Axon Enterprise Inc (AXON) 2008 Q3 法說會逐字稿

Good morning ladies and gentlemen, welcome to the Q3 2008 TASER International Incorporated earnings conference call.

My name is [Lutrece], I will be your coordinator for today.

At this time all participants are in a listen only mode.

We will be facilitating a question and answer session toward the end of this call.

(OPERATOR INSTRUCTIONS) At this time I would like to hand the presentation over to your host for today's call, Mr.

Rick Smith, CEO.

Please proceed sir.

Good morning and welcome.

Thanks for joining us this morning.

Before we get started I'm going to turn over to Dan to read the safe harbor statement.

Good morning.

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

Such forward-looking statements relate to expected revenue and earnings growth, estimations regarding the size of our target markets, successful penetration of law enforcement markets, expansion of the product sales into the private security, military, consumer, and self defense markets, growth expectations for new and existing accounts, expansion of production capability, new product introductions, price 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 herein.

Such factors include, but are not limited to, market acceptance for our products, the establishment and expansion of our direct and indirect distribution channels, attracting and retaining the endorsements 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 in markets in which we compete, and accompanying demand for our products, potential delays in international and domestic orders, (inaudible) risks of manufacturing automation, risks associated with rapid technological change, execution and implementation risks of new technology, new product introduction risk, 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 it could have on sales, product quality risks, potential fluctuations in quarterly operating results, competition, negative reports concerning TASER device uses, financial budgetary constraints of prospects and customers, dependence upon sole limited source suppliers, fluctuations in component pricing, risk of governmental investigations and regulations, TASER product tests and reports, dependence upon key employees, employee retention risks, and other factors detailed in the Company's filings with the Securities and Exchange Commission.

With that, I'll turn it back over to Rick.

Thanks Dan.

Okay, well I assume everybody's probably seen our press release this morning.

I'm really proud of our team able to turn in the results that they did in the current economic environment.

Revenues were almost $23 million, that is a $5.7 million or 20% decrease over the same quarter of last year, however on a sequential basis sales were up $1.8 million driven primarily by some strong international orders this quarter.

Now at the same time operations continued to demonstrate improvement, gross margins increased to 60.8%, up from 56.1%, that's almost a 5% of sales increase while the top line dropped to 20%.

So Steve Mercier and his operations team are really, really doing an outstanding job.

Research and development for the quarter increased by 240%, more than tripling over last year -- I'm sorry, the increase was $2.4 million.

And as we've talked about, TASER is continuing to invest heavily in R&D, new product development and building out the infrastructure of the Company to support what we believe are some significant future growth opportunities.

My favorite non-GAAP number is operating income pre-R&D, that remained above 20%.

We're at 21.2% operating income before R&D, year-to-date we're at 18.6%, and again the reason we like to talk about that is Dan and I like to have a metric to make sure that we're keeping our eye on the ball for our cost controls in our core business and make sure that the heavy spend in R&D doesn't obscure inefficiencies elsewhere in the business.

So our goal has been to keep that north of the 20% where we can.

Net income and diluted earnings per share for the quarter were $800,000 and $0.01 per share respectively.

Now the company generated $4.9 million in cash from operating activities, and we ended the quarter with $42.5 million in cash and cash equivalents, and zero debt.

I'd like to point out again another area I'm particularly proud of is the job that Dan Behrendt, our CFO, has done in the treasury function.

There are a lot of companies that have gotten caught in the current financial meltdown, and seen assets that they thought were cash turn out to be significantly impaired.

Our treasury position has come through unscathed, and I think that says a lot about what Dan and his team are doing.

Some other milestones for the quarter, let me talk about one that was a little more challenging, our C2 sales for the quarter were down about 50%.

We attribute that to a couple of factors, lack of sell-in to new retailers, retailers typically don't add new products in Q3, so while we benefited from sell-in in Q1 and Q2 we didn't see any major sell-in in Q3.

Also given what's happening in the economic environment, we're seeing a lot of retailers' drop their inventory stock levels so they're not restocking at rates we might see in a more normal economy.

Also the retail sell-through has been not as good as we would like to see, which we attribute primarily to the in store experience.

Our product does require a lot of education of the end consumer, it doesn't just sell itself like something, a more commodity well known product.

So we're putting a lot of work into the in store experience.

We'll see some of that hit on an experimental basis in Q4, but as we roll into the 2009 retail season the first quarter when a lot of retailers are making their plans for the year I think we'll have a much more developed retail program, given some of the talent we've added to focus in that space.

Some of the action plans we're doing on the C2; first of all our new senior VP of sales and marketing have met with every major retailer that we've got, and the good news is they're actually all quite happy with how the C2 is performing.

Although it's not up to the levels we'd like to see, the good news is they've all reported they view it as a successful program, and they'll continue to work with us on developing the in store experience and promotions.

