Axon Enterprise Inc (AXON) 2006 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2006 Taser International earnings conference call.

My name is Torleisha, and I will be your coordinator for today. [OPERATOR INSTRUCTIONS] I would now like to turn the call over to your host for today, Mr. Tom Smith.

Please proceed, sir.

Thank you.

Good morning.

We'd like to welcome everybody to our third quarter conference call.

As you all have probably seen, we put our number of $18.3 million.

But before we get into all the exciting stuff, we're going to have Doug read a little poem that he put together for you.

Doug?

Thanks, Tom.

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 for such forward-looking statements to 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 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 of product 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 the 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 risks and manufacturing automation, risks associated with rapid technological change, 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 deaths, media publicity concerning product uses and allegations of injury and deaths 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- and limited- source suppliers, fluctuations in component pricing, risks of governmental investigations and regulations, Taser product tests and reports, dependence upon key employees, employee retention risks and other factors detailed in the companies filings with the Securities and Exchange Commission.

Thanks, Doug, appreciate that.

And we're going to turn it over at this point to my brother Rick, who is out of the office and joining us remotely for an update.

Rick?

Okay, thanks, Tom.

At a high level, I'm sure everybody has already seen the earnings release, but jut to touch on it, I'm quite proud of the work our team accomplished.

We saw over 50% revenue earnings -- I'm sorry, revenue increase over the same period last year, and over 12% sequential quarterly growth, and we're back above 20% operating income.

So the key statistics financially for the Company are all trending upward, which is looking pretty good at this point.

As you know, this last quarter, we also started some new initiatives to broaden our revenue base beyond our core strength, which is the domestic law enforcement market.

We added a new vice president to focus on the federal and military programs.

One of the things that George Fenton, our new VP, did was to form this new senior executive advisory board, which -- just for those of you who haven't seen the release -- we've got, I believe it's five retired generals all with, obviously, significant experience within the Department of Defense and several that have significant Department of Justice experience as well, and that's really been a heck of a resource for us, helping us to understand and learn the needs of those markets as we move into them.

One of the first initiatives that you've by now seen is the announcement of the T-RAD System, which is the Taser Remote Area Denial, which is the name for the hardware module and the TaserNet, which is a software controller system.

The T-RAD is currently on the main page of our website.

If you're interested in learning more, please go take a look at it.

T-RAD at this point is a concept.

It is not a product.

The T-RAD takes our existing Taser technology and our Taser Cam technology, integrates it into one package where we use the imager for motion detection and to generate targeting solutions to fire multiple Taser cartridges.

This allows us to do the -- meet the requirements of the Army's [HNLM], Hand-in-Place Non-Lethal Munitions Program, where these devices can be used for area denial remotely, set up in areas you want to deny personnel from being able to move.

And if people come through that area, the imager will recognize them, generate a targeting solution and engage with them Taser electrodes.

Or these things can also be networked together through power over Ethernet for facility security, where we can then feed the images back to a central command and control center.

Basically, it's a CCTV system at that point but with the ability not only to observe but to engage and retain targets non-lethally.

Now, there's been significant interest in this kind of capability from the military.

We showed the T-RAD at the AUSA show, which is one of the big military shows focused on the Army, and I think we got very positive feedback.

Again, we're pretty excited.

We think this next generation approach using existing hardware solutions that we already understand but recombining them into a new deployment methodology will move us beyond today's revenue base, which is all handheld man-carried interpersonal close range non-lethal weapons, into an expanded market for area denial and facility protection, with the focus on border security, facility security, embassy's, etcetera, we see this as a significant revenue opportunity.

But of course, this is going to be a long-term project for the business.

Revenue's would be, earliest, 2008 but could be significant when they arrive.

So that program, we've just really launched into it.

The biggest challenge will be the image recognition software side to tie all the hardware components together, and we're actively working on that to keep that program moving forward.

We will continue to fund it with internal R&D.

You saw our sequential R&D numbers are up.

We're investing more in our internal R&D until such time as we're able to get government funding for the T-RAD program.

Also, this quarter, you saw some, obviously, some great news that we were quite excited about in France, where the first tender was awarded, and we actually made our first shipment of a thousand Tasers and Taser Cams.

Of course, the Taser Cam is now in production and shipping, and that was one of the reasons we were able to break free.

It's been very important for the French market, and again, now, we're beyond the test and evaluation phase and into actual deployments, and we hope to see that order as the first of many.

Also, many people saw the Los Angeles Police Department has been making several public statements about going full deployment with Tasers.

In fact, as I understand it, their police commissioner has approved, conceptually, purchasing Tasers for all the LAPD's officers.

You haven't seen any press from us on it because it's not an order yet.

We're still working the process, and we expect that that could start in the fourth quarter or first quarter.

Currently, as we look at it, LAPD may roll this program out over one to two years, so we don't necessarily see this as one huge order.

But the important part about LAPD, I don't think I need to mention, is their position of thought leadership globally and within the United States.

We believe that if we can get LAPD fully on the program towards a full implementation or a full deployment with Tasers, that will carry a lot of weight with the rest of the law enforcement community and can help accelerate our penetration rate.

And I think that will be sort of the end of the controversies from last year.

I think that will sort of put that squarely behind us and get us back focused on market penetration, [our customers comfortable].

One other thing to talk about.

Let's -- the Taser Cam did get into production.

In fact, we had a significant focus on the Taser Cam at the IACP Conference.

We sold about 3,000 Taser CAMS this quarter, a little bit more.

We've - one thing we have learned.

The chiefs -- there's quite a lot of excitement about the Taser Cam and also from a lot of the groups that have been critical of Tasers and some of the agencies that were a little bit hesitant during some of the 2005 controversies have really embraced the Taser Cam conceptually.

What we've also learned, though, is there is some concern from the line officers, whereas when we introduced the Taser X26, for example, we saw tremendous support.

Immediately, officers wanted to carry them, and the chiefs understood the benefits.

The Taser Cam is a little - we think it's going to be a little slower in terms of its adoption because it's a little bit radically different.

This is the first time we're now taking video with an officer on each of his confrontations.

