Axon Enterprise Inc (AXON) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2009 TASER International, Incorporated, earnings conference call.

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

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

We will conduct a question-and-answer session towards 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 your host for today's call, Mr.

Rick Smith, Chief Executive Officer.

Please proceed.

Thank you very much.

Before we get started I'm going to have Dan read the Safe Harbor statement.

Thank you.

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 the law-enforcement market; expansion of product sales to private security, military, and consumer self-defense markets; growth expectations for new and existing accounts; expansion of production capability; new product introductions; product safety; and our business model.

We caution that these statements are qualified by important factors that could cause actual results to differ materially from those 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 in the markets in which we compete and the accompanying demand for our products; potential delays in international and domestic orders; implementation risks or manufacturing automation risks associated with rapid technological change; execution and implementation risk of new technology; new product introduction risks; ramping manufacturing production to meet demand; litigation resulting from the alleged product-related injuries and deaths; media publicity concerning product uses and allegations of injury and deaths and the negative impact this could have on sales; product quality risk; potential fluctuations in quarterly operating results; competition; negative reports concerning TASER device uses; financial budgetary constraints of prospects and customers; dependence upon sole and limited source suppliers; fluctuations in component pricing; risks of government investigations or regulations; TASER product tests and reports; dependence upon key employees; employ retention risk; 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 Smith, our CEO.

Thanks, Dan.

While there are many things to be proud of this past quarter, the announcement of EVIDENCE.COM was a significant milestone in the evolution of this Company.

I'll return at the end of the call to discuss how we expect this new initiative, along with the previously announced AXON on-officer tactical computer, to transform the Company.

But first, let's start looking at the results of the first quarter.

So for Q1, revenues were $24.6 million, up $2.1 million or 9% over last year.

Operations continue to demonstrate improvement as gross margins increased to 59.5% compared to 56.8% last year, reflecting our continued focus on efficiencies.

I think that is particularly important when you understand that we had a very high ratio of cartridges this quarter, as the UK bought I believe over 100,000 cartridges to go with the weapons that they purchased in Q4.

So as you all know, cartridges have a much higher labor content as a percentage of sales and lower overall margin compared to our ECDs.

So to almost hit 60% with a very high ratio of cartridges was really quite an accomplishment for Steve Mercier and his team in Operations.

Consistent with our strategy announced last year, R&D was up $2.1 million or 98% in the first quarter, continuing to reflect our commitment to expanding our future technology and product diversification.

On a GAAP basis, loss from operations was $1.0 million for the first quarter compared to an income of $1.5 million last year.

So if we look at the loss on the GAAP basis, there's a couple things there.

It was primarily a function of, number one, increased R&D investment.

Number two, non-cash charges for stock option compensation, which by the way is an increasingly important component of compensation.

We are now building out a world-class tech team where have recruited -- you've all seen some of the names I talked about on the last conference call.

But we are now competing with the Googles and the Microsofts and the Apples of the world for the best talent in software and Internet services.

In that space, equity compensation is a very important factor.

We also saw a significantly higher proportion of sales in our lower-margin cartridges, as we talked about.

A sequential increase in legal costs due to timing and litigation.

We prepared very large number of expert reports during the quarter.

We had frankly a great quarter in terms of some of the wins that we had, and I will return to those shortly.

We also had increased costs related to travel and promotions related to our stimulus package program.

So speaking of the stimulus program, let me share a few thoughts.

The American Recovery and Investment Act included about $4 billion for law enforcement, for which about $2.75 billion can be used for equipment, training, and technology.

So I'm really proud of our team.

We moved at light speed.

From the moment the stimulus package was announced, we were moving within hours to launch a program to get our technology in front of law-enforcement decision-makers in the few weeks between the announcement of the stimulus program and the due date for the grant applications.

We have celebrated the announcement of EVIDENCE.COM.

We originally planned to announce this summer, when we were ready to go live.

We accelerated it so that agencies could plan ahead in their grant applications and their budget process for this powerful new capability.

We launched a Webcast that reached nearly 3,000 viewing locations, many of which we understand had groups of people watching our announcement.

We mobilized an extensive e-mail and Internet-based education campaign including our sponsorship of the premier grant education program at PoliceOne.com.

All indications are that we believe we have moved much faster and more effectively than any other company in the law enforcement sector in developing and executing a program to address the stimulus package.

I have personally been on the road almost continuously over the past six weeks, meeting with chiefs and senior leadership in major law enforcement agencies.

The stimulus package has also introduced some new factors into predicting our business.

Now we're certainly enthusiastic that these additional budget dollars will become available in the latter half of the year.

But there is a very distinct possibility that the stimulus program will have an adverse effect on second-quarter purchases by law enforcement.

If an agency submits a grant application to buy equipment, they cannot use existing funds to proceed with the purchase and then, if they get the grant, reimburse themselves later.

They can't do that.

So if they apply for a grant, the unintended effect of the stimulus package could well be that it freezes some purchases until the grant awards are made.

Therefore, this does introduce some short-term risk to Q2, but overall we think it's a significant benefit to the revenue opportunities on the full-year basis.

Again, this is another situation where TASER is at a significant strategic advantage compared to most companies.

Because of our strong cash reserves and our growing international sales, we're in a position where we can certainly weather any short-term pocket shifts between quarters this year.

So overall the message is stimulus is going to be very good, we believe, for law-enforcement community and could have some short-term negative repercussions.

The net loss and lost per share for the quarter were $0.5 million and $0.01, respectively.

Non-GAAP income from operations for the first quarter, which excludes stock-based compensation and depreciation and amortization, was $1.1 million compared to $2.5 million for the first quarter of 2008.

