Axon Enterprise Inc (AXON) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2006 TASER International Incorporated earnings conference call. My name is Tawanda, and I will be your coordinator today. [OPERATOR INSTRUCTIONS]

I would now like to turn the call over to Tom Smith, Chairman. Please proceed, sir.

Thank you, and good morning. We'd like to welcome everyone to our fourth quarter and end of 2006 conference call wrap up. We're obviously very excited about a record quarter, the best in our history, as well as a record year. But before we can get into detail chatting about that, Doug has got some riveting comments for us. 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 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 market; successful penetration in the law enforcement market; expansion of product sales for the private security, military consumer self-defense markets; growth expectations for 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 effected by the forward-looking statements.

Such factors include, but are not limited to: Market acceptance of our products; establishment and expansion of our direct and indirect distribution channels; attracting and retaining the endorsement of key opinion leaders in the law enforcement communities; the level of product technology and price competition for our products; the degree and rate of growth of the markets at which we compete and the accompanying demand for our products; potential delays in the international and domestic orders; implementation and risk of manufacturing automation; risks associated with rapid technological change; execution and implementation risk of new technology; new product introduction of risks; ramping manufacturing production to meet demand; litigation resulting from alleged product-related injuries and deaths; immediate 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 and limited source suppliers; fluctuations in component pricing; risks of government investigations and regulations; TASER product tests and reports; dependence upon key employees; employee retention risks; and other factors detailed in the Company's filings with Securities and Exchange Commission.

I'd now like to turn the call back to Rick Smith, our CEO.

Thank you, Doug. Again as Tom mentioned, we had a record year. Just a little bit more than we had in 2004, but after 2005 I can't say how proud I am of the employees here who really stuck it out and overcome the challenges and got this Company back on track. 42% in year-over-year revenue growth, $19.3 million in revenue in the fourth quarter and just up 20% operating income at $3.8 million. Also, as you all know, it's critically important for us how we're performing in the legal arena, and Doug and his team turned in seven more product liabilities suits dismissed for a total of 30, including a couple real big ones.

First was the Alvarado trial. As you all know, that was our first jury trial of in-custody death in central Los Angeles, which is notoriously a difficult jury pool area and we got a unanimous jury verdict in our favor. Together with LAPD, we developed a good partnership with them in defending that case and we're obviously very happy with the outcome. Also, the [Hassey] case, for those of you who remember, the Hassey case involved a man in Chicago. It was the first time that a medical examiner had made a conclusion that the taser was the primary cause of death, although all the experts we had look at disagreed viamently with that because Mr. Hassey had a lethal level of methamphetamine in his blood and the time coarse of events certainly did not support any electrical-related issues. We're very glad to see that we've now won that case at summary judgment. So Doug and his legal team just continue to do a fantastic job. I'll foreshadow a little bit, as well. He's also doing a great job of keeping costs under control [inaudible] improvement in that area by bringing a lot of work in house

We also saw continued growth internationally with another 1.6 million in TASER deployments in France, $1.6 million, not units yet. But we certainly remain very optimistic about the contribution in the international markets, although I think as Tom will point out, France is going to be a little bit slow in the next few quarters until they get through their national election. We also, on the political front, had some significant developments with LULAC, which is the League of United Latin American Citizens, and the National League of Cities both passing resolutions that were supportive of the work that we're doing here at TASER International. And I think both of those, especially the LULAC one is critical to point out here for a second, because 12-months prior they were actually looking at a resolution recommending a ban against the produce. And again, once you take the emotion out and look at the facts on how much of a difference our product is making in these communities, they've obviously reversed that position. It was very exciting for us to work with that organization and get that turned around.

During the quarter we also announced the TASER Remote Area Denial or TRAD concept. That's a new concept for deploying our technologies for area denial that we believe could open a new market space for us in military and area denial as early as 2008. Sort of indicative of the work we've been doing in R&D, we generated 21 additional U.S. patent applications and 26 international patent applications in 2006, bringing our IP portfolios to 25 issued patents and another 80 pending.

One other thing to talk about, as we look to the future, we at TASER International really pride ourselves on being leaders, not following into existing market spaces. For example, with the X26 or with the M26, we created a whole new area in law enforcement, a whole new market space and obviously, that's done very well for the Company, leading to significant growth since 2000. Similarly with TASER CAM we've stretched out in new space, and you'll see the same thing with our new XRAP with the TRAD technology and with the C2. None of these products that are going into existing or known markets, and when you're charting unchartered waters, as our analysts I'm sure are aware, makes it very difficult to predict the future, because you just don't know until you get out there and you get out into the market space. But it's also very exciting, because like the X26, any one of these products has incredible potential to be very big or it may be slower than expected.

With the TASER CAM, for example, we are seeing a longer adoption time than we originally anticipated, so sales last year of the TASER CAM were less than expected. But I'd also like to point out that it's still a great return on investment for our development dollars. So even on a conservative estimate with the TASER CAM, these new product developments are very good investments of our dollars and, of course, we're hopeful with C2 and of these other ones, we'll see faster growth like we did with the X26. We do believe long-term, by the way, the TASER CAM is being well received in the market. It's just requiring new procedural issues at police departments. It's a whole new issue they've never dealt with before and, therefore, it takes some time for them to get their hands around it, do field tests and develop policies. Again, this year you'll see a couple of new markets coming online with the C2 in the consumer's space and the XRAP going into the wireless projectiles, and needless to say we're very excited about the opportunity those represent.

With that I'm going to turn over to Dan to talk a little more about some of the specific financial results.