When the first in-car videos were introduced, there was a bit of an adoption cycle where at first there were some concerns about is it Big Brother, sort of privacy issues for the individual officers.

Now, with in-car video, studies have found that 96% of the time videos are available that it exonerates officers of charges of misconduct.

So it's really become one of the officers' best friends.

And you may have seen -- we had an advertising campaign this quarter that really culminated at the IACP emphasizing and hammering that point that we're really targeting the line officers at this point to focus on the fact that this technology is really their best friend.

Because in court, the police officers are generally the ones telling the truth, and the Taser Cam documents that.

So I just want to set expectations going forward.

We continue to see the Taser CAMS as significant capability.

It's going to move a number of agencies forward and get them past some of their prior concerns.

And we still believe long term that we're going to see significant penetration.

It's just going to take a little bit of time in that we've got to get the market acclimated to this concept of now taking video with them out of the cars and into the confrontations.

And I'm pretty confident that we can do that, but it's going to take a little bit of time and some good training and educational efforts.

Two other things before I end.

The first, we recently announced Phil's retirement.

I guess now that he's retiring, Tom and I can start calling him Dad again.

For those of you who've known Phil, he's a fantastic resource for the Company.

He - you know, we can't say enough nice things.

We wouldn't be here if he hadn't backed us early on when nobody else saw the dream of what we were trying to do at Taser, and for well over a decade, he was a coach and mentor to all of us on the management team.

His timing is pretty good.

When he retired from his full-time position here in late 2004, he likes to rib us a little bit that things got tough only after he left.

But as is sort of typical of Dad's character, when things got tough, he hunkered down with us, stayed on the board, wanted to stay involved.

He'd been planning on going to full-time retirement, but he's not the type of guy who runs from a challenge, and so he stayed involved with us over the past two years, not on a full-time basis but as our chairman and our sort of spiritual leader.

And at this point, I think he's comfortable that we've weathered the storm, that the ship is righted, heading in the right direction, and he's now -- this weekend -- going to be chairing our last board meeting and then retiring officially and focusing full time on his golden years.

And I couldn't congratulate him or thank him more for all he's done, obviously, for us personally and for the Company and wish him the best.

And as a part of that, we've of course made some shifts internally.

We've been reorganizing our structure to continue the growth of the Company.

The first thing we did was Tom Smith, who obviously introduced the call, our President, is going to be shifting to the Chairman role.

And let me explain a little bit about what's going on there.

Tom is staying involved.

It is a full-time position.

He'll be an active Chairman.

But as we've seen over the last two years, public interest in Taser has skyrocketed.

We have -- it's been very much a full-time position for Tom as the Company's spokesperson dealing with political concerns, public activist groups, major customers, major international customers.

For those of you who know his travel schedule, he's been on the road near continuously over the past two years.

And in that type of a role, it's been difficult for him to serve both as an external spokesperson and have internal operating and reporting responsibilities with as much roadwork as he's been putting in.

So this new role we're moving Tom in allows him to focus his efforts entirely on the public spokesperson role, the face of the Company and the relationship manager for our key major stakeholders.

And at the same time, we'll be promoting Kathy Hanrahan to Tom's former position of President, and we're restructuring that slightly.

Basically, what we've done between Tom, Kathy and myself, we're creating the office of the CEO, and what we're doing is we're sort of trifurcating the leadership responsibilities of the Company, of which we'll think of it in three major areas.

The first of leadership for the Company would be the public leadership -- stakeholder relations as I talked about, and that's really where Tom will be focused.

Then there's the day-to-day operational management of the Company, the Company's top manager whose job it is is to oversee the structure and allocate resources and clear obstacles and make sure that the machine is running smoothly.

That's Kathy's new role, and I'm very excited for her.

Obviously, we -- Kathy has helped us build this Company from scratch.

She's been our CFO and COO at one time.

She then focused in on COO, running our manufacturing and logistics operations.

We will be backfilling now with a VP of Manufacturing as Kathy moves into the President role.

And again, we felt for the organization it's very important to have somebody onsite who does not have an extensive travel schedule, but who's really focused on overseeing the day-to-day operations, the flocking, tackling, making sure the organization is running optimally.

And that's Kathy's new role.

I congratulate her as well on a job well done, and I'm very excited about her promotion into that position.

She's going to do a fantastic job.

And that leaves me as CEO to focus on sort of the third area where we see key leadership as being important, and that is long-term strategy, product strategy, marketing, messaging.

It's sort of the creative visionary work.

And this will give me more time to spend with our R&D times and with our marketing folks trying to accelerate the new products we bring out and how we market, message and communicate those products to create value.

The other area to talk about is really the brand Taser, and what I mean there is over the past several years, there's been this controversy, but public awareness of our brand has gone through the roof.

It's been really -- they say what doesn't kill you makes you stronger.

The public controversy, I think, has done that for Taser.

It has vetted our technology in a very public way.

No one can say now that our technology hasn't been looked at by just about every significant interest group or agency, and we've survived that scrutiny.

And all throughout, public surveys, approval rating for Taser equipment, Taser technology from independent surveys or when we hired [Dezogby Group] to do a survey for us, or to do a poll for us, we found between 70% and 80% support.

So we think that controversy tended to polarize people.

Those people who had an affinity for Taser, that affinity became stronger.

We now have, certainly, I think the best known brand in law enforcement, and even a very well known brand at the consumer level.

So now our focus is how do we monetize our brand equity, and we don't have those answers yet, but I just want to let you know that's one of the area I'm very much focused on -- how do we extend our technology and our brand to create more value?

There's been some talk this last quarter about the potential for Taser to get into acquisitions.

I think a little bit of that got overblown, but I will tell you this.

Obviously, we've got a very strong balance sheet.

Now, some of that cash on our balance sheet is going to be getting used to clean up the settlement of the shareholder class actions that Doug will talk about a little bit later, but we still do have significant resources, and we are generating cash.

But I wanted to let our shareholders know, this is not going to turn into a roll-up play.

We're not out actively looking at becoming an acquisition chain.