When you get down to what really matters, in my opinion, the Company generated $10.5 million from operating activities in the first quarter, ending with cash and equivalents of $58.3 million and zero debt.

Another factor that Dan and I look at in running the business is the operating income before research and development and extraordinary events.

That was $3.18 million or 12.9% of sales for the first-quarter 2009 versus about 16% of sales in Q1 of 2008.

Now significant events for the quarter include the following.

Our international sales were up to 37%, up from 28% in the fourth quarter and up from 13% in the first quarter of 2008.

We had significant follow-on orders out of the UK, Brazil, and some other countries.

The Company unveiled our new integrated digital multimedia evidence management platform, EVIDENCE.COM, which works in conjunction with the TASER AXON, which is an on-officer tactical computer and video-audio recorder that capture incidents from the officer's perspective.

EVIDENCE.COM is to AXON as iTunes is to iPod in the consumer world.

Together we believe that AXON and EVIDENCE.COM will revolutionize the way law enforcement securely captures, stores, analyzes, collaborates, and manages digital multimedia evidence collected by officers in the field.

The system will provide an end-to-end solution for integrating digital information and digital evidence.

On March 31, the Company announced that we began selling the TASER Shockwave Area Denial system.

I will point out we do not expect significant revenues from Shockwave in the near term.

Shockwave at this point is our first foray, as we've expressed before.

It is to take the whole concept of the nonlethal area denial out of the PowerPoint presentation and put it into the field.

But because it is primarily targeted at military and major federal agency-type customers, we expect significant lead times as they evaluate that technology over the coming months and years.

But we believe long-term that nonlethal area denial is a real growth opportunity for us, but I wouldn't go adjusting any financial models in the short term for significant revenues from Shockwave.

We also had five more product liability suits that were dismissed during the quarter, so we're now to a total of 84 wrongful death or injury suits that have been dismissed or judgment entered in our favor.

While we are on the topic of talking about litigation, let me talk about a couple other events in litigation.

We had very favorable rulings in the Markman hearing in our patent infringement case with Stinger.

The Markman hearing is part of the legal process in a patent case where the court looks at how to interpret patent claims.

So both sides present their interpretation of the claims, and then the court decides which interpretation it will adopt on those claims.

I don't have it right in front of me, but I believe something like four out of five of the key claims, the ones that we're most interested in, in fact the court ruled in our favor.

And we believe that that's very significant in terms of now that the court has adopted the majority of our claim interpretations, that that bodes very well for us as the case moves forward towards trial.

In another significant happening, we won a partial summary judgment in litigation against Steve Ward and Vievu.

Steve Ward is a former employee of TASER International who left the Company to start his own on-officer camera company and compete with TASER.

We filed litigation in that case, the primary claims in which had to do with the breach of fiduciary duty, and then Mr.

Ward was working on that project when he was here at TASER.

At least that is the primary element to the claim.

The court agreed with us on summary judgment and found in our favor on a breach of fiduciary duty and related claims.

So I think it's important to note the TASER does vigorously defend our intellectual property and we're usually pretty effective at it.

Knock on wood, we've continued to have some real success this past quarter.

On another note, we received the report from the Houston Police Department -- actually through their police union -- showing that the implementation of TASER devices in Houston has reduced their worker compensation claims for force-related injuries by over 90%.

So what that is showing is the cops in Houston are fighting a lot less and getting hurt a lot less.

In 2003 they spent $2.2 million on worker comp claims for injured cops injured in fights.

That dropped from $2.2 million to $149,000 in 2007.

We believe economics like this case will certainly help in these trying times, as agencies look at TASERs as investments in officer safety that yield both financial and other rewards.

During the first quarter we added another 263 agencies, so we now have a total of over 14,000 agencies deploying and testing our products in over 45 countries.

We added another 116 new full deployments with agencies and are deploying to all front-line officers.

On that note, I'm going to pass over to Dan to get into more details on the financials, and then we'll come back and talk more about the future.

Okay.

Thank you.

So as Rick said, sales for the first quarter were $24.6 million, which are up $2.1 million over the prior year, mostly driven by the significant increase in the Company's international business.

Sequentially Q1 sales are down $1.8 million from Q4, primarily caused by a decrease in domestic law enforcement sales due to the continued lower municipal budget spending in the US.

But the international sales were approximately $9.1 million in the quarter or 37% of sales, and the increase is mostly driven by the significant order from the UK and also a significant order from Brazil.

Gross margins in the quarter are $14.6 million or 59.5% of sales, or up 2.7% from the prior year.

The increase in margin is the result of several cost-saving initiatives such as the elimination of cash and distributor discounts; lower overtime and temporary labor expenses; better productivity; lower warranty expenses; improvements in scrap; partially offset by lower capitalization of overhead and inventory, primarily due to the lower cartridge inventory.

The sequential reduction in gross margins were driven by the mix change from higher-margin electronic control devices to lower-margin cartridges, mostly driven by large UK cartridge order in Q1.

Cartridges in Q1 of 2009 actually represented 32.4% of sales; this compares to 19.8% of sales in Q4 2008, so you can see the big shift in mix from the electronic control devices to cartridges.

We did see a $919,000 increase in indirect manufacturing expenses versus the prior year.

Again, this is mostly driven by lower absorption and capitalization of plant overhead due to lower cartridge inventories.

The large UK order basically wiped out the majority of our safety stock of cartridges, so that had a negative impact on our amount of overhead that we capitalize onto the balance sheet as well.

SG&A expenses were $11.4 million for the quarter versus $9.2 million in the prior year.

The increase was driven by higher salaries and benefits of $719,000 due to higher headcount as the Company has built out its management team and hired support for the new product lines coming into market.

