Axon Enterprise Inc (AXON) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2007 TASER International Inc.

earnings conference call.

My name is Dan and I'll be your operator for today.

It at this time all participants are in listen-only mode; we will conduct a question-and-answer session toward the end of this conference.

(OPERATOR INSTRUCTIONS).

As a reminder, this conference is being recorded for replay purposes.

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

Rick Smith, Chief Executive Officer.

Please proceed, sir.

Good morning.

Thank you very much.

Today is a very exciting day for TASER International and we're going to start off with one of the more exciting parts of our conference call with Doug Klint.

Thanks, Rick.

Certain statements contained in this presentation may be deemed to be forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995 and TASER International intents that such forward-looking statements be subject to the Safe Harbor created thereby.

Such forward-looking statements relate to expected revenue and earnings growth (inaudible) granted the size of our target market; the successful penetration in the law-enforcement market; the expansion of product sales to the private securities litigation military and consumer self-defense market; 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 reflected by the forward-looking statements.

Such factors include but are not limited to market acceptance of our products, the establishment and expansion of our direct and indirect (inaudible) channels; attracting and retaining the endorsement of key opinion leaders in the law-enforcement community; the level of product technology and (inaudible) of competition for our products; the degree and rate of growth in the markets in which we compete and the company demand for our products; potential delays in international and domestic orders; implementation and risk manufacturing automation; risks associated with rapid technological change; execution and implementation of risks of new technology; new product inspection; ramping manufacturing and production to meet demand; litigation resulting from alleged product related injuries and deaths; media publicity concerning product uses and allegations of injury and death in the negative impact it could have on sales; product quality risk; 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; risk of governmental investigation and regulations; TASER product tests and reports dependence upon key personnel; employee retention risk and other factors detailed in the Company's filings with the SEC.

Okay, thanks, Doug.

Today it's going to be a pretty fast call because we've got to get out of here to go ring the bell to open the NASDAQ market.

In fact we're in the fishbowl conference room overlooking the main floor of the NASDAQ here this morning.

Tom and Kathy are not with us on this call; they're actually over doing the Today show.

So they'll be on at about 8:15 or 8:20 this morning if you want to tune in and see them.

And Tom and I will also be on Jim Cramer's Mad Money this afternoon.

So you all can tune in and see us there, that should be fun.

I mentioned today is an exciting day.

Well, one of the big reasons is today we released the TASER C2.

You'll see us celebrating throughout the day.

The launch of the C2 in leading retailers including some of our launch partners, Gander Mountain, Cabela's, Academy Sports and a large number of independent retailers -- or smaller independent dealers.

Now as we look at the second quarter, obviously we're very happy with our results.

We reported $25.9 million in revenue.

Not only was that a record quarter, it beat our prior record quarterly revenue by 34% and we're up 59% over the same quarter of last year, generating almost $6 million in operating income.

There were number of significant sales that hit this quarter, many of you some of the press releases -- the Commonwealth of Pennsylvania state police, Hawaii County police, Riverside County sheriff's department, the Washington state patrol, Tallahassee, Scottsdale, South Carolina Department of Public Safety, as well as Bridgeport police department in Connecticut.

We also saw a significant growth in international sales which accounted for roughly 21% of our total sales in the quarter or $5.5 million.

And in fact we've had now one international police department that's gone full deployment.

Now we have made a practice of not naming our international sales for a variety of reasons.

Sometimes it's at the behest of the agency in question and many times it's simply to smooth the deployment process for them.

But for the international full deployment we're pretty excited about the precedent that that starts to set.

It was not a national police force; it was a regional police force.

I should also add that in addition to the growth in exports and law-enforcement orders we received a significant purchase order from the United States for an additional 2400 TASER X26s.

It is the first order in a five-year delivery indefinite quantity contract with the possibility of future orders up to a maximum value of a little under $23 million.

We also made a strategic announcement about our alliance with iRobot Corp.

We're quite excited about being able to get together with iRobot; we believe that our technology is really state-of-the-art, the industry leader in incapacitation -- that's sort of our secret sauce.

We've now, as we've talked about in the past, we've been looking at new ways to deliver that effect from today's handheld devices to some of the new technology I'll talk about later.

But also with iRobot now we can begin to deploy this without a human operator anywhere in the loop.

With some of the systems we'll be developing with iRobot in the not too distant future, we can see TASER systems being used to incapacitate people in caves in Afghanistan from human operators safely sitting here in the United States and that sits very well with our mission of protecting lives.

