Axon Enterprise Inc (AXON) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Third Quarter 2009 TASER International Earnings Conference Call.

My name is Jeff, and I will be your operator for today.

(Operator Instructions)

I would now like to turn the conference over to our host for today, Mr.

Rick Smith, Chief Executive Officer.

Please proceed, sir.

Good morning, everyone.

We appreciate you spending time with us this morning.

Before we get started, I'm going to have Dan read the Safe Harbor Statement, and then we'll move forward.

Okay.

Thank you.

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, and TASER International intends that such forward-looking statements be subject to the safe harbor created thereby.

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

Be cautioned 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 which we compete and accompanying demands for our products, potential delays in international and domestic orders, implementation risks of manufacturing automation, risks associated with rapid technological change, execution and implementation risks of new technology, new product introduction risks, ramping manufacturing production to meet demand, litigation resulting from alleged product-related injuries and deaths, media publicity concerning product uses and allegations of injuries and deaths and the negative impact this could have on sales, product quality risks, 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 governmental investigations and regulations, TASER product tests and reports, dependence upon key employees, employee retention risks, and other factors detailed in the Company's filings with the Securities and Exchange Commission.

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

Thanks, Dan.

Well, as we mentioned in our press release, I am just incredibly proud of the team here at TASER.

We are obviously operating in a very difficult global environment, and yet our sales team was able to turn in revenue growth of 17% over the same period last year, and over 23% on a quarter-over-quarter basis.

Now, there I'm talking about our adjusted revenue growth, what the salespeople actually brought in, what was shipped and billed to customers.

As we move through the conference call here, we're going to talk a little bit about our adjusted revenue versus our GAAP revenue.

And the reason is this -- in the third quarter, we announced the new TASER X3, our first semi-automatic TASER device.

When we announced that, obviously there's always a risk of disruption in your current product flow when you announce something as revolutionary as the new X3.

So, to mitigate that risk, what we did is we developed a trade-in program.

So the people could continue to buy the X26, and look at the X3, and if they decided to purchase the X3, they could trade their X26's back in, and upgrade to the X3.

Which, by the way, would be obviously a very good thing for the Company.

The X3 represents a higher revenue opportunity for us.

And the program worked.

I think our revenue numbers reflect that.

But there was no disruption in our core sales as we begin to spin up the X3 production lines.

However, due to reasons that I could try to explain but let's just suffice to say the accounting world sometimes will take things in a way that may not appear logical to a layperson.

We deferred a potion, a significant portion of our revenue.

Dan, how much was it per unit?

$250 per unit.

On an X26.

Now, again to be clear, we're booking those units and billing those units at full value.

We're just deferring, so we will collect the cash, the business operates as normal.

This is an accounting convention to account for the fact that the customers who purchased during the quarter had a right to trade in and upgrade those products to the new X3, and therefore we've deferred a portion of the revenue associated with the X26 until the program ends which is expected at the end of the fourth quarter.

So, that deferred revenue, when the program ends, will then be recognized the next quarter.

So, it does create a problem or a challenge at least, for people that are modeling our business, such as many of you on the call.

So, I'll frequently talk about what the business looked like without using an adjusted number, without the GAAP deferral.

Otherwise, the number shift all over the place, and it's really hard for people to track.

Okay, so on that basis, adjusted revenues for the quarter before the deferral were $26.8 million which is one of the best sales quarters in the Company's history, despite the economic environment.

It's an increase of $4 million, or 17% over the same quarter of the prior year.

And for the first 9 months of this year, the adjusted revenues before deferral were $73.2 million, an increase of $6.8 million, or 10% over the first nine months of 2008.

Adjusted revenues exclude the impact of course of the GAAP adjustment we talked about.

On a GAAP basis, if we look at the adjustment, deferring $3.5 million of revenue with no cost of goods associated with it, into the future quarter, net sales for the third quarter and the first nine months with the deferral in place would be $23.3 million, and $69.7 million, respectively.

If we look at gross margin, gross margin before the deferral was 62.5%.

Last year, we brought in Steve Mercier, our Executive Vice President of Operations, and you all probably remember about 18 to 24 months ago, when we brought Steve in we were really challenged in our gross margin space, and I have to say he's just done a fantastic job.

And in fact, our automation project is coming online this quarter for the investment we talked about there, which should continue to help us perform well in the gross margin space.

Of course, on a GAAP basis, if you defer $3.5 million right off the top, the margin does drop to 56.9%, compared to 60.8% in the third quarter of 2008.

So obviously, on an adjusted basis, it's a significant improvement, about 130 basis points.

Research and Development expenses this quarter were $6.7 million, which increased by $3.3 million, or doubled, over the same quarter of last year.

