Axon Enterprise Inc (AXON) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the TASER International first quarter 2007 earnings conference call.

My name is Alika and I'll be the operator for today.

(OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes.

At this time, I would now like to turn the call over to your host, Mr.

Tom Smith, Chairman of the Board.

Please proceed, sir.

Thank you and good morning.

Before we get started, we'll listen to the always-riveting Safe Harbor from Doug Klint, our General Counsel.

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 under that act.

Such forward-looking statements relate to expected revenue and earnings growth, estimations regarding the size of our target market, successful penetration of the law enforcement market, expansion of product sales to the private security, military, consumer and 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 the actual results to differ materially from those reflected by the forward-looking statements.

Such factors include, but are not limited to, the 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 accompanying demand for our products, potential delays in international and domestic orders, implementation risks of manufacturing automation, risks associated with rapid technological change, execution and implementation risks of new technology, new product introduction risks, ramping manufacturing production to meet demand, litigation resulting from alleged product-related injuries and death, media publicity concerning product uses and allegations of injury and death and the negative impact this could have on sales, product quality risks, potential fluctuations in quarterly operating risks, competition, negative reports concerning TASER device uses, financial and budgetary constraints at prospects and customers, dependence upon sole and limited source suppliers, fluctuations in component pricing, risks of governmental investigation and regulations, TASER product tests and reports, dependence upon key employees, employee retention risks and other factors detailed in the company's filing with the Securities and Exchange Commission.

Back to you, Tom.

Thank you, Doug.

And, again, good morning.

Welcome to our first quarter revenue call.

We, obviously, feel this was a very strong way to start out the year of 2007, up $1.4 million over 2006 first quarter, making it our highest first quarter in our company's history and that led to the results of about $300,000 in operating income on the bottom line, about $500,000 in net income for $0.01 basic and diluted earnings per share during the quarter.

Obviously, we didn't hit the mark we had set internally, but we do continue to invest in our infrastructure as we're planning for the rollout of the C2 during the second quarter and other products later this year.

Again, we're looking to the future and want to make sure we're well staffed and prepared to handle that future as it comes to us.

I mentioned the TASER C2.

We successfully debuted that product line at the Consumer Electronics Show in January, as well as with the SHOT Show later in the same month.

It received very high remarks.

This was a product we've spent a lot of time on.

We believe there's a lot of demand for it and we, obviously, got a lot of press coverage.

We were, I think, one of the top hits at the Consumer Electronics Show, which is very impressive, considering the size of the show, and, again, this-- we're listening to what the customers want.

We were able to design a very sleek product that's really being targeted at the largest market in the world, being the U.S.

consumer market as we continue to focus on that area and I'll talk more about that in a little bit during the sales section.

We also during the quarter had 14 product liability suits dismissed, bringing our total to 44 wrongful death or injury suits being dismissed.

Our legal team continues to execute strategically a very well-designed strategy to protect the company and to continue to make sure that the science prevails over the emotional response to some of these events and, obviously, what that is obviously being backed by is the science.

During this quarter, we also published a landmark medical study that was published in the Society for Academic Emergency Medicine that, again, addressed another concern about prolonged exposure to the TASER X26 having no abnormal respiratory effects on human subjects.

As we've done in the past and we will continue to do, we continue to invest in those areas on the science side that answer the questions so that the critics have less and less areas to focus on, because, again, the science, the medicine, the technology just continues to stand on its own and we're very excited about that project.

And you'll continue to see there's another handful of them, of medical studies, that have already been completed that are in the process of being reviewed that'll be published over the next several months that we're obviously very pleased about that.

One of the other highlights we're very proud of during the quarter was the addition to our board of directors of Dr.

Richard Carmona, former U.S.

Surgeon General.

He has a very unique background that is very, very applicable to TASER International and where we're going.

Dr.

Carmona's background came up through the military.

He was in the Special Forces, which, obviously, is a focus of the company.

After he left the military and pursued a medical career, he also was pursuing a law enforcement career.

So has both a military background, as well as a law enforcement background in health, in addition to being the U.S.

Surgeon General, having a medical background, having been a trauma surgeon.

So he can understand the three aspects of where TASER's been focused with military, law enforcement and science and brings a very unique perspective, having all three of those disciplines in his background, have been there and walked the walk in the field that he can have and really help us as we go forward in our future.

So we're very, very excited about him as an addition and his participation at our board level, I think, is going to be tremendous.

And really we have a fantastic board of directors that's complemented with a fantastic group of senior executive advisory board members, of former military and law enforcement personnel that embodies the company as we go forward that is also complemented by a fantastic medical advisory board.

So I feel very, very excited about our board, our advisory board, and the advice and strategic direction that we're able to bounce off of these guys and make sure that we're helping develop the next technologies out there that's going to meet the demands of the market place.

Again, it was a very exciting first quarter.

We didn't get to exactly where we wanted to.

We did get a couple of those orders in that we talked about.

We put them out earlier this week on the Pennsylvania State Troopers and West Hawaii County and, again, I think with this being a record first quarter it's a fantastic way to start 2007.

So with that, let's get into some of the details and I'm going to turn the call over to our President, Kathy Hanrahan.

Good morning.

As Tom commented, we reported record first quarter sales for the company.

Unfortunately, this did not translate to similar improvements in gross margins for the period.

In fact, our gross margins declined by 6.4% from the same period in 2006 and 5.4% sequentially.

This was the result of several key factors.

The first was a delay in shipping and recognizing significant sales anticipated in the first quarter and the subsequent loss of leverage in our indirect manufacturing costs.