We've got consulting and lobbying are up $505,000 due to additional marketing consulting done to support the C2 product line and new product launches, as well as IT consulting related to an upgrade to our new version of our ERP system.

Legal expenses for the quarter were up $450,000 due to more outside legal expert witness fees, as Rick spoke to, due to the number of cases going to trial in 2009.

Our 123(R) expenses also increased $602,000 due to options granted in 2008, including options granted midyear which replaced the cash bonus program.

Cash bonuses were down $93,000 during the first quarter, partially offsetting that increase to the 123(R) charge.

If I could make a comment there, I think it's important that shareholders understand that the vast majority of our employees actually opted into an option equity comp program and gave up cash bonuses for -- was it two years or three years, Dan?

Gave up two years of cash bonuses.

That's right.

So our employees have voluntarily gotten in the same boat with the shareholders.

We're very much believers in where the Company is going, and I just think it's worth pointing that out.

Yes, thanks, Rick.

I think that was a good point.

Sequentially, our SG&A expenses are up $514,000 over Q4 2008.

Again this is driven by higher salaries and benefits, the $294,000.

Mostly driven by headcount adds we made during Q4 there, where we had a full quarter of expense in Q1; also some new salary adds in Q1 as well.

We had additional stock compensation expense of $194,000 versus the fourth quarter, and also had increased legal and professional fees of $350,000 relating to a significant increase in expert witness expenses during the quarter.

We do believe that is more of a timing difference than anything else.

Also we saw our outside auditing fees up about $197,000 versus the fourth quarter.

This is a normal event.

Obviously the first quarter of each year is the heaviest part of your outside accounting work is done to support the work around the 10-K.

Our research and development expenses were $4.2 million for the quarter, which is an increase of $2.1 million over the prior year.

Again driven by higher salary benefits and 123(R) charges of $1.2 million to support both the hardware development and our new software development teams headquartered in California; outside development cost of $397,000 for the EVIDENCE.COM development; and we also had increased supply cost of $321,000 due to costs associated with developing working prototypes for the new products in the pipeline.

I think on a positive note, we did see a sequential decrease in R&D expenses from Q4 2008, as much of the development work that was done outside has now been brought in-house at a lower cost than the outside consults are charging for similar work.

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

Therefore, we expect our higher R&D spend to continue throughout 2009.

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

As Rick indicated, our non-GAAP cash income from operations was $1.1 million.

The Company believes that with the ramp-up of our software development team in California and the resultant increase in 123(R) compensation it makes sense to look at operating income on both a non-GAAP cash basis as well as a traditional GAAP basis.

The non-GAAP P&L expenses have grown to the point where they are now material.

Therefore we believe that cash earnings is more representative of our operations.

On a GAAP basis, the Company posted an operating loss of $1 million, with a pretax loss of $923,000 for the quarter and a net loss of $468,000 or $0.01 per share on both the basic and diluted basis.

Moving on to the balance sheet, we did finish the first quarter with $58.3 million of cash and investments.

This is an increase of $8.9 million from the December 31, 2008, balances mostly due to the cash flows from operations.

Due to the uncertainty in the market the Company has elected to keep its investments very liquid, which we believe gives us lots of opportunity cost as we move forward.

Accounts receivable of $12.3 million is down $4.5 million from the prior year-end balance of $16.8 million.

We talked about this a little bit on the fourth quarter earnings call.

We did have a large UK order received right at the end of 2008, which we collected in February; and that was a big part of the reduction in the accounts receivable balances.

Inventory of $10.3 million is actually down $3.1 million from the December 31 balances.

The reduction was really driven in large part by the large cartridge order from the UK which drove our inventory below targeted levels.

The reduction in finished goods also resulted in less overhead being capitalized into inventory.

We do expect inventory will increase in Q2 as the safety stocks are replenished and initial inventories of some of the new products such as Shockwave and XREP are produced.

But we are certainly happy to see the reduction in Q1 from an operations cash flow perspective.

Prepaid and other assets of $1.9 million are down $586,000.

This is really driven mostly due to the amortization of prepaid insurance.

Our investment in property and equipment of $28 million is up $900,000 from the prior year-end balance due to progress payments on the automated manufacturing equipment, some new IT equipment that is being brought in-house, and tooling to support the new products in the pipeline.

Our total assets at March 31, 2009, were $131.7 million.

On the liabilities and equity side of the balance sheet, accounts payable of $4.4 million is up $591,000.

This is really just driven mostly by the timing of AP check runs at year-end and increased purchasing activity.

Accrued liabilities of $3.9 million are down $452,000, driven mostly by lower accrued income taxes.

The current deferred revenue of $2.7 million is up from the prior year-end balance of $2.5 million due to the sale of more extended warranties in the first quarter of 2009.

We finished the first quarter with total liabilities of $18.3 million and stockholders equity of $113.5 million.

We continue to have no long-term debt and have plenty of liquidity on the balance sheet to fund our R&D efforts and investments as we move into the future.

Moving to the cash flow information, the Company had cash provided from operations of $10.5 million for the quarter ended March 31, 2009, compared to the first quarter of 2008 of $659,000.

So a significant increase in the cash generation in the quarter.

The cash again was driven mostly by the lower accounts receivable of $4.5 million and lower inventory of $3.1 million.

We had non-cash 123(R) charges of $1.4 million, and depreciation and amortization of $715,000.

So you can see the components that drove that cash from operations.

We did also have net cash provided by investing activities, $805,000.

The Company realized $2.5 million from a maturing -- actually it was an investment we had on long-term investments that was actually called in the first quarter.

So that generated $2.5 million in cash.

We offset that by $1.7 million of new property and equipment purchases.

