Axon Enterprise Inc (AXON) 2008 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the fourth-quarter 2008 TASER International earnings conference call.

My name is Francis and I will be your coordinator for today.

At this time, all participants are in listen-only mode.

We will be facilitating 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, CEO of TASER International.

Thank you.

Before we start this call this morning, I would like to start out by remembering TASER inventor, Jack Cover, who passed away this month after a long fight with Alzheimer's disease.

Tom and I founded this Company with Jack back in 1993 and I spent the first months learning inventorship in a garage in Tucson from a man who was at one point the Chief Scientist at the private subcontractor for the Apollo Moon Landing project.

I'll never forget the incredible experience or the amazing human being that Jack was.

Unfortunately it seems our society never recognizes greatness until it is gone.

I know that future generations will look back at Jack over his invention as a turning point in history when we stopped focusing on finding evermore deadly ways to kill each other and instead began to search for more humane ways to end our conflicts without taking human life in the process.

I'm going to turn it over to Dan to get the process started for our call this morning with our Safe Harbor Statement.

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.

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 product sales into private security, military and consumer self-defense markets, growth expectations for new and existing products and 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 herein.

Such factors include but are not limited to market acceptance of our products, establishment and expansion of our direct and indirect distribution channels, attracting and retaining the endorsement of key opinion leaders in the law-enforcement community, the level of product technology and price competition for our products, the degree and rate of growth of the markets in which we compete and the accompanying demand for our products, potential delays in international and domestic orders, implementation risks of manufacturing automation, risks associated with rapid technological change, execution/implementation risk in new technology, new product introduction risks, ramping manufactured production to meet demand, litigation resulting from the alleged product related injuries and deaths, media publicity concerning product usage and allegations of injury and deaht a the negative impact that 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, risks of government investigation regulations, TASER product tester 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 would like to turn the call back over to Rick Smith, our CEO.

Thanks Dan.

For the fourth quarter of 2008, revenues were $26.4 million, a $4.6 million or 15% decrease over the same quarter in the prior year.

However, on a sequential basis, sales increased $3.5 million, driven primarily by incremental growth in international orders, despite a weakening global economy.

Operations continue to demonstrate real improvement as our gross margins increased to 63.4% in the fourth quarter compared to 55.2% in the fourth quarter of 2007.

Consistent with our strategy announced last year, R&D increased by $3.2 million or 268% in the fourth quarter compared to the same period in 2007, reflecting our ongoing commitment to invest in new technology and product diversification.

Net income for the quarter was $6.6 million, compared to the $7.2 million for the same period a year ago.

Net income and diluted earnings per share for the fourth quarter were $3.6 million and $0.06 respectively.

Revenues for the year was $92.8 million compared with revenue of $100.7 million in 2007, a decrease of 8$.

And despite the decline in revenues, gross margin for the year was 61.4% compared to 57.1%, driven by our focus on a lean operating government.

Net income and dilted earnings per share were $3.4 million and $0.05, respectively.

The Company generated $8.1 million in cash from operations during 2008, ending with cash and equivalents of $46.9 million and zero debt.

The Company also repurchased 1.8 million shares of our stock for $12.5 million during the second quarter of 2008.

Needless to say, it feels pretty good to be in the strong financial condition that we are given what's happening in the global economy.

A lot of companies are struggling for their survival and we are in a position to be able to execute on new opportunities in these times, which we believe of course really will position us for a lot of growth as we come out of the global recession.

Our operating income before research, development and extraordinary expenses was 22% for the quarter.

If you look at the impact of the reversing the charges related to the [Hesting] case, it would've been 41.7%.

But of course, we consider that an extraordinary event.

While it's not GAAP, Dan and I like to keep our eye on operating income excluding R&D and extraordinary expenses because that's a way for us to look at how efficiently we're running the business, excluding things outside of our control like litigation as well as the R&D expenses.

So of course what we're trying to do is make sure what while we are investing in R&D, that those expenses don't take our eye off the ball and running an efficient business.

For the year, our operating income before R&D was 19.5%.

In 2007 that number was 24.6%.

A lot of significant events in the fourth quarter.

International sales increased to 28% of total net sales compared to 16% in the third quarter.

We sold 5000 TASER X26 ECD's following an announcement that the UK government intends to fund 10,000 units for police officers in England and Wales as they continue to roll out TASER devices beyond just firearms officers.

550 TASER X26's from the Korean National Police as they expand their program.

1000 TASER ECD's to the Brazilian National Guard as they begin to spin out the TASER program.

And we are investing to build our international success.

We've added new hires with a European sales manager in Q4 and a new Middle Eastern sales manager in the first quarter.

And some of our increases in SG&A that you'll see are related to investments both in international sales infrastructure as well as additional sales and marketing support for the new business initiatives I'll talk about more at the end of the call.

Domestically we saw LAPD purchase 1275 TASER X26's, Jacksonville Sheriff's Office 480, and Maureen County Sheriff's Office with 101 TASERs in Northern California.

C2 sales grew in our consumer market from 4 million in 2007 to 6.1 million in 2008.

Overall the C2 product line generated 6.8% of sales, helping to offset some of the decreased municipal spending in our domestic LE sector.

We also added this year a significant new hire with Nick Pappas, our VP of Strategic Communications which includes marketing, to help focus on further developing the consumer segment.

You may recall Nick has a very strong background coming from Gateway Computers were he led the team to develop Gateway.com.

Then he was one of the 12 program leaders who developed BestBuy.com at Best Buy.

He went onto Circuit City and Luxottica eyewear.

His extensive -- he's leading an extensive effort to develop the right retail displays, messaging and packaging to further refine our C2 product for expanded retail success.

You have seen a number of mainstream retailers come on this year now carrying the C2.

We also demonstrated a number of innovative new products and concepts at the International Association of Chiefs of Police Conference in San Diego, including the TASER AXON, the new controlled digital power magazine for the X26, the TASER Shockwave and the TASER XREP.