We view this as this should be the high water mark in our R&D spending, with our major conference this summer where people come in from around the world, our trainers, to learn about our new products.

And at this year's conference we introduced two major new platforms, one that we'd been developing under wraps.

That was the TASER X3.

And then the AXON, which is now moving into the Field Pilot phase.

Both of those are major product lines for us.

They have significant revenue opportunities.

The X3 gives us an opportunity to go back and upgrade our entire installed base, which we estimate Dan, the revenue opportunity on that?

Roughly $600 million.

On the X3, so and that will also allow us, we believe, to open up foreign markets where TASERs as a multi-shot device become even more of a viable option as a primary force option for unarmed police forces that don't have firearms.

The multiple shot capability is particularly important, according to our market research.

So, the X3, obviously the spin-up for production, all of the validation units that have to be built and basically destroyed as part of the validation process, all that hits R&D as well as the AXON that we've been investing in heavily for the past year.

We're hitting the same point this quarter, where we're building validation units that are not for revenue, but they're being used for training purposes and validating the design.

So, we do expect to see our R&D return to more normal levels in the fourth quarter, and again, I would say I think based on customer reactions, I just got back from the International Association of Chiefs of Police conference, where I met with oh, probably 100 or so chiefs including many of the chiefs from the largest police agencies across America and Canada, and some international.

And both of those products were very well received.

As well as our EVIDENCE.COM service.

So, we believe the investments were deliberate.

They were a little larger this quarter, I think, than people were expecting, but the products that resulted from that are in my opinion spectacular and present a real opportunity for the company to continue to grow in the future.

This quarter, our adjusted operating income again, excluding the trade-in and also excluding stock based charges, depreciation, amortization and litigation judgment expense, was $0.6 million.

So, we were profitable on an adjusted income basis, although compared to $2.8 million for the third quarter of 2008 the big difference there being the incremental R&D investments.

Now, the GAAP loss from operations was $4.8 million for the third quarter, compared to income from operations for the same period of the prior year.

The big differences there being the deferral of revenue, and the incremental R&D investments.

So, the net loss, the diluted loss per share for the quarter were $3.2 million, and $0.05, respectively.

Now, the Company so far this year despite the investments that we have made, has generated $5.5 million in cash from operating activities in the first nine months of 2009, ending with cash and equivalents of $45.4 million and no debt.

So again, just to be clear, two years ago we made the call to invest in transforming this business.

With AXON and EVIDENCE.COM into more of a full solutions provider as compared to only being a hardware provider.

We look at it that companies in that space, full solution providers, are valued very differently than companies that are pure hardware plays.

So, we think it was the right investment for our shareholders, and we've been able to fund it from our cash from operations without significantly dipping into our cash reserves.

Significant events for the quarter, international sales continue to be very strong, representing 19% of net sales and 16% of the adjusted revenues for the quarter.

The most significant shipment in the international space for the quarter was funneling orders for almost 2,000 TASER X26s and TASERCams, into Australia.

We also had a very large, or very significant order, for the US Customs and Border Protection here in the US, which we view as a big win.

To see the Federal agencies such as Customs/Border now really beginning to move significantly towards TASER.

I can't provide much more color than that, due to security concerns with the customer.

We will not be providing specifics as to dollar amounts or unit quantities shipped related to that order.

Also, we talked about the X3 being unveiled at our conference this summer, which has several just revolutionary new technologies including the rotational pulse drive, that makes it a semi-automatic multi-shot device, and a (technical difficulty) system.

(technical difficulty) customers have particularly up in Canada, there has been much discussion about bring TASER devices in to be tested periodically, for their electrical output.

So, getting ahead of the curve, we've now built an electrical calibration and test system into every X3 so that there's no longer any logistics involved to be able to -- the device self-calibrates every time it's used, and that information can be downloaded and analyzed easily and conveniently.

Very well received by customers, that feature is.

Also this quarter, the EVIDENCE.COM data center and servers have gone live.

We've not yet opened up customer -- we're not live in terms of bringing revenue customers onto the system, but the servers are live, we're in test and validation mode.

And we'll be transitioning into field pilots with non-revenue customers in the fourth quarter as we test out both the AXON hardware, the X3 and the EVIDENCE.COM service, and we expect those obviously to move into revenue contribution in 2010.

We won six more product liability suits that were dismissed during the quarter.

So at the end of the quarter, we had a total of 96 wrongful death or injury suits that have been dismissed or judgment entered in favor of the Company.

Speaking of liability, there's been some discussion in the public media about a recent training bulletin that we put out.

As we frequently see due to the sensational nature of police work, of TASER devices and of the media, what we've seen in the media is not a very accurate representation of what our bulletin has sought to achieve.

So let me speak to that for a minute, and then I'll hand over to Dan.