So again that's an area where we are investing right now in different test markets for different type of fixtures to sell the product in the store.

So some milestones for the quarter, the first I'd like to talk about is really some of the rounding out of our management team.

This last quarter we announced Jas Dhillon coming on board as our Chief Strategy Officer and the General Manager for our new TASER virtual systems division.

Before coming here Jas was responsible for the team that led business development strategy, product innovation and M&A for Microsoft Office Live.

For those of you who keep track of these things, Office Live is one of Microsoft's major strategic initiatives as they port their core Microsoft product offering from in the box delivery to an online delivery mode.

That's a major initiative, and needless to say we're pretty excited to have somebody with this background joining our team here at TASER.

As well as Mark Fidelman our new Executive VP of Sales, Mark actually was with Jas Dhillon at his first start up, BlueLine Online, now CTSpace, and since that time Mark is working consulting where he's worked across a variety of different company sizes, from the Fortune 500 to Fortune 100, on down.

So Mark brings a lot of experience both in from start ups, all the way up through the growth chain to very large companies, and he's doing a great job building out the right infrastructure to take our sales to the next level.

We also added Irene Blomgren who is a prominent recruiter out of silicon valley who's been helping us make these other significant adds.

She's up now as our Human Capital Executive Vice President.

And as you know this builds on some significant adds earlier in the year with Nick Pappas out of Gateway where he was responsible for Gateway.com's start up operations, Best Buy, Circuit City and Luxotica Eyewear, so a strong marketing and consumer background with Nick.

And Steve Mercier running our operations, Steve is out of Intel, 20 some years at Intel and I think again our shareholders can certainly see the footprints in the snow for where he's been in terms of our operating results.

International sales this quarter represented 16%, total net sales, that was up from 12% last year.

I'm sorry, up from 12% sequentially.

Significant shipments included the first order for about 1,250 TASER X26 devices from the Queensland Australia Police Services, which has more than 9,000 law enforcement officers, and is adapting our TASER technology after conducting extensive trials and studies.

We see Australia as a significant growth opportunity, the products are being very well accepted there.

We also had a follow on order for 1,000 TASER X26s from the Korean National Police, which is expanding its program.

In France we saw the Interior Minister issue an official decree in September that permits local French law enforcement agencies to deploy TASER ECDs.

There's more than 20,000 over these local agencies that are now open market for TASER.

We are very much focused on the French opportunity, we've continued to see the right policy and infrastructure moves, although we haven't seen the significant orders yet.

The good news is we're continuing to see all the progress that's indicating that we're going to see expanding future deployments.

In fact, I believe this last quarter there was a statistic that came out of France at the ministerial level where they reported although TASERs are deployed by approximately 1% of their police officers, they've seen a 30% decrease in police shootings.

So again those are the types of results that are very good for long-term growth of the TASER programs.

Domestic orders, we didn't announce a lot of big orders this quarter.

One of the more interesting ones was 400 TASER devices with 400 TASER CAMs from Palm Beach County Sheriff's Office in Florida.

But the good news is we've continued to see some stabilization in our core market for the small to mid size agencies, which really carried the business through the quarter to some pretty solid results, given the operating environment.

We also saw four more human studies published on TASER devices, including the new XREP that's currently in field trials and getting ready for commercial rollout.

These studies continue to build on the scientific compendium of information that's out there that supports the overall safety of these devices.

We had three more product liability suits dismissed during the quarter, for a total of 74 wrongful death or injury suits that have been dismissed or judgment entered in favor of the company.

And of course you all probably saw yesterday that we found out Friday that the US District Court in northern California eliminated the $5.2 million in punitive damages awarded in the Heston case.

It's obviously a significant win for our legal department, it reduces the estimated total damages in that case by over 97%.

We now have, by our calculation, $153,000 in compensatory damages.

We're continuing to look at the appropriate legal angles, obviously we feel that even there are issues with any damages in this case, where the jury found that Mr.

Heston was 85% responsible and assigned 15% to TASER in sort of the "straw that broke the camel's back" theory.

While our hearts to out to Mr.

Heston's family, they certainly have been through a lot, we think the judge came to the right conclusion, certainly on the punitive damages.

At this point I'm going to hand over to Dan, and then I'll be back to talk about our future initiatives.

Thank you very much.

Let me go through the income statement first for the quarter.

As Rick indicated, sales for the quarter were $22.9 million, which is down $5.7 million from the prior year, although sequentially our sales were up $1.8 million from Q2, mostly driven by the increase in international sales.

The decrease in sales from the prior year was mostly driven by the continued lower municipal budget spending in the US due to the economic constraints right now in the country.

Gross margin is at $13.9 million or 60.8% of sales, are up 4.7% as percent of sales from the prior year, which is very significant.