We have at this point made a decision that the XREP which we previously targeted for a first-quarter launche is going to slip to the second quarter.

The reason is that last year when we were in field trials, we made a determination to do some significant design enhancements on the XREP based on what we were learning in our validation process.

Those design enhancements have been very successful.

We have received back parts off production tooling and we have done preliminary builds.

We believe we have cut the touch time in manufacturing in terms of labor by over 50%, enhanced the robustness of the (inaudible) both from an electrical standpoint as well as a mechanical standpoint.

We have added a second battery that will increase cold weather performance.

But one of the things that happened when we put the whole round back together, we actually learned that it significantly changed the aerodynamic performance of the round, actually in a good way.

We're seeing significantly better aerodynamic performance but what that's meant is the fins that we designed to stabilize the round through spin stabilization are in fact too large now for the round.

It's spinning it too fast.

So we've had to go back and we're now redesigning those fins for this better aerodynamic profile.

What this will mean at the end of the day is we will actually get, we believe, longer range with less drop and less loss of velocity as we can decrease the profile of those fins.

It just means it is going to mean retuning the device and some retooling on the fins which will slip this into probably late in the second quarter until XREP goes to market.

But we do continue to get (inaudible) input from law enforcement, a lot of interest in this round and it is a significant round.

This will be by far the most sophisticated -- effectively it's a missile system launched from a 12 gauge shotgun.

So you can kind of understand the complexity of bringing tha system reliably to market.

Also this year there were a number of new studies published.

In fact 36 Company funded medical studies and safety studies were published in 2008 and there are now a total of 236 medical safety studies published on TASER devices, making it the most studied of any (inaudible) leathal weapon systems.

Despite some of the sound bites that get repeated in the public media sometimes, there is no system with more published studies in law enforcements hands today.

Three more product liability suits were dismissed in the fourth quarter, representing at the end a total of 77 wrongful death or injury suits that have been dismissed or judgment entered in favor of the Company.

We also saw a significant victory on October 28 when the District Court in the Northern district of California eliminated the $5.2 million in punitive damages in the Hesting case.

It's a significant legal finding in the Company's favor and it reduces the estimated total damages by over 97% to $153,150 in compensatory damages, which amount is fully covered by our insurance.

As a result, the Company has reversed the related $5.2 million litigation judgment expense in the fourth quarter of 2008.

The Company also established our new TASER Virtual Systems Division, headquartered in Carpinteria, California and appointed former senior Microsoft strategy leader, Jas Dhillon, to run that new division.

This division represents the core of our new growth strategy on transforming the Company's product offering into a network of intelligent devices that create breakthrough information and tactical capabilities for our customers.

And I will come back to that the end of the call to provide a little more detail.

Finally, we have formed a strategic relationship with Mossberg, one of the world leaders in fire arm manufacturing and certainly one of the world leaders in shotguns.

Together with Mossberg, we codeveloped the TASER X12 less lethal platform which has been tuned specifically to enhance performance of the XREP and we have implemented a new patent-pending radial key technology that enables us to build a shotgun platform based off of Mossberg's [mill spec] approved existing platform, but we have now added a technology where this system will reject legal rounds and will only accept less lethal rounds.

Again, tremendous feedback from law enforcement.

They really like that feature because it eliminates the risk of an officer loading a lethal round by accident in a less-lethal situation.

That device, the TASER X12 by Mossberg, will be going to market contemporaneous with the TASER XREP later this year.

So with that, let me pass over to Dan to talk about financial matters and then I will be back.

Thanks Rick.

I will go through the financial results in a little bit more detail.

As Rick indicated, sales for Q4 are $26.4 million which are down $4.6 million from the prior year but up sequentially $3.5 million from Q3, mostly driven by the increase in international sales which attributed to 28% of our sales in the currnet quarter.

Again some of those large international sales that we shipped in Q4 were the UK, Brazil and South Korea orders.

Gross margins of $16.7 million or 63.4% of sales are up 8.2% as a percent of sales for the prior year.

The increase in margin was caused by several factors, including elimination of both cash and distribute discounts, lower overtime and temporary labor expenses, better productivity, lower warranty expense and improvements in our scrap expense for year.

The $450,000 decrease in the indirect manufacturing expenses again was driven by the lower scrap and supply expenses, partially offset by lower absorption of plant overhead due to lower manufacturing levels in the fourth quarter of 2008 versus the fourth quarter of 2007.

SG&A expenses of $10.9 million for the quarter versus $8.8 million in the prior year, the increase was driven by higher salaries and benefits of $594,000 due to higher headcount.

Consulting and lobbying expenses are up $775,000 versus the prior year due to additional marketing consulting to support the C2 product line and some of the new products we're going to be offering in 2009, as well as the IT consulting relating to the upgrade to a new version of our ERP system that we're going to put in place in early 2009.

Legal expenses increased $382,000 due to more outside legal and expert witness fees and the 123R expenses for the quarter increased by $355,000 due to options granted in 2008, including options granted midyear which replaced the cash bonus program.

Cash bonuses were down $203,000 during the fourth quarter, as a result partially offsetting that 123R increase.

On the research and development line, research and development expenses were $4.5 million for the quarter which is an increase of $3.2 million over the prior year again, mostly driven by the -- as in previous quarters the outside development cost of $1.5 million on the AXON product.

We had higher salaries and 123R charges of $739,000 due to the increased headcount to support both hardware development and our new software development team headquartered in California and increased supply cost of $625,000, mostly due to the costs associated with developing working prototypes for this new product in the pipeline.

We do expect higher R&D spending to continue into 2009.

Our heavy investment R&D is really driven by our strategy of product line expansion and diversification.

We have several new and differentiated products in the pipeline which will better position TASER to capture market share and address the new opportunities as the economy improves.

The Company did reverse the $5.2 million charge related to the punitive damages in the Hesting case based on the judge granted the Company's motion to throw out the punitive damages in October 2008.