What we do understand as well as we look at ways to create value, whether it's through technology or extending our market presence, every one of those initiatives should go through and will go through a make versus buy decision where we look at -- does it make sense for us to develop technology internally?

Are there places we can buy technology, license technology, market access, distribution capabilities, etcetera?

And in some cases, it may make sense for us to look at acquiring from external sources either companies or technology, etcetera.

So those are issues that are going to be taking up more of my time as we now look at the challenges of how do we deploy our capital to maximize our shareholder value.

And I want to let you know that we're going to be very careful about that and make sure that anything we do makes strategic sense in building us towards our long-term goal of being the world leader in the non-lethal weapons space.

And with that, I'm going to wrap up and with the comment that I think now we can start shifting from defense to offense.

Last year, we were very much protecting the Company, protecting the brand, protecting our technology, protecting our reputation.

We've seen major progress on those issues, and as I tell my internal team, it's now time to put the offense back on the field and now focus on creating value as opposed to protecting the value previously created.

And that, to me, is a very exciting time.

And with that, I'm going to turn over to some of the other folks for the call, and I'll start with Dan to take us through the financial numbers.

Thanks, Rick.

Yeah, first I want to cover the results for the quarter.

As Rick said, the sales for the third quarter were $18.3 million, which is a 56 point percent increase of third quarter 2005, which is obviously very encouraging.

Gross margins for the quarter were $11.6 million or 63.5% of sales.

This compares to $7.7 million or 66% of sales in the third quarter of '05.

The decrease, slight decrease in gross margins is really driven by sales mix.

Kathy will cover this a little bit more in her area, but we certainly saw more of our sales in cartridges, batteries and other accessories that carry a slightly lower gross margin than our hand-held sales.

That did have a negative impact on the margin for the quarter.

SG&A expenses for the quarter were $7.1 million, which is up $400,000 over the prior year.

Roughly half of this was 123R charges for the stock compensation.

The other half of the increase was driven by increases to legal, salaries and benefits and insurance, partially offset by some lower professional fees due to our second-year Sarbanes-Oxley costs being lower than first-year implementation costs for Sarbanes-Oxley.

R&D, as Rick talked about, is up sharply over last year by $773,000 for the quarter, which is up 412 over the prior year but continue to invest heavily in R&D.

That's a trend that I certainly expect to continue the rest of this year and beyond.

Income from operations was $3.7 million for the quarter, which is 20.4% of sales.

This compares to $654,000 or 5.6% of sales in the prior year.

And we're very encouraged by the large year-over-year increases in income from operation as we get leveraged with the higher sales levels.

Interest income for the quarter is $483,000.

This is up $176,000 over last year, primarily driven by the higher cash and investment balances and higher yielding investments.

And then, on a net basis, net income before tax was $4.2, $2.4 million on an after-tax basis or $0.04 for basic and diluted share.

Year-to-date, our sales were $48.4 million.

This is up $13.3 million or 38% over the prior year.

Gross margins for the year-to-date are $31 million or 64% of sales.

This is $9.5 million higher than the same period in 2005, [inaudible] at 61.3% gross margin.

Most of that increase is driven by the higher leverage of our indirect costs.

SG&A expenses were $22 million year-to-date, which is up $2.7 million over the prior year.

Again, I think part of that is the 123R charges for stock compensation, about $700,000 for this year versus zero last year and increases to legal salaries and benefits and insurance.

R&D expenses year-to-date were $2 million.

This is up 81%, almost $900,000 over the prior year as we continue to invest heavily in the new product development for the Company.

Income from operations for the nine months ended September 30 were a loss of $10.7 million, which is [upside down] versus the prior year.

But as we announced at the end of last quarter, we had a $17.6 million settlement charge recorded in the second quarter for the settlement of the shareholder and [derivative] lawsuits.

Obviously the Company's results from operations are up sharply when you exclude the settlement expense.

Without the settlement, it would be about $6.9 million on a year-to-date basis versus $1.1 million income from operations in the prior year.

Interest income is year-to-date, so $1.3 million.

This is up $428,000 over the prior year, again given by the higher cash investment balances.

And then on a total year basis, our pre-tax loss at this point is $9.4 million.

The net lost is $6.4 million.

Again, this is driven by the settlement.

The Company's results are up sharply from prior year when you exclude the settlement charges.

Moving on to the balance sheet, the Company through the cash generator from operations in the quarter saw its cash investment balances increase to $50.5 million versus $49 million last quarter.

It's up sharply this year.

Accounts receivable moved up in the quarter to $10.4 million on the higher sales levels for the quarter.

Inventory, we had $8.5 million of inventory on September 30.

This is down roughly a $1.5 million so far this year as we continue to try to manage our inventory.

The insurance settlement proceeds - again, this is $4.5 million as the Company's booked receivable from our insurance company for their portion of the shareholder's settlement.

You'll see that on the balance sheet.

The current assets are now $55.5 million, which is up $13.3 million over the year-end balance.

It's mostly driven by the high receivable and short-term investment balances.

Property [planning] equipment at September 30 were $20.8 million.

This is roughly flat with the year-end balances, as new purchases of assets are offset by depreciation charges.

We're pretty much staying at a steady state today on the property planning equipment line.

Total assets, $128.7 million, which is up $16.4 million, again drive by increases to cash and investments, accounts receivable and the insurance settlement proceeds.

On the liability side of the balance sheet, accounts payable is $6.6 million, which is up roughly $300,000 for the year, mostly driven by the high manufacturing activity in 2006 versus 2005.

The litigation settlement -- you'll see that on the balance sheet -- is $21.75 million.

Again, this is the gross value.

It's offset by approximately $4.1 million of insurance proceeds, leaving a net expense of $17.65 million, which was recorded the second quarter of 2006.

Deferred revenue has climbed sharply this year to $2.5 million as more customers are buying extended warranties for their devices.

We're at $1.4 million at the 12/31/05, so that's up over $1 million so far this year as our customers buy these extended warranties.

And then in stockholders equity section, you can see the Company's purchase $2.1 million or $2.2 million of treasury stock during the second quarter.

We purchased 300,000 shares during the quarter.

The cash flow statement for the nine months -- you see the Company's generated $9.5 million of operating cash flow.