We ended the period with $58.3 million in cash, which is up $10.6 million from the prior March 31 balance.

As I stated earlier, we still have plenty of liquidity to manage the business in these challenging times.

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

Great.

I'm going to talk a little more now about our future initiatives.

Any of you who have not had the opportunity, I certainly would invite you to go to EVIDENCE.COM and watch the webcast there.

It's about a 45-minute webcast that will show you a little better than I can describe just here over the phone where it is that we are going with this new service offering.

So with the announcement of EVIDENCE.COM, we now have a complete solution set that we can take to law enforcement's most challenging problems.

Out on the streets when lives are at stake our family of TASER ECDs provides the safest and most effective option for police to respond to resistance.

With the AXON technical tactical computer, we streamline the collection and analysis of actions while preserving an audio-video record from the officer's perspective of what really happened in these incidents.

In all incidents -- not just TASER incidents, but everything from traffic stops to the most contentious and dangerous use-of-force incidents.

With EVIDENCE.COM, we will provide groundbreaking analytic capability for digital information and evidence, while preserving a pristine evidentiary chain of custody all the way through the courts until the last gavel drops.

So the point is, we are now developing a suite of tools to help our customers not only doing their jobs in the streets, but defending their actions and protecting themselves against false allegations and claims against them.

We're building this capability through EVIDENCE.COM in a way that lays the foundation for a secure global network for the law-enforcement community.

Specifically, this set of hardware and software tools has the potential, we believe, to revolutionize law enforcement in the same way that real-time tactical situation awareness technologies have revolutionized the military.

If you look back over the past 20 years and you think about how GPS and autonomous systems like cruise missiles or GPS-guided munitions, they actually revolutionized our military capabilities in the two wars in the Persian Gulf.

We see a similar prospect for technology to be able to revolutionize law enforcement through better information technology.

Our assessment is that while many agencies use computers today, for the most part many are still using paper-based forms.

Or they are just printing information and using computers to store documents.

AXON, with its multimedia recording capabilities and the ability to use GPS to be able to plot where incidents are happening within a jurisdiction is going to give tactical strategic dashboards to law-enforcement leadership that will enable them to do a much better job of policing because of real-time information tools, in addition to having tools that help them defend use of force or other types of cases in the court system.

So it's not just about creating evidence for the court system; it's about creating tactical situation awareness.

This integrated set of hardware and software tools has the potential to continue the revolution we started with our handheld TASER electronic control devices which are reducing violence, reducing injuries -- as we saw in Houston, cutting worker comp claims by over 90%.

And those devices are saving lives every day.

AXON and EVIDENCE.COM protect truth through and end-to-end integrated solution to capture, store, and analyze digital information and digital evidence in ways that enable both tactical and strategic decision-making.

EVIDENCE.COM brings software-as-a-service for the first time to Main Street through public safety and law enforcement.

You've all heard of the Web 3.0 revolution.

Web 1.0, right, was Amazon and Expedia, the rise of commerce over the Internet.

Web 2.0 was the rise of social networks, user-generated content, YouTube, MySpace, etc.

Zerodegrees from Jas's background.

Web 3.0 is this concept of cloud-based computing.

Centrally-deployed applications like Salesforce.com, one of the big ones, Google applications, Microsoft Live.

EVIDENCE.COM is taking some of the best of all iterations, but particularly Web 2.0 with social networking technology, to enable better investigative capabilities across agencies, and Web 3.0 of deploying software-as-a-service.

So law enforcement don't have to go out and figure out -- set up their own video data servers or their own video management server farms.

We can provide that on a turnkey service.

So through EVIDENCE.COM we will create the network that can tie together the eyes and ears of hundreds of thousands of law-enforcement officers into a global secure law-enforcement collaboration network based on digital information.

We believe this capability runs to the core of how to keep our communities safe and how to address modern threats facing society.

In fact, it was the mission of uniting the 18,000 state and local law-enforcement agencies into a seamless community with which the United States formed the Department of Homeland Security.

It's been very difficult, however, to get true interoperability across these 18,000 agencies with directives from the top down.

We believe this is something that can best be accomplished with grounds up, a bottom-up approach like you've seen out in the Internet in general, where you can unite people through networks that are built from the user base rather than being dictated from the top.

So we believe that the revolutionary capabilities of AXON and EVIDENCE.COM will create a unified collaboration network among our 14,000 customers.

The future certainly is digital information.

Our breakthrough hardware, the AXON, accelerates the need for massive data storage and management because of the video that it collects seamlessly.

EVIDENCE.COM creates both the method and the network through which they can handle this information.

Using a software-as-a-service approach removes the burden, capital investment, and the execution risk of local agencies who are struggling with how to handle the complexities of digital evidence and video in particular.

I've talked with agencies that have spent millions of dollars -- in fact, I talked with one agency that had spent over $100 million on a customized IT system that was supposed to be an end-to-end system for handling all these new digital assets.

And that agency scrapped the program after spending over $100 million.

So the execution risk, you can't understate that.

That's a very sensitive point for these agencies.

It is a difficult thing to do.

By providing the software and the infrastructure as a turnkey service, we remove that execution risk for our customers, and we are finding that that message really resonates well.

We are designing this infrastructure to enable next-generation video analytics and secure social networking, to enable really the vision of a unified law-enforcement community that is able to interact, interoperate much more effectively.

So what we're doing is we're taking elements from a variety of fast-moving technology trends and combining them together to empower law enforcement.

From the miniaturization of video recording devices and wearable computers, such as the iPhone or BlackBerry that many of us wear in our pocket every day, make no doubt about it -- those are computers with communication capabilities, with data transfer, and e-mail.

We are now bringing that into a dedicated law-enforcement hardware and software set.