Okay, thanks. On the income statement first let's look at the fourth quarter. Sales for the quarter were $19.3 million, which is up 53% from the prior year. Our gross margins for the quarter were $12.2 million or 63.3 % of sales. This is down from the prior year due to increased material costs, sales mix which included less of the high-margin X26 product during the quarter versus the prior year, and then we had some costs associated with building C2 products for the CES show in January. We did get a lot more leverage out of the indirect expenses in the year because of the 53% increase in sales over the prior year.

SG&A expenses were $7.7 million for the quarter versus $7.2 million in the prior year. Variances were really driven by higher salaries and benefits, the stock-compensation charges resulting from the implementation of 123(R) for the Company of $114,000 for the quarter, and then higher travel and meal costs of $392,000 for the quarter, which is really driven by two large shows we had in fourth the quarter. We had the International Chiefs of Police show in Boston and the National League of Cities in Reno during the fourth quarter and both of those resulted in heavy travel expenses for the Company and its employees. These unfavorable variances were partially offset by lower outside legal fees of $209,000 for the quarter, lower professional fees of $115,000 and lower IR costs of $136,000 for the quarter. Research and development expenses were $705,000 for the quarter, an increase $235,000 over the prior year. Again, this is driven mostly by salaries, stock-compensation charges, and higher supplies. Again, the Company plans to continue to ramp up its R&D spending in 2007.

Income from operations of $3.8 million or 19.7% of sales is up 877% in the prior year. I think this should prove to be more impressive if you consider the fact that this year's results do include the 123(R) charges we did not have in the 2005 numbers. Interest income for the quarter was $599,000. This is up $223,000 from the prior year on higher investment balances and better yielding investments. Pretax for the quarter is $4.4 million, with net income of $2.3 million or $0.04 a share on both the basic and diluted basis. Going on to the total year sales -- or total year results, we had sales of $67.7 million, which as Tom and Rick indicated, for the highest one-year total in the Company's history. This is up $20 million or 42% from the prior year. Gross margins of $43.2 million or 63.8% of sales are up 1.7% from the prior year. This is due to getting more leverage out of our indirect costs resulting from the higher sales levels.

SG&A expenses were $29.7 million for the year versus $26.5 million last year. The variances were driven by higher salaries and benefits of $1.1 million, stock-compensation charges of $800,000, higher travel and meals expenses of $333,000, and these were offset by lower investor relations expenses of $362,000 versus the prior year. R&D expenses were $2.7 million for the year which is an increase of $1.1 million over the prior year, again driven by higher salaries of $591,000, stock compensation of almost $200,000 and then higher supplies and consulting costs.

Income from operations is a reported loss of $6.8 million, but this does include the $17.65 million shareholder settlement expenses which were recorded in the second quarter. You can do the math to see this one -- if this one-time expense were excluded we'd have filed a double-digit operating income for the year despite additional $1.1 million of stock compensation due to the implementation of 123(R). Interest income of $1.9 million for the year is up $649,000 from the prior year at higher investment balances and better yielding investments. Again, the net loss for the year is $4 million, driven by the one-time expense for the shareholder's settlement, for a loss of $0.07 per share on both the basic and diluted basis.

Moving on to the balance sheet, on the asset side of the balance sheet we did finish the year with $47.8 million of cash and investments.. This is an increase of $3.9 million over the prior year despite making the first $7.9 million cash payment on a shareholder settlement in the fourth quarter and buying back $2.2 million worth of stock during the year. Accounts receivable for the quarter of $10.1 million, this is up sharply due to the higher sales level from the fourth quarter of 2006 versus fourth quarter of 2005. Inventory of $9.3 million is actually down $847,000 from the prior year despite the 42% increase in sales, which is great news.

Prepaids and other assets of $2.2 million are down $634,000 due the receipt of the O&R grant revenue [which we got paid at the end of last year]. The current deferred tax asset is up sharply, but if you look down the balance sheet, you'll see it's a reclass of the long-term deferred tax asset below. Current assets ended the year of $56.1 million, up almost $14 million from the prior year. Property, plant and equipment finished the year at $20.8 million. It's roughly even with the prior year number, as the Company's investment in new property and equipment is roughly offset with its depreciation expense taken for the year. And total asset for the year finished at $119.8 million. It's up $7.5 million from the prior year's total of $112.2 million.

On the liability side of the balance sheet, accounts payable and accrued liabilities at $6.8 million is up $500,000 from the prior year due to more purchasing activity driven by some of the new product developments and increased sales levels. Current deferred revenues is up -- of $1 million is up sharply from the prior year due to sales more extended warranties in 2006. Deferred insurance settlement proceeds of $509,000 are up slightly from the prior year and litigation settlement liability as $9.7 million represents the final payment in the shareholder class action [inaudible] lawsuit. The Company intends to fund this final payment of $8 million on the shareholders suit in cash. We do not want to dilute our shareholders with a payment of stock when we have such a strong cash and investment balance.. Current liabilities are $18.3 million. Deferred revenue, net of the current provision, increased by over $1.1 million to $2 million during the year on strong sales and extended warranties during 2006. Total liabilities of $20.5 million and the Company finished the year with $99.2 million in shareholders equity.

On the cash flow -- as we move on to selecting information of cash flows, the Company had operating cash flow of $7.5 million for the year compared to $1.1 million in the prior year. Net cash used in investing activities was $3.6 million as the Company invested $1.8 million in new property and equipment and invested $1.5 million in investments. The Company used $1.5 million to finance these activities, mostly driven by the $2.2 million stock repurchase during the quarter and stock buy back approved by our board. And the Company ended the year with $18.8 million in cash, which is up $2.4 million from the prior year, with total cash and investments of $47.8 million, up $3.9 million for the year.