As discussed on previous conference calls, we're building a manufacturing infrastructure adequate to support expected sales levels while promoting growth through new product development.

To accommodate this, we augmented our quality assurance, engineering and manufacturing support staffs in the latter part of 2006 and early 2007.

This brought to the company new skill sets in production automation, MRP and product testing applications.

These have all proven to be great investments in our progression, but will impact our short-term success in periods with sales fluctuations and when the new product revenue has not yet been realized.

During the period, the declining sales versus the cost of expanding capability resulted in approximately 2% loss in margin over the fourth quarter of 2006, where we recognized $4 million in additional sales.

The first quarter gross margin also reflected labor and material challenges for manufacturing.

During-- during the period we saw an average increase in our bill of material costs of 2% of sales.

These were created by the rising costs of plastic and printed circuit board assemblies and components.

To help offset the impending increases, we implemented a price increase to all customers on January 1st, 2007, for cartridges and specific X26 configurations.

These increases, although effective, do not fully cover our change in cost.

It was our objective to split the increase with our customers and focus on recovering the balance through labor efficiencies and upcoming product automation.

The third area that impacted the gross margins, although unfavorable, was an investment in the upcoming product launches.

During the first quarter, we hired new production operators and transferred existing employees into key roles on our C2 production line.

In order to maintain control during the early production phases, we used overtime and temporary labor to backfill our forecasted production requirements during the period, which drove up our average labor rate in the first three months of the year.

We believe this will normalize late in the second quarter as we move from small validation and marketing runs into full-scale production for distribution.

The fourth and final significant variance for the prior period was in production-related scrap.

During the quarter we converted more than $5.7 million of raw materials into sub-assembly and finished goods.

This was an increase of more than $700,000 over the fourth quarter of 2006 and one of the highest production periods in the last few years.

This increase in production, coupled with supplier quality and operator-related issues on the assembly lines resulted in a $200,000 increase in our production scrap, which is reported as a period expense.

We're working on corrective action with both our suppliers and line operators on the issues surfaced in the first quarter and we remain confident in our ability to reduce similar scrap issues in the coming months.

Manufacturing challenges were not the only areas we tackled this period.

In preparation for the C2 launch into retail distribution, a cross-functional team consisting of executive management, manufacturing, sales and finance representatives evaluated the contracts and shipping rules set forth by our new retail launch partners.

After analyzing the costs associated with the demands imposed by this distribution channel, we met with and contracted the services of a large third-party distribution facility.

This organization will serve as TASER's interface to the large retailers by providing warehousing, full EDI services, as well as coordinating and tracking the shipments of all outbound orders to distribution centers and store locations.

We see this as a significant strategic move to ensure success as we roll out the product in the new consumer locations and to minimize our shipping costs and logistic risks.

Before turning the call over to Dan Behrendt, I want to reiterate that we recognize our gross margin performance was neither indicative of our operations or precedent for future periods.

We've identified those issues we can impact and we're working toward that effort, but it's important for our investors to understand that our philosophy as an organization is to promote long-term growth and new product innovations.

This does not always come without short-term sacrifice in financial performance.

Our challenge remains to find ways to minimize the costs of new production rollout while accelerating our new products to market.

With that, I'd like to turn the call over to Dan Behrendt, our Chief Financial Officer.

Thanks, Kathy.

Let's start with the income statement for the quarter.

Sales for the quarter, as indicated, were $15.3 million, which is a record for the first quarter.

It's up 10.1% over 2006.

Our gross margins of $8.9 million or 58.1% of sales are down 6.4% from the prior year due to the increased material costs, particularly components on cartridges, high direct labor costs due to some of the inefficiencies associated with the new production employees, as well as costs associated with pre-production build of the TASER C2 and XREP.

The $394,000 increase in indirect manufacturing expenses were mostly driven by the higher scrap during the quarter, as well as indirect supplies purchased to support the production of C2 products.

As Kathy indicated, we are addressing these issues during the second quarter.

SG&A expenses were $7.6 million for the quarter versus $7.3 million in the prior year.

The variances were driven mostly by higher salaries and benefits of $307,000, higher travel and meals of $192,000, which were driven by the Consumer Electronics and SHOT trade shows here in the U.S., and the [IWO] show in Germany during the first quarter.

These unfavorable variances were partially offset by lower professional accounting fees during the quarter.

Research and development expenses of $971,000 for the quarter is up $307,000, mostly driven by higher headcount costs, increased supply costs associated with soft tools and other supplies to support the new XREP product line and increased consulting costs to support the launch of the C2.

The company intends to continue to ramp up R&D spending during 2007.

Income from operations were $336,000 for the quarter.

We had pretax income of $843,000, which is down 559 from the prior year due to increased spending on SG&A and R&D, as well as the reduced gross margins.

Net income for the quarter was $495,000 or $0.01 per share on both a basic and diluted basis.

Moving on to the balance sheet, we finished the quarter with $41.6 million of cash and investments.

This is a decrease of $6.3 million over the prior year end.

The decrease is really driven by the final $8 million payment for the shareholder lawsuit made during the first quarter.

Accounts receivable of $7.5 million are down $2.6 million from the prior year balance of $10.1 million due to lower sales in the first quarter of 2007 versus the fourth quarter of 2006.

Inventory, at $10.3 million, is up $1.1 million from the prior year balance of $9.3 million as the company built inventory for sales in Q1 which ended up being pushed out into Q2, as Tom indicated earlier.

We will build C2 inventory in the second quarter, but the inventory of the other products should come back to normal levels during the quarter.