The original charge was taken in the second quarter of 2008 when the jury verdict was rendered and before a motion related to the punitive damages was ruled on.

Income from operations for the fourth quarter was $6.5 million and pretax income was $6.8 million for the quarter.

The decrease in income from the prior year is mostly driven by higher SG&A and R&D expenses partially offset by the reversal in the Hestin punitive damages during the quarter.

Net income for the quarter was $3.6 million or $0.06 per share on both a basic and diluted basis.

One of the things that I just want to point out is that the 123R charges were definitely a driver in both the SG&A and the R&D expenses for the quarter.

The Company has -- the total for the 123R charges for Q4 were just a little over $1 million.

That is up about $650,000 over the prior year and up about $360,000 from Q3 of 2008 and we expect that 123R charges will grow further in 2009.

One of the things I wanted to note is a large proportion of these new options are performance-based options which are tied to the successful launch of new products into the market.

The other thing that's really driven the option expense in the fourth quarter and will be driving it next year is as we ramp up our TASER Virtual Systems business in California, we're hiring more employees that -- and are competing for employees that put a high value on equity compensation.

As a result, we're going to see that 123R charge grow over the current million dollar number in 2009.

We will see -- certainly we will talk about that in future quarters, but that's just become a bigger part of our compensation structure here and something you should expect to see going forward as well.

Results for the year, sales for the year were $92.8 million which are down 7.8% or $7.9 million from the prior year.

Gross margins of $57 million or 61.4% of sales are up 4.3% as a percentage of sales from the prior year.

The increase in margin was the result of several factors including elimination of most of the cash and distributor discounts, lower labor expenses, improved productivity and improvements in material cost and scrap expense.

The indirect manufacturing expense of $9.1 million is down $2.6 million from the prior year, mostly due to lower scrap warranty and supply expenses and better leverage on some of the fixed expenses we had.

The SG&A expenses of $38.9 million are up $6 million over the prior year, mostly driven by increased salaries and benefits of $2 million due to the increases in headcount, higher advertising cost mostly due to the infomercial of $1.1 million, higher consulting costs for marketing, public relations and IT of $1 million and higher recruiting and relocation expenses of $500,000 due to the hiring of new executives during 2008.

R&D expenses of $12.9 million are up $8.5 million over the prior year due to increased outside development costs, mostly associated with the AXON product of $4.2 million, higher salaries and benefits of $1.4 million and higher supply costs of $1.3 million driven by the costs associated of developing the prototypes of the new product and the pipeline.

Income from operations was $5.2 million for the year and pretax income was $6.9 million with net income for the year being $3.4 million or $0.05 per diluted share.

Moving onto the balance sheet, we finished the year with $49.4 million of cash and investments.

This is a decrease of $10.9 million from the prior year and really that decrease is driven by the stock buyback of $12.5 million that was announced and completed in the second quarter.

The Company now has $46.9 million in cash on its balance sheet.

And due to the uncertainty in the market, the Company has elected to keep the investments very liquid.

So you'll see that cash balance likely to stay high during the year and keep that liquidity in the business.

Accounts receivable jumped in the fourth quarter to $16.8 million.

This is up $5.1 million from the prior year.

And the large driver there is we had the UK order which shipped right at the end of 2008.

You saw the announcement in early 2009.

We've already received payment on that order.

But again with such a large order shipping at the end of the year, that certainly had a pretty big impact on the AR balances.

But as I said, we've already collected that order for the UK.

Inventory at $13.5 million is in line with the prior year-end balances that the Company successfully worked off the higher inventory balances from early in the year that were produced to support the anticipated higher sales levels.

We were able to reduce inventory in the fourth quarter by roughly $4 million.

The mix of inventory has also changed from the prior year with a larger investment in raw materials offset by lower work and process inventory as the Company adopts more lean production practices.

Prepaid and other assets of $2.5 million are down $1.8 million from the prior year due to insurance receivables collected and the [extension] of the prepaid production cost in the infomercial in 2008 and amortization of prepaid insurance.

The investment in property and equipment of $27.1 million is up $3.5 million from the prior year balance.

Drivers here are mostly the progress payments on the automated manufacturing equipment, some new IT equipment and tooling to support the new products in the pipeline.

Total assets, finished the year with $129.6 million of assets.

On the liabilities side of the balance sheet, accounts payable and accrued liabilities of $8.1 million are actually down $2 million from the prior year due to some timing difference in our year-end check runs for accounts payables and some lower purchasing activities in 2008 versus 2007.

Current deferred revenue of $2.5 million is actually up from the prior year-end balance of $1.7 million due to the sale of more extended warranties in 2008 and the total liabilities at 12-31 are $17.2 million and we finished the quarter with $112.3 million of stockholders equity.

We did finish another year with no long-term debt.

We do have the revolver of $10 million we have not tapped.

But we have plenty of liquidity to fund our business here and certainly feel good about that as we move into 2009 here.

On the cash flow information, the Company did have cash provided from operations of $8.1 million for the year ended 12-31-08 compared to cash provided from operations of $13.9 million at prior year.

Cash generated in the current year was driven by lower prepaid asset levels, depreciation, 123R charges, and was partially offset by the higher AR due to a large year-end order for the UK.

Net cash provided by investing activities was $9.1 million as the Company realized $15 million from maturing and [called] investments which were partially offset by $6.1 million of new property and equipment purchases.

The Company used $12.2 million of financing activities, mostly driven by the stock buyback at $12.5 million approved and executed in the second quarter.

We did purchase 1,,791,000 shares or approximately 2.9% of our outstanding stock in the second quarter of 2008.

The Company ended the period with $49.6 million of cash which is up $4.1 million from the prior year-end.

With that, I'd like to turn the call back over to Rick Smith, our CEO.

Thanks Dan.

So as you all know, we're investing heavily in research and development.

We invested an incremental $[8] million over 2007.

And again, it's good to be in a position where we can make this kind of investment and we're funding it out of our existing profits and cash flow.