And with that I'll pass it off to Kathy Hanrahan, our President.

Good morning. 2006 was a good year in operations. When we began the year, we targeted improvements in the area of inventory control, gross margins and operating efficiencies. During the 12 months ended December 31, 2006, we achieved a gross margin improvement of 1.7% of sales compared to 2005, inventory reduction of approximately $850,000, with the addition of new inventory SKUs and piece parts for new products. We completed full implementation of a TASER CAM product, a new product offering in 2006. Direct labor efficiencies improved through increase yields and Lean managing principles. And scraps, both as a percentage of sales and a percentage of material converted to product declined. Although gross margins improved year over year, we did not realize the full benefit of the work performed. This was due largely to increased costs of direct materials, indirect mater -- or manufacturing costs associated with new product development, and a change in our overall sales mix of products and services.

In 2006, we experienced raw material increases ranges from 5% on petroleum-based plastic products to as much as 10% on key electronic assemblies. To reduce the impact of these increases going forward, we adjusted end-user pricing where appropriate and our materials department is working to negotiate longer term purchase agreements with key suppliers to drive unit costs down. Shipping and import fees also increased due to rising fuel costs. Indirect labor and supplies increased as we prepared the manufacturing floor for the entry of the TASER CAM, the C2 and preliminary XRAP production. And we saw increased cost associated with our training program as we introduced a new curriculum directed towards risk managers, chiefs of police and key agency decision makers.

Results for the fourth quarter were similarly impacted. Gross margins for the fourth quarter declined from the same period in 2005 and from the third quarter of this year. This was a combination of two factors; reduced margins associated with our sales mix and training program and increased costs associated with manufacturing, both direct and indirect. The C2 launch was also a key manufacturing priority in the fourth quarter. Although no revenue was generated during the period, approximately $100,000 or 0.5% of sales was expensed in setting up the new production lines and assisting R&D with prototype and marketing builds. During the last quarter we a;so expensed labor, affecting our overall labor efficiencies, as the line operators began training and working with the C2 cartridge and the C2 handle prototype. And at the end of the fourth quarter we wrote off approximately $60,000 in raw materials, which became obsolete due to process improvements. We made a lot of progress during 2006 and we're looking forward to great things ahead.

As discussed in the last conference call, we hired a new VP of manufacturing to assume my role as the lead for manufacturing operations. Mr. [Polo] comes to us with experience developing and implementing world-class manufacturing systems in company's whose products were integral to General Motors and who ranged in revenue for $50 million to $160 million on an annual basis. We're excited to add his expertise to our team and we look forward to his leadership in the automation of our current processes. He and a team of engineers and technicians have already begun our first project, which we hope to have fully implemented in 2008. Preliminary indications are that this fully-integrated line once complete will assemble multiple cartridges per minute utilizing a fraction of the direct labor expense now required for the same production. We're also excited about the response for the new C2 product line and look forward to moving this product family into full-scale production in the coming weeks.

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 on our pending litigation. In the securities class action litigation, the court entered an order on December 14, 2006, which gave preliminary approval of the stipulation of settlement, provide for notice of the settlement, set March 5, 2007 as a deadline for submissions to objections and exclusions from the settlement, and set a final settlement hearing date of March 12, 2007 and established April 16, 2007 as a claim submission deadline. We've got good news to report on the product liability litigation front. The rate of litigation is decreasing. For the first time we have had fewer lawsuits filed in the fourth quarter. We had seven lawsuits filed in fourth quarter, which is a marked reduction from the 13 lawsuits that were filed in the third quarter. It's important to note that for the first time we have not had any training injury lawsuits filed and we hope this is a trend going forward. In addition, we had eight lawsuits dismissed in fourth quarter. Notable among those was the jury defense verdict we received in the Alvarado lawsuit that Rick mentioned.

I'd like to point out that we are so committed to winning these lawsuits that we actually settled with our insurance company in this litigation rather than allow them an opportunity to offer a settlement to the plaintiffs, and it paid off for us. We ended up with a unanimous jury verdict, which validated our strategy in this case. It's also important to note that we are aware of at least four lawsuits that were not filed against TASER as a result of our aggressive defense of this litigation. This is the first time we've actually had a net decrease in pending litigation and this is, hopefully, the beginning of a trend going forward. We've had a total of 32 product liability lawsuits dismissed through judgment entered for TASER. We have not lost any product liability lawsuit. While we are absolutely committed to winning and we don't anticipate losing any of these lawsuits, our strategy is not dependent upon winning every trial, and we have adequate insurance coverage to protect the Company against possible financial loss in the future.

The strongest factor in our favor in defending this litigation is the fact the plaintiffs have not been able to prove the TASER device was defective or was the cause of any injury or death. 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 cause of relationship in any death or suspect injury. Our strategy is hire the best world-class medical and scientific experts in all relevant fields. We stand behind the exception safety record of the TASER product and we plan to take all cases through trial, if necessary. We aggressively defend these cases by filing motions for dismissal and summary judgment as appropriate and we seek sanctions for filing frivolous litigation as the cause arises. It is our policy not to settle in a suspect injury or wrongful death case. Our objective is to send such a strong message to our adversaries by overwhelming them with the strength of our defense, our resolve not to settle, that they will be deterred from filing any litigation against TASER in the future.