So many of us now use these devices every day.

(inaudible) contact with computers is of course taking this technology and refitting it for law enforcement.

EVIDENCE.COM is a world-class Web 3.0 cloud-computing solution perfectly fit to address highly complex, capital-intensive technology need of the law-enforcement community.

It's a bold vision, but it's becoming reality quickly.

We are set to create the technology toolset of hardware and software products and solutions that enable the vision of a safer community while making law enforcement more effective and more accountable.

I believe our technology will transform this community, and it will transform our Company from a world-class product manufacturer to a cross-technology platform solutions provider.

Our customers will receive breakthrough capabilities never before possible.

And our Company benefits with significantly expanded available markets, both in terms of revenue and market segments, as we see AXON applicability in adjacent markets where our prior TASER product may have limited applicability.

Further, subscription-based software-as-a-service greatly reduces the need for our customers to make capital investments.

But for our Company it creates more predictable streams of recurring revenue while enhancing customer retention and further developing the depth of our customer relationships.

Over the past two months, the senior leadership at TASER has met with more than 60 command staff from the top 150 law-enforcement agencies to share our vision of TASER, AXON, and EVIDENCE.COM.

The result has been extremely promising.

The significant majority of the agencies we met with have validated the customer pain points that we are solving, and their interest in our solution set is high.

In fact, we even have received very favorable feedback from agencies who are not significant customers for our core TASER products.

So next week, we are holding a technology summit with over 130 participants from leading law-enforcement agencies around the world who are coming together here in Scottsdale with us to learn more about EVIDENCE.COM and to provide further customer input into our final product development phase.

In fact, over 400 officers have already participated in focus groups and surveys that have helped us to develop this breakthrough solution set.

We know this past year has been a difficult time for us to ask our investors for patience as we significantly extended our R&D investments in spite of a troubled global economy.

The short-term challenges of constricted municipal budgets still exist.

But as I have said before, now is the time for us to invest from a position of strength, to extend our lead and enter into new markets.

Challenging times favor the strong and the bold.

Our Company's financial condition is indeed strong.

Our ideas and our people are innovative, and our thinking is bold.

So thank you for your support.

We look forward with great interest to the latter half of this year, and with that we'll open it up and take a few questions.

(Operator Instructions) Eric Wold, Merriman Curhan Ford.

Good morning.

I guess first of all, first for Dan real quick.

Do you mind giving us the unit numbers as usual (multiple speakers) the quarter?

Yes, absolutely.

The units for the X26 were 13,392.

M26 were 3,941.

And the C2 actually saw a little bit of a decrease.

I think it is kind of a seasonal nature of the first quarter.

It was a little weaker for us; it was 5,111 units.

Then the cartridges again was where we saw the huge ramp-up in units.

That went from 284,000 in Q4 to 438,000 in Q1.

So 438,337 in cartridges.

And then TASER CAMs were 1,710.

Okay.

Then a question on the stimulus plan.

I guess applications are coming in now, and obviously you're having conversations with police departments about their needs.

What kind of evidence have you seen so far just anecdotally about what level or what percentage of the funds they are requesting they [may be] possibly allocating towards TASER products?

That's a great question.

I wish we had good visibility into it.

The best visibility point I can give you is that we have had -- a little over 230 agencies have approached us for assistance with grant writing through our grant help at TASER.com helpline we set up for grants.

One of the challenges is law enforcement tends to look at their grants as information that they're not going to share.

So we don't get a lot of feedback.

There tends to be one-way information flow.

So they'll ask us for help.

We will provide information.

We've provided an integrated set of tools, an Excel-based model that helps them estimate not only cost but financial savings, benefits, an increase of jobs calculator.

So we will be going back to our customers.

The final deadline will be May 18, so we are still out talking to everybody.

The last phase of our communication program will be to get customers -- to incentivize them to share information with us basically by telling them that we are expecting a lot of grant applications related to TASER and that if they would give us a forecast, by letting us know what they have put in for, that that will help us to reserve inventory in case we do get a surge in orders.

But at this point, we are not getting a lot of feedback.

Agencies tend to hold their actual grants pretty close to the vest.

Perfect.

Then so I believe it was a [media] article maybe a month or so ago where you estimated this, the grant could generate about a year's worth of revenues to the firm -- or to TASER, I mean.

Can you give a sense of how that came about, that estimate?

Yes, you know, I was talking with the reporter and he sort of cornered me into -- well, what do you think is possible?

I just -- I'm going to be honest; that is not a very accurate number.

There was no science behind it.

That was more just a matter of the reporter asking.

He did a pretty good job of trying to corner me and said, well, would you agree it might be worth as much as a year of revenue?

And I said yes, that is not unreasonable.

But it's really hard to say.

You know, out of the $4 billion there is $2.7 billion that can be used for training and equipment.

What proportion of that comes towards TASER is going to be -- it's really hard to say.

So I wouldn't go looking at that as if that was something that we have been able to model.

That would represent about 4% of the stimulus funds.

We certainly have internal goals we'd like to see in terms of the amount of stimulus dollars spent towards TASER products.

But your modeling is probably going to be more effective or more accurate than that number because that was really just the result of the conversation with the reporter.

Hopefully it's a conservative estimate.

Lastly --

Halleluiah.

Would you get a sense that -- I know it's early and they have not shared a lot of stuff in their requests for products with you.

But would you get a sense that the majority of the funds would likely go towards kind of the regular TASERs and cartridges?

Or you think you could see a lot of this being used towards getting people involved in AXON earlier than they may have otherwise have been?

That is the next great question.

One thing we can look at in that respect is the American Conference of Mayors was approached by the Obama administration to put together a wish list of where they would spend the money.