Prepaid and other assets at $2.2 million are in line with the year-end levels.

Current deferred tax asset is down sharply, but it's just a reclass of long-term deferred income tax asset that you see down below.

On a total basis, our current assets are $45.9 million, which is down $10.2 million from the prior year-end, mostly driven by the $8 million payment for the shareholder lawsuit and the reduction in accounts receivable.

Property, plant and equipment for the quarter ended at $21.3 million.

This is up $500,000 over the prior year-end number due to purchases of C2 production equipment, as well as costs associated with the company's new website, which should launch in the next 30 days.

Total assets finished the quarter at $112.3 million, down $7.5 million over prior year assets at $119.8 million, driven by the reduction in current assets.

On the liability side of the balance sheet, accounts payable and accrued liabilities of $6.1 million are down $733 million (sic -- see Press Release) from prior year-end due to the timing of some check runs and the reduction in payroll-related accruals.

The current deferred revenue, $1.1 million, is up slightly from the prior year-end balance of $1 million due to the sale of more extended warranties in Q1 and deferred insurance settlements of $476,000 are just down slightly from the prior year-end.

The litigation liability of $1.75 million represents the amount still owed under the derivative lawsuits.

We'll pay this liability in Q2 via the issuance of new stock.

It's worth noting that the company has already purchased stock in the open market through the stock buy-back program to offset shares which will be issued to settle this lawsuit and the company did fund the final $8 million payment of the shareholders suit during Q1.

We did this in cash.

We could have made this payment in stock, but decided to do it in cash because we did not-- did not want to dilute our shareholders with a payment in stock.

Current liabilities are $9.6 million.

This is a reduction of $8.1 million from the 12/31 balance, mostly driven by the $8 million shareholder settlement.

Deferred revenue, net of the current provision, increased by $97,000 to $2.1 million due to the sales of the extended warranties during the quarter.

Total liabilities at quarter end were $11.7 million and the company finished the quarter with $100.6 in shareholders' equity.

Statement of cash flows -- the company had operating cash usage of $5.5 million for the year-to-date period compared to $2 million in the prior year.

This, again, was driven by the $8 million payment for the shareholder lawsuit in Q1.

The net cash provided by investing activities hit $2.3 million as the company realized $3.5 million from maturing investments, which were partly offset by $1 million in new property and equipment purchases, again mostly made up of C2 production equipment and costs associated with the company's new website.

The company generated $469,000 in financing-- from financing activities, mostly driven by stock option exercises during the quarter and the company ended the quarter with $16.1 million in cash, which is down $2.7 million from the prior year and, again, total cash and investments are $41.6 million at 3/31.

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

Thanks, Dan.

I'd like to give you a brief legal update.

We're going to start with the settlement of the shareholder class A litigation, the derivative lawsuits.

In December the court entered a preliminary order which approved the stipulation and settlement, provided for a notice of the settlement, set March 5, 2007, as the deadline for submission of objections to and exclusions from the settlement.

On March 12, 2007, the court entered a final order approving the settlement and establishing April 16, 2007, as the final date for submission of claims.

The only remaining liability is a payment of the $1.75 million in stock, which will take place in second quarter 2007.

With respect to other litigation, this litigation is down significantly from fourth quarter.

In first quarter we filed a patent infringement lawsuit against Stinger.

With respect to the Watkins litigation -- this is litigation we filed against our former patent attorney -- in February 2007, the court ordered an assignment of all Watkins patent rights to TASER without compensation to Watkins.

This follows on the partial summary judgment that was granted to TASER on the breach of fiduciary duty in 2006.

Also on first quarter, the Supreme Court Commission for Arizona recommended the disbarment of Mr.

Watkins.

We have begun settlement negotiations with Watkins and we expect to conclude this matter in second quarter 2007.

We also have two lawsuits pending against medical examiners.

The first one is a lawsuit we filed against Dr.

Roland Kohr, who did the Borden autopsy.

This lawsuit is still pending.

We also filed a lawsuit against Dr.

Lisa Kohler, who was the medical examiner for the Hyde and Holcomb in-custody deaths.

That case is still pending.

It's significant to note that in March 2007 the City of Akron, Ohio, filed a motion to intervene as a plaintiff against Dr.

Kohler in this litigation in order to contest her autopsy report, as well.

With respect to product liability litigation, we've had a total of 44 lawsuits dismissed.

In first quarter, we had 4 lawsuits filed and this is down significantly from the 13 lawsuits that were filed in third quarter 2006 and the 7 lawsuits that were filed in fourth quarter 2006.

It's significant to note that we've had no training injury lawsuits filed since August of 2006.

We believe that's because of two reasons.

The first is we have new warnings which are very comprehensive and secondly, we are now requiring waivers and releases being signed for every training class.

We're very encouraged that the rate of litigation has significantly slowed at this point.

In addition, we've had 14 lawsuits that were dismissed in first quarter 2007.

This results in a net reduction of 10 pending lawsuits from fourth quarter 2006, which also builds on the net reduction of 1 pending lawsuit from third quarter 2006.

These are the first two quarters where we have had more dismissals than lawsuits filed and we hope this is the beginning of a trend going forward.

At the end of first quarter, we had 47 total pending lawsuits, which is down from the 57 lawsuits that were pending in fourth quarter.

It's important to point out that plaintiffs have not been able to prove that the TASER device is defective or was the cause of any suspect injury or death and these are essential elements that must be proved in any product liability lawsuit.

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

The safety of the TASER device has been well established by over 80 medical and safety studies.

In addition, we have over 40 nationally renowned medical and scientific experts who have all concluded that the TASER device is not defective and played no causal relationship in any suspect injury or death.

