

  • Dan Behrendt - CFO

  • Thanks Rick.

  • I’m going to cover the income statements first.

  • For the quarter we had, as Rick said, we had sales of $16.2 million, which is a 22.9% increase over the second quarter of 2005.

  • We had gross margins of $10.4 million for the quarter, or 64% of sales.

  • This compares to $8.2 million or 62% of sales in the second quarter of 2005.

  • The increase in gross margins, on a percentage basis, is driven by both improved leverage in our indirect manufacturing expenses and improved operating efficiencies in the production area.

  • From SG&A expenses we had $7.6 million for the quarter, which is up $493,000 from the prior year.

  • The big drivers here were increases to legal, we had [inaudible] for stock compensation of $233,000, we had increases to salaries and benefits, and insurance as well, the two of those increases year-over-year.

  • On a sequential basis, when we compare to the first quarter, SG&A is up about $350,000.

  • The main drivers there are, we have our annual user conference that we have, which is a fairly heavy expense for us, and also the costs associated with printing and mailing our annual reports and proxies also drove an increase over the first quarter.

  • R&D for the quarter was $563,000, this is an increase of $167,000 over the prior year.

  • The company’s going to continue to invest heavily in R&D to develop new products, I expect that this expense will continue to go up for the remainder of 2006.

  • Income from operations was $2.2 million for the quarter, or 13.7% of sales.

  • This compares to $686,000 or 5.2% of sales in the prior year.

  • We’re encouraged by a large increase in income from operations as the company gained operating leverage on its increased sales.

  • Interest income for the quarter was $430,000, an increase of $82,000 over the prior year, driven by the higher cash and investment balances, and higher yielding investments.

  • And finally, income before taxes for the quarter is $2.65 million and net income for the second quarter was $1.5 million, which rounded down to $0.02 per diluted share.

  • Year-to-date, we saw sales of $30.1 million.

  • This represents a $6.7 million, or a 28.7% increase over the prior year.

  • Gross margins were also strong at 64.2% on a year-to-date basis.

  • This is a $5.6 million increase over the same period of 2005, where we had 58.8% gross margins.

  • SG&A expenses were $14.9 million year-to-date, which is up $2.3 million over the prior year.

  • The drivers there are similar to the drivers for the quarter.

  • We had increases to legal.

  • We had $533,000 of the 123R charges for stock compensation expenses.

  • And we had increases to salaries benefits and insurance as well.

  • R&D expenses for the year thus far have been $1.2 million.

  • This is up almost $500.000 over the prior year and again it’s something, I think, you will see that track continue in the second half of ’06.

  • Income from operations for the six months ended June 30th, ’06, were $3.3 million, which is [$2.8] million up over the prior year, again driven by the greater operating leverage on the increased sales.

  • Interest income, year-to-date, is $797,000.

  • This is a $250,000 increase over the prior year, again driven by the higher cash investments balances and the better yielding investments.

  • Pre-tax income was a little over $4 million year-to-date and that income is $2.3 million or $0.04 a diluted share.

  • This is four times higher than we were at the same point last year, so we’re very encouraged by that.

  • As I move onto the balance sheet, at June 30th, we had cash short-term and long-term investments of $49.1 million.

  • That’s a significant increase over the year-end balances for those accounts.

  • Accounts receivable moved up to $7.8 million on the higher sales levels.

  • We had $9.7 million of inventory June 30th, 2006.

  • This included about $1.1 million of inventory related to the TASER Cam product.

  • Pre-paid and other assets came down by roughly $500,000 to $9.6 million, mostly driven by the lower pre-paid insurance that amortizes over the year.

  • And again, you can see the insurance settlement proceeds, which we had a balance at year-end of zero as we’ve collected those funds from the insurance company.

  • And you’ll see the deferred settlement proceeds of $439,000 on the liability side of the balance sheet, which [looks to] will reduce those expenses coming in to offset those proceeds.

  • Current assets at June 30th were $46.3 million.

  • This is an increase of $4.1 million over the year-end balances, mostly driven by increases to short-term investments.

  • Property, plant, equipment at June 30th was $21 million.

  • That’s basically flat with the year-end numbers as the purchases of new assets are offset almost dollar-for-dollar with the depreciation expense.

  • Total assets at June 30th were $15.6 million.

  • This is up $3.4 million, primarily driven by the increases to cash investments and accounts receivable over the year-end balances.

  • Moving onto the liability side of the balance sheet, accounts payable and accrued liabilities are roughly flat, at $6.1 million.

  • Current liabilities sit at $7.5 million, which is up about $100,000 from the year-end.

  • Deferred revenues, about $1.2 million; this is up about $325,000 at year-end as the company continues to sell a number of the extended warranties and this is the deferred revenue on those warranties.

  • Total liabilities sit at $8.6 million and equity increased by $3.3 million from the year-end balances.