These were shovel-ready projects.

Now this is not any indication of where the money will actually go, so just let me put that disclaimer out here.

But when the Conference of Mayors came back, in their list of saying here is where we would put the money, there was about -- we identified in that list about $2.4 million related to TASER devices.

We identified $17.5 million for video equipment.

Particularly in-dash cameras or surveillance cameras.

So based on that sample, $2.4 million to $17.5 million.

What is that?

It's about 8-X in the organic budgets that were produced sort of through this third-party survey of the Conference of Mayors.

So that is sort of consistent with what we've seen in general.

The budget dollars allocated to video solutions in law enforcement tend to run between 5 and 10-X of the budgets.

Again it's very informal, but we've seen it from a couple of different sources.

And that's one of the reasons we accelerated the launch of EVIDENCE.COM and AXON, is we figured -- we knew that many agencies would be putting in budget requests for both TASER and in-car video.

Frankly, what we were trying to do is make sure that these agencies don't pen themselves in by putting in a grant request specific for in-car video.

As we've talked with our customer base, we have been letting them know about AXON and EVIDENCE.COM and making sure they write their grants with open-ended language that gives them the flexibility to use it for on-officer or in-car video.

I think that message has really resonated.

We've got a number of agencies we've talked to -- like Bill Lansdowne, the chief in San Diego was out on National Public Radio and announced that they've basically held off on deploying in-car video in favor of AXON.

And I've quietly gotten that feedback from a significant number of departments.

So from the stimulus package perspective, there is a bigger pool of funds to go after for the AXON and EVIDENCE.COM, just based on those factors I gave you previously.

Perfect.

Thank you, guys.

Paul Coster, JPMorgan.

Thanks.

Rick, when does the AXON product actually go on sale?

We are currently targeting the end of this summer, around the August time frame that we would began field shipment.

Okay.

When does the sales pipeline start to build?

Has it already started?

Well, with law enforcement they are going to want to go through a test and evaluation phase with products.

The larger the agency, generally the longer that the test and evaluation phase is going to take.

So we've got a significant pipeline of interest, but until we can start putting the physical product out in people's hands we are not able to really start predicting any pipeline flow yet.

Other than it's been pretty -- it's been very well received.

Again, I can compare this to when we were launching TASER into the law-enforcement market.

That was a much harder fight to get people to accept this concept of an electronic weapon eight, nine years ago, when we really entered law enforcement.

The advantage we have now is twofold.

Number one, we're coming back.

TASER has built a deep relationship with law enforcement.

Not only because of the weapon that we provide that has really impacted their job on the streets, like the Houston example; but the fact that frankly we're as aggressive as we are in defending law enforcement officers.

They love that.

One thing when you talk to police they get really frustrated about -- a cop on the street who is involved in an incident where the agency gets sue and the agency settles.

Those officers look at that as an affront to their honor.

They get very emotional about it.

They do not like these cities stepping up and settling claims against the agency.

So TASER has been very aggressive about defending those claims.

In fact we were a plaintiff where we filed the lawsuit in Ohio against the medical examiner in that case where an officer had been charged with murder because of, frankly, what was a bad ruling from a medical examiner.

And 15 officers were sued.

We stepped in, went after the medical examiner, prevailed in court.

And because of that, that officer was basically exonerated in that case.

So those types of actions have built a real deep relationship of trust with law enforcement.

So now as we're coming back with our second major product category set we've got a very strong relationship of trust, which we will never violate with our customers.

And we are fishing in an area where, because of the yeoman's work that has been done with the in-car video business, has built what we estimate to be a $350 million annual business for in-car equipment.

So there is an existing budget.

We've got what we believe is a breakthrough solution set and strong relationships.

So how fast it will accelerate, though, is really going to be a function that we're not going to be able to put any real numbers on until we get units out in the hands of agencies.

And then we've got this other uncertainty factor of the stimulus dollars.

All those things will be hitting, by our estimation, around the late third quarter and into the fourth quarter.

So I wish I could give you a more specific answer other than we do see a lot of opportunity and a lot of green light indicators that this is a big opportunity for us.

Should we assume that initially AXON sales are a product sale, and the EVIDENCE.COM service revenues kind of kick in a couple of quarters later?

I think there is probably -- that may -- we are still working through exactly how we are going to go to market on that.

There may be -- I certainly think that we will have the EVIDENCE.COM service up and running right out of the gate.

Exactly when that revenue starts flowing, I think we still need to work with our sales and marketing departments to figure out what's the best way to position that.

But certainly, we want that recurring revenue stream to start.

We also want, obviously, our customers to get used to having to pay for that service.

So I think the ramp is really going to be -- there's a big question.

I think the stimulus is probably the biggest wild card right now.

That could cause a quicker adoption than what might otherwise happen naturally, but it still kind of remains to be seen.

Do you think the AXON product, the revenue recognition will be amortized over the life of the service contract potentially?

No, our intent right now is to bifurcate those two and recognize the product sale upfront and then the service ratably over time.

Okay; got it.

All right.

Now with respect to the near-term outlook, I realize you don't issue guidance, but we should be pretty conservative about the second quarter and the first half of the third quarter, it sounds like.

Then hopefully the stimulus spending and the uncertainty around it will be relieved, and we will start to see some kind of upgrade cycles and new sales kicking in late third quarter.

Is that the correct way of thinking about things here?

Yes, this is Dan Behrendt.

Yes, I think that's the right way to look at it.

I think not only do the stimulus dollars flow, but any of the money that maybe has been on the sidelines as people wait for their stimulus dollars.

There may be money that is budgeted right now that gets parked for a quarter or a quarter and a half as people wait for the stimulus funds.