In addition, we have hired four warnings experts over the last several years to review and revise our product warnings and to make them comprehensive and best-in-class.

These warnings play an important role in our risk management strategy and are a key factor in defeating and preventing litigation against the company.

Our strategy is to utilize best local counsel with police defense experience and product liability expertise.

We hire the best world-class medical and scientific experts.

We stand behind the exceptional safety record of the TASER product and, in addition, we plan to take all cases through a trial, if necessary.

It's our policy not to settle any suspect injury or death cases.

We file motions for dismissal and summary judgment and seek sanctions, as appropriate, and our objective is to send such a strong message to our adversaries by overwhelming them with our defense and resolve not to settle that they conclude that filing litigation against TASER is not a profitable venture.

It's also important to understand that from our customer's perspective, product liability lawsuits are not a risk to law enforcement agencies.

This lawsuits are not filed against law enforcement agencies.

Our customers battle excessive use of force litigation and the TASER device has played an important role in reducing 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 devices have been deployed.

The reasons are simple -- suspects are not getting injured as often in the course of arrests.

Statistics from our customers show a 79% reduction in suspect injuries from use of the TASER device and the courts have also routinely held that the use of a TASER does not constitute excessive force, since it has the lowest risk profile of any use of force tool.

Our customers place a very high value on the TASER device in reducing their excessive force litigation.

I'd now like to turn the call back to Tom.

Thanks, Doug.

As I mentioned earlier, I'm going to discuss the sales part of this on the call now.

We had $15.3 million in revenue during the quarter.

I think it's interesting to note that when we took a look at that, the majority of those sales were from our baseline business.

In other words, we only had a handful of sales-- orders that came in that were over the $250,000 mark, which, again for us is a great sign that the baseline business that's out there continues to grow, continues to be the bread and butter of where our business is going, and although the large orders that we had delayed a little bit, we did get them in and get them announced earlier this week.

Those, as you know, are also the most difficult ones to predict on exactly which quarter they're going to come in.

So, again, we're watching two specific aspects in that as we're growing into 2006 -- that's the baseline business, the bread and butter, that we do see that continue to grow and then, obviously, the larger ones that are out there that those are still on track.

They just may have missed by a couple of days here and there on a specific quarter, but they do continue to move forward and, especially with the Pennsylvania State Troopers, they took a very extensive look at this.

It was a very large order of 3000 X26 units, so that was following a long field trial, a lot of research.

And the same with Hawaii County.

It's a full deployment right out of the gate and, again, those larger ones take some more time because they involve the city managers, risk managers, city council, budget approvals, where the smaller agencies can usually move much quicker.

So we're seeing growth on, again, the baseline business that makes us feel really good.

We also are looking at the international market.

We saw a 4% increase over 2000-- first quarter of 2006 with roughly $1.8 million in international business during the quarter, representing 12% of the quarter.

Some other numbers -- during the quarter we added 360 new agencies, bringing the total to 10,927, just shy of 11,000 agencies that are testing or deploying our product and, again, as reference that we have out there for total agencies in the United States is roughly 18,000.

So we continue to move forward on that front.

On the full deployments, we added 225 new agencies that are now fully deploying our TASER, meaning one on every officer, bringing the total to 3571.

So, again, we're seeing growth on new business as well as on our existing customers that are expanding their programs, having seen the results, with new agencies continuing to add and other agencies that have been customers adding to full deployment and expanding their TASER programs, which, obviously, is good news for us to continue to focus on, as we look forward.

In terms of the number of units sold during this quarter, we sold 11,968 X26 units compared to 11,811 a year ago, but that's down from the fourth quarter from 15,696.

We also saw M26 units of roughly 1358, down from 1800 a year ago and down from 1700 last quarter.

Again, I believe the customers that are expanding their programs are going with the X26 with the smaller size and more convenience and we're seeing the M26 numbers decline a little bit as they transition over with their X26 units.

On the air cartridge front, we sold 233,063 during the quarter.

That's up from 221,000 a year ago, but again down from the fourth quarter from 273,000.

However, our ratio went up-- from cartridges to handles went up to 17.5 during the quarter compared to 16 a year ago, as well as 16 in the fourth quarter.

So our cumulative X26 unit sales that are out in the field is roughly 187,000 and the M26 units are roughly 71,000-- 71,600 that are out in the field.

During the quarter we processed roughly 1493 orders with roughly an average of $9700 per order.

Again, that goes back to my opening comment on the sales that it's our bread and butter business, that it continues to grow with those small orders that continue to come in daily versus reliance upon one single big order.

The baseline business is continuing to expand and the larger orders are the ones that we continue to focus on and just continue to be challenging to see the timing of when they're going to come in.

The C2 -- we talked about that earlier.

We announced it in the Consumer Electronics Show.

We got an incredible, incredible response from media.

I mean, I was up at the show and I got very little time in the booth, because I was spending a lot of time covering the media and I can tell you when I was at the booth, it was a packed booth.

I mean, we've never had an interest like that in a consumer product that we've done in a very long time and, I believe, again, it's because we're listening to the customer.

We were able to meet a price target that they've been asking for, as well as something that was sized for them to carry and it was convenient to carry.

It has a very high-tech look and feel and then the designer colors making it convenient to carry.

No matter what the device is, if you don't have it with you, it's not going to do any good, so when we looked at the design of this product, it was designed from the ground up for the consumer market, which is, again, the largest market in the world and it wasn't just a law enforcement product that was mapped over.

This was designed specifically and targeted for that market.