  • It sits at $107 million at 6-30-’06.

  • Moving onto the cash flow, it’s very encouraging for us.

  • Cash flow on a year-to-date basis - cash flow from operations is $6.1 million.

  • This is driven by the net income of $2.3 million.

  • Depreciation and amortization was roughly $1 million, and the stock-based comp, which is non-cash expense, is $673,000.

  • So, we’re about $6.1 million in operating cash flow for the year-to-date.

  • About $4.1 million came in the second quarter of 2006.

  • The cash used by investing activities is about $7.3 million.

  • Roughly $1 million of this was the purchase of new property, plant and equipment.

  • The remainder is just investments in short-term and long-term investments.

  • This is sort of a [pocket] shift between cash and the short-term and long-term investments.

  • And again, we ended the period with about $49.1 million of cash and investments.

  • So, we feel very good about the cash generation of the business.

  • It’s something we hope to see in the second half of the year as well as with the results from the operations.

  • And with that, I’ll turn it over to Kathy Hanrahan, our Chief Operating Officer.

  • Kathy Hanrahan - COO

  • Good morning.

  • Today, I’m going to focus on Operations’ top three objectives for the second quarter of 2006;

  • TASER Cam production and shipment, MRP and Inventory reduction and our financial contributions for the quarter.

  • Let me start with the TASER Cam.

  • During the last conference call, we talked about the Beta test of our new video module for the TASER X26.

  • We issued units to several key agencies in the United States and abroad so they could field test both the X26’s ability to upgrade to the new software revision and to test the full function of the camera feature set.

  • Throughout the trials, officers were asked to upload the software and use the module in the field.

  • From their experience, we identified key improvements for both the software uplink and the hardware interface.

  • Both were addressed prior to ramping manufacturing in full production in June.

  • The customer feedback for the TASER Cam was critical, as it’s always been in our production development cycle.

  • And the changes did result in almost a full month of delays.

  • Our engineering department modified the software code, changed our assembly processes and re-performed all product testing.

  • Manufacturing was cleared to move into full production the second week of June and completed more than 5,500 units by quarter-end.

  • In total, we shipped 1,176 TASER Cams in June and ended the quarter with approximately 4,500 units in inventory for third quarter sales.

  • [Yields] for our new TASER Cam averaged 97.1% for the first month of production.

  • This rate was much higher than originally planned for and was the result of extensive front-end testing performed by our suppliers and our assembly team.

  • Although the manufacturing launch of the TASER Cam was successful, the product line negatively impacted our goals for inventory reduction in the second quarter.

  • To support the anticipated demand for this product, we brought in more than $1.5 million in inventory for the video module during the three months ended June 30th of ’06.

  • The investment would insure our pipeline of sub assemblies, components and bare boards available to meet the demand for the second and early Q3 deliveries.

  • As a result, our inventory increased by approximately $610,000 during the second quarter of the year.

  • On June 30th, the TASER Cam inventory was approximately $1.1 million, of which nearly $600,000 was finished goods.

  • During the quarter, we continued the implementation of our MRP system and our materials team focused on inventory reductions targeted for the remainder of the year.

  • Operations continued to provide solid performance during the second quarter of the year, delivering gross margins of 64%, a 2% improvement over the second quarter of 2005.

  • Sequentially, our margins declined by .5% from the first quarter.

  • The decline in margins was due to the result of the shift in sales mix, increased material costs due to petroleum-based products in cartridge upgrades, along with higher landed costs for materials associated with our TASER Cam.

  • Year-to-date, our gross margins from operations were 64.2%, an improvement of 5.4% over the same time last year.

  • The year-to-date improvements were the results of higher sales, which allow us to better leverage our indirect expenditures, lean manufacturing initiatives, which have improved our production efficiencies and increased product yields.

  • With that, I’d like to turn the call over to Doug Klint, our VP and General Counsel.

  • Doug Klint - VP/General Counsel

  • Thanks Kathy.

  • I’d like to comment briefly on our litigation.

  • We have three securities litigation cases pending.

  • The first is our class-action shareholder litigation.

  • We have a motion to dismiss pending.

  • The court has not ruled on that yet.

  • We also have three derivative cases pending, one in the Arizona, United States District Court; one in the Arizona Superior Court and one in the Delaware Chancery Court.

  • We did file a motion to dismiss in that case, which was denied and we are proceeding with discovery in that case.

  • There’s also a demand for a protection of documents case pending in the Delaware Chancery Court, under Section 220 of the Delaware Code.

  • That case is pending; discovery is starting in that case.

  • We also have three other litigation cases pending against the company; two of them involve contract disputes with former distributors.

  • In one case, we have a motion for judgment, that occurred during the trial, and that is still pending.

  • We made that motion in December and we’ve not heard from the judge on that yet.

  • Also, the city of [Dalton] litigation is still pending at this time.