The increase in margin was caused by several factors, including the elimination of most of the cash and distributor discounts, lower overtime and temporary labor expenses, better productivity, lower warranty expenses, and improvements in our scrap expenses.

The $950,000 decrease in indirect manufacturing expenses versus the prior year were driven, again, by the lower scrap and warranty reserves for the quarter.

SG&A expenses were not quite $1 million versus $8.1 million last year, the increase again was driven by higher salaries and benefits of $477,000 due to higher headcount.

Legal expenses are up over the prior year due to an increase of outside legal expert witness fees.

Advertising costs mostly related to the infomercial increased by $247,000 versus the prior year.

As Rick indicated, research and development expenses were $3.3 million for the quarter, which is an increase of $2.4 million over the prior year, driven mostly by the outside development costs for new programs, especially AXON, at $1.3 million, higher salaries of $379,000 due to the increased headcount, and increased supply costs of $424,000, mostly driven by costs associated with developing working prototypes for these new programs.

As we communicated last conference call, we continue to ramp the R&D spending for the rest of 2008 in order to accelerate the introduction of the new products in the pipeline, and we see the higher spend actually moving in 2009 as well as we continue to move these products from the development phase into production.

Income from operations was $1.5 million, and pre-tax income was $1.8 million for the quarter.

The decrease in income from the prior year is, again, driven mostly by the decrease in sales and the higher R&D spending.

Net income for the quarter was $600,000 or $0.01 per share on both the basic and diluted basis.

If we look at the year-to-date for the nine months ended September 30, sales were $66.5 million, which are down 4.7% or $3.3 million from the prior year.

Gross margins of $40.3 million, or 60.6% of sales, are up 2.6% as a percent of sales from the prior year.

The increase in margin was caused by several factors, including elimination of the cash and distributors' discounts, lower labor expenses and improvements in material costs and scrap expense.

Again, indirect manufacturing expenses improved $2.1 million to $6.3 million for the year-to-date amount, again on lower scrap, lower [warranty] expenses and better leverage on our fixed expenses.

SG&A expenses, at $27.9 million, are up $3.9 million over the prior year, driven mostly by increased salaries and benefits of $1.5 million, due to increases in headcount, higher advertising costs, due to the infomercial of $1.3 million, higher insurance costs of $211,000 and a higher 123R charge for the stock option expenses of $213,000.

R&D expenses of $8.5 million are up $5.3 million over the prior year and are due to increased outside development costs, mostly associated with the AXON product of $2.8 million, higher salaries and benefits [another] $55,000 and higher supply costs of $711,00, due to the prototype work we're doing right now.

Loss from operations on a [year-to-date] basis is $1.3 million, driven by the $5.2 million accrual for the Heston verdict.

As Rick indicated, we had some good news on that on Friday.

We're going to review the accrual in the fourth quarter to make a determination of [whether to] reverse once the judgment's entered.

Pre-tax income of $167,000, a net loss for the year-to-date, is $181,000 for a breakeven on an EPS basis.

I know, as you look at the results for the year-to-date, the tax provision looks odd.

Actually, our tax provision's higher than our pretax for the year-to-date.

This is driven by the $250,000 impairment charge we took in Q2 related to the Arizona tax assets.

So, if you back that out, the tax rate is a little bit more of a normalized basis.

But when you add the $250,000, that's the reason for the tax expense looking so odd for the quarter.

As I move on to the balance sheet, we did finish the quarter with $47.5 million of cash and investments.

This is a decrease of $12.8 million from the prior year's end.

This was really driven by the stock buyback of $12.5 million that we announced and completed in the second quarter.

We have $42.5 million of cash and investments and, of the $47.5 million, $42.5 million of that is actually cash and cash equivalents.

So, due to the uncertainty of the market, we've really elected to keep our investments as liquid as possible.

So, out of the $47.5 million, $42.5 million is actually in cash and cash equivalents.

So, we're very well positioned right now.

Accounts receivable, $11.6 million, is down roughly $100,000 from the prior year's end balance due to lower sales in the third quarter of '08, versus the fourth quarter of '07.

As we look at our day sales outstanding, we're at 45.2 days.

This is actually down a little bit from the last quarter.

It is about 10 days higher than what we had at the year-end but that was expected.

We did eliminate the cash discounts and obviously, the net result of that is our day sales outstanding is going to increase a little bit but we're pretty satisfied with the receivables, given where the market is, that we're keeping our day sales outstanding pretty much in line with the prior quarter.

Inventory, $17.5 million, this is still up $4 million from the prior year balance of $13.5 million but we were successful in reducing that balance from June by about $3 million.

And we'll continue to look at that inventory balance and make sure that we've got the appropriate amount of inventory for the year the business we [see].

Prepaid assets of $1.9 million are down $2.5 million from the year-end balances.