While we're making adjustment and winning these lawsuits, we are also beginning to see a reduction in outside legal fees, as we implement our strategy of utilizing our in-house legal team to reduce outside legal services. In fourth quarter, our outside legal fees were $850,000, which was down significantly from $1.090 million in third quarter. I'd also like to point out that from our customers perspective, product liability lawsuits are not a risk to law enforcement agencies. Law enforcement agencies are not liable for product liability litigation. Our customers battled excessive use of force litigation and a TASER device has played a very important role in reducing excessive use of force litigation against law enforcement agencies. Statistics from our customer show a marked decrease in excessive use of force claims when the TASER devices have been deployed. The courts have routinely held that the use of a TASER device does not constitute excessive use of force. Our customers place a very high value on the TASER device in reducing their excessive use of force litigation.

With respect to other litigation, I'm pleased to report that we reached a satisfactory settlement in the Stinger unfair advertising lawsuit. In first quarter, we filed another lawsuit against Stinger for patent infringement. I'd like to point out that we've got a very strong patent portfolio, with 25 issued patents and 80 patents pending. These patents are very broad, they're very basic bedrock patents to the electronic weapon field, and we are absolutely committed to enforcing our patents against any infringer. We have in-house litigation and patent attorney expertise to handle any of these lawsuits with very little outside expense. I'd also like to point out that recently there've been media reports regarding previous lawsuits we filed against ALS and EDT for patent infringement suits. And I'd like to point out that after we filed that litigation, we received assurance from both these companies that they were not going to be bringing these products to market, and we believe that these lawsuits are very instrumental in protecting our intellectual property.

With respect to the lawsuit we filed against our former patent attorney, Mr. Watkins, we did receive some rejudgment in fourth quarter, where the court held that there was, in fact, a breach of fiduciary duty. It's also important to note that the supreme court commission recommended disbarment of Mr. Watkins as a result of his actions in this matter. We have a hearing coming up in February 28th on our motion for equitable assignment of any of his claimed patent rights, and we intend to pursue this action fully to completion.

We also filed a lawsuit against Bestex for patent infringement. The court granted both parties motions for summary judgment and this case has been dismissed. I would like to point out that before we filed this lawsuit, we sent a letter to Bestex demanding that they cease and desist, asking them to contact us regarding their level of inventory going forward to discuss this matter. We received absolutely no response. We were forced to file this litigation. In the course of discovery, it turned out that they were selling inventory in 2006 that was actually purchased back in 2001 while they still had a license. It was also disclosed to us that they only had 11 units left in inventory. We determined it was not worthwhile to continue this lawsuit for 11 units, and we felt we had mission accomplished at that point. We also have two pending lawsuits against medical examiners, one in Indiana and one in Ohio, for errors made in the autopsy, and we are going to continue those to completion, as well.

I'd now like to turn the call back to Tom Smith, our Chairman.

Thank you, Doug. I'm going to talk about the sales accomplishments during the fourth quarter, and let's start with agencies. During the quarter we added 709 new agencies, bringing the total to 10,567 that are either testing or deploying our products. Out of those customers, we added 313 of our existing customers to full deployment, bringing the level now to 3,346 agencies with full deployment, meaning every patrol officer is carrying a TASER. That's roughly 31.5% of our existing customers, so again there's still very good growth opportunities, both in customers not carrying our products as well as existing customers that are continuing to expand their deployment. During the quarter, we had 27.5% of sales in the international markets space, which if you look at the year-to-date basis on international that represents 13.7% or roughly $9.3 million of our revenue during 2006 occurring overseas.

In terms of unit sales, during the fourth quarter we sold 15,696 of our X26 units. That's down from the previous quarter with 17,196, but what we did see is an increase on cartridge unit sales, which went from 232,068 in the third quarter up to 273,835. That did change our ratio of cartridges during the quarter from the third quarter, where we had 13:1 cartridges, the fourth quarter saw roughly 17:1. And again, we do expect to see that continue to increase as we go forward, as there has been more existing units out there and officers continue to train and use on the cartridges with the existing as well as new unit purchases.

I'll also touch on the M26, our other product line. The sales went up from 1,383 during the third quarter to 1,719 during the fourth quarter, as that product line is still being used by agencies in the marketplace today. We also talked about the TASER CAM and why sales were lower than expected. We did still see units going out there during the quarter. We sold 3,118 and that's up from the previous quarter. And I think very significantly, earlier this year we saw a fantastic video from the TASER CAM that was put out, I believe, out of Kansas City demonstrating how the officers were facing a situation where when they opened the door with a suspect, they were facing a mental suspect that had a very, very large butcher knife. Gave him commands to drop the knife and he didn't do so, and again demonstrated the use of the TASER. Capturing the scene as it's occurring, again allowing people to see the successful use of the product. And I think one of the things tha's contributed to the adoption of this is as the agencies looking at policy and implementation of the accountability of the TASER CAM -- Rick touched on it earlier -- it's been a very good return on investment for us. But it is a product area with video that we've not gotten into before and we are still seeing continued growth in that area.

During the quarter we also attended our largest law enforcement trade show. Dan touched earlier the International Association of Chiefs of Police which was held in Boston, Massachusetts in October. Again, there was a big emphasis put on the TASER CAM product during that trade show and very good reception again, with getting a lot of units out for test and evaluation and those are continuing to go forward. We also had and continue our chief's course programs, which is really designed towards the administrative and executive staff, as well as attorneys for the different cities. During the quarter we held them in both Toronto and Oakland, very well attended courses, as we continue to discuss risk mitigation and other issues that are usually interested at the chief's level.