We are spending a lot of time right now looking at advertising.

We're going to be coming out with an advertising program as these start to hit shelves this quarter where we're going to be doing some print advertising in some national magazines.

We're going to be doing advertising in local regional magazines or city magazines, especially where we have a lot of retailers within the city areas, and we're also going to be spending some dollars advertising in the different fliers for the different retailers that are carrying the products to really specifically expend resources to target knowing-- letting consumers know where they can go get some products off the shelf.

We have spent a lot of time in evaluating the product internally through our R&D group as they're rolling it into manufacturing.

We've also spent a lot of time in not only listening to the customer, but we're trying a bunch of different marketing materials and seeing what the response is so that we can get the right message out there, as well as let people know where they can go get it.

Now I know I and Dan have both received a lot of calls asking where and when are we going to announce which different retailers are going to be carrying this, and I can't wait to tell you, but I'm not going to tell you until we have them on the shelves.

It doesn't do us any good to put out an announcement today announcing which big box retailers are carrying this and then because of distribution and contracts and other things, have it 6 weeks until it's actually on the shelf.

So as you start to see us announce during Q2 and Q3 which retailers are carrying the product, you'll see that announcement come out as the product is hitting the shelf so that as we generate that press and we generate that interest from the media market, we're able to have people go into the stores and see the product on the shelf rather than having to wait several weeks and maybe lose the excitement and interest in them going into the store to find the product.

I can tell you, I've spent a lot of this-- my recent time traveling around, meeting with these big box retailers in a variety of locations from big box in the sporting goods to consumer electronics to a number of different areas and we've again, not had interest in this in the past and I'm very excited and very happy with what's lining up for us.

We're being very strategic in how we're picking our retailers that we want to have involved in the rollout.

Obviously, we want to make sure that the people that are going to be answering the store-- the questions of the customers in the stores are knowledgeable, so we're putting together good in-store information for training the personnel and that we, again, have the right retailers in the big box retailers to roll this out as our production ramps up, because we believe this is going to be a very large market for us -- again, it's the largest in the world -- and we're being very strategic about how we approach it from a number of aspects.

And I am very excited to get the announcements out on who these retailers are and I think they will surprise you once they start to get on the shelves.

But unfortunately, that does take time for the contracts, for the advertising, for the distribution centers and all those things to come together.

But we're very excited and pleased with how that's going.

Dan also referenced earlier our website development.

We're going to be rolling out a new website here shortly.

We've got a lot of feedback on-- and a lot of updates that we want to include, especially on our web store.

We've obviously heard the information that it has been persistence that has guided our customers to come through that process to order the products on line and we've heard those loud and clear and have spent a lot of time focusing on that, as well.

So I'm very, very excited about the C2.

I think this is a product that's going to meet a lot of needs, that's, again, designed for that market, that we're going to have the right retailers in place, the right advertising campaign.

It's going to be some television campaign, as well as print to get them into the stores and you're going to see that continue to roll out and we will keep you advised as these come together and they start showing up on store shelves on where you can go to get them.

And I will tell you, we have-- we do have pre-orders in house, but, again, we're not going to release that information at this time until they're on the stores of these different retailers.

International -- obviously we were very pleased to see the results in the first round of the French elections with Sarkozy taking the majority of the vote there.

They've whittled it down now to two different candidates, which that election will be held now on May 6, which is about a week and a half from this time.

The early exit poll indications show Sarkozy is still leading-- leading in those results, so we're obviously very excited about where that future is going.

He was a very big driver for us in the French market, starting with the TASER program in 2006 and, obviously, we believe it'll bode very well for the company, internationally as well as in France, if and when he can win those elections on May 6th, so we're very close attention to that.

I can tell you it's been quiet in France this year as, obviously, they've been focused on the campaigns and other things, but we still do have some open markets orders against that original tender that was issued last year and we believe those will come in, in the latter half of this year, after they get through this political season and get, hopefully, Sarkozy elected to the new office.

Our international sales are up.

I mentioned they were-- represented about 12% of our quarter, up from 8% a year ago.

So the international market does continue to move forward.

For those of you that do the media clips, you're seeing a lot of positive results in a lot of countries -- New Zealand, England.

We continue to see fantastic uses where this is continuing to show how it can protect life for the officers and the citizens.

The Los Angeles Police Department -- that's something that's been out there since last fall.

Again, I'll reiterate, all the indications that we're getting is it's a second half of this year type of a situation for that.

It's a large-- it's the second-largest agency in the United States.

So, obviously, there's a lot of haggling and maneuvering that has to go through as they look at budgets and deployments and other things.

We believe the mayor's budget is going to be coming out here shortly where LAPD has requested that and that will continue to come out as the budget starts in July and, again, I believe it'll be a second half of the year event and we still do not at this time have an indication whether that'll be all at once or whether that'll be spread out over a certain time period.

And, obviously, as we get information we'll try to keep you informed on that.

We're also actively recruiting a VP of International.

We talked about this on our last call.

We believe this is a very, very strategic hire for the future of the company.

It's something that Kathy has been taking on personally, as well as all of our top management.

We have several candidates that we're pursuing and we're getting close on, but we are taking our time and making sure we interview these people multiple times so that we make sure we have the right person.

Again, it's a very strategic focus for the company.

International's a big key of our future and we want to make sure we have the right candidate when we officially offer that position and I believe we're going to get there.

I can tell you we've had a phenomenal response to the request for resumes and people interested in that position and we want to make sure we look at each and every one of them and we do a detailed analysis, again, so we make sure that we have the right candidate.