Again, as Rick alluded to in his statements, we'll use some of this cash to -- for the shareholder settlements.

But when you look at the operating cash flow on a nine-month basis, we generate $9.5 million this year versus a usage of $400,000 during the same period of 2005.

Year-to-date, we've purchase $1.25 million of fixed assets this year versus about $7.5 million in the prior year.

The big decrease versus the prior year is we had a lot of costs in 2005 associated with constructing and outfitting our new headquarters' facility.

And with that, I'll turn the call over to Kathleen Hanrahan, our Chief Operating Officer.

Good morning.

As Rick and Dan commented, the third quarter was a strong quarter for the Company, due to both increased revenue, focused efforts to reduce spending and increase cash flow.

In operations, our focus was growth margin contribution, inventory reduction and continued support for new product development.

The highlights from operations for the third quarter as follows: manufacturing achieved gross margins of 63.5% in the third quarter.

This is down slightly from the second quarter of the year due to a shift in sales mix caused by higher volumes through distribution and increased volumes of lower-margin ancillary products such as cartridges, batteries, Taser Cams and extended warranties.

During the period, we also saw a slight increase in raw materials due to increased costs of petroleum-based products and electronics demand in the marketplace.

We hope to offset the increasing cost of materials through improvements in line efficiencies and supplier management initiatives.

Year-to-date, gross margins increase 2.7% from 2005 to 64%.

This increase is a result of improvements for labor and material efficiencies and a reduction of in line [scrap] generated through continual improvement efforts on our product floor.

These improvements were partially offset by the expansion of our quality assurance, materials and manufacturing/engineering departments, which believe are investments in the Company's future.

During the third quarter, inventory was reduced by $1.1 million.

To achieve the reduction, we executed additional purchasing controls and converted approximately $5 million of raw materials into finished goods and completed sub-assemblies, ending the quarter with $3.6 million of finished goods available for fourth quarter shipment.

Our materials department plans to continue this trend through the use of MRP tools and through improvements to supply chain management.

However, their short-term efforts to reduce inventory are being partially impacted by large buys of two key components.

As of September 30, the total investment in these two components totaled more than $1 million in raw materials, a decrease of $200,000 from last quarter.

Additionally, we had an increase of $450,000 of Taser Cam components received as scheduled late in the quarter for future production.

Operations also continued to support our R&D efforts in the third quarter, through participation on product teams and prototype builds and testing the future products.

This process -- the collaborative effort reduces our transition costs moving forward, and it streamlines the integration of new products into the manufacturing process for future periods.

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

Thanks, Kathy.

I'd like to give you a brief update of our litigation.

We previously announced a settlement of the shareholder class action litigation, the derivative litigation and also the Delaware Section 220 Document litigation.

The terms of the settlement were previously disclosed, and I do not plan to discuss those in detail again.

However, I would like to state and stress that the settlement of the shareholder litigation should not be confused with our product liability litigation.

We are adamant in our policy of not settling product liability litigation.

We have never settled a case brought by a criminal suspect against the Company, and the message we want to send to plaintiff's lawyers is to forget about suing us to extract a settlement payment.

It's just not going to happen.

With respect to our other litigation, the Roy Taylor contract litigation has been dismissed.

We were the prevailing party in the Hennigan contract litigation and a dismissal is pending.

A dismissal is also pending in the City of [Doden] class action litigation.

The James Ruggieri litigation has also been dismissed.

This was a lawsuit we brought against an unqualified individual who published false and misleading reports about Taser devices.

We did achieve our strategic objectives in the suit, and the suit has been resolved to our satisfaction.

Confidential provisions restrict us from discussing this case in detail.

We were also awarded partial summary judgment in our lawsuit against Thomas Watkins.

In addition, we have had 23 product liability lawsuits dismissed or judgment entered for Taser.

We have not lost any product liability lawsuit.

In our product liability litigation, plaintiffs have not been able to prove that the Taser is defective or was the cause of any injury or death.

These are the strongest factors in our favor in defending this litigation.

The safety of the Taser device has been well established by over 70 medical and safety studies.

In addition, we have over 30 nationally renowned medical and scientific experts who have all concluded that the Taser device played no causal relationship in any injury or death.

We believe these lawsuits are frivolous.

We aggressively defend all product liability suits.

Our strategy is to, number one, hire the best world-class medical and scientific experts in all relevant fields; second, stand behind the exceptional safety record of the Taser product, and we plan to take all cases through trial if necessary; third, we filed motions for dismissal and a summary judgment at every opportunity and we seek sanctions, as appropriate, for filing frivolous litigation; and fourth, 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 Taser.

While the rate of litigation filed against the Company has been steadily decreasing since fourth quarter of 2005, we did see an increase in litigation during third quarter.

We believe this increase is an anomaly brought about, in part, due to the settlement of the class action lawsuit.

However, as discussed earlier, plaintiffs are totally misreading this if they think that we will change our policy against settling product liability suits.

It's just not going to happen.

We remain adamant in our policy of not settling these lawsuits.

In fact, we believe so strongly in aggressively defending these suits that we took the extraordinary step of settling with our insurance company in our first two trials rather than allow them to settle with the plaintiffs.

In both the plaintiff's case -- the Power's case, which we won in December of '05 and then the Alvarado case, which is currently on trial, we did not have the right to direct the defense under our insurance policy that was in effect at that time, and we settled with our insurance company in order to prevent a settlement with the plaintiffs.

We felt that a settlement with the plaintiffs was not in the best interest of our shareholders and would only encourage more frivolous litigation against the Company.

We will not allow plaintiffs' attorneys to profit from litigation against the Company.

This policy is not going to change, and we will not settle any litigation on the courthouse stairs.

Under our insurance policies in effect for the balance of our litigation, we have the right to direct our own defense, and it's unlikely that we will need to settle with our insurance Company in any of those cases.

The aggressive defense of litigation is not without its costs.

While we're making an investment in winning these lawsuits, we're also beginning to see a reduction in outside legal fees.