If we can protect lives through the deployment of our technology or by deploying it by keeping operators away from harm, that all fits with our mission.

So we're very excited to work with iRobot.

Also this quarter we saw Doug and his team continue with their outstanding results, eight more product liability suits were dismissed during the quarter now representing a total of 52 suits that have been dismissed or judgment entered in favor of the Company.

We also saw seven additional human safety studies analyzing the cardiovascular and physiological effects of the TASER X26 released at the Society of Academic Emergency Medicine.

Of course these studies are continuing to support the safety and efficacy of TASER devices.

Turning now for a few moments to look at some of the numbers in a little more detail.

Unit sales for the quarter, on the X26 we shipped 21,669 units; on the M26 we shipped 1578 units; cartridges were 389,345 cartridges, that's partly due to the order from the military where we tend to see higher cartridge to unit ratios bringing our average for the quarter to 16.7 cartridges per TASER device sold.

We also saw some continued growth in the TASER Cam area where we're continuing to get feedback from the marketplace that the TASER Cam is starting to take hold.

More and more agencies are now talking about deploying it and more agencies are deploying it with 3289 TASER Cams.

As I mentioned before, we had $5.5 million of international sales and we also had some significant qualitative developments in the international marketplace.

First to talk about, as many of you know, Nicolas Sarkozy has been elected president of plans.

Mr.

Sarkozy has made a large part of his reputation on law and order and modernizing the French police.

He's made some public statements that he believes TASER devices have a place for widespread deployment in France.

I would caution folks that national deployments do not move quickly.

Of course we're very excited about this development, but it's going to take some time and we're not sure exactly when we'll start to see those programs develop and mature.

Although we have started to see some additional maturation in the United Kingdom where recently they've expanded TASER deployments now beyond just firearms officers where we started a few years ago, TASERs are now starting to be deployed with nonfirearms trained officers.

We also hired a new vice president of international sales, Scott Mustian joined us this quarter.

We're very excited.

We took our time.

As you know, we talked last year about recruiting to fill that position as Steve Ward moved from international sales to take over our marketing.

We went through a pretty significant recruiting process, looked at hundreds of candidates and we think that Scott is just a hell of an addition to the team, brings a lot of experience and is going to really help us grow sales internationally.

At our conference just after the end of the quarter we also talked not only about iRobot, but about some new opportunities to deploy TASER technology to protect lives, particularly many of you have seen now, or if you haven't gone to TASER.com to see these videos, the first is the XREP, the extended range electronic projectile.

As you've seen, our engineers have managed to package the TASER with the same bio effect as the X26 in a disposable 12 gauge shotgun round that includes the entire TASER system.

We'll be moving that into field tests and pilot deployment later this year and we expect full release after a six to 12 month pilot phase.

Second, we also talked about Shockwave.

Shockwave is the new area [denial] system.

It is the first of what we envision as multiple generations of TASER remote area denial or TRAD.

The Shockwave is a Lego type system meaning that it interlocks in individual modules that can be built up to create systems of virtually any size covering virtually any area of any dimension where our soldiers and our war fighters, who are our primary target market -- we can now give them the ability with the push of a button to deploy TASER and saturate an area, dropping everybody in that area to the ground so that they can now engage people, particularly places like check points where if someone is approaching the check point and they don't stop, right now our soldiers have generally only legal options.

We believe that the Shockwave capability to be able to do area coverage deployment of TASER devices is a very exciting development again where we can protect life in new ways that enhance the capabilities of our war fighters.

Also looking back at the quarter, I talked a little bit about the numbers of agencies that we added, 542 new agencies for a total of almost 11,500.

We're at 11,469 agencies testing or deploying our products.

We added 210 new full deployments for a total of 3791 including one international police agency.

We also hired two new sales managers to focus -- to create more focus and single point accountability in specific markets.

We've had a citizen sales manager focused on building the C2; we've now augmented that with a private security sales manager focusing on the private security industry which, by the way, in terms of manpower and spending is significantly larger than the law-enforcement market and that's one where we anticipate his private industry begins to follow the TASER trend of law-enforcement.

There are significant opportunities.

And the other sales manager is to focus on state and federal corrections where again we see an opportunity to further expand our sales.

So with that overview I'm going to turn it over to Dan Behrendt, our CFO, to get a little bit more into the numbers.

Thank you.

As Risk indicated, sales for the second quarter are $25.9 million which set a record for the highest quarterly sales in the Company's history the sales for the quarter were up 59.4% over the prior year.