We have not had to dig into the cash on our balance sheet.

In fact this year, we're able to return $12.5 million to our shareholders through a share repurchase.

Now while we're making this investment in R&D, as you've seen, we've also seen some significant improvements in operations.

Last year we made the decision to invest in some significant new hires.

Steve Mercier has been nothing short of phenomenal in my opinion, our new Executive Vice President of Operations.

Look what he has done in a very challenging economic environment.

We saw the topline decrease, yet we've seen an almost 9 percentage point improvement in margins over the prior year and at the same time, look what has happened with our inventory.

We entered 2008, we certainly had high inventory levels as we were ramping for continued improvements in sales.

And obviously the global economy took an unexpected turn as well as gas prices that are a big issue for our customers.

Steve has just done a fantastic job of working through those challenging environments and really improving our overall operations.

We talked a little bit earlier about Nick Pappas who joined us as our Executive VP of Strategic Communications, which includes marketing.

You have all seen his background; very strong in both e-commerce and consumer as well as communications in general.

We also hired Irene Blomgren as our Executive VP of Human Resources.

Irene was key in finding the types of talent with Steve and Nick and then a lot of the new hires you've seen out of TASER Virtual Systems.

As you see, we've been bringing in some real world-class talent over at TASER Virtual Systems.

Let me talk about some of those people real quick and then we will talk a little bit more about what they're doing for us.

As you all know, Jas Dhillon, our Chief Strategy Officer and General Manager at TASER Virtual Systems has just an incredible background.

He's been the founder and CEO of two very successful Internet ventures, one in social computing with Zero Degrees that was acquired 13 months after its launch by InterActiveCorp, providing its investors a 10x return on invested capital.

Prior to that, Jas was the founder of BlueLine OnLine, one of the early pioneers of software as a service enterprise solutions in the Internet space.

(inaudible) Jas went on to become one of the five executives responsible for defining, developing and executing Microsoft Office Live strategy.

Microsoft Office Live is one of four majors strategic initiatives at Microsoft and spearheads Microsoft's transition to a software as a service business model.

The fact that we were able to entice Jas to leave such a prominent position really at the tip of spear in the war between Microsoft and Google to come and head up our TASER Virtual Systems, that to me was a major coup and a real resounding endorsement of our strategy.

Yogesh Saini, our Senior Vice President of Internet Services at TASER Virtual Systems, which I will call TVS for simplicity from here on out, Yogesh was CEO of ZenSutra Software Technologies, an Internet services firm delivering custom solutions for Fortune 100 and 500 clients.

He also was involved in Zero Degrees with Jas, wealth management innovators such as [Yodeli], technology leader Hewlett-Packard.

He was also one of the founders of BlueLine OnLine.

So Jas has brought with them some of the talent that he's used to build historically some of his software teams.

Jason Droege, our Vice President of Internet Services and Product Development, he's basically running our software engineering group.

Jason began his career as the co-founder of Scour, Inc., the first multimedia search engine on the Internet, which he founded from his dorm room at UCLA in 1997.

They grew Scour to over one million daily users and 65 employees.

It became the number one search engine for video in 1999 and eventually sold to CenterSpan.

Of course having the founder of the first major video search engine, when you look at some of the things we're doing, that is a critical skill set for us, let's say.

After transitioning Scour over to CenterSpan, he started Back Nine Golf which created an aftermarket for pre-owned golf inventory, essentially creating the Kelly Blue Book of golf.

He then went on and joined SIPphone, Inc.

as President responsible for all product management, engineering business development where they built and deployed a global VOIP videoconferencing instant messaging file sharing network with over 6 million registered users by October of 2008.

SIPphone, also known as Gizmo 5, is regarded as being the largest independent competitor to Skype for VOIP and videoconferencing.

He joined us in November of 2008 and is responsible for all Internet service product development engineering.

Chris Van Vleit, our Chief Software and Systems Architect and frankly one of the smartest guys I've ever met; Chris has over 10 years of proven experience developing and delivering cutting-edge Internet service and desktop Internet applications.

Prior to TASER, he was the CTO and Chief software Architect at [Callout Inc.], a highly innovative company developing and delivering next generation, selection based search applications in the consumer market space.

He was also the CTO and VP of Network Operations for Cafe.com, a WiFi network serving the retail food franchise industry, which was acquired in 2005.

He's also provided expert consulting services for many years years on software architecture and scalability to companies in the financial document management and financial transaction sectors.

And we also have one other new hire, our VP of Product Management.

We will be putting a press release out in the near future.

This individual comes with a 12-year track record of accomplishment in designing, launching and scaling large-scale Internet services.

Prior to TVS, he served as Vice President of Product Management at a firm where he managed the development of a social community platform with over 6 million unique visitors and 240 million page views per month.

He was a key member of the team that launched Citysearch.com, the first premier local online resource and is considered a pioneer in developing local strategies.

He actually spearheaded the creation of the first radius-based search engine.

So what are these people working on here at TASER International, a less-lethal weapons manufacturer and what vision is enticing to come here?

I'm going to give you a little more visibility today but obviously we're not going to give you full visibility until we're ready to launch.

So if you look at our mission at TASER, it is to protect life.

We make devices that are used during critical dangerous incidents to bring them under control.

However, what we have learned is that dropping a resistant subject to the ground and getting him into custody is not the end of our customers problem, it is only the beginning, particularly for our law enforcement agency customers.

For nearly every incident that requires a physical use of force in the field, invariably leads to a legal conflict where lawyers and judges and jurors spend years analyzing and debating what unfolds in the few seconds when officers must make life and death decisions.

So whether it's prosecuting a violent offender to seek a conviction or defending officers from allegations of excessive force and other civil claims, agencies spend millions of dollars.

In fact, many of our larger agencies spend tens of millions of dollars every year adjudicating these incidents.

In fact, agencies spend orders of magnitude more financial resources adjudicating these cases than they spend in the incidents themselves.