Earlier I talked about the growth of our international markets. Obviously with over 20% of our international is coming out of the fourth quarter in France as well as other countries, we're putting a refocus on our international growth and markets and we're actually in the process right now of recruiting for a vice president of international sales. That recruiting process is being head by Kathy. We deem that to be an very, very key strategic hire for us going forward. Joe Polo is a fantastic addition to the team to run the internal operations area for us. We're very excited about him and and we're very excited about the opportunity to get in a vice president of international, as international continues to be a key part of our growth as we go into 2007. And I think it is key to note that we crossed over the 250,000 point in terms of total number of TASERS carried and used by law enforcement in over 40 countries around the world. So as RIck said, our R&D teams are very busy. We have introduced the C2 electronic TASER personal protection system at the CES and SHOT shows in January. That product will be coming out during the second quarter. There will be no revenue from that product category during the first quarter, and we'll spend more time on our next conference call in about 60 days talking specifically about that product.

We also will not be giving any guidance for the year 2007, just in case there were questions on that. And again, we really like to focus on the fact that I've been asked as I've been traveling around, people were trying to figure out was 2004 or 2005 the year of the anomaly, and I think we've demonstrated that basically 2005 was a year taken away from us and we're back on track now. We've come out with our best quarter in our history in the fourth quarter, our best year in 2006 in our history, and it's onward and upward as we're now looking to expand our technology that's about protecting life and really making a difference in the world and in our community and expanding that into other markets that Rick and the design team have got some really exciting products coming out, with the C2 being the one coming out the closest.

So with that, obviously we're very excited about the year and we'd like to ask our host, Tawanda, to go ahead and open this call to any questions that people may have and also to stay tuned that in April on the third week, we'll be doing our first quarter conference call to discuss the first quarter 2007.

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Mr. Eric Wold with Merriman Curhan Ford. Please proceed

Good morning, everybody. Couple questions on the C2 launch, not looking for guidance, but can you give us just some overall thoughts now that you've had a couple shows and spoken to distributors, what the initial read looks like from distributors on potentially how many doors this could get into in the second half the year? And then also, obviously you've been taking preorders on your website for consumers. Do you have a sense on potentially even how that looks?

We're not going to give out any numbers in terms of the orders that have been received from the website, but from the distribution side, the response has been fantastic. Obviously we got a lot of coverage at the shows, introduced a product that's been asked for by the consumers. That product was really designed for the consumer, where over the last several years, even though we've been selling to consumers since 1994, our focus since 2000 has been law enforcement and taking the law enforcement product and kind of rolling it over to the consumer.. This one was designed from the ground up for the consumer marketplace, and I think we really did meet the needs of the requests that have been out there for that. And I can tell you we've had a lot of large box retailers that have never shown an interest in the past taking an interest and taking a look at it. But we have not done anything in terms of putting out numbers, putting out any projections at this point, because,again, we used the show to wet their appetite and get into those discussions points, and at this point, that's where we're at is really talking to these different distributors. This is Rick. Let me add a little bit of color there. I think what we've seen so far is really for the first time I would say in our history, we have a consumer product where even at CES, individuals walked right up and whipped out their credit cards to buy, which is very encouraging. But I'd also temper that with the challenge now is going to be establishing distribution, finding where this fits in the distribution chain. Now while we've started some talks with the big box retailers, by no means are those are concluded or conclusive yet, as you can imagine, because TASER is so high profile, there is trepidation, certainly from certain types of retailers about whether or not this is a fit.

I think it's pretty clearly a good fit in the -- for the major firearm retailers. I would say we're going to have no problem getting into that channel. But for us to really take advantage of the C2s potential, we're going have to mainstream it into more mainstream distribution, and I don't want to tell you that that's done yet. There's still a lot of work to be done as we move into the second quarter. We're seeing some encouraging signs though. [Again, one of the reasons we don't want to give out] a lot numbers at this point is -- I think the best characterization is giving you sales into distribution is not going to be particularly helpful until we actually know the consumer's buying it. So I think the best characterization like we said before is we're in uncharted waters with great opportunity, but let's be cautious and not get carried away on the front end until we really prove it out and the product's moving through distribution.

Okay, fair enough. One more follow-up question. If I look back to the press release you guys put out at the end of December, talking about the $2.3 million in international orders, and you guys said there'd be anticipation of more orders in the fourth quarter, can you give a sense of what might have not hit, maybe not naming specific names, but what might have not hit in the fourth quarter, if that has, in fact, rolled in the first half of this year and of those what you thought might have hit in the fourth quarter, you have they already been hitting so far in this year or is the expectation there?

Well, yes, obviously for competitive reasons, I don't want to give those out there to give them any direction, but one that is out there that a lot of people have been following and looking at is obviously the LAPD. That's one is one that we continue to work on with them. We've heard the police commission approval there, but there's still still a long way to go. It still has to go through committees, city councils, budget years, and as you know, the cities are strapped with cash with that. So the timing of when that's going to occur, we really don't know, but that's just one example that obviously has been out there. And there's other ones in a similar position that are a large customer for us that we continue to work with, so we're -- again, it's a business that's really tied back to government. But once the police makes the decision, you still have to go back to through city council, through funding, through public safety, subcommittees and trying to figure out that process and exactly when that's going to occur is a challenge. We continue to work on that and we just want to makes sure people understand that we're focused on them, but the anticipation that they were going to come right away is something we're not going to put out for competitive reasons or try to guess the timing of a vote by government to approve the process. Yes, one thing -- this is Rick again, chiming in. In the fourth quarter, one thing you didn't see a lot from us were press releases on individual orders, and as I went back, frankly, preparing for this conference call, I sat with Dan and we talked about that and it's good and bad news. The good news is we just got lots of small orders in the quarter that in aggregate took us to a record. Some of the bigger ones we were working slipped out on us and we didn't get them in the fourth quarter, and frankly, you'd have seen the press release if we'd gotten them already in the first quarter. So, we're pretty confident that these, particularly LAPD and some of the other big ones we're working on, they were through the primary selection hurdles, and now it's the mechanics of getting the financing and purchase across the finish line.