We're also openly recruiting for corrections and private security positions within the company as we broaden our market focus beyond just military, beyond just law enforcement.

We're coming out after the consumer market.

We're also going after private security and corrections and we're going to have individuals tasked internally with specific drive and focus on those markets.

As, again, we see the acceptance within law enforcement, we're seeing the additional acceptance and interest in the consumer.

We believe private security and corrections will help broaden our focus as we go forward and get people that are just spending full time on those specific markets rather than part time, as it's been over the last couple of months.

So we're very excited about where we're going and we still think 2007 is going to be a great year for TASER International.

With the launch of C2 this quarter and several other products coming out later this year, we continue to invest in the infrastructure so that we're ready for the growth when it comes and we're also ready to handle these multiple product lines as they come up.

We'd also like to make sure I extend an invitation to all of our shareholders to attend our annual shareholder meeting, which will be held on May 25th at 10 a.m.

We have-- the proxies are starting to hit now for voting for the different resolutions on there, but, again, come on May 25th.

Meet the management; meet the board and that'll be held at our offices here at 10 a.m.

And I guess at this point we'd like to thank you for your time and we'll go back to the operator so that we can open up this call for a few questions and then-- then we'll move on and get focused back on the business.

Thank you.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Eric Wold with Merriam Curhan Ford.

Please proceed.

Thanks.

Good morning.

Good morning, Eric.

A couple of questions on the C2.

You obviously-- I don't want to get in to try to get you say what big box retailers you're talking to, but can you give any sense of the number of doors you're currently in with the existing product -- I think it was like less than 200 -- what you think that could possibly expand to by year end if everything goes well and then kind of what the average door would likely take in terms of initial sell-in of the product?

Well, I can tell you where we're at right now.

It's mostly in the gun retailers and it's a couple of hundred.

I don't know the exact number off the top of my head in terms of store doors.

I can tell you the different retailers are-- that we're talking to are anywhere between 100 and up, 500-store chains out there.

So we don't have a specific number of store doors that we're targeting, per se, but it's more the partner, the fact that we're going to have somebody that's going to put the resources in on the investment side as they have the people in the store trained to answer the questions.

So we're not targeting a specific number of doors but more that we have the right retailer in place as we launch this product to get it out there and, again, covering different market segments between consumer electronics, sporting goods -- again the gun retailers that have been carrying us in the past and that market will continue to expand -- that it's the right retailers.

So I don't have a specific number that we're targeting, but these guys, the big box that we're targeting is anywhere between 100 and 500 out of the gate in terms of store doors.

Do you know about how many each store would take as initial inventory?

It's hard to say at this point.

Obviously, this will be a new market space for them.

I don't think you're going to walk in and see 20 TASERs on the shelf.

I think it's going to be somewhere in the 3 to 6 range per store.

I can tell you what they are talking with us about and that's what Kathy referenced, that we have the right warehouse distribution that we can respond to these guys very quickly as they do get sell-through and that also includes them having units in their distribution centers so that as certain stores may sell through better than others that they can get the product to those stores that are selling through.

And that's something that, again, we're working through because the last thing we want is guys to be going into stores and not be product on the shelf.

So I think you're going to see low-- not a huge number in the stores right out of the gate, but they'll be staged in the distribution centers and in our distribution center so that we can respond as we find where those ads are being effective and where the stores are moving and pushing it through much quicker that they can get the stores stocked very, very quickly.

And the-- and the retailers that you've been talking to, any of the ones that have said-- if there any that said no, we're not interested, what have been the reasons why?

We have had a few that have said no.

The primary reason has just been that they didn't feel it was a product fit for where they were going.

They've obviously seen some of the information in the media that's not always been positive on the company.

But to be honest, I've been more surprised about the ones that have said yes, that have come to us and knocked on our door that want to be involved with us going forward.

The noes didn't surprise me as much when we went there.

It's more been the yes ones that have surprised me, again, that want to be involved with us as we go forward.

Okay.

And then lastly, on France, I guess two questions.

One, if Sarkozy does win, what do you think the chances are of getting more than the initial 5000-unit tender this year and then, two, if Royal wins, does that end the chance of getting anything further in France?

Well, let's start with Royal.

I think if she wins, no, I don't see that-- think that'll end the deal for us there, because we're having tremendous success with this.

I was over in the country earlier this year and met with some of the officers and they're very, very happy with the results.

So I think if she wins it's still going to move forward.

I just don't know that it will move forward as quickly and as large as it would if Sarkozy wins.

In terms of him winning, I really don't have a feel for how quickly they'll expand the program.

I believe their budget is the latter half of the year.

So I don't know that-- and what I mean by that is I think it's roughly a November timeframe for their budget cycle.

I do know that he will be pushing to expand the program much quicker if he gets in there, but we haven't gotten any numbers.

The last thing I did see in the French media, which ran on TF1, which is the largest channel in France, again mentioned the units-- the number of 100,000 units, and that was several months ago and roughly right out of the gate, that's all squad cars within the country.

So we don't have a whole lot more detail than that at this point.

Perfect.

Thanks, guys.

Thank you.

Your next question comes from the line of Dick Ryan with Feltl.

Please proceed.

Hi.

Say, Tom, I didn't catch the number of orders and the value.

Could you give me those numbers again?

Yes.

It was roughly 1493 orders during the quarter with roughly 9700 per order.

Okay.

I didn't hear anything, any comment on the camera.

Can you talk about that contribution in the quarter and what's going on there?

It's-- it's down a little bit from last quarter.

We continue to get a lot of test and evaluation units out there and, again, because it's a capital investment, it's still running through budgets and there's still a lot of interest in it.