On our gross margins we had gross margins for the quarter of $15.5 million or 60.1% of sales which is down 4% versus the prior year due to increased sales through distribution, increased material costs due to higher component costs.

And also a higher sales mix with more sales of cartridges and TASER Cams which carry a higher percentage of material content than the handles, the X26 and M26 handles which contributed to material cost increases of 1.8% of sales.

We also have higher labor in the quarter due to some inefficiencies associated with new production employees as well as higher temporary labor and over time costs incurred as we expanded our workforce to meet the growing demand for our existing products and prepared to launch the TASER C2 and XREP productlines.

Those items contributed to an 8/10 of 1% increase in direct labor and a percentage of sales versus the same quarter of 2006.

We do expect that labor and efficiencies will improve as we move into the fourth quarter of 2007 and our staff is fully trained and gathers further experience in producing our product.

The $1.4 million increase in indirect manufacturing expenses was mostly driven by higher scrap during the quarter due to costs associated with the preproduction builds of both the C2 and XREP as well as higher X26 lines that are out.

We also incurred higher indirect supplies expenses to support the production of the C2 product and higher indirect wages due to increased headcount in our quality, manufacturing and engineering and materials departments, trying to make sure we can adequately support the ramp up in production of these productlines.

As the new products come to market we do expect to better leverage those costs moving forward.

We did see a sequential improvement in gross margins.

Our gross margin as a percentage of sales improved from 58.1% in the first quarter to 60.1% in the second quarter due to costs associated with the initial preproduction builds in C2 and as we move into production here in the third quarter I don't expect to see significant improvements in margins in Q3.

But once we go into full production I think we'll see gross margin improvements as we move into the fourth quarter.

On the SG&A expenses, SG&A expenses for the quarter were $8.3 million, this compares to $7.6 million in the prior year.

The variances were mostly driven by higher salaries and benefits of $375,000, increased bonus expense due to the improved operating performance, higher professional fees $180,000 due to increased legal and consulting costs.

The variances are offset by lower legal fees in the quarter which is a nice trend to see here, $137,000 and lower travel costs of $192,000 as the Company held its annual user meeting in the third quarter this year versus the second quarter last year.

R&D expenses for the quarter were $1.3 million.

This is an increase of $700,000 over the over the prior year mostly driven by higher salaries, $237,000, as well as increased supply cost of $314,000 as the Company purchased soft tools and other supplies to support the new XREP and C2 productlines.

The Company intends to continue to invest heavily in R&D during the remainder of 2007.

Income from operations for the quarter was $5.9 million and the Company had pretax income of $6.3 million.

This is up $21.3 million versus the prior year due to improvements in the operating leverage in 2007 as well as the shareholder's settlement which was recorded in the second quarter of 2006.

Net income for the quarter was $3.7 million or $0.06 on both a basic and diluted basis.

On the year-to-date basis, year-to-date sales were $41.1 million which is up $11 million or 36.7% over the prior year.

Gross margins of $24.4 million or 59.3% of sales are down 4.9% versus the prior year, again due to higher material costs on components as well as the Company would see a higher percentage of cartridges and TASER Cams.

Cartridges and TASER Cams on a year to date basis were 30.8 percent of sales versus 24.6% of sales in 2006.

We also had higher labor costs associated with the ramp up of production as we hired new production employees and have higher over time and temporary labor cost as we work through the preproduction builds at both the TASER C2 and XREP.

The $1.8 million in indirect manufacturing expenses were mostly driven by higher scrap during the first half of the year and increased indirect supply purchases for the production of the C2 productline.

SG&A expenses of $15.9 million for the year versus $14.9 million in the prior year.

The variances are again driven mostly by higher salaries and benefits, $694,000 increased bonus expense of 251 and then higher consulting costs of 294 due to increase legal consulting and consulting costs.

Again the unfavorable variances were partially offset by lower legal fees year-to-date of $237,000.

R&D expenses are $2.2 million year-to-date.

This is an increase of $1 million again driven by higher salaries as we rampup headcount in that area $385,000, increased supply cost of 422 related to the soft tool and other supplies to support the new products coming to market, and increased consulting costs $130,000 versus the prior year.

Income from operations year-to-date $6.3 million and pretax income of $7.2 million which is up $21.1 million versus the prior year, again based on the improvements in operating leverage as well as the shareholder settlement which we reported in the second quarter of 2006.

Net income for the year was $4.2 million or $0.07 a share on basic and $0.06 a share on a fully diluted basis.