Despite the recent increase in lawsuits, third-quarter legal fees were down approximately $100,000 in the second quarter 2006, and we expect to see additional reductions in fourth quarter as we implement our strategy of utilizing our in-house legal team to reduce outside legal services.

It's very important to understand that from our customers' perspective, product liability suits are not a risk to law enforcement agencies.

Those lawsuits are not filed against law enforcement.

Our customers battle excessive use of force litigation, and the Taser device has played a very important role in reducing the excessive use of force litigation against law enforcement.

Statistics from our customers show a marked decrease in excessive use of force claims when the Taser device have been deployed.

Statistics from the Michigan Municipal Risk Management authority show a 75% decrease in the excessive use of force claims with Taser deployment and no claims from Taser use.

The courts have also routinely held that the use of the Taser device does not constitute excessive force.

Our customers place a high value on the Taser device from reducing their excessive force litigation.

With that, I'd like to turn the call back to Tom Smith, our President.

Thank you, Doug.

I'm going to touch briefly on what sales has been up to during the quarter.

Right out of the gate, we added 347 new agencies for a total of over 9,850 now testing or deploying our products, which is over about half of all U.S. law enforcements in the United States, with the total being roughly 18,000.

Also during the quarter, we added 518 new full deployments for a total of over 3,000 agencies that now are carrying a Taser on every officer .

That's now 31% of our existing customers are at a full deployment level with the usage of our product.

During the quarter, we also attended and completed 25 different trade shows and conferences.

And for those of you that have seen the Taser truck, we had it traveling all over the country in the quarter and had it appear at seven different distributor sites around the country doing different promotional advertising and assistance with our distributors in promoting the Taser Cam and letting people get the hands on visual of how that works.

Rick also mentioned during the quarter our new VP, George Fenton, established our Senior Executive Advisory Board and held our first meeting in August.

We've had several subsequent smaller meetings of members of the group, but they are assisting in providing us direction in how we are going to the military market, making sure that our messaging is something that they would be interested in seeing and really providing a lot of guidance and assistance as we go at the military from several different perspectives.

There was also an emphasis on the Taser Cam.

We introduced a new marketing campaign.

For those of you that have gone to the website, I believe we put out six different scenario-based mini-ads that kind of show the difference on how the Taser Cam can assist an officer and the fact that the person that they'll see in a courtroom isn't necessarily the person that the officer had to make an arrest on this street, and I've kind of told people that as you say a picture is worth 1,000 words, and that Taser Cam's going to give them a lot of pictures.

And Rick referenced the study that was done by the International Association of Chiefs of Police that over 96% of the time, the officers are acquitted when the Taser -- when video is present.

And that came out of an in-car video study, again, which goes back to the fact that the video is really going to protect and help the officers in establishing the story against some false allegations.

The Taser-RAD was a new development that we presented at the AUSA trade show that had a very positive response -- again, a concept type of device that, as Rick gave a lot of details, you can learn more on our website.

We also hosted our European tactical conference during September for our third quarter.

We had over 25 different countries represented at this conference, with nearly 100 attendees over a four-day period that was held in Amsterdam.

Very, very positive conference -- probably the best that we've done to date.

And again, to show the international advancement of the product and how it continues to move in Europe, which I'll touch on in a minute.

We also announced recently the [Lulack] has passed a provision in helping Taser work on education within the communities and helping with some local use of force policy initiatives and community involvement.

And again, I think that's very important because on of the things that we saw in 2005 was a lot of different local community groups and third-party interest in what was going on with Taser, and this was a leading organization out there that has now said, "Hey, this is a good -- the Taser is having a good, positive influence on our communities.

Let's work with the Company.

Let's work with the local departments.

Let's educate the community, the media and others in how it's making a benefit and providing a benefit for the community," and I think that's a very, very positive move.

Obviously very exciting during the quarter.

Rick touched on the LAPD announcing the direction that they're going to go.

Again, there's still a lot of work to do there on determining when and the time frame that those are orders are going to start to come in.

But obviously a positive step in the right direction that they will be going toward the Taser program following some tests earlier this year and an announcement in February that they were going to be evaluating this.

And that was presented to the police commission.

And again, to emphasize as Rick mentioned, you won't see any press on us in terms of a press release until we actually receive a physical order for the LAPD.

But what we did get during the quarter was the France order.

It was for 1,000 Taser X26 units along with 1,000 Taser Cams.

That order had been discussed in early August and published in the periodical in France called [La Figueroa] as their first step in launching the Tasers in France.

We shipped that order in late September and got those over there, and that was part -- that was shipped against the tender.

The tender was awarded to our distributor during the third quarter for France and has authorized the French government to spend up to a number of dollars to purchase 5,000 Tasers.

Now, not all of those will include the Taser Cam, but certainly the first order with the matching one for one was very positive.

But it does authorize the spending of 5,000, so we have another 4,000 to go and I'm very confident that we will get some of that order during this quarter.

We just don't know the quantity or the time frame at this point in time.

But obviously a very positive step.

The Minister of the Interior, Sarcoxie, continues to mention Taser when he talks about the police over there.

And again, this is going to be a huge lift in France in getting the law enforcement tools that they need to deal with often violent situations over there, and then the video, again, to protect them.

And it's obviously, for us, another great step in our international area, where international sales during the quarter totaled about 8.6% of our revenue, which brings our year-to-date international number to roughly 9.5% or $4.6 million of our numbers.

The France order, obviously, has gotten the attention of others in Europe, and we've seen other interested advance in smaller numbers as other countries are, again, seeing now that the United Kingdom has gone forward;

France has gone forward.

I kind of talked about the five leading countries out there with Australia, Singapore and Korea being the other ones, that as they continue to use and expand programs, that that gets attention within local areas.

Because during the quarter, one other country -- New Zealand -- that is very, very conservative in their policing, very similar to the United Kingdom, also started a program on September 1.

Obviously, there's been a lot of media out there.

And unfortunately, a very small group of less than 70 individuals are garnering a lot of that attention down there against the use of it.

But it's shown right out of the gate in its first several weeks how it's been used multiple times to end confrontation where neither the officer nor the suspect got injured.