We at TASER International have come to understand these litigation issues because we've become a partner with our law enforcement customers in defending many of these cases.

I said before, what doesn't kill you makes you stronger.

As we've now adjudicating by the present time over 80 of these cases and I have personally sat through every trial that TASER's gone to, we've come to understand uniquely among the private sector how these challenges face law enforcement.

And it is from this point of view that we now approach these problems holistically.

From protecting lives during actions in the streets to protecting truth in the courtroom, we're developing a suite of tools and technologies that will provide our customers an end-to-end solution set from the moment an incident begins until the last gavel drops.

In fact, it's not an entirely new endeavor for us.

We've always led the way with advanced accountability systems.

If you look back when we launched the M26 in 1999, we added a dataport feature in the M26 that recorded information about how the M26 was used.

It can be downloaded to a computer.

With the X26, we added a USB dataport with advanced connectivity and more information.

And in 2006, we added the TASER Cam with audio/video recording capabilities.

We're now realizing the power of connecting these intelligent microprocessor controlled systems into an information node on a network that generates evidentiary and tactical information capabilities that have never before been possible.

So make no doubt about it.

We will continue to dominate the less-lethal law enforcement market with renewed focus on our consumer corrections and military markets and take TASER to a whole new level with greater growth opportunities in incident video and digital evidence management, which complements our ECD products and expands our product lines to high-margin video evidence management and storage.

As I've met with law enforcement leaders to introduce the AXON concept, they've clearly seen that this approach is a breakthrough.

Moving incident video from the patrol car to the officers perspective, particularly for municipal law enforcement where studies indicate over 90% of the work they do is away from the car.

In fact, just to tell you about one of these meetings, Chief Lansdown of the San Diego PD announced on National Public Radio that they have stopped purchasing in-car video systems and will convert over to the AXON.

We've learned that gathering video and incident information, as much as a breakthrough that the AXON will be, gathering the information is the easy part.

Where agencies are really struggling is what do with this information, how to store it securely, how to manage the incredible amount of data generated and how to create knowledge that drives performance with this information.

Organizing this information in ways that speak to different users audiences and makes the information relevant and meaningful will drive operational efficiencies, tactical results and frankly, we believe, will dramatically reduce litigation costs by either disproving false allegations against police immediately and foregoing the entire litigation process or at a minimum, dramatically reducing the amount of time and effort spent in discovery on factual disputes about what happened during an incident.

In fact, an analysis that was done with our internal team indicates we believe over 50% of the costs of discovery involved in many of these cases is associated with dispute of fact.

Now fundamentally this is a software problem.

This is where the primary customer [pain] point emerges and we believe the company that solves this problem and provides breakthrough capabilities to store, manage, archive and analyze this information in a manner that is easy to use and easy to learn will create a dominant market position in what we estimate to currently be a 350 to $500 million per year market in North America alone for in-car video and storage solutions.

So just to put that in perspective, we at TASER International currently have a 99% market share in our $92 million a year business.

We see an opportunity to become one of the leading companies in this $350 million to $500 million market in North America alone and we believe we are positioned and have a number of strategic advantages I will come to at the end of the call.

The existing incident video companies that we have analyzed are fundamentally hardware companies that have approached software as an afterthought.

We have identified that in order to solve this problem, we needed to put as much or more effort into the software component as into the hardware system.

That's why we decided to set up a separate division, TASER Virtual Systems, located in California right in the middle of tech (inaudible) pool.

And this will not be broken out, by the way, as a separate business segment in our 2009 financials, although it may be in 2010 and beyond.

We see tremendous analogy to the consumer MP3 player market in the late 1990s.

MP3 players were a commodity business.

When Apple has the insight that the customer didn't just want a piece of hardware but an easy-to-use, integrated solution that helped them easily put music onto their device, organize it and take it with them, they came to dominate this market and we all know how successful they have been.

For law enforcement, there's lots of hardware systems to gather video evidence but they struggle with where to put it and how to put it to use.

We are determined to provide an end-to-end solution that solves this problem with a single, easy-to-use integrated hardware and software solution.

Now why do we think we can win in this market space?

Well first, let me point out, TASER is already the dominant player clearly in the electronic control device market.

But you may not know that we are already the market leader in on-officer video, with over 30,000 TASER cams in the field today.

So we are already the market leader in on-officer video.

With AXON and the associated software systems being developed at TVS, we will deliver a double breakthrough.

First, a breakthrough hardware solution with AXON that provides incident video from the officer's perspective coupled with breakthrough software that solves the pain point around storing and using this information easily and efficiently.

Third, we have a very strong distribution channel as video moves onto the officer.

Our day-to-day interactions with law enforcement [trainers] provide us with close relationships with customers who come to trust us as an innovative company which provides high-tech solutions to the problems of cops on the street.

We have over 300 master instructors and a total of more than 25,000 instructors who have been certified in our TASER products.

We're there with them in the field.

Our hardware goes with these cops to their most difficult assignments.

So unlike a software company that might approach this from the back end, we are able to approach this problem holistically.

We're there with the officer in the field, we understand the entire challenge from capturing resistant subjects all the way through the litigation phase, prosecution and defense and we have now built a world-class software team that is helping us build the back end to go with the hardware that we deploy out in the streets.

Now since our last conference call, I have personally met with chiefs of several of the largest police departments in North America and the response has been very positive.

They acknowledge they are all struggling in dealing with digital leverage.

The digital video in particular is a very specialized skill set that's very difficult to execute by going out and having to really look across piecing together different software and hardware solutions organically at every individual agency and individual project.

Almost all of them expressed a high degree of interest and several of them have pushed that they want to be the first major agency to deploy the full AXON solution set.

As far as budgets are concerned, several of the agencies I have talked to have indicated that their budgets for in-car video and/or surveillance and support systems are many multiples higher than the budgets that they have had for TASER devices.