Again, I think it's going to be a good product line for us.

It's just taking time to get through the test and evaluation phase and, again, we're getting a little bit of pushback that it's some oversight on some of the officers and we're still having to work through some of those issues, but, again, it's still, I think, going to be a good product line for us going forward, just not as quickly as we had hoped.

But we are getting great results.

I don't know if you all saw that video that came out in Kansas with the guy holding the butcher knife and that's exactly the type of incident that the camera's going to assist in with a guy there that's standing there with a butcher knife.

They gave him the order four times to drop it.

It clearly shows it.

You clearly hear the officers.

So when the guy comes back and says, "I wasn't doing anything," it's going to protect those officers.

And those are-- we need more of those incidents out there for the chiefs and the command staff to see, as well as for the line-level officers that, again, the data came back from that other study that 96% of the time when video is present, it protects the officers.

We just have to continue to get that out there and we do see more and more agencies coming and testing and evaluating it and a lot more excitement out of the command staffs after they've had it in the field.

You had a couple mentions of new products coming out later this year.

Is this XREP or is this some new-- some new product launching?

It's a little bit of both.

Obviously, XREP, we talked about it coming out in 2007 and then there's some other ones that we have in the pipeline that we're looking at that'll either be a late '07, early '08, timeframe that we haven't really talked about.

But we are continuing to invest in research and development for new product lines, as well as enhancing existing products and we believe, again, that's going to be a key for us as we go forward.

What-- what can you talk about on the military side?

Are you making some progress there?

We are.

We're seeing some requests come through for quotes.

We're continuing to see uses.

We continue to get good feedback from the troops that are using these in country.

We are still seeing good progress there and, obviously, with George Fenton having been focused on it, we're seeing a lot more activity.

In other words, we're seeing a lot more troops, a lot more visits, a lot more field demos, a lot more at different bases around the country, because, again, it's been his full-time focus that he's going and traveling to these different shows.

We're doing a lot more military shows.

So we are seeing a lot of activity there now.

We just have to convert that activity into sales.

Okay, thank you.

Thank you.

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

Please proceed.

Good morning, guys.

Good morning.

A couple questions.

Just on the international side, starting there.

Besides the countries that you focused on up until 2006, in 2007 are you looking to expand your focus into some other countries, as well?

Yes, we are.

We've actually-- as we're focusing on the VP of International, we've also hired a consultant in one of the larger countries to focus full-time on that country.

Again, I believe what we're trying to do right now is we've got a lot of seeds out there.

We have over 40 countries out there.

Now what we're doing is really spending resources and focus and time on a handful of those countries to get them to really push forward.

Obviously, with the French election, we're going to be spending resources there once that's over to really drive that program.

I mentioned we hired a consultant that's full-time focused in another country.

So we're really going to be expending resources within specific countries that we can get these seeds to move forward so that the other countries that will follow.

Obviously, there's a lot of those 40 countries that are smaller, that aren't going to have a worldwide impact, so our time and energy is going to be spent on the larger ones, like a France, like a U.K.

and others that will have a regional impact, as well as a worldwide impact, because it's-- we've got the seed now.

We just have to execute.

It's the blocking and tackling that we're focused on to get the right resources in place to make these successful, to get the training done and to help move them forward.

Obviously, we don't really control the budget process, but we want to make sure the people that are looking at that process have all the answers that they need so that they can make those decisions as quickly as possible.

Okay, great.

And then besides France, are there any other sort of larger orders in the pipeline on the international side that you're keeping your eyes on?

There are.

Obviously, with the result coming out of New Zealand it's not going to be an absolutely huge order, but as we see them continue to have success and the results continue to hit the streets and now editorials even showing up from the newspaper commending the police for their diligence, for their testing, their results, it's going to just-- we want to see continued expansion within those countries.

And, again, that's just going to give other countries the confidence so that as we go out, again, with this targeted approach on these large countries that we can point to some of the ones that are having success, that have good training programs, that have good policies.

Obviously, the largest potential in the short term is the European area with France and the U.K., but it's the larger countries that take the longest time period.

So we're also focused on those smaller ones.

And there-- I will tell you there's probably at least 5 to 10 countries that are coming through their-- moving forward with programs that are sizable that we're watching and we just have to hope they come to fruition.

Those fronts are really the bluebird ones that-- to try and time them is anybody's guess, but they are out there that have got our attention.

Okay, great.

And then do you have a strategy at all for C2 on the international side?

I know probably in a lot of countries you probably can't sell it to civilians, but maybe you could try and frame sort of what the market potential is for the C2 on the international side?

It's definitely going to be limited.

And one of the things, again, to do to focus, the largest market in the world is right here in the U.S.

It's the U.S.

consumer market.

I can tell you overseas really the only country right now that has shown any interest in it and that we're working with is in the country of France.

They did a big promotional event.

They got an incredible amount of press coverage at the end of March over there, got a great response and, as you said, most of the other countries prohibit this or any type of device like it for civilians.

So we're really going to stay focused on that, make the U.S.

a tremendous success, help support France as they roll that out, as well, but beyond that, there hasn't been a whole lot of focus from us, because, again, the largest one is here in the U.S.

We want to make this a success and then just with France showing the interest, we'll support them.

But we're not going to go out there and focus on trying to change laws when we have a huge opportunity in front of us where we don't have to do that and we need to make that a success.

Yes.

And then just sticking on the C2 here, is there any way you can kind of give us some idea for how many pre-orders you've received?

Is it in the hundreds, thousands?