And again, I think those concerned individuals in that country will have to pull their head out of the sand and take a look at the fact that this is a step in the right direction in providing life-saving technology that really has a positive impact.

They have to stop reading the media headlines to the contrary.

But we'll get them eventually.

Some numbers during the quarter.

The X26 units shipped during the third quarter were 17,196, with M26 units being 607 for a total of over 17,800 units going into the field.

That brings our total in law enforcement to roughly 230,000 units since late 1999, which represents roughly 23% to 25% market penetration here domestically.

During the quarter, we shipped 231,275 cartridges, bringing the ratio of cartridges to Taser units during the quarter again 13 to 1, same as we were at last quarter.

You know, I've been doing a lot of traveling around looking with investor relations and talking to individuals where they were evaluating how our first half of the year compared to our history and whether -- was 2004 the anomaly?

Or was it 2005?

And I think now with the numbers that we just put out in the spreadsheet when I compare the results for the first nine months of 2004 versus versus 2006, we're both at $48.4 million.

So I think it clearly shows that 2005 was the anomaly year.

I believe that's going to give the investors the confidence of where the Company is going because we are back on track.

We basically had a year taken away while we were [being a] piñata last year, quite frankly, and I think the future's very bright, and we're seeing a lot of positive movement in that area.

And again, I've talked many times about the fact that with the FCC going away, with groups like the LAPD stepping forward, France placing those initial orders, it's taken some time to prime the pump, and we're going to continue to see that grow.

It's not going to skyrocket over night, but we're seeing that steady consistent growth come from our customers, and we're now -- as Rick said -- going to look at how we can leverage the name Taser, which is recognized worldwide as a leader in this field to continue to advance this technology.

And we're obviously looking at some other relationships that will be coming out later this year and earlier next year that will be very exciting that will continue to leverage us as we go forward.

So obviously, we're very excited with where we are at this point in time.

We're matching the best year we've ever had in our history, which was 2004, literally dollar for dollar.

And we believe, again, the fourth quarter's going to be very strong for us.

And with that, I would like to open it up to question and answer.

[OPERATOR INSTRUCTIONS] And our first question comes from the line of Eric Wold with Merriman Curhan Ford.

Please proceed, sir.

Hi, good afternoon -- or good morning, guys.

Good morning, Eric.

There's an article that came out yesterday, and I think it's happening today, talking about a bunch of -- I think 20 or so local police departments that are meeting with the White House, meeting with Bush to push for more local funding to fight crime.

Do you have any sense on how Taser might fit into that and if you've had any conversations with the White House or the government in terms of making Taser a broader part of what they may provide funding for?

We have not.

Obviously, we've been talking with law enforcement on a number of different areas, and there's been a big push from them.

The COP Program, which in the past has provided a lot of funding in that area have been cut dramatically last year, and we're one piece of that puzzle for them looking at it.

We have not had any direct contact there, but obviously it's very positive because we continue to establish our self as a leader in this area, so I think we're one of the tools that will be looked at.

But no correct with us or the White House or the government in looking at funding for local departments at this point.

Okay, then, a couple questions on the international front.

Any update -- first of all, any update on U.K. and when we might hear something there?

And then two, on France, what are your thoughts on once this initial 5,000-unit order is completed, whenever it's completed, what the next step is.

Is it really just once they complete that 5,000 units or once those are shipped that they can order on an as-needed basis kind of any amount kind of any time they want?

Well, let's start with the U.K..

Obviously, the U.K. has a new Ministry of the Interior from where they were at before.

So that's really being driven internally by the union, who is obviously a strong advocate of the use of the tool, as well as the ACPO, which is the Association of Chief Police Officers, going to the Ministry saying that they want to expand the program.

They want to move it to the level below firearms officers.

They want to expand it more broadly throughout the country.

But they've had several meetings at this point, but they've had to go back and reeducate a new minister, reeducate a new staff.

Those meetings are continuing this month, so there wasn't a whole lot of movement there other than some smaller purchases.

But they are pushing forward to try and expand that program.

There's no timeframe that we've been given.

But several meetings did occur during October in that vein.

But obviously, we're on the outside as that's being driven internally by our customer, which is obviously great for us because the customers are our biggest advocates and have seen the results for themselves over there.

So there's no real time frame at this point in the U.K., but obviously, their uses are continuing to expand.

I know there was some things in Ireland published where they were looking at it and some push back from some of the activist groups again, but I think when people are looking at the results, they understand that it works, and it reduces injuries, and that's why you're going to continue to see them go forward.

In terms of France, the election is next May.

It's May of 2007, where Sarcoxie and several others are going to be running for that position.

So beyond the 5,000 -- and we'll have to go out for another tender, so it will not be open season on purchasing -- that that will -- they authorize it ahead of time for a certain number, and then they'll come back and purchase against it.

And at this point, I think what they want to see is they want to see it out on the street.

They want to see some of the results.

They want to get through these initial numbers.

But the tender for the 5,000, by the way, was awarded over the summer, and it's good for two years.

So technically, they can do that purchase over a two-year period.

We don't obviously believe it's going to take that long, but they will have to go back for another tender authorization for additional purchases.

And if they get these units out on the street, we'll be more involved to figure out what that next step is.

But at this point in time, they're just trying to get these units in there, get officers trained, get them out on the street as quickly as they can, and that'll be happening through the rest of this year and early next year.

One quick thought, real quick.

In terms of when the next tender comes, is the tender open up to other possible participants, or is it basically you guys still have it, but it's just another tender for another amount under the original one.

Well, they always will have to go back out and open it up for everything, but obviously at that point, it's much more restrictive because our device will be the one that's been used and be on the streets.

But it'd be -- the way the public tender system works, still domestically, internationally, is it will go out for anyone to participate in or to be evaluated.

But we obviously have the head start there because our product's the one that was awarded this tender and is being used and providing the results.

Thanks, guys.

Thank you.

And now our next question comes from the line of Dick Ryan with Feltl & Company.

Please proceed, sir.

Hi, Tom or Rick, can you talk about on the Taser Cam side, I mean, test or evaluation sites underway?

I mean, is it an expanding number?