  • We also have five lawsuits that we’ve filed against competitors, a former patent attorney and two others for defamation.

  • Those cases are still pending as well.

  • For our product liability litigation, we have a total of 49 lawsuits pending.

  • We have 29 cases that involve wrongful death litigation by criminal suspects.

  • We also have 15 cases pending involving officer injury litigation, involving police officers.

  • I’d like to note that the rate of this litigation is declining due to new enhanced warnings we’re using and also new release forms we’ve initiated.

  • It’s important to note that no litigation has been filed where an injury occurred after the date that we started initiating the release forms.

  • We also have five excessive-use-of-force litigation cases pending, where criminal suspects claim they were injured in the course of arrest.

  • We have not lost any of these cases.

  • We will aggressively defend these lawsuits.

  • Our strategy is to hire the best world class experts in medical and science and in all relevant fields.

  • We stand behind the exceptional safety record of the TASER product.

  • It’s important to note that none of these cases have been able to establish that the TASER product was defective, or that the TASER product caused the injuries that are being alleged.

  • We also filed motions for dismissal and summary judgment and seek sanctions, as appropriate, for filing frivolous litigation.

  • Our objective is to send such a strong message to our adversaries by overwhelming them with our defense that they will think twice about filing litigation against the company.

  • However, this strategy is not without cost and represents a large investment by the company.

  • Over the last six quarters, we have invested over $8 million in our legal defense.

  • However, this strategy is showing results.

  • As Rick noted, we have had 22 lawsuits dismissed or judgments entered in TASER’s favor, with 10 of those occurring during the second quarter.

  • While our policy is to aggressively defend this litigation, we have reached an agreement to dismiss in the small of officer injury cases for nuisance value and for an amount far less than our cost of defense.

  • Due to the confidentiality nature of our litigation strategy and confidentiality agreements, we do not disclose these cases or the amount paid.

  • I would like to note, however, that these payments total less than 2.2% of our total legal budget over the last six quarters.

  • I’d now like to turn the call over to Tom Smith, our President.

  • Tom Smith - President

  • Thanks, Doug.

  • I’m going to talk this morning about our sales activities and our legislative activity.

  • I’ll first talk about some of our accomplishments in the sales area during the quarter.

  • We added 411 new agencies, bringing the total of the number of agencies, those that are testing or deploying our products, to over 9,500, out of 18,000 in the United States.

  • So, we’re over the 50% mark in the number of agencies actually testing or deploying the product.

  • We also added 357 new full deployments for a total of 2,515 agencies with one TASER on every officer on the street.

  • That’s roughly 26.5% of our customers.

  • So again, we’re seeing growth within the new customer market, as agencies continue to adopt, test and deploy the product; and, with our current customers that have seen those results for themselves, expanding the program, getting to the level of full deployment within those agencies.

  • In terms of the percentage of sales, international vs. domestic, we’re running right around that 10% mark.

  • During the quarter, we were around [$]1.8 million in international sales, and again, that’s tracking about what we were doing last year.

  • I believe last year, in 2005, we had roughly 12% of our sales internationally.

  • I’ll talk about the international a little bit more, later in this segment.

  • Also, during the quarter we have the – the state of Florida had some legislation.

  • Rick talked about our battles out there.

  • We haven’t seen as many or as extensive battles this year, but there certainly has been activity.

  • And, the state of Florida is one that passed the legislation that stresses officer training requirements as well as use requirements.

  • We were supportive of that legislation and the law enforcement community within Florida was very supportive.

  • That was signed by Governor Bush during this quarter and is now law surrounding that area.

  • So again, this is very thoughtful legislation that was addressed over an extended period of time working with law enforcement.

  • And again, it was not a knee-jerk reaction.

  • I think that’s been a very positive view for us as we look at the other activities going on in other states; that we can go back now and point to several where, after people have really taken time to understand the technology and see its benefits and realize that it’s here to stay and that we’ve revolutionized law enforcement.

  • The legislation is really helping people understand that.

  • It’s just insuring that the good training and policies needed with any tool are implemented.

  • That would include ours.

  • We’re also continuing to conduct chief courses.

  • During the second quarter, we conducted two in Cleveland and in Portland.

  • That’s giving an opportunity for us to get out and work with the command staff of these agencies, let them hear about risk management reduction and those types of aspects of the product and the technology.

  • We continue to get very good feedback from those.

  • There will be several during the rest of the year.

  • One is coming up in Colorado Springs, as well as Chicago and other cities, as we’ve taken that course out of our building and put it on the road, since we had such a tremendous response to it late last year and early this year.

  • We also completed 28 trade shows and conferences, and it was mentioned earlier, our user conference, that’s our biggest conference that we host domestically where we get into hosting an environment that people can come and exchange and learn and it’s an opportunity for us to get around well over 200 of our users from different agencies around the country and let them share ideas and successes, as well as recommendations for improvement on where we can enhance our technology and enhance our training.