Then if they don't get the stimulus, then that money still flows and the purchases start.

But right now I think there is definitely some near-term risk.

You know, let me add one other thing on the topic of the AXON revenue recognition.

So we've announced pricing at $1,700 per AXON unit which is about a third of the cost of most in-car videos, so we think it's very favorably positioned competitively.

But it's got twice the revenue opportunity of a TASER X26 from a selling opportunity.

The recurring revenues, we've announced pricing of the EVIDENCE.COM service at $100 per officer per month in terms of revenue.

So obviously you can do the math on that, that $1,200 per year in recurring revenue.

That again is pretty favorable even compared to the sell-in opportunity with the TASER X26.

So sort of twice the sell-in revenue opportunity plus recurring revenue opportunity as we talked about.

But we have had a number of agencies in some particular market segments -- like the parole and probation segment -- have alerted us that they may prefer to lease the equipment and have an integrated monthly service fee that includes both the service and the hardware.

So there is at least a possibility we may look at doing that with a third-party leasing company, so that we would effectively sell the hardware to them and still recognize that revenue.

But I don't want to put a line in the sand here that we will not amortize.

We may have market segments where we make a determination, given the amount of cash we have got on the balance sheet and the relative cost to go and do leases.

We may end up having some segments where we amortize the hardware over the life together with the service.

Okay.

Last question.

France, can you give us any update on what is happening with the national police in France?

Actually, Tom is there today as we speak.

So that's about the best update I can give you.

We are certainly in discussions with them over there.

We are frankly expecting some cartridges orders before we would expect to get some more hardware.

They've been running a little low on cartridges.

We have had some logistics purchasing issues we've had to work out.

When you deal with a large bureaucracy there is a lot of process you go through.

But we are continuing to get fantastic feedback from the end-users.

I wish Tom was here.

For the number of TASERs they have had deployed versus the reductions they have seen in police shootings, it's been pretty remarkable.

But we don't have any short-term forecast we are able to put on it.

Unfortunately, what happens with these international customers is there is this black box of bureaucracy that -- we get questions.

We are certainly doing presentations, etc.

We don't get a lot of feedback.

And then, bang, out comes a purchase order.

It's just a challenging thing to try to break that business.

Let me give you one piece of good news, because I know every conference call when we're talking about producing predicting the future we are telling you how hard it is.

The EVIDENCE.COM piece at least we will be able to model the recurring revenue.

So at least a portion of our business and a growing proportion of our business will become more predictable.

That is one of the reasons that we have really focused on launching this new service.

Thank you.

Steve Dyer, Craig Hallum.

Thank you.

Good morning, guys.

Most of mine have been answered.

A couple of them.

A while ago, probably a year ago, you had talked about installing some automation equipment that would make the production of cartridges a little bit less labor intensive, a little bit more automated, which was intended to improve margins.

Where are we in that cycle, I guess?

Yes, that's a great question, Steve.

Actually right now as we speak, our engineers are up at the manufacturer of that equipment.

They are going through factory acceptance testing right now.

There is some pretty significant tests that we do before we [buy off] the equipment at the factory.

Then it needs to then be disassembled and reassembled on our site.

And there is further tests that go on to get through the site acceptance test.

But we do expect that equipment will be here this quarter and will be up and running and that we will start seeing some of the benefits of that equipment probably as we begin the third quarter, to be conservative.

We expect that equipment to be installed here.

Assuming all the tests go well at the factory, we will see that installation in the May time frame and we'll be up and running by the -- sometime in June.

So it's a very complicated project and one that certainly had a lot of challenges from a technology standpoint.

But we're pretty close right now.

Like I said, we have got our engineers up there going through the testing and the runoff of that equipment to make sure that it performs as we expect it.

Okay.

What kind of an improvement, I guess, do you expect in operations margin-wise?

I mean, nothing to hold you to, but what are the thoughts?

I expect -- I'm sure this is -- I think at one point it was going to be an $8 million or $9 million piece of equipment.

Yes, that's right.

That's right.

We are certainly going to see a margin impact.

I think the tough thing is you are going to be -- right out of the gate we may not be as significant as we will see, as we get that piece of equipment running exactly as we would like to see it.

It's also candidly a function of the amount of cartridges we are selling each quarter.

We certainly would have loved to have had it this quarter with the large volume.

But we do expect that the project will have a positive ROI and be a solid contributor to margins in the second part of this year.

From a product lifecycle management perspective, this is -- we're timing this output.

As that equipment is coming online so are some of our newer products like AXON and XREP.

So that we are able to redeploy our work force on to some of those other new products.

So from a global perspective, there will be a transition period as we are shifting people around.

So we should see the cartridge margins improving on a labor basis as we redeploy those on to some of the other devices that we are making.

But it's not going to be a clean cutoff.

There is going to be sort of a transition period.

Okay, thanks.

Then the other thing, I was wondering if you could give a little bit additional color on the UK order.

I think you shipped some handles in Q4, and then you had indicated a big cartridge shipment in Q1.

What is left on that initial, I guess, funding tender?

Or is that pretty much through the pipeline now and out in the field?

Our expectation is really most of those dollars allocated have been used at this point.

I think what was significant is you had the UK central government funding both the purchases of handles and the cartridges.

I think they originally approved the purchase of 10,000 handles.

I think really what has happened is they've reallocated some of those dollars into the cartridges, because they bought 5,000 handles right at the end of 2008 and no cartridges.

So given they typically use about 15 cartridges per year in training, we knew they would be coming back to us in Q1 for some significant cartridge purchases, which we did see.

So they did buy some more handles and then reallocated some of the dollars to the cartridges.

At this point, there is still potential sales for the rest of the year through the constabulatories.