It is an expanding number, and I think we referenced this last time that we were probably -- they want to see it, touch it and feel it, and we've definitely learned that again.

But the numbers are expanding.

We're starting to get a number of uses on the videos coming in, so it's something that they want to see for themselves and not rely on somebody else telling them that it's a good product.

So we are seeing a huge increase in the number of test and evaluation units that are going out so that they can be evaluated by the local agencies.

Has there been enough uses of the camera that you're actually seeing?

Are you seeing any officer push back?

Or is that just kind of word of mouth where the line officer may not be totally enamored with this?

It's more word of mouth.

I mean, there's no consorted effort out there.

You know, Rick kind of touched on it that the initial concept is a little bit of Big Brother, but again, some of the chiefs have made the comments in the past that if it's something you don't want it recorded, it's probably something you shouldn't be doing.

And again, once people get it out there and see how it can protect them -- they look at the IACP study on what in-car video did to protect the officers -- we get by that pretty quickly.

So I wouldn't say it's a -- it's more of a rumor kind of push back then anything concerted.

And we certainly have the support at the command staff level for the use of this.

And quite frankly, a bunch of the groups that in the past had opposed the use of Tasers are saying, "Wow, what a great thing this is now because you're going to be able to give them some oversight."

So I think it's still very, very positive.

But kind of like that Tasers took a little bit of time to get accepted, we're seeing the same thing here.

Obviously a big push with France taking 1,000 right out of the gate was very good.

But we still see some of out other major customers out there saying, yes, they want to go forward with this.

It's just we don't know the timeframe because a lot of times they do still have to go back and get it into the budget to get funding for it.

It's not some -- they can't use discretionary funds to acquire this in most of the larger agencies.

They do have to go back and get a funding request.

Okay.

Say, Kathy, on the manufacturing side, how's the process with the cameras?

Any issues to date?

No, it's actually a pretty smooth transition onto the floor, so we've done really well with that product line.

Great.

Thank you.

Thank you.

And our next question comes from the line of Matthew McKay with Jefferies & Company.

Please proceed, sir.

Hi, good morning, guys.

Nice quarter.

Thank you.

Thank you.

Just kind of following up on the Taser Cam question prior, are there any policies or procedures that need to be put in place by police chiefs down at a local level before Taser Cam can be deployed more broadly?

Absolutely.

And that's one of the things that we've learned and that the departments have learned is that the way that the Taser Cam works is when it's installed in the bottom of the Taser, it starts recording once the officer arms the device -- in other words, they turn the red laser dot on.

Well, that in and of itself becomes arming the system so if some of policies don't want a Taser used until active resistance, that has to be evaluated by the department as to is that going to, let's say, aggravate a situation because now you're turning and arming a Taser and pointing it at somebody because you want to get that video.

So that's something that they want to look at very, very closely from a policy perspective, which again, that's up to them to participate in.

So it is something that they're having to evaluate and incorporate into the policy that one of the other things they also learned is we had one of our early beta sites say, "Well, they didn't use the Taser because the original fight wasn't recorded again, so they've had to state clearly to the officer that you don't have to fight them twice to use this.

So it has brought up some policy issues that they're working through.

And I think, again, as they get used to that or used to the system and evaluate those is where you're going to see them continue to push forward for it because it does provide valuable information.

How long does it take to institutionalize, I guess, the procedures for the Taser Cam?

Well, again, it depends -- when you have the support of command staff, once they've gotten and rolled out, it goes very, very quickly.

But a lot of times they want to run a 60/90/120 test with it, put a policy in place.

Then, as always, they're going to reevaluate policies, and it's kind of a moving target out there, per se.

That's something they'll always be looking at.

So I wouldn't say the policy's a huge holdup.

But it's something that we make sure we cover now on our training that it's something that they want to look at is what the policy's going to say as they implement the Taser Cam into the field with the officers and again stressing the training to the officers, that they don't have to fight twice.

So again, it's helped us learn to get those message points out as well, along with the product so that they can implement it a little quicker and be ready for those types of questions.

Okay, great.

And then, switching over, you've obviously made a lot of investments on going after the military side.

And if you could talk a little bit about, maybe, some opportunities that you're seeing in the military or what, maybe, areas that you're specifically focused initially to kind of penetrate the military.

Well, some of the areas that we've obviously gotten feedback was the successful uses of the products in-country and theater, both the M series and the X series.

Again, the indirect, informal comments back from soldiers that it's been a fantastic tool over there.

We obviously demonstrated the XREP earlier this year that we've already announced will be out in 2007, the T-RAD, which we touched on.

So we have a variety of different product platforms that are being evaluated right now by the military in various different locations.

So we do see a lot of interest.

We do see a lot of opportunity there, which is why we made those investments so that we can figure out what's the best way to get information out to the military.

Because just like everybody else, those commanders and the generals read the newspapers, and some of them saw a lot of that bad press on us last year.

So we're also having to provide education to the command level within the military about the Tasers and how it works.

So again, it's -- I wouldn't say there's one specific area, per se.

But there are a number of different areas that we're going after.

For example, during the quarter, the Air Force passed -- put a policy out there that any base out of their own base funding can acquire Tasers.

Now, they're not huge numbers, but again, it's a step in the direction showing that the military is seeing the value in this technology and going to be making it available.

So we're working a number of different perspectives on that, but it's not only for current products.

It's for the future concept of the T-RAD type of system as well as the XREP that was demonstrated earlier this year that will be out next year and to have them aware of it now so that they can be finding funding sources so that they can have those acquisition programs in place as this technology comes to market in future years.

So it sounds like there's nothing specific in, for example, the DOD budget for Taser other than maybe some little taking some money out of, sort of, broader buckets.

So in that case, anything would probably be more a fiscal '08 in the DOD budget for the potential for Taser.

Most likely.

And again, the way -- since the budget year runs through September 30, we obviously don't have anything specifically in 2007 for this technology, but it provides a unique capability for them that they've seen success already in theater.

They've seen the technology coming.

So again, we're taking a proactive stance in educating them about what some of those future technologies are so that they can get those funding sources in place to be able to acquire this.