Engaging in this larger existing budgetary marketplace gives us the opportunity to significantly expand our total available market in terms of total available spend dollars.

Now they're certainly -- there are still hurdles to overcome.

Make no doubt about it.

There will be the need for field trials, acceptance of revolutionary concepts takes time.

But I couldn't be more encouraged by the early feedback I've had in meeting with leaders of law enforcement as well as law enforcement users, law enforcement union leaders.

In fact we have put hundreds of law enforcement officers through focus groups through our development process.

In 2008 made, we made the decision to nearly triple our R&D investment and based on conversations that I am personally having with these leading law enforcement agencies, I'm confident these bold initiatives will set the Company apart in 2009 and beyond.

In fact, it recently came to my attention that BusinessWeek published a report that analyzed companies who increased their investments in R&D during the last recession.

They found that these companies have outperformed the rest, both from a valuation and also by growing their business.

If you go to Businessweek.com, go to the search bar and type in 'how to play it: R&D spending' and you'll see the video link come up to that story.

We think this study supports our position and our decision not to pull back, but rather to increase our investment while potential competitors are reeling in current market conditions.

This is an opportunity for us to extend our lead to enter new markets from a position of strength where others may be experiencing weakness.

One final point.

The stimulus package that includes around $4 billion for law enforcement is part of a broader shift in our economy.

Over the next several years, the proportion of government spending as a percentage of GDP is likely to increase significantly vis a vis the private sector.

Now as a company where over 80% of our revenues come from governmental customers, our overall business model stands to potentially benefit from this shift.

Now I will say though it's impossible, it's simply impossible to predict how the current economic conditions versus the impact of the stimulus package will affect near-term spending patterns among our core customers.

But we do believe that we're positioning ourselves long-term to build off of our current revenue and customer base and expand in a significant way.

And with that, we will wrap up and we will take a few questions.

(Operator Instructions) Paul Coster, JPMorgan.

Hi, good morning.

Rick, that was a really interesting overview of what is to come.

Unfortunately, I have to switch the topic to what is here and now, just briefly anyway.

What are you seeing in this quarter to date and as we think about '09, can you give us some sort of initial lots thoughts about the revenues and expenses as you see them?

Obviously (inaudible) in a tough position, as we don't guide.

But certainly the domestic municipal budgets are going to be challenging in 2009.

We certainly see some headwinds in the US and really until the impact of the stimulus package starts taking effect, it's hard to see that changing dramatically.

But internationally we're very encouraged by the fact that we have seen an uptick in international business in the end of 2008 and certainly as we look at the ability to grow the international business where our penetration is significantly lower than what it is here domestically, we certainly think that puts us in a good position.

I think the other key driver in 2009 as we see it is the new products coming into the market.

The second half of 2009, we will see some of the new products like AXON hit and certainly to the extent that we get market acceptance of those products out of the gate, we certainly expect to have the sales improved in the second part of the year.

Let me kind of pile on.

This is Rick.

Obviously that was Dan.

I would say this, that there is a lot of uncertainty.

Uncertainty can be good or bad.

You know this stimulus package, we're trying to get our hands around it.

I've got some summits coming up with our legal advisers, with our lobbying advisers to really try to understand what that opportunity is, how much of that $4 billion goes to basically law enforcement agencies backfilling their existing budgets or keeping manpower on the street versus how much goes into equipment purchases.

That is something we don't fully understand yet, but that could have a significant impact on the business in the short-term.

One other thing I would point out, part of our strategy as well by building out additional products and services is that the software component to this business will have much more significant recurring revenues than our current business model, which as we roll in the future should build more predictability into our revenue stream, whereas today you know we don't generally have much of a backlog.

We book and ship our business every quarter.

We sort of kill what we eat every quarter from a sales perspective.

We believe that what we're doing with TASER Virtual Systems will increase customer stickiness and will increase software and service recurring revenues that should add a more predictable baseline to our business.

You talked about kind of keeping R&D spending going.

Does that mean an increase in '09 or are you talking about just keeping it at the level you exited '08?

I think certainly if we look at sort of the fourth quarter run rate on the R&D expenses of the $4.5 million, as we look to 2009, we expect we will certainly be able to stay within that range of the $4.5 million.

There's certainly going to be some timing differences, but the investment in R&D in 2009 is going to be another heavy year because of these products in the pipeline that we have.

So we do expect that to continue.

You think the gross margins are sustainable at this level even with some slight movement up and down in unit volumes?

I think certainly our internal targets continue to be gross margins above 60%, mix does drive that.

But we have got a lot of initiatives on the plant floor.

We have got some training going on right now for -- to trade some green belts here from a quality and lean manufacturing perspective.

Steve Mercier has brought in some new supply chain management and Tom Maulhern who is doing a good job to drive the supplier cost.

We've got a lot of initiatives going on to make sure those gross margins stay at these higher levels.

We certainly feel that the improvements we've made in 2008 are sustainable.

Last question.

Rick, the platform that TVS is developing, will it embrace third-party products, in-car video that's already installed for instance?

Yes, I will -- I don't want to give too much windage on this.

But our whole goal is -- you've used the word platform -- is to build out a dedicated, one-stop platform for law enforcement agencies that can assist them with the broader challenges of digital evidence which can include third-party tie-ins.

Eric Wold, Merriman Curhan Ford & Co.

Good morning, a couple questions.

But before we start, can I get, Dan, the normal kind of quarterly unit figures?

Sorry about that.

Yes, the cartridges for the quarter were 306,204 cartridges, so that is up a little bit from Q3.

The handles of the X26 are 20,001 handles in the quarter.

The M26 handles were 2,409 handles and the C2 handles actually we just about doubled our unit volume from last quarter, were at 7836 C2 handles in the fourth quarter.

So we had a lot of marketing initiatives in Q4 on the C2 and we were able to move a fair amount of product through those initiatives.

And the cams?

Yes, TASER cams were 1825 cameras in Q4.

One follow-up question from the the last time.