This is, again, due to the receipt of insurance receivables we had on the books.

We also had some amortization of prepaid insurance and the expensing of our infomercial.

So this is the driver of the prepaid assets.

Property, plant equipment $26.5 million is up $2.9 million from the prior year-end.

The big driver there is continued investment in the automation equipment.

We continue to make progress in payments on that so that's been the major driver of our Cap Ex for the year.

Total assets finished up in the period at $127.1 million, compared to $137.8 million at the end of 2007.

Liabilities, from the balance sheet, accounts payable and accrued liabilities of $12 million are up $1.9 million from the prior year-end.

The big driver here is that accrual for the Heston litigation judgment of $5.2 million.

Again, we're going to take a look at that in the fourth quarter, once that judgment's entered, to decide whether to reverse that accrual.

Current deferred revenue of $2.1 million is up from the prior balance of $1.7 million, due to the sales of more extended warranties in 2008.

And then, we ended the period with $19.5 million of total liabilities and $107.7 million of stockholders' equity.

Moving on to the statement of cash flows, the company had cash provided from operations of $4.6 million for the period ended September 30th.

This compares to $6.7 million of cash generation in the prior year.

The cash generation in the current year is really driven by the lower prepaid assets' depreciation and the 123R non cash charges.

Net cash provided by investing activities was $7.3 million, as the Company realized $12.5 million from maturing and called investments, which were partially offset by the $4.8 million of new property equipment purchases.

And the new purchases were mostly driven by the purchase of the new automation production equipment, as well as purchases of new IP equipment.

The Company used $12.2 million in financing activities.

This is driven by the stock buyback of $12.5 million that we announced and completed in the second quarter.

We were able to purchase 1.79 million shares of stock, or about 2.9% of our shares outstanding in Q2.

And we ended the period with $42.5 million in cash, which is up [$15.5 million] (sic - see Press Release) from the prior year-end.

Again, as the markets have been in this turmoil, we've elected to keep our investments very liquid so as the investments were called and matured, we've kept them in cash and cash equivalents, versus reinvesting them in longer-term investments.

And with that, I'm going to turn the call back over to Rick Smith, our CEO.

Okay, thanks Dan.

One thing I'd like to talk about a little bit is, you know, what doesn't kill you makes you stronger.

I think there's yet another example of that with what's happened with TASER over the last four years, from a litigation perspective.

Those of you who've been with us for a long time know that in 2005, this company was really challenged when we saw a significant increase in our litigation profile.

That forced us to get very good, frankly, world class, at use of force defense litigation; because, we've had to sit, side-by-side with our partners in law enforcement when these responses to resistance or use of force incidents get adjudicated.

What we've learned through that process is not only that we've built a world class capability, that's built into our business model that we're able to perform that function.

But we've come to understand something about our customers.

And that is, when there's an incident where police respond to physical resistance and there's use of force, if we think of that incident like a fire, it lasts for a few seconds or minutes.

And that's where TASER's typically been focused, is, giving tools to be able to incapacitate during those uncertain and fast evolving moments.

And we've got a huge impact for our customers.

We've saved many lives and major cities go for over a year without shootings, for the first time in some of their histories with these devices.

But what we've also learned is, from that fire comes a cloud of smoke that really does the long-term damage, financially, to an agency.

So, if you think of the incident as a fire, the smoke is the years of litigation and post incident legal reviews.

That happens almost universally in these cases.

And while the human cost is certainly very high, or the risk to human cost is very high during the incident, from a financial perspective, agencies might spend hundreds to thousands of dollars in the course of dealing with these incidents.

But in the post incident aftermath, they spend hundreds of thousands to millions of dollars, through the litigation and adjudication phases.

And so, TASER has uniquely come to understand that pain point for our customers.

We uniquely understand that process.

I, as the CEO of TASER, personally have sat through three trials, multiple weeks in duration, start to finish.

And, obviously, we've built an [in house] litigation team that really understands that very well.

And, in fact, I think our market views TASER now as somewhat of a (inaudible) leader in this space, given the record that we've been able to attain.

So, what we're doing now at TASER is we're broadening our mission a little bit.

We're not just focused on the tools that police use during the incident.

But now, we're looking at becoming more of a full solution provider, where, we're going to be there for our customers, not just shoulder-to-shoulder in the courtroom.

But, we can take our unique abilities to create technology solutions to help solve these problems for our customers.

So, we will certainly continue to be the leader in response resistance force options.

But now, with AXON, we're adding new information in evidence products and services to reduce the aftermath, to reduce the uncertainty.

What we've seen in these trials is the primary weapons against police are fear, uncertainty and doubt.

When I sat with those officers, shoulder-to-shoulder at the defense table during the Heston trial and their honor and integrity were continually being questioned, it was all about the uncertainty of what really happened.