If we move on to the balance sheet, we essentially reported a $44.5 million of cash and investments, this is an increase of $3.3 million -- a decrease of $3.3 million over the prior year-end.

Cash balance decreased due to the $8 million payment and shareholder settlement we made in the first quarter.

The overall cash balances, just on the balance sheet and (inaudible) investments increased partially due to the $5 million of long-term investments which matured during the quarter.

Accounts Receivable of $4.9 million is up $4.8 million for the prior year-end balance of 10.1 due to significantly higher sales in the second quarter of 2007 versus the fourth quarter of 2006.

Inventory of $9.9 million is up almost $700,000 from the prior year-end balance of $9.3 million due to increased work in process inventory built to support the higher sales levels.

Prepaid and other assets of $1.9 million are down $278,000 from the year-end levels due to the amortization of our liability and AD&O insurance policy.

The current deferred tax asset is down sharply, but this is just a reclass from the long-term deferred tax asset which you see down below on the balance sheet.

Current assets of $63.9 million -- this is up $7.8 million from the prior year, again driven by increases in Accounts Receivable and cash.

Property, plant and equipment of $21.3 million is up $0.5 million over the prior year number due to purchases of C2 production equipment as well as costs associated with the Company's new website which is launched in the second quarter.

Full assets for the period are $119.3 million, down just $0.5 million over the prior year; end balance was $119.8 million.

On the liability side of the balance sheet, accounts payable and accrued reliabilities of $7 million are up $170,000, again it's just related to higher purchasing activities to support the higher sales levels.

The current deferred revenue of $1.3 million is up due to the sale of more extended warranties in 2007.

The deferred insurance proceeds of $[508,000] are just flat with prior year end, and we did see customer deposits increase $362,000 over the prior balance due to prepayments on orders from both new customers and from four customers that prepaid for some of their orders.

The litigation settlement liability is now zero, that's because the Company made the $8 million cash settlement payment end of Q1 and we actually made the final payment via the issuance of stock in Q2.

We did buy the stock associated with that in the open market as part of our buyback program so there's no dilution from the shares issued in Q2.

Deferred revenue net of the current provision increased by $662,000 to $2.6 million, again as the Company sold more extended warranties during 2007.

Let me move on to the cash flow statement.

The Company had operating cash usage of $2.9 million for the year compared to cash generation of $6 million in the prior year.

Again this is driven by the $8 million payment for the shareholder's lawsuit in Q1.

Net cash provided by investment activities was $8.2 million and the Company realized $10 million from maturing investments which are partially offset by $1.6 million in new property and equipment purchases.

The new assets purchased were mostly on the C2 production equipment and costs associated with new website.

The Company did generate $1.4 million from financing on a year-to-date basis, again mostly driven by stock option activity during the year and we ended the period with $25.5 million in cash which was up $10.1 million from the prior year due to the maturing long-term investment in both cash and investments again for June 30th for $44.5 million.

With that I'd like to turn the call over to Doug Klint, our general counsel.

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

We have a patent infringement lawsuit pending against Stinger.

In the litigation we filed against Thomas Watkins our former patent attorney, the court entered an order and final judgment international judgment against Watkins of all right title and interest that he has or claims to have in certain U.S.

patents and applications and related electronic weapons technology.

The court order further requires him to execute a written assignment to (inaudible) assigning all rights title and interest that he has to these patents.

In addition, a court order criminally (inaudible) Watkins from claiming or seeing to obtain the ownership rights in the (inaudible) property.

Also his disbarment has been ordered by the Arizona Supreme Court commission.

We have a lawsuit that was filed against (inaudible), the medical examiner for the Fort Knox (inaudible) is still pending.

We also filed a lawsuit against Dr.

Lisa Kohler, the medical examiner for the (inaudible).

This case is set for trial this fall.

It's important to know that the city of Akron, Ohio actually filed a motion to intervene cleanup with us against Dr.

Kohler in this litigation.

On the product list liability front, we have a total of 52 lawsuits that have been dismissed at this point and we only had three lawsuit that were filed in Q2 2007.

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

And in addition, we have a total of 22 lawsuits that have been dismissed since the beginning of this year.

You have to bear with me for a minute here.

While Doug is cleaning up -- he's got his laptop having an issue there.

I think it's important to say again, as you all see, Doug has just done a masterful job of building the right team that's able to control our litigation expenses in the environment that developed in 2005 and to create the number of wins, we've had 52 wins.