I think also, when we put the press release out, we wanted to be careful that -- and send a message to our shareholders that at that point, based on what we were seeing in the business, we didn't want people to make an expectation that was in the incremental to expectations at the current point in time. As you know, with our business, we don't do guidance because it's so hard to predict. With that regulation FB, we've got to be very careful in how we set the Street's expectations and I think the language there did exactly what it was intended to do. Hey, these are some big orders, but let's not get carried away and have people expect that it's on top of current expectations. Yes, I think again, with the -- with everything that we've gone through in 2005, it really shows that the bread and butter, the smaller agencies out there came back in 2006. They put their programs back in place. And then in another conversation we were having with Dan earlier is during the year of 2006, we only had the mid-70s number of orders over $100,000. So it's really, the bread and butter agencies, the mainstream customers that are out there that we didn't get in 2005, came back in 2006, that we didn't have a year reliant upon two or three large orders that really carried the day there.

And the international unit's been running and growing for us. It went from 10% to 20% during the quarter for an average of 13% for the year. We talked about international for a long time. It's a very long curve for adoption, because you have one decision maker for the entire country. The good news is, it continues to progress obviously I think with France. We'er going to -- Rick mentioned during the call, we're going to see slow down there, because they're going into a presidential election that happens in May that I don't think you're going to want to see anybody want to really rock the boat with huge deployment into a presidential election. So we'll see some activity there in the latter half of the year, but those -- those political situations do have an affect on our business. But we do see continued growth internationally. We're going to be hiring a vice president of international, because it is a key to our future, and we want somebody dedicated at the highest level of the Company for that particular market space.

Perfect. Thanks, guys.

Thanks, Erik.

Your next question comes from the line of Mr. Matthew McKay of Jefferies & Co. Please proceed.

Good morning guys.

Morning.

Just to sort of -- you're focused on the U.S. law enforcement first of all. Do you expect -- first of all the X26, do you think that growth rate can accelerate a little in '07 or are we more at a stable growth rate? And then also with the TASER CAM, I'm assuming you probably expect to see a little bit of acceleration in the growth rate there, given that you didn't get that much in '06?

I would just say on X26, you're going to see a stable growth rate and on the TASER CAM, I so think we'll expect to see that continue to accelerate, especially as more videos come out like the one out of Kansas City. It's on our website if you haven't had a chance to see it, but that is just the prime case right there for why you want to have the video ability. It's showing what the device saw, how it was used, the guy with a butcher knife, not a whole lot of other options, very confined space. So I do think you're going to continue to see that grow with agencies kind of coming to grips with how the policy implementation's going to be, so we do expect to see TASER CAM continue for us. And as Rick said, it's been a good return on investment for us.

Yes.

I'll just add real quick just on the C2 issue. It's one of the reasons that right now we're not real comfortable giving out even some of these pre-existing numbers, per launch. If you recall, before the TASER CAM launch, all our expectations based on market feedback was a faster ramp than we saw, and at the end of the day it took a little longer. So again, we're just trying to make sure expectations don't get ahead of reality on the C2.

Yes, yes. On international law enforcement, can you just kind of -- I don't know how many countries it is right now, but kind of give a list of the countries that are at some stage of either piloting or rolling out a TASER program?

Well, we have 40 countries out there at various stages of it, and I'd say all of them, really, other than the UK and France, are at the pilot stage that we've talked about. There's kind of thought leaders in each region of the world in the past, and I think they're continuing to evaluate and move forward with the programs. And as you see continued success and adoption in the larger countries being UK, France, Australia, South Korea, those types of locations, I think you're going to continue to see the other countries in those regions follow their leadership.

And an example of that is New Zealand. New Zealand is much closer to UK law. They're down there by Australia. Australia was a year or two ahead of them. and in September of this past year, they finally came on board and started a program and have had tremendous success in the use of the TASER. They've averted several shootings that could have gone very bad for them, and the police department's done a very good job of educating. And I think that really came about because of the success that they were having in Australia, because of the success in the United Kingdom that you're going to continue to see other countries come on board and drive a program. But some place like New Zealand, they're going to be, I believe, in a trial period with the number of TASERS that they have for at least a year. I'd like to chime in as well. This is Rick again. Again, it's not that we have a great in fascination with secrecy, but we have seen in the past when we've announced or we've publicly made public where we have pilot programs on-going, there are certain public interest -- or certain political activist groups that have made TASER a fund-raising cause that have got in and they've [inaudible] horrors on us and we've just found that strategically it's not in our best interest to give them a hunting list to go try and cause political trouble or disrupt the deployment process. In fact, in New Zealand they even created an organization with our name in it that was opposed to the use of the product with [inaudible] as a member. So as Rick said, we're really trying to make sure that we want these countries to advance and go on the merits of the program, and not have an emotional or political response because of something they may have read that's not true in a newspaper.

Okay, fair enough. And turning over to the military, is there anything brewing in the military that could come out over the next year or anything you can talk about?