  • That was done in May and we’ll be doing our international version of that conference in the September timeframe, during the third quarter, again as we continue to focus on the European market.

  • Rick touched on earlier the Maricopa County Sheriff, I think this was a very good agency for us to work with, its right here domestically.

  • One of our supposed competitors had made a big splash with this agency last year, got a lot of attention, and again after the evaluation came down and they looked at some of their results they did a press conference with Rick discussing their plans to roll it out in a very broad way at their agency, which did start this quarter and will continue into the third quarter.

  • Let’s talk about the number of units in terms of sales.

  • During the quarter we shipped 14,604 X26 units, and 1,876 of our advanced TASER unit, as well as 212,251 cartridges.

  • So our ratio during this quarter of cartridges to TASERs ran 13 to 1, which represents our cartridges being approximately 20% of our business during the quarter.

  • Also on the sales orders, we have processed 1,491 sales orders, which gave an approximately sale per order of roughly $10,500.

  • Kathy touched on the TASER Cam briefly.

  • The TASER Cam was late; we did not get it going until mid-June.

  • We did see a decent response, however some of the orders we expected and hoped would come in did not get processed in time, and again, like we’ve seen with our products, the test and evaluation phase of our technology, especially in the law enforcement community, is vital.

  • So we do see a lot of those agencies that want to get their hands on them, they want to touch them, they want to feel them, see the [inaudible] camera, how it works and play with it, and then they again have to go back and get budget requirements and funding for that.

  • So we continue to see a very positive response, however the sales, we did have a few that pushed because we didn’t get the budgets in on time from the agencies.

  • We do believe that that’s still going to be a very good part of our business as we go forward, because it applies to both installed current X26 users as well as new users.

  • We are seeing progress in some of the large agencies domestically as they continue to push forward.

  • They do take time to process, and we expect to see several of those come to fruition this quarter.

  • Let’s talk about international.

  • The country of France has obviously been a topic I get a lot of questions on.

  • They did receive TASER Cam units during the second quarter, a number of units that they requested.

  • They were able to test those and that test was completed successfully.

  • The latest update that we have on the activities going on in France right now is that the public tender for bid on the process moving forward closed in mid-June.

  • There were no additional tests or requirements and those tender bids are now being processed.

  • We believe the actual tender will be awarded by late August or early September.

  • Once that tender is awarded then it will take a certain time period for people to actually place orders against that tender.

  • We believe the quantity on the tender is going to be for a total of roughly 6,000 units.

  • However, we believe the initial order will be in the 1,000 to 2,000 unit range, which we believe will come sometime in late Q3 or Q4 and then they will have a roughly two year period to take the balance of that.

  • We don’t believe it will take that long, but there is a timeframe under the tender for people to process the orders.

  • Again as this country continues to move forward, we do have the understanding is there to continue to go looking at budgets for broader deployment in the country, which we’ll be doing during 2007.

  • We also did see the French military, specifically the navy, purchase units during the quarter, which was a very positive sign, as well as the justice area in the French jails beginning their test and evaluation program.

  • Several other countries are continuing to move forward, we have put out press releases on several orders internationally during the quarter.

  • As we’ve mentioned on previous calls unless the publicity comes from the country itself we’re not going to name these specific countries.

  • However, suffice it to say that international is running smoothly so far.

  • It just takes a bit of time for them to process these orders, look at them and evaluate them, and we continue to be very optimistic about where our international sales are heading as we go into the future.

  • We’re also continuing to discuss domestically our citizen sales efforts.

  • We hosted four different events around the country during the quarter, continuing to make people aware of how the citizen sales model works.

  • A lot of people don’t understand we’ve been in that market of selling citizen units since 1993.

  • However it’s not a significant portion of our business yet, as we continue to test and tweak messaging and what the different requirements are for our citizen units.

  • So in summary the sales internationally, we touched on it earlier I believe, with what happened to us in 2005.

  • We basically lost 12 to 18 months in our sales cycle.

  • We’re seeing those trends come back and match and model very similar to our record year of 2004 in terms of revenue growth.

  • As I talked earlier it does take time to prime the pump.

  • We’re continuing to see the requests for quotes; we’re continuing to see large interest from larger agencies that a year ago were kind of on the sidelines.

  • And we have continued to focus on working with the elected officials, we attended the U.S.

  • Conference of Mayors during the quarter, we continue to attend state legislator conferences, and provide education in those community environments.

  • I think that is having an affect.

  • We’re seeing a lot of activity, we’re seeing these people over and over again, and they’re understanding the result of saving lives and reducing injuries, and making our communities safer.

  • We’re continuing to push that envelope and see those results with the agencies that deploy our technology.

  • So with that I believe at this point we would like to open up the call to any questions that you may have.