And when I told those officers what we were doing with AXON and promised each one of them they'll get one complementary for what they've been through to help make sure that never happens to them again, I can't tell you the response I got; the hugs when they said, "Man, I wish I could show that jury what I saw because, words just don't do it justice." And those words have been challenged and recast and twisted throughout the process.

And so, AXON and all the attendant systems around it, you think of it like a TASER for the legal process.

Or, in some cases, we've used the analogy of legal body armor.

Because while cops face all sorts of physical threats in the field, the agencies face massive financial threats and officers, threats to their career, in the post incident world.

This is not entirely new to TASER.

Our success, I believe, has been built on a triad.

That triad includes the leg of products and technology, a second leg with training and training systems and a third of systems and controls to make sure that our products are used appropriately and that the users have the right tools to make sure they're used appropriately.

So, let me put some meat on that.

If we go back to 1993, when we launched our first consumer product, the Air TASER, we didn't just launch a new self defense system.

We also launched AFID, of Anti Felon Identification tags, where we serialize and track the ammunition and disperses ID tags printed with the serial number.

We also introduced VHS training tapes, which, at the time, was sort of an advanced approach where every purchaser of our product got world class training.

In 1999, when we launched the M26 in the police market, not only did we launch the first neuromuscular incapacitation device that truly could incapacitate, we also launched Data port, the first device that had an onboard recording that would tell you every time the trigger was pulled.

And we migrated our training to CD ROM, full multimedia integration.

Well, in the years since 1999, we've seen more technology enhancements with the X26 in shaped pulse technology.

Our Data port became more sophisticated with USB plug and play and advanced data capabilities.

And our systems became more comprehensive as well, with the TASER CAM that now added audio/video recording.

And now, you've all seen the AXON initiative, the Autonomous Extended [On] Officer Network.

Basically, it's a command and control device that integrates into their radio that gives us, not just an audio/video recording of what the TASER device is pointing at, but everything that officer sees, from his perspective, which is the standard by which he will be judged because the United States Supreme Court has found that an officer's actions in these fast moving and uncertain incidents can only be judged from that officer's perspective at the time of the incident.

With AXON, we're giving officers the tools to now record, indisputably, what they saw from their perspective.

It is going to revolutionize post incident proceedings, the same way that our physical tools have revolutionized the way police deal with these dangerous incidents in the field.

Now, as a part of the AXON initiative, you've seen we're building a world class software in technology integration team, with Jas Dhillon, coming out of a senior position in Microsoft.

He's also been CEO twice of some very successful and leading companies in the Internet space.

He was CEO and Founder of ZeroDegrees, which was a business networking system, or product offering.

They were neck-and-neck with LinkedIn.

Many of you may use LinkedIn today and InterActiveCorp bought ZeroDegrees.

Prior to that, Jas was the founder of Blueline Online, one of the first software and service providers in the professional space, [where they] provided project management tool sets to many of the world's leading infrastructure providers.

And Jas is building around a great team.

We've announced some of them.

There are more to come.

By the way, Jas, although he's only joined us recently, he's been on a consulting contract for about four months before that.

So, this project has been ongoing for a period of time.

One of our key insights has been, if we look at Apple Computer, I see a lot of eyes are on them; they've just performed extraordinarily well.

What we see is the breakthrough that Apple achieved over the last five years or so, is they've broken through from being just a hardware company to being a world class company that's been able to seamlessly combine hardware and software into a seamless ecosystem that creates breakthrough value for their customers.

More so than any hardware company or a software company could do on their own.

When you've got the ability to control that seamless integration, it leads to results like Apple becoming the world's largest music retailer.

Now when we look at TASER's capabilities, historically we've been very strong in the hardware and in the training space and now as we build out our software development team we've brought in a world class team to do it.

We're not just out hiring programmers, and we're not going to do this like the typical hardware company, just adding software as an afterthought.

Jas has complete control of TASER Virtual Systems as its General Manager.

We're setting up, -- we've actually established a foothold in California.

We'll have an office out there in the tech community where that division will run.

Just like we added, this quarter as well, a D.C.

facility where we've added operations in our nation's capital, giving TASER a presence near to the heart of national policy making and military and federal law enforcement agencies.

Which, by the way, we found a way to do that in a very cost effective way, where we're subletting from one of our government affairs service partners, so the cost structure is frankly immaterial, and yet we've got an outstanding footprint in the nation's capital.

We're doing the same thing out on the west coast, getting into the tech community.

Irene Blomgren, our EVP of Human Capital, is one of the prominent recruiters in the tech space, and she's now come on board.

She's pretty excited to see what we're doing as well.

So I'm not going to give a whole more detail about specifically the programs that we're working on.

But I think you can see by the talent of the people that are jumping on board, those folks that have seen the vision and the detail of what we're doing are pretty excited about the opportunity.