That is how it was funded traditionally, and then the central government stepped up to make this significant purchase.

I think there is still an opportunity this latter part of this year for the constabulatories to continue to just purchase on their own.

Okay, all right.

Great.

Thank you.

Greg McKinley, Dougherty.

This is [Pete Mann] calling with Greg.

I've got a couple questions, guys.

Looking at the gross margin, we were at just under 60% this quarter, which was down from the last three quarters.

Where do you see that running for 2009 for the last three quarters?

Yes, certainly we saw the mix impact this quarter, the shift from electronic control devices to cartridges, had about a 1.8% impact.

So just that alone would have put us back up into the low 60s.

Certainly our internal target is to stay north of 60%.

But as I've said on prior calls -- and unfortunately this quarter I think bore that out -- the fact that our mix does have, can have a pretty material impact on the margins.

I think in the fourth quarter, we enjoyed a real heavy mix of electronic control devices, which is beneficial for us.

This quarter we saw a shift back to cartridges.

We expect the second quarter will have a more traditional mix.

But then the other part that will drive it is obviously our overall sales volumes will have an impact, because we do have fixed costs that we need to cover as well.

But our term targets are always to be above 60%.

If the sales -- depending on sales levels and mix we certainly think that those targets are still reasonable.

Fair enough.

On that same topic, where do you guys see EVIDENCE.COM and AXON fitting into the gross margin picture?

Are those going to be like higher-margin products?

I assume the EVIDENCE.COM would be; but how does AXON fit in that picture?

Yes, AXON, I think will be certainly within our range on a variable margin basis of existing hardware products.

It's not -- it's a very complicated product, and certainly out of the gate we think it will have comparable margins of other hardware that we sell.

Clearly as the volume ramps, and we get our folks on the product engineering and process engineering side looking at things, there's certainly opportunities to take costs hopefully out and get efficiencies as far as the manufacturing side.

But out of the gate it is going to be a solid contributor and certainly we think with time it will be good.

EVIDENCE.COM again will be a good margin product for us.

There is definitely from a capital perspective, as Rick indicated we are taking a lot of that risk on ourselves.

So there is going to be a fair amount of capital spent in the next quarter or so to create those data centers.

But we think that's part of the value proposition for customers, that they don't need to make those capital investments.

We'll make those, and we can be just more efficient to make those investments and manage it across lots of agencies, versus them taking that risk on individually.

Excellent.

That's very helpful.

Last question.

Looking at your operating costs, I know you guys mentioned that research and development is going to remain at these levels throughout the rest of the year.

But from an SG&A perspective, do you see your headcount where you want it to be at?

Or are you still pursuing some other people to fill other software holes or other initiatives that you guys are tackling?

Certainly I think that's a great question.

I think there is certainly some more heads we need to add, especially around the AXON and EVIDENCE.COM products.

Selling that software-as-a-service is a different animal.

There's certainly sales engineering talent that we are going to need because it is a little bit more complex as far as how we spec it out and how we implement the product.

So there is certainly some infrastructure there that -- I think we're sort of nearing the completion of that ramp-up of headcount.

I think in the near term, we've got the tech summit that's going to happen in the second quarter which is an incremental expense.

We think that the money we are putting there we think is very well invested, because it's going to gather both good information about the product features and making sure we are hitting the mark, but also it gives our customers a really good introduction to the product and gets them excited about the technologies that comes to market.

We also have in the second quarter the expenses around the annual report, the proxy, the annual shareholders meeting.

So there is some incremental things for the second quarter that are kind of unique to the second quarter.

But certainly we are paying attention to the costs.

We are trying to make sure that we are smart about where we're making the investments and really spending the money where we think we've got the best return and the investment is most strategic.

But certainly it's a little bit of a challenge as we kind of really transform the Company and really get ready for sort of the next phase in the Company's growth cycle.

Okay, great.

Thanks a lot, guys.

At this time, there are no further questions.

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

Rick Smith for closing remarks.

Thank you very much.

Again, it was -- I don't want to overlook the fact that on a revenue basis -- I believe, Dan, this is the strongest first quarter we've ever had.

That's right.

Not many companies are saying that in Q1 2009.

So proud of what our team has been able to do.

As you know, historically, we've returned funds to shareholders through share repurchases, etc.

Over the past year we made the strategic decision that rather than returning cash, that we had an outstanding investment opportunity with AXON and EVIDENCE.COM, and so we've -- well, we have been able to fund that from our operating cash flow and from our operating income stream.

As you start to model this you will all realize the total available market opportunity is at least as large as our existing business.

So we think obviously on a pro forma basis the investment made a lot of sense.

We look forward to getting to the end of this year and seeing how market acceptance goes.

But it's really quite an exciting time.

There are some guys out at our software division out at TASER Virtual Systems in Carpenteria, California, and one of them had a really key insight.

He said, how amazing is it to be involved in such a really cool project, hiring people, creating jobs, and creating new capabilities when the world really needs that?

A lot of people are struggling right now.

A lot of people are afraid.

A lot of companies have pulled back.

A lot of people are without work.

And we feel really good about the fact that we're able to make a positive economic contribution.

We are putting people to work on a great project.

And I believe our shareholders will see we are going to create breakthrough value for our customers and our shareholders if we succeed in this endeavor.

So thank you for being a shareholder in TASER.

We enjoy working for you.

We've got our annual meeting coming up May --

28.

May 28.

You are all invited to come on out.

And we will show more at the shareholder meeting.

You can see some of the hardware and we will do some demonstrations with some of the EVIDENCE.COM capability.

So it should be a fun shareholder conference this year, and look forward to talking to you all again in July.

Thank you very much.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.