  • I think we’ll turn it back over to our operator, Tony.

  • Editor

  • [OPERATOR INSTRUCTIONS]

  • Operator

  • Your first question comes from the line of Eric Wold with Merriman Curhan Ford, please proceed.

  • Eric Wold - Analyst

  • Good morning.

  • I want to stay on international real quick, can you give us an update on where the UK is in their decision making process?

  • Tom Smith - President

  • The UK has, Rick mentioned Scotland and their call for the police over there to have the unit.

  • Within the country of England itself they’re continuing to make that request, however at the leadership levels within the country they did have turnover.

  • They have a new Minister of Interior, they have a new Police Minister, and obviously now they have to go back and [inaudible] the chiefs of police as well as the unions and reeducate and bring these people up to speed on what’s been done and where they want this project to go.

  • So we are continuing to see orders there, in progress, but they did have to basically start over with the new appointed and elected officials coming in during the second quarter.

  • Rick Smith - CEO

  • When you say start over, Tom, what you’re talking about there is to expand beyond the firearms officers, which is the current state of affairs?

  • Tom Smith - President

  • That is correct, thanks Rick.

  • The start over means the education process that they’ve had tremendous success with the TASER with the firearms officers and that they want to go beyond that to the non-firearms officers and again, that is progressing, but they do have to go back and get an education to these individuals on what’s been going to date and where they want this project to go.

  • Rick Smith - CEO

  • Because it requires a national policy change, right?

  • Tom Smith - President

  • That is correct; it does require the Minister of Interior, with input obviously from the Police Minister, to allow that to occur.

  • Eric Wold - Analyst

  • OK, and then shifting over to the TASER Cam for a second.

  • How big of a factor, or how much of a factor, do you think the delay in TASER Cam in terms of you getting products into people’s hands to test, possibly delayed some orders?

  • Were there any kind of large orders either from large agencies or small agencies that maybe were in your hands before it had been evaluated, and once they kind of decided they wanted the TASER Cam had to kind of come back, re-bid, maybe get a re-budget for a larger order, and maybe kind of push something into subsequent quarters.

  • Tom Smith - President

  • Certainly we did have that, as you mentioned there were some larger agencies that were looking at that, and did want to see them.

  • So I do think that had an impact, as well as the agencies that currently have the X26, they wanted to see it and evaluate it for themselves.

  • So with us being a month late or so getting them out there it had an impact.

  • Quite frankly with them coming out in mid-June there were several that we had on the plans to get in here, and it just didn’t happen by the end of the quarter.

  • But suffice it to say the response has been very positive.

  • The BETA test gave us the feedback we wanted, so we had a much better product rollout when mid-June came.

  • They do want to see it and touch it before they’re actually going to go place the order.

  • So I do think with us being late certainly had an impact on the number of units we were able to get orders for during the quarter.

  • Eric Wold - Analyst

  • With 1,200 shipped in Q2, any general sense or range of how many you’d like to get out the door in Q3?

  • Tom Smith - President

  • Not at this point.

  • I think it’s too early and I think we’ve talked in previous calls too, the third quarter, with the summertime, July and August in particular, everybody tends to be traveling out of the office, especially in Europe.

  • And in Europe quite frankly with the World Cup and the Tour de France, they’ve had a lot of distractions.

  • So I think it’s too early at this point to tell how many we can get during this quarter, again because of the test and evaluation process and also because of the budget requirements and getting budget planning done, those police departments just not having the resources there because of people being out for the summer.

  • But we continue to see great response on it, but I really can’t give you a number.

  • Eric Wold - Analyst

  • OK.

  • Perfect, thanks guys.

  • Tom Smith - President

  • Thank you Eric.

  • Operator

  • Your next question comes from the line of Matthew McKay with Jefferies and Company.

  • Please proceed.

  • Matthew McKay - Analyst

  • Thank you.

  • Good morning guys.

  • Tom Smith - President

  • Good morning.

  • Matthew McKay - Analyst

  • Now if my calculations are right here, it looks like the gross margin on the TASER Cam, based on what you have in inventory right now, would be around 33%.

  • Is that right?

  • Maybe I’m missing some of the accounting, whether you’re including indirect and direct into that.

  • Dan Behrendt - CFO

  • That wouldn’t be correct; the margins on the TASER Cam are not that low.

  • I think the margins dropping sequentially from the first quarter is really driven by more just our mix, including the mix of cartridges versus handle sales also impacts our margin.

  • So we are definitely enjoying margins north of that 33%.

  • Matthew McKay - Analyst

  • Sorry, I meant actually the costs being 33% of the gross margin, being higher than that.

  • Basically the question I’m trying to get to is kind of what impact the TASER Cam is going to have on the gross margin over the next couple of quarters here.