So we're building, from our world class hardware engineering and training, and adding a dedicated software and Internet services group that's every bit as world class as our hardware group.

With that we believe that, again, these challenging times create tremendous opportunities for companies like TASER.

As we look back at a case study again, looking at what some of the great companies have done, Apple's transformation came really at a troubling time with the Internet bubble bursting in the early 2000s, so when they were stepping on the gas as far as making the investments in their transformation.

TASER, we're in a unique position in that last year we had our strongest year ever, and we've been on a great growth path.

So we're not making this investment from a position of weakness, it's really from a position of strength.

Building from our core and expanding our vision to diversify our products, increase our value add to our customers, increase recurring revenue, increase customer retention.

We have a vision that we believe will, again, revolutionize value for our customer, and create break through value for our shareholders.

So I'll conclude by saying again I'm very proud of the hard work of our entire team, which despite the current economic conditions, turned in sequential revenue growth, profitability, solid margins, generated almost $5 million in cash from operations on decreasing sales over last year.

Steve and his team have been working down inventory, improving margins, improving throughput and efficiency, right sizing our manufacturing team, just doing a great job.

And economic times like the one we're in create opportunities for market leaders like TASER to extend our technology and our market leadership.

I've been reading on the financial pressers, I'm sure many of you have, that the ice ages, so to speak, like this, where the environment becomes very difficult, creates real opportunities for strong companies.

TASER, where we're cash flow positive, with a very strong balance sheet and no debt, we've got a lot of options, and we're keeping our eyes open.

We're keeping our cash close to us right now to see what opportunities are out there for us, because again, we have the opportunity most companies don't, that comes from financial strength and technology leadership.

So we're able to remain profitable and cash flow positive while making significant R&D investments into our future business, during a period most companies are cutting back.

So as the economy comes back, we believe we'll be a year a two ahead of the curve, when everybody else starts turning on their growth engines, we'll be running at full steam.

So I believe these investments will further extend our leadership position well into the future, and again our strong balance sheet gives us the operational flexibility to optimize opportunities unavailable to many other companies in the world today.

With that we'll wrap up and we'll take a few questions.

Sure.

(OPERATOR INSTRUCTIONS) Our first question comes from the line of Eric Wold with Merriman Curhan Ford, please proceed.

Thank you, good morning guys.

One just numbers question, I have two questions after that.

Can you, Dan, give the normal breakdown of the units shipped of the different products?

Sure.

The number of cartridges shipped for the quarter were 284,559, so that's actually up versus the second quarter.

We shipped 16,721 X26 units, 965 M26 units, and 3,831 C2 units; and the TASER CAMs for the quarter are actually 2,947 TASER CAMs shipped.

You know one thing actually Dan, to maybe add a little more discussion on there, the ratio of cartridges to handles and what we've seen there qualitatively.

Sure.

What we've been looking at is the number of cartridges sold each quarter versus the installed base, and typically we've seen a ratio be between four and five cartridges per handle in the field per year.

And that ratio this year has been down versus the historical trend, it's been down around three cartridges per handle in the field.

I think a lot of that is due to the economic climate we're in right now.

I think our customers are using the cartridges they have instead of continuing to purchase from us; I think they probably built up an inventory over the years, to where in the good times they used sort of the budget flush monies to buy cartridges.

When I look at the sales this year, if I normalize the sales for the normal cartridge levels, our sales would actually be almost $7 million higher than they've been.

So actually instead of being down about 5% we'd be up 5%.

It's obviously a trend we're going to continue to monitor.

I think that as our customers kind of work through their current inventory they're eventually going to be back to us, but that certainly had an impact this year.

Okay, understandable.

And then I guess obviously with the customers, potential customers, looking their budgets and looking at their tax receipts and kind of figuring out where they can spend, where can TASER fit into the budget cycle?

If a budget is kind of fixed and set for the coming fiscal year by a municipality, and TASER is not in that budget, how easy is it to get in there mid-year if things improve?

I think one of the things that our customers have done historically to find money for the TASER programs is they use asset forfeiture monies, which are something that the police department has some latitude to spend as they see fit.

So they obviously will continue to look at that.

We've got a very strong value proposition, certainly the budgets for these municipalities are tight and that's not helpful.

But we still feel that our payback is really unrivaled as far as equipment.

So that puts us in a good position.

And as Rick said, we're going to continue to invest in new products and new markets to really just broaden our product offering.

Obviously the economy has an impact on us, but I think that as we expand our product offerings, that's certainly going to help us to get into new markets.

And we're going to be looking at federal grant programs as well, as a way for our municipal customers to find monies to purchase the product as well.

Okay.

And then on the gross margin side, margins were up 4.5% or so from the year ago quarter, but then down almost 400 basis points from the sequential quarter, Q2, on higher sales.