We're now seeing a significant decline in new litigation.

In fact, we're hearing in many cases where certain civil rights attorneys are going after law-enforcement agencies that they are now intentionally avoiding brining TASER into those suits because we don't settle and we bring many, many experts and resources to bear in these cases.

So the strategy is paying off.

We told you two years that we were going to invest in fighting these cases, but to think about it in investment and we're now starting to see the rewards of that investment because, again, we just don't settle these.

The laptop is up and running again, sorry about that.

We've actually had a net reduction of five pending lawsuits in the quarter first quarter which builds on the net reduction pending lawsuits from fourth quarter of 2006.

It's important to know that for the last three quarters we've had more dismissals and fewer verdicts or lawsuits filed and this appears to be a positive trend going forward.

Year-to-date we've had seven lawsuits filed a 24 lawsuits dismissed a net reduction of 17 lawsuits.

It's important to see that the key to our success is the inability to plan to prove that the (inaudible) device was effective or was it cause of any suspect injury or death.

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

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

In addition, we've got 40 nationally renowned and internationally renowned experts who've all concluded TASER devices not defective and have played no cause or relationship in any (inaudible).

Our strategy is to utilize the very best local consulate police experience.

We use the very best experts and we stand behind the safety record of the TASER product.

And it's our policy not to settle suspect injury or death cases and we file motions for dismissal whenever possible.

It's important also to note that our strategy is not dependent upon winning every lawsuit.

Juries are unpredictable and we may very well lose a lawsuit in the future.

If that were to happen we have adequate insurance coverage to cover any anticipated financial loss.

Our objective is to send such a strong message to our adversaries by overwhelming them with our expense and resolve not to settle that they concluded that final litigation against TASER is not a profitable venture.

This strategy is beginning to show results and as we've had six lawsuits that we are aware of that were gone through and dismissed by the claims (inaudible) order, when it became apparent then that we would not settle, and they saw the medical and scientific evidence we had in favor of the TASER.

We're also aware of at least eight instances where litigation was not filed against TASER.

As a result the relitigation has flowed considerably over the last three quarters from 13 lawsuits filed in the third quarter of 2006 to only three lawsuits that were filed in Q2.

And one of those lawsuits was dismissed within a week after it was filed.

We're also continuing our efforts to reduce legal expenses.

second-quarter outside attorneys' fees were down both from a year ago and down slightly from the first quarter 2007.

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

Thanks, Doug.

So for those of you haven't seen the keynote address from our conference a few weeks ago, you can download it off of TASER.com on our homepage.

And I think you'll find it interesting.

It was a good overview of the state of the Company and our vision going forward.

Over the last few years while Doug and his team were defending the Company in court, I was working pretty assiduously with our R&D and engineering teams to relentlessly innovate, to bring our technology this unique TASER (inaudible) incapacitation affect into other delivery methods -- new ways to create weapons systems that are powered by TASER that can incapacitate without causing death.

And you're now starting to see the fruition of that.

It's really a two-pronged strategy from a business perspective.

First is to take our existing technology and to put it more broadly into new marketplaces, whether that's the international market where we've seen significant growth now the last quarter or private security or with the new TASER C2 we've repackaged our technology in a much more consumer friendly way and (inaudible) it's extremely easy to use with our revolutionary new CheckLok technology where we do the background check after the point of sale so we don't have to burden distribution with a background check requirement, we can handle that directly with the end consumer and give them an activation code to activate the C2.

We've also hired, as I mentioned, managers for private security and corrections, again, taking our existing technology and broadening our market base.

And then of course the second aspect of our growth is to move the technology further down the field with new technologies such as the XREP for wireless engagement and longer ranges with the Shockwave where we can now do area denial with the push of a button.

And future systems we'll be developing with iRobot and systems we develop on our own where TASER devices can be used either deployed remotely through robotic systems that can be thousands of miles away from a human operator or systems were we can take the Shockwave and in future systems -- future generations of TASER remote area denial we can add all sorts of technology that enabled the devices to deploy themselves much like we talked about in the original TASER remote area denial or TRAD concept last year.

So we'll continue to broaden our base.

We think today is a turning point in the history of the Company as we re-enter the consumer market with a product that qualitatively is being extremely well received.

It is a very common event as we're talking to just average people of all walks of life?

When we talk about the C2, really for the first time in our company's history we get a response not only that they think is interesting but they want to give us their credit card number and purchase one, that's the best indicator at the end of the day is consumer sell through.