  • Kathy Hanrahan - COO

  • Well when we talked on the last conference call, I expect that it’s going to impact us a little bit, and what that’s going to look like as we move forward, we’re definitely going to be pushing on our suppliers to get the testing piece of that down once we’re confident in the quality we’re receiving from them.

  • But right now the actual cost of the unit is running at about 40%.

  • So that’s one of the areas we’re definitely targeting to get down by year end.

  • Matthew McKay - Analyst

  • OK.

  • Kathy it looks like the inventory turns, despite having the higher TASER Cam, actually did pick up during the quarter, so congrats to you on that.

  • How quickly can you get the turns going on the inventory?

  • Where can this kind of stabilize?

  • Kathy Hanrahan - COO

  • Actually we’ve got a pretty aggressive plan between now and year end to work that down.

  • We haven’t provided any guidance on what the inventory turns are going to look like, but you can expect to continue to see that improving.

  • Matthew McKay - Analyst

  • OK, great.

  • Tom Smith - President

  • I’m starting to help feed her and get the sales going quicker, so that we get those ratios up as well.

  • Matthew McKay - Analyst

  • Both sides help, definitely.

  • Then if you could talk a little bit more about some of the military opportunities you have up there.

  • Obviously you’ve been investing a lot in the business in terms of hiring on the military side.

  • Is there anything imminent out there, or is this viewed as sort of a longer term investment, in terms of products that specifically can go after the military?

  • Tom Smith - President

  • Definitely I would say it’s a long term investment.

  • There’s a couple of things imminent, but nothing really big at this point.

  • We are really focused on this program for the long term.

  • Rick mentioned Colonel Fenton coming in here; he’s doing a great job.

  • The executive advisory groups have their first meeting during this quarter where we’re going to get some really great people together and help us kind of steer the direction for both future grant projects that Rick will be working on with our R&D.

  • We’re continuing to expand our R&D department as well as the current off the shelf items that we have that they’re looking at, and figuring out how they fit into the current deployment scheme in the theater.

  • So it is a definite investment that the company has made, it’s a definite direction we’re going for the long term haul, with the R&D grants on new and future technologies, as well as the current shorter term views of getting the projects in the hands of the soldiers, because we have seen success in giving them a force multiplier option or a scalable affects option for what they’re facing in theater.

  • Rick Smith - CEO

  • I’ll expand a little bit.

  • We are also putting up and east coast office presence, George is going to be based out of the Virginia area, able to work between sort of the Quantico area where the Joint Non-lethal Weapons Directorate is, as well as up in D.C.

  • I think what we’ve identified is that we’ve done very well at the soldier level, at the user level, in terms of them understanding the benefits and the need of the technology.

  • We get great feedback from a lot of the users who’ve used them in Iraq.

  • But frankly, last year the controversy hurt us at the higher policy levels within the military, and at the political levels.

  • Now that a lot of that controversy is abating, we see real opportunity.

  • But that’s where our real focus is frankly, short term I would say, is we need to do better up at the high policy level, and that’s where this advisory group is really going to help us identify the right programs and the right touch points we need to get to in the military to make sure that we’ve got the high level folks educated to the same degree that we’ve got the end users pushing for the product.

  • So, we could see some orders spring free this year.

  • You know, they’re not going to be huge orders, because that just doesn’t happen without foresight and planning in the military.

  • But we do see opportunities to break orders free this year.

  • And then, in ’07 we think we can start to see some fairly significant movements, both in terms of new product development funding.

  • As you know, this year we’ve demonstrated the X-Rep, the wireless projectile system.

  • That’s moving rapidly towards production in ’07.

  • We think that that will be a big seller for the military and for our other markets.

  • And, based on the success of that development program, we believe that puts us in a good position for other R&D development projects when we get into the October timeframe and the new budget year opens up.

  • Tom Smith - President

  • I do think we’ve learned also - on the military side, Rick talked about the, you know, standing up the East Coast Office.

  • You know, I think we need to have a presence in that area.

  • It’s also a consumer education campaign.

  • It’s part of what we’re doing in the law enforcement, the consumer area.

  • Now, we’re doing it in the military area, because, unfortunately, often they do read the newspapers as well.

  • On a lot of that information we need to make sure that they’ve got the facts.

  • So, again, it’s a focus on getting them the information on how the technology works, what it’s really doing and it’s part of that whole educational campaign effort that we have ongoing.

  • And I think you’re seeing the progress.

  • You’re seeing it certainly in the media.

  • The negativity is still there.

  • We’re not out of the woods yet.

  • But, there’s a huge trend positive in the stories that we’ve been seeing in the last quarter and this year.

  • And, we’re just going to continue that effort with the tenants at military trade shows that are coming up in the summer and fall, just providing the education and the information about our technology, where it’s at today and where it’s going in the platform and how it can be done [inaudible] available force option for our personnel on the field.

  • Matthew McKay - Analyst

  • OK, that’s helpful.