Talk to us about what was the changes there from between Q2 and Q3.

There really, the two big things, we elected to, we wrote off some obsolete inventory, some of the early C2 bores that we could have reworked into the product, as we really looked at the impact that would have on our scrap levels and productivity for our production we decided to write off some of those bores.

We also, the way we're able to reduce inventory is really but cutting back on production and the impact of that was actually less absorption of our overhead.

So we scaled back our number of units produced, which affected our overhead absorption, which had a negative impact in the quarter on margins.

And what was the write off on the inventory?

About $300,000.

Okay.

And then last question, in the opening remarks you mentioned that you haven't decided on the Heston case whether or not to reverse that 5.2 that happened in Q2.

Is there -- what can happen there at this point forward?

Can that be appealed by the Hestons and either get a new trial, or could some other charge come back, or is that 5.2 basically gone for good?

Basically there is an opportunity for the other side to appeal.

What we're waiting for here in the fourth quarter is really to have that judgment entered, it hasn't been entered yet.

The judge has obviously written his opinion but we need to see it entered into the court record, and then we'll see what the other side intends to do as far as appeals.

There is an opportunity to appeal.

We think, obviously, the same reasons why the judge felt the reverse in the punitives was appropriate it will certainly bode well for us in the appeal process.

But we're going to consider that carefully, understand what our legal options are, and make a determination in the fourth quarter of whether to take that back or not.

Thank you guys.

Thank you.

And our next question comes from the line of Paul Coster from J.P.

Morgan, please proceed sir.

Hi, it's actually Mark Strauss on behalf of Paul.

First off, can you just give us an update on the timing of the new product announcements, AXON, Shockwave and XREP?

XREP and Shockwave are currently slated for first quarter; we expect to start seeing some revenue from those two.

AXON we're probably looking at field trials late in the first quarter, in terms of significant field trials.

In terms of revenue from AXON, from a modeling perspective, I'd probably start modeling AXON revenue in the second half of next year, maybe third quarter, perhaps first real significant revenue impacts late third quarter or fourth quarter.

Okay, good, so no changes there.

Then can you tell us how significant you think this Marine Corps directive is that just came out earlier this month?

Well we think philosophically that it's very important, that these kinds of directives, what you're talking about there was the, I forget the acronym, basically an all Marine Corps directive that gave them the ability to buy from the operating budgets down to the unit level.

So we've already had a few small sales associated with that.

The main thing is, in many of these federal and military agencies the most important hurdle to get over first is if they've got a policy that allows them to buy it, and that allows us then to work directly with the operators down at the field commander level, who do generally see the utility of having these types of devices for their mission.

So we don't see that that's going to necessarily open up a major centralized buying in the short term, but it gives us the ability to go down to the unit commander type level and begin to open up that market.

Okay and then lastly, was there any impact from FX during the quarter?

There was not.

Okay, that's all I have, thank you very much guys.

Thank you.

And our next question comes from the line of Greg McKinley with Dougherty, please proceed sir.

Yes, thank you.

Dan can you comment a little bit about how we should look at your recent additions into your R&D and sales team impacting operating expense run rate going forward?

Is -- we're I think all expecting increases in operating expenses in the third quarter, although they were maybe a little smaller increase than I might have had in mind.

So can you talk a little bit about how we should think of that moving forward?

We're going to obviously continue to make the investments in our infrastructure here.

I think we -- we sort of have the infrastructure support, a $100 million business, which is sort of where we ended last year.

We're obviously making investments right now to really create a team that is capable of running a bigger business in the future.

I think we'll continue to increase that spending.

Part of why we're flat a little bit to last quarter is we had some significant expenses in Q2 related to things like the shareholder meeting and mailing the proxies in, the reports, we had our annual Taxon Conference which is our big user group meeting that has got a heavy spend associated with it.

So we did have some things that were heavy spends in Q2 that didn't repeat themselves, that certainly helped us.

As we go into Q4 we have the IACP, which is our big trade show for our police customers, so I expect to see that SG&A ramp u again in Q4.

On an ongoing basis, I think as these new executives look at the skill sets we have internally and look at the team they have and see the skills they need in order to profitably grow the business, we may have to make some additional adds, and it's likely we will as we move forward.

Okay.

And could you also talk about your automation equipment investments?

I know the last quarter or two you've talked about making some progress payments into that vendor.

So where are you in the overall process of implementing that?

How much have you spent, how much will you spend, and maybe when do you expect to start seeing some manufacturing efficiencies come out of that?

We've spent about $6 million to date.

The total project is going to run roughly $8.5 million, so it is a significant investment.

We're working with the manufacturer right now; they're actually working with some of the integration of the different parts of that equipment in Canada.

We expect we'll see that equipment some time in the first quarter and we're going to do significant tests at the manufacturer and had significant tests here.