And that's also rolling over to the federal law enforcement as well that has a fair amount of interaction.

The National Guard was put down on the border.

We've attended a lot of those trade shows, and you see a lot of crossover between federal law enforcement as well as military.

So the border's been a big issue.

There's a number of different issues that we just want to make sure people are aware of this technology, how it's working and that funding is going to need to be set aside with acquisition programs for future years as this technology comes to market.

Okay.

And then, given you had 25 countries at your European conference, any chance we're going to start hearing of, like, a Germany, a Spain or an Italy or someone like that going forward with some pilot projects here?

We -- actually, two of those three countries, we do have some pilot programs going, but very, very small, so certainly we expect to those to try and expand.

This France order has gotten a lot of coverage over there.

It's certainly on everybody's radar screen with the success that they've been seeing in the U.K. with over 350 uses.

Again, it is driving those other countries, and I think that's why we saw so many attendees at our European conference.

And again, it's about providing information, getting these people together so that they can talk, and I do think you're going to see continued expansion in our international.

We're running about 9.5% of our sales, which obviously, we'd like to see that increase and I think we'll see some more -- the French orders this quarter.

And as those continue to go, it'll give the other countries confidence that they aren't going alone, that they're going to be joining a group rather than being out there in front.

Great.

And then just the R&D spend ramping up.

I know you guys don't want to talk too much about what goes on in the black box, but is there some way -- can you give us some indication of should we be expecting a new product every year or every two years?

And when I say new product, not just necessarily an upgrade, but maybe sort of an expansion opening up in new markets, just some way to think about expectations for any products that could come out of the R&D spend.

Well, that's the challenging question because obviously we're investing a lot of money there, so there's a lot of new things being looked at in R&D, and it's a balance that we have to walk because if we start announcing things too early, we can shoot ourselves in the foot for what we're producing today.

So I wouldn't say that there's anything specifically that you would say, "We're going to see something every year."

But we are looking at other marketplaces and products to fit that.

The T-RAD and the XREP are two examples of that with the Taser Cam being an adaptation of an existing technology for expansion.

So I'm not going to lay out that we're going to be having X number of new things every couple of years, but suffice it to say, we're looking at not only existing markets but expanding markets with our technology, and there's going to be some other announcements coming, but we do want to keep the cards close to the vest, let's say.

Okay, fair enough.

Great job, guys.

Thanks a lot.

Thank you.

Appreciate it.

And our final question comes from the line of [Chris Zeff with Saks Capital].

Please proceed.

Hi, guys.

Good quarter.

Thank you, Chris.

I have two questions.

First, internationally, when I look out over the next year or so or even one to two years, what should I think of in terms of kind of the natural market opportunity for international revenues as a percentage of the overall business?

Well, right now, it's a 9.5%.

Obviously, we'd like to see that grow.

We're about 23%, 25% in domestic markets.

So we're still obviously focused here.

We have a huge opportunity.

We've only got about 20%, I believe it was, of our existing customers at full deployment.

So within our existing group, we have a lot.

We have a domestic market, and we don't want to take our eye off that ball.

And obviously we'd like to see our international continue to grow in terms of percentage of revenue, but those come in much bulkier orders because domestically, I've got 18,000 chiefs, which means 18,000 decision makers, where when you go over seas -- and we talked about this before -- it's a Ministry-level decision.

So once they decide that, it's been very thoroughly tested.

U.K. looked at this for three years, France for two.

Then they kind of dip their toe in the water, but the opportunities within those countries are huge.

It's just trying to figure out when and how those are going to come to fruition is the real challenge.

It'd be like trying to figure out when our own government at that type of a level is going to make a decision.

So I don't want to -- and we haven't given any guidance on that area, but I can tell you there is an emphasis on international.

We obviously expect to see that to continue to grow, especially when you see the results that we're seeing.

I mentioned over 350 uses in the U.K..

The first four weeks in New Zealand, they had 11 uses with saving people from getting injured, and they get a lot of scrutiny right out of the gate, so they proceed very, very cautiously.

And we just need to see after those initial deployments and the initial response and kind of subdue people's fears that is out of control, let's say, within law enforcement.

We haven't gotten to that level yet, so I really don't have a feel for how quickly it's going to roll out other than it is going to roll forward and with new technologies coming out, we're keeping our eye focused on domestics, but then we have private security.

We have military.

We have consumers that are still out there.

So international's going to be a big piece of that, but we really don't have a feel yet for what the growth could be in future years.

Okay, great.

And then final question is on T-RAD.

I realize it's not an '07 revenue opportunity, but roughly how big is the opportunity longer term, whether it's -- I don't know what the average selling price would be, just any metric you could give us.

I wish I could give you a metric.

We went out there with that product concept to get a feel from the market place on what they wanted to see.

We haven't done any pricing on it.

We didn't discuss any pricing.

We don't even have cost yet.

We've literally mocked up a couple of units, presented the idea with a very conceptual mockup and scenario-based display.

So we don't have any pricing or any concept of how big that could be because it's something that's not only military.

You could be looking at embassy protection.

It's a scalable force option.

It could certainly play a role along the borders as they're discussing putting up these fences, perimeter protection around, let's say, airports or things like that.

So there's a number of different areas, not only military, that it could go into that at this point, we're trying to just make sure that what we're looking at from a technology perspective is matching a need that's out there, not only with the military, but with the other federal agencies that have looked at this.

I can tell you there's international interest as well.

We've gotten some of the overseas countries that saw the press on it ask for more information.

So -- sorry we're kind of being vague on this, but it is something that's an '08 type of timeframe, and we just don't have any size market estimates at this point.

Okay, great.

Great quarter, guys.

Thanks, Chris.

Appreciate it.

I'd like to turn the call over to Mr. Tom Smith for any closing remarks.

Please proceed.

I'd like to thank everybody again for their third quarter conference call attendance, and obviously we're going drive forward into the fourth quarter, and we will talk to you -- if not before hand, but sometime in early 2007 with our final results from 2006.

Thanks, and everybody have a great day.

Take care.

Thank you for your participation in today's conference.

This concludes your presentation.

You may now disconnect.

And have a great day.