  • And just, how do you see it unfolding?

  • You know, is it just going to be, you know, you’re working on these R&D contracts, which eventually, you know, move into sort of a larger opportunity?

  • Or, do you need to win some contract vehicles in order to sell more effectively into the military?

  • Or, do you need to partner with another company that may already have those contract vehicles, to sell into it?

  • You know, is it – I’m just trying to kind of get a feel for sort of how quickly this potentially could ramp up.

  • Tom Smith - President

  • Well, Rick mentioned getting a presence back into the Quantico area.

  • The joint non-lethal weapon directorate does have its own budget.

  • I know there was a formal presentation they made about budget requirements and where they see this going in the ’07, ’08, ’09 and fiscal year 2010.

  • And, obviously, they’re asking for increases in the whole non-lethal weapon area, which includes our technology in addition to others.

  • So, it’s really hard to say if the different vehicles that are out there, that we can get on.

  • But you know, we’re obviously looking at a number of different tracks.

  • That’s part of where this executive advisory group is going to help steer us, because they come out of that environment and I think that’s going to be a big help as we really focus in this area.

  • But just to stand here today and tell you specifically what it’s going to be, I don’t think we know, at this point, other than there are areas for our current technology, as well as the future technologies.

  • We’re just going to have these advisors help steer us in the right directions and guide us through that process.

  • Matthew McKay - Analyst

  • OK, that’s helpful.

  • Actually, just bouncing back to the day the [inaudible] [went] second, so the 1200 that you sold in the quarter, you know, can we use that kind of as a per, you know, two or three-week run rate to try and extrapolate out into the future quarters?

  • Or, is it just, you know, that was just sort of an initial blip and it’s just going to be volatile for the next couple of quarters here?

  • Tom Smith - President

  • Yes, I wouldn’t base anything on that.

  • That was just a two-week period in there.

  • Again, we were late, that we didn’t get some of the orders in that we thought we were going to get in because of budgets and other things.

  • So, you know, I mentioned earlier some of those units went to France and some of our other international customers.

  • So, I wouldn’t use that as a specific run rate.

  • I don’t think we know enough yet.

  • We’re only four weeks into that production cycle and I think we really need to see what happens over the next quarter or two before we can really say that that’s a – to use that as a real run rate on a weekly basis.

  • Rick Smith - CEO

  • This is Rick.

  • I expect it is going to be volatile and particularly because we do have some big agency customers looking at it right now.

  • There is going to be some real lumpiness.

  • So, we might see some upside surprises, or we might see that, you know, over this quarter it could be that we just ship a lot of TV units and, you know, the volume doesn’t develop for another quarter or two.

  • So, we just don’t know.

  • I mean again, it would be dependent on some big, lumpy issues.

  • Fortunately, as you well know, that’s an issue with this business in general.

  • One of the reasons that we don’t give quarterly guidance is, you know, one or two customers that are very hard to predict exactly when that order is going to come in.

  • We can have significant swings in the revenue and bottom line potential for the business.

  • It just makes it real hard to predict.

  • Tom Smith - President

  • Yes, I think it’ll take a little bit of time to get it out there to the bread-and-butter.

  • You know, again, our average order size is running around that $10,000 or $10,500 level.

  • It’s going to take some time for those individuals to get them and see them.

  • I think the major cities are going to see them quicker than the rural areas.

  • And, as Rick said, it’s just going to take some time to prime the pump and get it into that cycle.

  • Rick Smith - CEO

  • There will be - the TASER Cam, we are putting on a major promotional campaign that will be our primary focus at the International Association of Chiefs of Police conference this year in October.

  • We believe that has the potential to be a real accelerator, where we can really get this in front of a lot of Chiefs as an in-production, available technology.

  • Matthew McKay - Analyst

  • OK.

  • You know, trying to, you know, you’ve talked about, you know, the issues that you’ve had over the past year, pushing out the sales cycles - are at 12 to 18 months.

  • You know, where you are now in terms of the pump being primed, you know, can you relate that to sort of where you were during 2004?

  • Where you are now, is it, you know, comparable to second quarter, third quarter, and fourth quarter of 2004?

  • Tom Smith - President

  • I would say that literally, it’s about the same timeframe.

  • It’s that second quarter, third quarter, type of feel that we had going in that 2004 year.

  • You know, we’ve seen the trend; it went up, you know, 23%, I believe, is the number.

  • So, we’re seeing that come back to what we were doing that current year.

  • I think the difference, again, is that it’s a completely different political environment that we’re in now.

  • The people really know us.

  • I think it’s much more steady.

  • We’ve seen the quotes coming in.

  • We’ve seen the – it’s the current expansion of the existing customers with the expansion of the new customers that are coming back.

  • And as Rick mentioned, some of the large agencies out there that we’re having some great conversations with, with programs moving forward, that we can’t get into a whole lot of detail yet, that we didn’t have any of that last year.