On R&D, you talked about R&D this year staying kind of at a consistent level with where it was in Q4 as these new products come out.

Getting everything out or just the majority of new products out this year, what do you see -- I don't want to get too early -- but what do you see kind of in 2010?

Is this kind of a new level of R&D spending we should expect kind of going forward as the Company continues to innovate or will it start to drop off in 2010?

I think a lot of it is going to depend on what we see as we look forward as far as the economy and the ability to absorb new products.

But certainly some of the expenses are bearable.

There's a fair amount of consulting that is in the numbers, the higher spend rates on AXON and some of the other products.

So certainly after these products launch, there's opportunity for some of that to pull back.

But candidly we're going to have to look at our position in the market and if we see that we're still well positioned to drive new products into the market (inaudible) really expand our product offering and leverage our relationships with the customers, we will probably continue to invest.

But I think it's probably, to your point, a little early to predict the 2010 spend rate at this point.

A lot of it is going to be driven by what we see in the economy and our ability to grab that market share.

And then on the domestic front, obviously you did see international revenues have presented a total pop-up consecutively from Q3 to Q4.

But if you're going to back it out, domestic dollars actually were flattish Q3 and Q4 which is I guess a positive sign, at least to me.

What are you hearing kind of from the domestic guidance or the body language?

Is it really just dependant on how their budgets are in terms of if they want to go forward with certain projects?

Is the demand still very much there but kind of just a little shaky spending environment and if the outlook there improves, you could see that ramp back up?

We're continuing to see significant demand for the product.

Everybody's budgetarily challenged.

Right now everybody's scratching their heads trying to figure out the impact of this stimulus bill.

One thing we're really focusing on, we do cost-benefit analyses for law enforcement and when they start making decisions about equipment purchases, there are very few places where they can make an investment like they can with TASER devices where the reductions in police officer injuries and worker comp claims and reductions in lethal force incidents and suspect injuries.

So even though there is talk about the TASER related litigation, if you actually look at studies of agencies that deploy TASERs like the Michigan Municipal Risk Management Authority, they found that the deployment of TASERs cut their total excessive force litigation by over 50%.

So we're really focusing our message or honing our message in on these cost saving attributes of the TASER devices to try and make sure that when they're spending scarce dollars that a lot of it is coming our way.

And then last question on kind of looking at the new products coming on board this year, not looking for a dollar amount or specific guidance, but can you get a sense of how significant of a contribution can the new products have this year?

And then as they come into play on the margins, should we expect kind of with other new product launches in recent years that the initial revenues from these guys for the new products should be low on margin or ramp up or have you worked the processes such that margins can essentially be at least comparable to where you are getting now?

That's a really good question.

This is Dan.

We see our ability to sort of grow the business and maintain our current business is really going to be highly dependent on these new products.

Certainly there's still a large market out there for our existing products.

But I think in this environment, really our ability to go back to especially existing customers that are say fully deployed with the X26 and now have a new product to sell them with the AXON or the Shockwave or XREP is certainly I think going to be a real positive thing from a sales perspective.

On the margins, we have really done a lot of work on the operations side.

Rick has talked about the good work we've done there and a lot of it's also on the new product introduction process.

The amount of validation and testing and design for manufacturability of these new products is much enhanced from what we had say a year and a half ago when we launched the C2.

I think that we made great stride there and as a result, I think the impact on margins out of the gate for these new products is going to have less of an impact than what we saw with some of the introductions in the past because of the discipline we put into the new product introduction process now.

Perfect, thank you guys.

(Operator Instructions) Greg McKinley, Doherty & Co.

Good morning.

Guys could you talk a little bit about -- I know, Dan, you spent some time on the call talking about your stock comp expense.

But I wonder if you could just put that in the broader context of your SG&A.

How do you generally expect that to behave during the course of the year?

Is the Q4 number a decent run rate or I know you've added a few more people and leadership positions.

How should we look at that in 2009?

The 123 -- this is Dan.

The 123R charges in Q4 were just a little over $1 million, $620,000 of that was in the SG&A line.

As you saw from the 4's, we did have our annual grant.

We tied it this year to employer reviews.

Instead of doing the annual grants in May like we have done in prior years, we did at December in order to more closely tie the stock compensation to performance.

So I do expect that $1 million of 123R charges to go up in 2009 mostly because the grants we made in December, we didn't see a lot of that expense in the fourth quarter.

So I do expect that to go up.

But of the $10.9 million of SG&A, about $620,000 of that was the stock compensation.

Okay and then so maybe that component of the 10.9 goes up a little bit due to some of these grants late in the quarter.

But is the 10.9 excluding that stock comp, is that a reasonable sort of base level type of operating expense or is there -- as you guys add some leadership positions into some of these new initiatives, should we look for that to grow a little bit or how should we think about that?

I think -- I would expect it to grow more than just sort of inflationary growth over that sort of run rate at this point.

Obviously we're going to have to make some investments on the SG&A side to support these new products in the pipeline.

Certainly products like AXON that are a high-tech product may require some sales engineering talent that we don't have on board today.

But I think a lot of the more significant adds have been made and are in the run rate.

It's really more now trying to leverage the expenses we have and make sure that we can be as efficient as possible.

But at the same time, we want to make sure that we've made a heavy investment in R&D.

We want to make sure that we're making the right investments in SG&A to position the Company well for the opportunity in front of us.

And then can you just talk a little bit again about your new product additions that are likely to come on this year, the timing of those?

I think AXON you said is a second-half launch.

The XREP looks like a late Q2 launch.

What other products should we be expecting to be introduced or are those the two primary ones for '09?

XREP, we're looking late in the second quarter.

That is currently slated to come to market.

There's still some uncertainty in that, by the way.

I mean we are tweaking the aerodynamic performance of the round.

It could come in a little sooner.

If we run into some problems, it could take a little longer.

Just the nature of research and development.

But we expect it by the end of Q2 XREP should be online.