We're not going to talk about any of the current pre orders with the C2 because we basically feel that our current orders are to fill distribution and there's not really any real correlation between distribution fill and sell through.

So we think it's wise for us to wait.

Next quarter we'll begin to have sell through numbers and we'll share those.

We would caution at this point that the C2 is still an unknown until it's in the stores, moving off the shelves and we have got proof of final sell through that everybody should take a conservative look at the C2 and I wouldn't build much in terms of incremental expectations on it until we have firm data.

But obviously our core businesses recovered nicely this last quarter and we're very excited about the future.

And with that we'll take a few questions and then we're going to have to go run and open the NASDAQ market this morning.

(OPERATOR INSTRUCTIONS).

Eric Wold, Merriman Curhan & Ford.

Good morning, guys.

Since you ended with the C2 I'll start with a quick question there.

I'm not looking for obviously sell through or the backlog, but if you're doing some checks for the weekend, a lot of stores that I called only had about one to three they're going to start selling today.

So can you give a sense of what those three retailers you talked about last week, kind of what the plan is to get units out to them and/or the ones that haven't been announced yet in terms of what they may initially get and kind of how that will fill over the coming weeks?

Qualitatively and our first shipments went out last week.

The C2 really has been the most Rigorous prerelease testing we've gone through.

As you know, we were late.

We stubbed our toe in terms of timing.

Getting the product to market we discovered some issues -- we were not happy with the performance, we went back and redesigned some of the components to where now it's extremely robust, but part of that process -- of course any time you redesign a component that means you've got to get components flowing back into the manufacturing cycle and that's just taking some time.

To date we've shipped in the hundreds of units and we're planning on starting to scale that up.

It will probably be -- all the stores should at least have gotten initial units in the next seven to 10 days as we expect that by the end of those of coming week we'll begin to see production smooth out as we start to get more of the -- basically more components and subassemblies in from our suppliers.

So to be honest in a perfect world we would have loved to have had a lot more inventory on the shelves.

But at the end of the day we think we did the right thing by slowing the bill rates down and making sure the product is rock solid.

Okay, perfect.

And then just lastly -- kind of the military products you're launching are kind of at the other (inaudible) of the tier, like XREP and the iRobot alliance.

Do you get a sense on potentially -- I'm not looking for a dollar amount, but maybe how significant those could be in '08?

Or is it kind of what we saw with the X26 where the military took a big order of cartridges back in '05, maybe kind of looked at it for a couple year and then you had the large $23 million contract a couple weeks ago.

Should we expect to see anything here or are these kind of more further along in the process?

The best way I'd characterize them is these are high-risk, high return sort of business decisions or products.

As we've kind of talked about in the past, we're doing things that have never been done before like the Shockwave.

We developed that based on feedback primarily from our military advisory board, and early feedback from end users in the military has been very encouraging.

The question is just one of whether it will be stimulated enough demand to go around the normal military procurement (inaudible) because we've got to get urgent needs requirements put together to get these out to the field quickly.

So I'd say the way to look at it is if the military doesn't buy it, for example on the Shockwave, in the short-term due to just the procurement cycle, we think that there's actually a fair market with specialty law-enforcement applications, SWAT teams, etc., that could be in the few millions of dollars annually which is enough, frankly, for the program to be cash flow positive and a reasonable return on our tooling and development costs.

But the big question is, is the capability revolutionary enough for the military to kind of step outside of their normal development procurement programs?

We like to think so, but it's just going to take getting some units into the hands of the war fighters.

And I wish I had a better answer for you, but we're certainly excited about it, we know that our customers are excited about it.

We'll just have to wait and see what happens.

And sort of similarly with the XREP, the XREP we certainly see our military customers -- or I'm sorry, our law enforcement customers are excited about it.

We anticipates there's a lot of folks who want to participate in the pilot test, we're going to keep it pretty limited because, frankly, it's never been done before.

We've fired about 1000 rounds or well over 1000 rounds now in the lab, but as we move it into the field we need to make sure the round is performing per our specifications in the real world.

So law enforcement, we see demand there, but I would also caution that it's not going to be as large as our handheld devices because it will be generally used by more specialty SWAT teams, folks that are extended range engagement as opposed to day in and day out use of the X26.

But again, the military is going to be an interesting customer there because they really do want to reach out.

They have a much greater need to be engaging folks outside of our normal 35 foot range.

So we wish we could give you a better read on 2008 with those products, but we think each of them will be profitable on their own accord.

But how significant the revenue impact remains to be seen.