  • But, we did have a lot of that back in 2004.

  • So, I would say it’s kind of got that mid-year feel that we had in 2004.

  • Rick Smith - CEO

  • And to kind of cut to the chase, you know, as we look at the third quarter, as we’ve mentioned, historically, third quarter seasonally tends to be our weakest quarter.

  • However, we do have a number of big agencies in the pipeline that could - it could be a real blockbuster as well.

  • I wish we could see the future and give you some real guidance as to where it’s going to be; we can’t.

  • But we are, overall, building some real strong momentum.

  • I’d say, really, for the first time now, we’re beginning to have some significant discussions with some of the real big boys, again, that are real serious, whereas [not] those that had really pulled off the sidelines during the whole SEC investigation.

  • Matthew McKay - Analyst

  • That’s great.

  • Then just a couple of more housekeeping – Dan, what tax rate should we be using, going forward here?

  • Dan Behrendt - CFO

  • Roughly 43%.

  • It’s going to be in that 42% to 43% range, going forward.

  • It’ll be kind of like where we are year-to-date, similar rates for the second half of the year is probably going to be appropriate.

  • Matthew McKay - Analyst

  • OK that’s good, and then, I just missed, you know, how many units of the X26 – if you could just run through actually those numbers again, how many units were shipped out.

  • Tom Smith - President

  • It was 14,604 of the X26; 1,876 of the Advanced TASER series and then 212,251 cartridges.

  • And that gave us a ratio of 13 to one during the quarter.

  • Matthew McKay - Analyst

  • OK, great.

  • Thanks a lot guys; nice job.

  • Operator

  • Your last question comes from the line of Dick Ryan.

  • Please proceed.

  • Richard Ryan - Analyst

  • Say Tom, in your discussion on France, you talked about the testing and tender process that went on.

  • Was there anybody else being evaluated during that period?

  • Tom Smith - President

  • To be honest, we don’t know.

  • The tender process was an open public tender for anybody to submit.

  • It was open for several months and we won’t really know that until after it’s awarded.

  • There’s no conversation or communication with the French government during that.

  • So, you know, obviously our distributor is intimately involved.

  • Whether or other people tried to jump in there, we don’t know.

  • We just know that it will be awarded by, you know, probably the late August, early September timeframe.

  • Richard Ryan - Analyst

  • OK.

  • And, back on the camera, the retrofit opportunity having gone through the beta period and now the, you know, first round of shipments, do you think - are you as optimistic on the retrofit opportunity as previously?

  • Tom Smith - President

  • I would think so.

  • I mean, again, we’ve not really given a number out there.

  • But, the current customers that have the X26 that participated in our beta test gave great feedback and were very supportive.

  • And I think, again, when you look at what the in-car video has done for the officers’ careers and protection on that side, this is going to give them the same type of feel.

  • So, we don’t have a real good feel for the number, but certainly the install base that’s out there, I think, is certainly – I still feel very good about that.

  • Richard Ryan - Analyst

  • Are you still getting some performance feedback?

  • Or, are you pretty much done with that part of the process?

  • Tom Smith - President

  • Well, we always are looking for feedback.

  • But, I think we addressed some of the major concerns that they have.

  • And, some of the things now are as much just user training on dealing with the software, the interface with how it works with Microsoft Windows in our products.

  • Not all the agencies are on the same version of Windows, so I think that’s as much – you know, we haven’t really heard so much about the device itself, which, again, goes back to a different philosophy we implemented with this program from our R&D in testing and implementation into production.

  • We’re really trying to help the departments right now with the different versions of Microsoft Windows that are out there that this software runs on.

  • So, I think, you know, we’re always getting feedback.

  • But, it’s certainly been very, very positive.

  • I think that beta test really served us well to get that critical information, so that when we rolled it into full production, we were way ahead of the curve.

  • Rick Smith - CEO

  • I think one thing I want to point is that the TASER Cam, right through the same uplink that you upload the video, there’s a capability to update the software.

  • So, if, let’s say, we do find some more software enhancements, over time that’s something we’ve done on a rolling basis that will be as seamless as the way Microsoft Windows installs updates every couple of weeks; so, for any of the users, if they’re online, can download later software revisions.

  • But I think we’re through the lion’s share of that.

  • Richard Ryan - Analyst

  • Great, thank you.

  • Tom Smith - President

  • Thank you.

  • I think that will conclude our conference call.

  • We appreciate everybody listening.

  • Again, we’ll talk to you in the October timeframe as we enter our third quarter and hopefully see some of you before that.

  • Rick Smith - CEO

  • OK, thank you much.

  • Tom Smith - President

  • Tony, we’d like to close.

  • Operator

  • Thank you for your attendance at today’s conference.

  • This concludes your presentation.

  • You may now disconnect.

  • Good day.