The Shockwave, which is the area denial system, that should be ready to go here in a couple of weeks early in the second quarter.

I wouldn't count on a lot of revenue from Shockwave.

Shockwave I would characterize as more of a concept, proof-of-concept product.

The area denial, there's not a big need for that in law enforcement, although we did recently just have a SWAT team utilize it in a barricade situation very successfully.

But in law enforcement, Shockwave will be a little more of a niche.

But for corrections, we see an opportunity for Shockwave to be a significant product and then the military is really the primary focus where we felt that it was worth the investment.

We needed to get these non-lethal area denial systems off of the PowerPoint page and into reality so that people can start to see these.

But military customers you know takes a long time to digest new concepts and operationalize them.

The CDPM which is the control digital power magazine which is a basically a control lanyard for the X26 that enables it to be disabled if it is taken away from an officer, and you have to have a code to be able to reactivate the weapon; we see that -- that was very significant with some state correctional agencies that were looking at deploying TASERs but they were worried about the the risk of the weapon being taken away in a correctional environment.

So we believe the CDPM which is now shipping will open up some corrections markets for us.

The AXON in second half of the year as well as the support, software and service products that wrap around AXON in the second half of this year.

And then we do have some other unannounced products that we have not made final determinations on when to make launch announcements.

But there's more in the pipeline than what we've publicly announced.

Paul Coster, JPMorgan.

I'm wondering if you would be kind enough to comment on specifics of what you're seeing in the UK from Canada at the moment.

The UK, when is the next 5000 order coming through?

France, what's the latest thinking on the National Police?

And Canada, I understand there's some news coming out from Canada today on Police Chief support of TASERs.

What does that mean for you?

This is Rick.

Certainly let's start with the UK.

We understand that there is an order for potentially another 5000 units, although we have heard some rumblings that they may split that between some units and cartridges.

Unfortunately these big orders, they're not in the bag until they're done, until we get the PO and then once we get the PO, we can generally ship pretty quickly.

So I wouldn't want to go out on a limb and try to predict when the governmental purchase process will come to conclusion on those.

But we're certainly hopeful that that'll be sometime in the first half of this year.

On France, my brother Tom has been very actively involved in meeting with senior officials in the French National Police.

Again we don't have anything specific to report.

As soon as we will, we will report it.

But we're continuing to hear very good things from their TASER experience.

They've seen dramatic improvements in their operations.

Unfortunately I can't quote the statistics off the top of my head, but from the limited TASER deployment they have had so far, they have seen really pretty dramatic operational results.

Coming to Canada, Canada has been a very challenging environment for us.

The Canadian media has really been actively engaged in the discussion about TASER devices.

There has been frankly a lot of negativity around the issue ever since the incident in the Vancouver airport last year.

Even though the autopsies have come back and the independent medical examiners who ruled that they don't believe the TASER played a significant role in that unfortunate tragic incident and what we're seeing now is that they've spurred a number of governmental studies in Canada which we are fully supportive of.

The more scientific studies that look at this issue, we think it promotes public interest and it promotes better understanding of this technology and how it works.

And one of those studies was the Canadian Police Chiefs Association which has now come back and made a recommendation that every officer in Canada should go through TASER training and that the availability of the devices should be expanded.

During the past year during the discussion about TASER devices, we've seen a number of lethal force incidents in Canada where police have unfortunately had to resort to lethal force that may have otherwise been avoidable, had devices like TASERs been available and I think these studies are coming back and acknowledging that.

And if you actually look at the inquiries, the coroners inquests, the inquiries that are being launched with effectively jurors of either Canadian citizenry or panels of experts, we are seeing that fairly consistently those are coming back are very consistently those are coming back and reporting that in fact more TASERs should be deployed.

This technology does save lives and reduce injuries and we see this Canadian Police Chiefs recommendation as a major step forward in laying a lot of this controversy to rest.

How that will translate into financial order flow for the Company expanded deployment remains to be seen.

But we certainly see these all as positive steps in the right direction.

Dan, what tax rate should we plan for '09 please?

I think that (inaudible) probably be in the sort of the -- taking a look at for next year, I would say we're going to be in the probably about 44% rate for next year.

44%, why is that?

Just because we have got things like the ISO 123R charges end up being -- get added to the book income, lobbying, meals and entertainment.

So the sort of permanent items will drive up the tax rate above sort of the statutory 39%.

We will be in that sort of 42 to 44% range for next year.

Okay and then just one last question, Rick.

It sounds like you're already sort of building a pipeline for AXON.

Do you believe that we will see sales immediately [as products] launch?

That's a real tough question.

I tend to think that we're doing all the right things to position it.

A lot of our meetings early on have been with the larger police agencies, so we can start the process.

They tend to take a very long time to purchase.

The real success with AXON that could impact things in the short-term would be at the small to midsize agencies that can tend to turn more quickly.

So my personal opinion is I think once we roll the product out that we will start to see some orders in fairly short order.

But we're going to be careful about how we do this.

There will be a field trial process we will go through to make sure we've really validated the hardware and the software solutions.

But the other thing that's been kind of interesting is the cross marketing opportunity with AXON.

I have been in to see some Police Chiefs frankly in agencies that don't have significant TASER programs and have not expressed a lot of interest in TASER programs.

And when we've given them the presentation on our vision of how all these devices and technologies work together from again engaging subjects in the field all the way through documenting these incidents and taking them through the legal process, we have at least one major agency come back and is looking at starting a TASER program whereas they had really not had interest before.

So we are seeing cross marketing opportunities where these products will build off of each other.

So that AXON line should potentially help our long-term TASER sales and vice versa.

Excellent, thank you very much.

With that, we're going to go ahead and we will wrap up the call.

Appreciate everybody's time this morning.

You've been with us a little over an hour and we will be back with you in April.

We look forward to what for us is a very exciting time in this Company's history.

Thank you all for your participation in today's conference call.

This concludes the presentation and you may now disconnect.