Perfect.

Thanks, guys.

Matthew McKay, Jefferies & Co.

Good morning, guys.

Nice job on the execution here.

First of all, just what are your expectations for the number of stores the C2 is going to be in by the end of the month?

I think we've got a couple of these 80 to 100 store chains, certainly we are working to make sure those retailers have product on their shelves as quickly as possible.

I think that there's a lot of independent dealers that a lot of the sales are into the two-tier distribution and so you've got a lot of store doors associated with that.

I think as we see the initial retailers, hopefully as we see success there we'll expect to see more retailers that are on the fence come on board as well.

So I think you have to hit the right item, that the number of store doors is going to be real key for us and really what we're focused on is making sure these initial retailers are successful, and that way the retailers that have been evaluating whether to carry the product, I think that will help to solidify their decision to move forward.

Okay.

In terms of the number of stores that come online, is it going to be more a function from the retailer's angle getting comfortable with the C2, or is it going to be more controlled from your end as you ramp up capacity?

Out of the gate it's going to be a little bit of both.

I think that we want to make sure that we're servicing the retailers we've signed up first before we sign up more.

We don't want to create a situation where we've got customers who are frustrated where they've got backorder situations.

But as we ramp our production we'll certainly add retailers.

I think that puts us in a good position today because we can pick and choose which retailers we sign up as we move forward and make sure that we can match our capacity with our retail customers.

Okay.

And then by the end of the year, what type of capacity do you expect to reach on the manufacturing side?

The goal is to across one shift to be able to make a similar number of units as what we're making on the X26.

We're not -- obviously at this point we're not sure we're going to need all that capacity, but out of the gate the overall goal is to be able to produce on the C2 handle line a similar number product as what we're selling on the X26 productline.

That's like 25,000 a quarter, right?

Roughly about 500 a day, that's right.

500 a day, okay.

And then just -- I think you've been looking at -- assuming that demand is pretty robust here, where -- one of the biggest challenges it seems like you're going to have is just handling manufacturing capacity and the supply chain and just how well do you think you have your arms around all those issues and is there anything in particular that you might be a little concerned about?

I think obviously the supply chain is something we need to make sure we match that with our own internal capacity.

The one thing I'd caution here is obviously capacity and sell through are two different things.

I wouldn't necessarily say that we're going to be selling 25,000 units a quarter out of the gate as we ramp up here.

But we are looking at the supply chain, we're making sure to understand what the capacities of our suppliers are, we're developing second sources as appropriate to make sure that we can meet demand if the demand is there.

Okay, good.

And then just on the TASER Cam.

You said interest has continued to increase there.

Are we -- should we start to expect a more significant ramp maybe in 2008 in TASER Cam?

Are you starting to see that some of agencies out there are getting close to making some larger orders?

I think there's a lot of interest out there.

I think again it's tough to predict the sell through on the TASER Cam product.

I think we've got a lot of trial and evaluation units out there in the field.

We've got a number of customers that are full deployment; I think customers are already fully deployed.

I think the easier sale for those guys is someone who is partially deployed.

So as the number of full deployments goes up I think that our target customers -- number of customers we can target for the TASER Cam also increases.

But I think the TASER Cam is probably going to be a fairly lumpy product for us.

Certainly we had a strong quarter here, in the second quarter we felt good about that, we were encouraged by that.

But I think we're going to have to (inaudible) our philosophy quarter-by-quarter.

I mean the good news is I think from a return on investment perspective it's a good product for us.

I think that hopefully we'll see further adoption as more and more customers move towards that product.

Okay.

And then on the international side, obviously you had a good quarter there.

I guess this is a tough question, but is it more sort of lumpiness or are you seeing sort of maybe a broader base of demand start to increase on the international side?

I'd say it's still pretty lumpy.

We're frankly pleasantly surprised by the international sales this past quarter.

We're trying to get more and more systematic again with our new VP putting together more international infrastructure to try and get more countries up and rolling in parallel.

But at this point we're still dealing with fairly large agencies with individual decision-makers that in any quarter that one comes in they could have a big swing for us either way.

So I wouldn't characterize it that -- it's not like the U.S.

where we've got large numbers of agencies so you can get sort of a statistically predictable base.

We're still in a pretty lumpy phase.

Any more movement in the Middle East?

Not at this point.

We haven't had any major orders out of that area in the past quarter.

Okay.

Then just switching over to the margins, Dan, in your comments you said you expect third quarter to be probably flattish relative to this past quarter and then start to hopefully increase from there.