Well, I think just the TRAD. We introduced it at the AUFA trade show last fall. There continues to be a lot of interest in that, but again with the military there's a lot of red tape, so to really predict anything there, I think we'd be putting the dart before the horse.. I'd say our new advisory board has really been helpful in getting us to understand the processes of getting things approved and our long-term strategic direction. The demand from the user level is certainly -- is great. Everybody we're showing the TASER capability to in terms of men in the field,special forces guys who've gone through training. In fact, the other day I was just reviewing a bunch of feedback forms from their training and extraordinarily high interest. It's just we've not been able to necessarily overcome the [tech] classification issues and some bureaucracy. I wish we could give you a better read on it, but at this point, we just don't know when we'd be able to get through that, and that's what it's going to take to get significant orders will be to get through the tech classification and the procurement process.

Okay. And then it's on some of the execution on the consumer market. Are you going to announce when you set up new distributors, maybe some big box distributors when you actually sign a contract with them?

I don't think we'll be doing it exactly when we do a contract with them per se. I think it's going to be more around a event when we get closer to the hard launch date in the second quarter. Obviously we need to do a good job of making people aware of where they need to go to see this and get this. It is a very visual product and -- but I don't think it behooves us right now to talk or do press releases on contracts until we really see the revenue start coming in the second quarter and actually are shipping products and doing promotions with those customers so that they know where to go from a retailer perspective to purchase the product.

Okay.

When Tom says hard lines, what we are looking at doing, we've not yet selected a firm date for -- just firming up a couple issues as far as production and design finalization before we do, but once we -- once we've got our bead on it, we'll announce a hard launch date with the concept being that we'd like to build up media interest and awareness and then make those announcements at a time when that publicity can actually translate into consumer action. So we'll probably get a little closer to the launch date so it's driving people to the stores rather than getting some media attention early on [inaudible] we can't turn that attention to action. Similarly that they do by announcing a DVD movie coming to a store available at a date in the future, we'll be doing that as we get closer to launch date.

Okay, and are you -- you say second quarter in the press release, but is it sort of April or are we looking more June at this point?

[LAUGHTER] It's somewhere right in between. We're looking at May, but there are some things that could slide it out to June. I wouldn't see it moving forward to April, just because we're got to get the parts and things moving through the system, so best estimates right now are May.

Okay. And so in May you'd expect to have a lot of the distribution channels set up outside of, for example, the firearm distributors but having some big box distributors in there as well?

We're working on it. I'm not sure we'll get -- most of those folks [inaudible] their logistics training probably wouldn't allow them to get in board by May but certainly by summer, and I think we'll have -- we're hopeful to have some partners of note by May. We certainly believe we'll have significant distribution in the firearms industry by May, but not sure that we're going to be able to get the huge big box guys moving that fast. And our intent is to have on that hard launch date literally products on the shelf. So that's, I think, when Rick's talking about getting these guys up to speed to work through the chains and the logistics. I think some of the smaller tier two, tier three big [inaudible] box retailers will be part of that, but to have a tier one participate that quickly is going to be a challenge, but they're -- and we still have a way to go with discussions --. It'll be the second half the year. We've had the chicken and the egg discussions here about do we hold the launch until we get a major retail partner or not, and we've come to the conclusion we don't think that's the right strategy. We think the excitement of the launch will help drive the decision making process of getting some of the bigger retailers online. We've got =-- frankly in the firearms industry alone, we think we've got a pretty good [inaudible], sufficient distribution to get the launch rolling and then hopefully build steam and see big box retail in the second half of the year.

Okay, and on the marketing, is it going to be TV, print, radio, what's the strategy on the marketing side?

Primarily print at this point, although we're also looking at doing some direct response television. That's by no means been decided yet. We did do a 30-minute infomercial in the -- back in the 90s. At that point it was not a commercial success. With the C2 on some limited basis' from our trade shows and a couple of consumer trade show type events we've done, we've seen a positive return on -- basically for the dollar spend for the event versus orders written, which tells us we think there might be a direct response channel and obviously that gives us a little more channel control. And we also feel that, given the nature of TASER and the complexity of our devices, the educational elements are being able to do like a 30-minute direct response paid advertising program would make sense, but we're really starting to research that now. Our real focus has been on retail, and most of the retail we're going to drive through print, at least in the early days. Only once we have significant retail presence do we think it would support the economics of going to TV, 30 or 60second TV promotions. And as we're evaluating this, obviously I think in 50 days during our first quarter conference call we'll be able to address a lot more of those issues without waffling on which direction we're going to go.

Yes, fair enough. Turning to actually the manufacturing, I think you talked about some automation that you're looking to put into the manufacturing. If you could just flush that out a little bit, are you building and designing new machines to help with manufacturing capability or what exactly are you doing on that that [inaudible]?

We are. Actually, the VP that we hired, one of the major reasons that we hired him is his experience with helping to design and implement automation equipment, so what we're working on now is the specifications. We met with five key automation builders across the country and they're working on the design specs now that include both quantity and the quality of cartridges we want to see coming off the machine itself. So we're hoping to round that into final stages and kick somebody off to get that equipment started in Q2. But again, we don't expect to see the impact of that until the middle of 2008.

We're [inaudible] several options. We're evaluating full-scale automation, a fully automated production line, also versus [sell automation], where it'd be a hybrid between our more -- our current processes, which are largely human operators versus full automation. Once we get -- in the next, probably 60 days, we should get the quotes back and then we can run the ROI analysis and see how much automation makes sense. ANd be clear, that's been done by experts, that that's what they do for a living. That's not what our R&D teams are doing.

Correct.

Yes. Fair enough. And what kind of capacity would that create in your current facility?

What we're looking at right now is the piece of equipment could actually -- just if we looked at 2006 levels, it could, at the fully automated, actually produce all of 2006 on one shift of the equipment with higher quality and better yields. That's no overtime, so the impact is pretty dramatic. It also takes a lot of the labor out of the process.