Kind of how-- what the response has been over the past few months here?

Again, I said earlier we're not going to get into that.

I can tell you, it's-- it's been better than we expected, but we're really not going to get into the numbers yet.

It's going to be coming out here over the next several months and, again, I think it'll surprise some people when we start to make announcements on who the retailers are.

So just at this point we're just going to keep that number internal.

Yes.

I was thinking like pre-orders through your website of individuals.

We have that, as well as we have distribution getting in line that they want to be some of the first ones and, again, we've been really targeted in who we want to go and have participate on that, as well.

So I appreciate that, but at this point we want to keep the number internal.

Okay.

And then a question for Dan.

Revenue recognition on the C2, are you going to recognize it once it's shipped out your door, once it's sold by the retailer, somewhere in between?

Any color on that would be helpful?

Yes, it's probably going to be something in between, to be honest with you.

I think it's going to depend on-- we've got traditional two-step distribution we're selling into.

Obviously, we'll recognize that revenue as it leaves our shop, because there's no rights to return or any issues from a revenue recognition standpoint.

On the retailers, we're going to have to look toward a case-by-case basis, look at sort of the terms and conditions that we're operating under and recognize the revenue appropriately.

So it's probably going to be a bit of a mix out of the gate.

Okay.

And I think one of the big challenges for us, also, has been the small novels that come with the interest with these retailers from the vendor performance side that Dan has to understand, Kathy has to understand, with operations that-- and Doug going through legal.

I mean, these things are anywhere between 50 and 500 pages as you go through them and that's why I think you're going to see us be very conservative on our-- on our revenue recognition.

In the past, it's been very cut and dried for us, dealing with the cities and now, as you get into retail, there are different challenges, but we're going to be very conservative on it, which is also why we're being very conservative in how we're announcing it to the marketplace.

Yes.

And then I wasn't quite clear just on the distribution warehouse.

Is that a third party that you're setting up or is that-- just kind of explain to me how exactly that's working with-- kind of on the distribution side?

Okay.

We were actually introduced to a company that is capable of a multi-step approach with us.

To start with, what we're going to have them do is ship the finished kitted product to their warehouse.

They will take it from there and then process the EDI orders out through retail.

They've got a capability and shipping expertise that we do not have currently in house.

We also went and saw their facilities and, quite frankly, they're very impressive with the automated equipment and can do things much quicker, much more under economies of scale than TASER is set up to do.

So, again, initially we'll send finished product ready to go and then, as we transition into larger orders, the plan is to actually send them handles and cartridges, have them do all the final configurations and kitting and ship.

And I think to elaborate that, again, when you go back and look at the vendor agreement, the thing that's got all of our attention is the penalties if you screw these things up with pre-shipment notifications, post-shipment notifications, label location on the box, timeliness of the shipment.

Those penalties can add very quickly.

Whereas when we're dealing with a third-party vendor that this is what they do for a business, not-- we make TASERs.

We don't-- we don't target that kind of shipment.

So we're getting somebody in here that's got the expertise, that's already doing it, that's been doing it, and then, really, that responsibility of any penalties that are associated with those problems falls back to them.

So it really helps protect us and ensure us that if those things occur, it's not because of our problems in house.

We can-- we really stay focused on our manufacturing and marketing side and let them focus on getting it to the warehouse centers quickly and timely and if they don't, the penalties go to them, not to us.

And the other benefit to them is because this is a large retail distribution facility, they also have much better margins on their shipping, so we're looking, actually, at some cost decreases as we move forward into larger volumes.

So we're pretty excited about the relationship and we're looking forward to going forward with them.

Okay.

And just to be clear, so when it's actually in their facility, it's still considered to be part of your inventory on the balance sheet?

It absolutely is.

It'll be one of our warehouse locations.

Okay.

And then just actually on the automation, maybe you just can give an update in terms of some of the automation that you're doing on the manufacturing side?

Because it looks like with the volume you're doing on X26 and with C2 coming on here, you may be coming up to a capacity on your current shift schedule.

So just kind of what your expectations are for maybe putting in another shift in there and other automation that you're going to be putting into the manufacturing side?

Sure.

Let me start first with the capacity.

Right now, our building we're only utilizing about 20% of our capacity.

And you're right.

We have only one shift running.

It would be fairly easy for us to ramp up in terms of multiple shifts, seven days a week.

Our new VP of manufacturing is actually evaluating those options.

In terms of automation, our first project -- I talked briefly about it on the last conference call -- is to automate our cartridge lines.

Those are perfected processes.

We've been doing them since inception and the VP's been working with the major automation houses across the country to actually design that equipment.

And we're anticipating it'll go into place on the manufacturing floor early 2008.

So in the interim, we're continuing to focus on our lean manufacturing principles.

We're looking at our labor efficiencies and he's working with each of those lines to try and take out any unnecessary labor on the lines.

Okay.

That-- that is helpful.

So thanks a lot, guys.

You bet.

Thank you.

At this time, this concludes the Q&A session.

I would now like to turn the call back over to Mr.

Tom Smith for closing remarks.

Again, I'd like to thank you for taking the time to join us on our call.

We're off to a great start in 2007.

Don't forget the annual shareholder meeting on May 25th at 10 a.m.

here at TASER's facilities.

And we also look forward to talking to you at July 25th where we'll be having an announcement that we'll be doing that call from New York.

We actually, I guess, are going to be doing the opening bell ceremony and ringing the bell on Monday, July 25th, as we discuss the second quarter results.

See you then.

Ladies and gentlemen, this concludes the presentation.

You may now disconnect.

Thank you and have a good day.