Looking out to '08 when the C2 hopefully stabilizes a little bit, what kind of gross margin overall should we be expecting?

I think that as we move into 2008 obviously we're hoping to see -- we've got a lot of cost reduction efforts currently underway, kind of part of the normal continual improvement process.

We're hoping to, as we see moving into 2008 the ability to leverage some of those indirect costs we've invested in this year to support the growing business.

So I do expect that in the fourth quarter hopefully we'll see some sequential improvement from the third quarter which I do expect to be somewhat flat with the second.

And then as we move into next year we've got a lot of programs in place to improve the operating performance, but we don't have an overall target that we're going to share at this point.

We're going to have to roll in about five minutes, so if it's okay if we can take one or two more callers.

We appreciate good questions.

Thanks, Matt.

Greg McKinley, Dougherty.

Good morning.

Guys, could you comment a little bit on your reported transactions in the June quarter, there are a number of significant transactions you were scheduled to ship.

Did they all ship or did some of that -- should we expect to be delivered in Q3?

Yes, I think that we announced the orders, some of them we said we'd ship in Q2 or Q3.

There were a few orders we received towards the end of the quarter there that we weren't able to get out the door.

We were able to get the majority of the product moved.

We worked a lot of overtime towards the end of the quarter to make sure that we could satisfy the customer need there.

Okay.

So a couple of those that you said potentially could straddle both quarters are likely to apportion a shipment in this September quarter?

That's right.

And then there's also a comment here on the wire this morning, your investment in some automated tooling equipment.

Could you talk about that briefly and what type of investment that is and what type of benefits you expect to get from that, maybe the timing of the implementation?

The timing, we've made the initial investment here to procure some manufacturing equipment.

As we looked at our production capacities we felt the need to invest in some new equipment in order to make sure we could meet that demand.

To be honest with you we'll talk a little bit more about it as we come up and ramp that equipment up later -- we expect it to be delivered later in 2008.

So it's one of those things where we're kind of in the early proof of concept stages, so at this point there's really not a lot to say.

I think as we move further along we'll have more to say in future calls.

Okay, thank you.

We'll take one more.

Steve Dyer, Craig-Hallum.

Good morning, guys.

Nice quarter.

I'm wondering just kind of as the overall legal environment improves if you're seeing any sort of incrementally better visibility.

And I know that's kind of a qualitative question.

But have you noticed anything different say a year from now that you didn't a year ago?

I would say yes, absolutely.

Qualitatively there was -- I'll point probably to this last quarter.

That was about the 45th lawsuit or so dismissal where qualitatively we kind of felt a shift and it seemed like a lot of these bigger orders started coming off the fence and there was a bit of a momentum shift where we saw a significant number of them this quarter to where our average order size this quarter is up significantly over prior quarters because of the number of large orders that came in.

And we think that had a lot to do with the litigation results.

Great.

And then another kind of trend that I'm interested in knowing your take on is with respect to cartridges.

You guys obviously had a huge cartridge quarter, are you seeing the number of usages per year?

Which I always kind of thought to be in the four to six range.

Are you seeing that increase or was this just kind of an abnormally stock the shelves of a quarter for cartridges?

This really had more to do with the military order.

The military tends to buy significantly more cartridges for a TASER device.

A couple years ago we had a big military order and I think that skewed us all the way up to the 22 to 1 ratio.

So that really does skew it.

I wouldn't read anything into that we're seeing some sort of shift in the usage cycle of the product that really is just more of a customer shift.

Okay, great.

And then just one housekeeping question, I may have missed it.

Receivables were up fairly dramatically this quarter.

Was that a timing issue, was there something else at play here?

I think it's just really more of a timing issue.

We did see the sales for the quarter were obviously much stronger than the first quarter and much stronger than the fourth-quarter so it's really more of a function of sales levels than anything else.

The days sales didn't change appreciably and, again, as you know, our sales tend to be a little bit back end loaded in the quarter so it's really not anything I was surprised by.

Okay, great.

Thanks, guys.

Thank you.

We're going to go ahead in wrap the call up.

Thank you everybody who attended.

We will be ringing the bell here shortly to open the NASDAQ market.

I see Tom is back in the room with us now and we'll be on Jim Cramer's show at 4:00 Eastern today.

It should be fun.

Tune in, check it out.

And Kathy will be on the Today Show at 8:55.

All right.

So tune in and catch the Today Show and stay tuned to TASER, a lot of more good things to come.