So it's several -- it's probably tripling or quadrupling of our cartridge capacity, and that's where we're going to start because that's where the majority of our labor content is currently are the cartridges, so that'll be our first -- first project.

Okay. And then lastly, you're going to start generating a lot of free cash flow here, looks like. Just wondering what you're expected to do with the cash? If you're looking at any acquisitions or stuff of that nature?

At this point, obviously we've got some short-term needs with the final payment on the shareholder lawsuit to be made with court approval here in the next six to eight weeks. After that, we intend to invest heavily back into R&D, back into the business. and build up some large cash balances. At this point, we're not -- we're staying so innerly focused, we think we've got a lot of opportunities in front of us with our internally-developed products and that's really going to be the focus, at least in the short-term.

It's not to say we wouldn't look at an acquisition, but it would have to really make strategic sense, especially with the explosion in private equity over the past few years. There's a lot of folks that are really good at going out and screening acquisition capabilities. We're frankly not one of them. That's not our business is going out and doing roll-ups. For us to compete in that space, we'd have to see an acquisition that really fits with us strategically that creates new value. And we're open to that, but we're not out snif -- running around just looking to buy companies. At this point, there are such good opportunities for internal growth.

I mean, you look at the X26. I just presented it to our board last week. The X26 cost us roughly $1 million, $1.5 million to develop and over a five-year license. It's already generated well over $100 million in revenue between it and accessories. Those types of returns are hard to find outside, and we think we've got a couple more opportunities. And yet we don't know which ones are going to hit. Of the four or five significant projects we've got ongoing I'm hopeful we'll have one home run and a couple of triples, and we'll have some singles. We may have one or two that strike out, but our odds internally, we think, are very good places to put our capital. It's not going to be enough to [inaudible] into our balances. We expect them to continue to growth. We'll maintain them on our -- maintain cash. We're being very careful with it. Until we get to a point where it -- if it becomes excessive we would certainly return it to shareholders. But we think, again given the unpredictable nature of this potentially dynamic and explosive growing marketplace, there's a real option value to us having that cash should we need to move on an acquisition opportunity or some other competitive opportunity. But in the meantime we're really focusing on organic internal growth.

Okay, great. Thanks a lot, guys.

Thank you.

Your next question comes from the line of Mr. Rick Ryan with Feltl. Please proceed.

Good morning. Just following on that question. What's the buy back program? What's left under that authorization?

We still have $7.8 million open on that buy back program. We bought $2.2 million of stock, 300,000 shares, and the board's approved us -- for us to buy up to $10 million.

Okay. Tom, getting back to the camera, it's -- even though it's taking a little longer, it's had a nice ramp since Q2, but can you talk about the end -- end users? If my calculations are right it's around 7,300 have been sold. Is that to a handful of customers or are you seeing that broaden out a little bit?

It's definitely broadened out. We have a lot of them out there where there's five or ten at different departments and they're putting them out on the street for evaluation, so -- and that's why we were talking about the adoption being slower than expected is it does go through a review phase. They do put these out on the streets and they do -- they want to get a number of videos and they want to see the impacts by the users on these, and so they are spread out quite a bit over a number of different customers.

Have any customers come forward with complete procedural issues that have been nailed down that other agencies are looking at?

Oh yes, absolutely. There were a number of things out there where they had to make sure that from the documentation standpoint, if the fight wasn't caught on film that they didn't have to fight again prior to the use of the TASER. So they definitely have worked through a lot of those policy issues, so they may have done a test and revised the policy then redone the test under the new policy. And they are -- the departments are talking among themselves and sharing that information, because they're the experts in use of force and in policy and they're the ones that are putting that information out. The Maricopa County Sheriff's here in Arizona, our biggest deployment, and they do have a -- a little over 2,000, so they've been the first people to move in a big way. Sheriff Joe Arpaio here locally is well known as an innovator and they saw the value of putting this out and being the first in the country to move in a big way, and we certainly applaud that. The rest of it, though, is mostly on TNEs, which is encouraging because TNEs are where you plant the seeds to grow and lots of units out in test and evaluation.

Okay. Kathy, in your -- in your presentation, did you say you've adjusted end-user pricing and if so, what -- which units?

It's on the cartridges. We effectively had a $1 per cartridge price increase that was implemented January 1st of this year. That was to help off set some the costs we saw on the materials on those products.

Okay. Any push back on that?

Did we get any push back? Very little. And the one thing I just want to tamper that with is we've got some longer contracts with some customers, and those prices will remain intact throughout the period of their contract. Some of the larger agencies won't see that increase fall through for a few years out.

On the camera production side, how's the -- your yields on manufacturing?

Pretty good. We're actually doing very well. At the end of the year, we had 90% yields across 20 of the 22 production lines, so we're doing quite well.

Good, good. One last one for Doug. Doug, are there any high-profile cases on the horizon that we should keep an eye on?

You know, not really. Most of the cases we have filed against us are really frivolous cases. They're guys that got hurt during a fall. We've got several where they fell out of a window. These are things that we've been warning against for years, it's just common sense. We don't really see any high-profile cases coming up certainly in the next year that we are very concerned about.

Great. Thank you, guys.

Thank you.

This concludes the question and answer session. I'd now like to turn the call over to Mr. Tom Smith for closing remarks.

We'd like to thank everybody for taking their time this morning, and obviously we've put a wrap on a very exciting 2006. And as we're going to be trudging ahead, we'll talk to you in about 60 days to discuss the first quarter of 2007. Thanks so much, we'll talk to you soon. Bye-bye.

Thank you for your participation. This concludes the presentation. You may not disconnect, and have a great day.