So, I think it'll start having a positive impact for us, probably in the second quarter of next year.

Okay and all that equipment will be centralized in your Arizona facility?

Or did I not understand that correctly?

It will be here in Arizona.

It's being manufactured by an automation company that is manufacturing it.

They were doing it in Tucson, Oregon and Canada.

Now, they're moving most of that equipment to Canada to complete the final optimization of that equipment.

Thank you.

You're welcome.

And our next question comes from the line of Steve Dyer, with Craig Hallum.

Please proceed sir.

Morning guys; thanks for taking my question.

Most of mine have been answered.

Curious as to your take sort of on the recent situation in France, with your representative over there; what you think that may or may not do to progress over there.

Okay, I'll take that one.

You know, actually we sent over a team of folks, including our VP of Government Affair, as well as Doug Klint, our General Counsel and Tom Smith, our Chairman, who's been involved in France, to work together with the local counsel in France.

We have a public relations consulting group we work with as well, to make sure that we're getting an independent evaluation of the situation.

And, our read on it, short-term, is, frankly, that the distributor over there -- it was an interesting turn of events, let's say.

The distributor in France filed a defamation lawsuit against the French politician who's the head of the Communist party, related to defaming the TASER products by sort of loosely reinterpreting some of the Amnesty International statements where Amnesty talks about the people that have died after being hit with the TASER.

This French politician took it a step further that the TASERs have killed 150 people.

So, our distributor called him to task.

They actually had a trial that started and commenced last week that the scientific evidence -- always in support, you know, we helped our distributor present very strong evidence and the political figure presented zero scientific evidence in the trial to support any claims that he was making.

Two days before the civil litigation began the police arrested our distributor on charges that he had spied against the political figure.

So, it's a little bit of an interesting situation, let's just say.

But I would say this; our distributor, we looked at everything he's done.

We've seen no evidence of any wrongdoing.

In fact, he hired a private investigative firm, specifically because, when you hire a PI firm or you hire investigative firms, so that they will handle the investigations appropriately; that's their area of expertise.

And the reason he hired that firm was to ascertain where they could serve this minister.

And I think his total bill was less than EUR1,000.

So, it wasn't a significant campaign.

They did serve this gentleman with the papers and our distributor's position is that he believes it was inappropriate that influence was exerted to have him arrested days before the beginnings of the civil trial.

And he intends to pursue that.

So, we've looked at it and we've also talked to various officials within the French government.

In fact, the French Ministry, at the ministry level, came out and said that this is an issue purely between the distributor and this politician and it has nothing to do with the usefulness of equipment.

And, I believe that was in the context where they may submit, although they've only had 1% of their officers using it, they've had a 30% decrease in police shootings.

And they're not going to get distracted by any disputes between the local business owner and the politician.

So, we think it'll blow over fairly quickly.

And, we're continuing to monitor the situation but we don't see it having significant impact, long-term.

Okay, great.

And then, secondly, I know you don't give guidance but how should we think about next year, just in terms of municipal budgets probably getting even tighter than they are right now.

What are you hearing from your distributors?

Any color there?

Well, you know, the recent decreases in oil prices, we're watching with great interest.

It's not only the total budget but it's also the unexpected changes in budgeting that can impact our business.

For example, last year we got hurt with a double whammy, in that budgets were decreased by lower funding and higher expenses.

But it was the unexpected change in budgets, as well, that was particularly problematic because they didn't have time to adjust.

They budgeted for a gas price of $2.00 a gallon and they were paying $4.00.

The optimist in me says that we might see some positive effects from unexpectedly decreasing gas prices.

I don't want to overstate that or say that we're seeing any evidence of that yet because we're not.

And I certainly would not suggest that you model that in.

But there are some, you know, some opportunities for some bright spots and that in the gloom in the economy.

So, we're planning for a continued tough environment.

We're seeing our business sort of stabilizing at the levels that we're at now.

We're looking at the new products, new initiatives to help spur growth.

And internationally, as well, the weakness of the dollar, we believe, makes our product a little more attractive.

We saw an increase in our percentage of international orders last quarter.

We'll be looking to make some more investments, putting some more feet on the street internationally to further grow those markets to diversify some of our market risk here in the US.

Okay, great.

I wish I could give you a better answer but it's still clouded with uncertainty in the current environment.

Understood; thanks, guys.

Thank you.

Okay.

Well, we appreciate that everybody spent a couple, well, about an hour with us here this morning.

Again, as you can tell, I'm very excited about the future.

You know, some of the short-term turmoil, we believe, gives us the opportunity to extend our lead.

We're investing heavily and we look forward to our next conference call coming up after the first of the year and a very exciting 2009.

Thanks everybody and have a great day.

Thanks for your participation in today's conference.

This concludes the presentation.

Have a great day.