In a recent training bulletin, we lowered the point of aim, the intended point of aim, from the center of mass which could be interpreted as the chest, to the abdomen area for shots on the front of the body.

Now, the release of the training bulletin should not be interpreted in a significant change in how our product should be used.

The recommendations should be viewed as best practices that mitigate risk issues resulting in more effective deployments, because we know if you shoot lower on the front of the body, you have bigger muscles in the abdomen and the pelvic region that are more incapacitating than shots up in the chest region.

But the other reason is to do from risk management.

As we know, police confrontations are violent, they are risky.

The TASER device has been proven to be the safest force option available.

The only other force option that's in the same sort of minimal risk class category would be the pepper spray category, which is nowhere near as effective as TASER devices.

So, there have been a number of great studies this year sponsored by the Department of Justice and others, that are showing an injury rate that is a fraction of 1%.

However, the risk, from a risk management perspective, sudden cardiac arrest is one of the leading causes of death in the United States.

About 325,000 people die every year from sudden cardiac arrest.

That's why they have defribulators now in airports and on golf courses and in gymnasiums.

So, it's certainly possible that somebody struggling with police, that the stress of that event could lead to an adverse outcome.

They could have sudden cardiac arrest.

And the challenge for us and our customers is, if a TASER is used, even if the TASER has nothing to do with the cardiac arrest event, if there's a shot to the chest, defending that case from a risk management standpoint is much more challenging than if the electricity path is not in the chest.

So, after consulting with our training board experts, with [warning experts] and our legal team, we felt that from a risk management standpoint this greatly enhances the ability of the law enforcement agency customer and TASER to defend those cases more easily, i.e., we're trying to avoid the situation where we get put in position of having to prove innocence or in this case, prove it was not a factor, which is nearly impossible to do.

Because you cannot replicate all of the different human conditions of a person who might be you know, 60 pounds, who's a methamphetamine addict, who's taking all sorts of different drugs.

You can't replicate that sort of testing.

Which is one of the things our critics have pointed out, and we have pointed out that it's true, that kind of testing cannot be done.

It would be highly unethical to do those things to people.

It would not be admissible or legal anywhere in the world to do that sort of medical testing, and therefore you cannot disprove those, that the one in a million case can't occur.

So, from an investor perspective, I think the right way to look at this is, every -- substantially every case against us, so maybe an exception of one or two, are failure to warn cases.

So, by adjusting our warnings accordingly to even things that are alleged but are not proven, enhances the defensibility for both TASER and our law enforcement customers, by acknowledging that all risks cannot be disproven and once those risks are acknowledged in warnings, the defensibility of those cases goes up pretty significantly.

So, if you need more information on that bulletin, it is posted on the training section of our website at TASER.COM.

I'd invite folks to go take a look at it, but again, one way to look at it is, we do believe that this will significantly enhance our risk management on a going forward basis.

And with that, I should also point out that the medical tests point to very low risks.

Again, we just can't, you can't prove that a risk is zero, but we know from field data we're talking, we've had almost 2 million human exposures, and if you look at the number of cases that where cardiac arrest is even plausible it would be a handful at best, meaning that the symptom patterns, we don't have something that helps us specifically exclude it.

So we talk about risks less than 1 in 100,000 in terms of the incident rate, which is extremely remote.

However, we cannot prove it to be zero.

It's just not scientifically possible.

So, we've adjusted our warnings.

And we believe for the long term it will put us and law enforcement in a stronger position.

And with that, let me turn over to Dan, to go into more financial detail about the quarter.

Okay.

Thanks a lot, Rick.

So first, the results for the quarter.

Again, as we talked about last call, and Rick mentioned, we're deferring a portion of the X26 sales for the quarter, roughly $250 for every unit in the quarter, and really what we've done from an accounting perspective is looked at what that trade-in right, the ability to buy an X26 and then get relatively full value towards the price of an X3, what's that trade-in right worth?

And we've kind of, there's a -- some accounting around that, that's used in the software space and other places, we applied here to calculate that value at roughly $250 a unit.

So the good news is, that $3.5 million deferral, to the extent that those customers have not traded up in the quarter, that'll reverse itself in Q4.

So, and this does sunset, but it does make for some challenges, from comparability purposes, so that's why we're going to talk about the results both on a GAAP basis and a non-GAAP basis, so.

Again as Rick said, the adjusted revenues for Q3 were $26.8 million.

This is up $4 million, or 17% from the prior year.

Again, mostly driven by the increases in our Federal/Military segment, led by the sale under the IDIQ contract with Customs and Border Protection, as well as higher sales to the company's international customers.

Mostly driven by the large sales Rick said of TASERs and TASERCams to Australia in the quarter.

The net sales on a GAAP basis for the quarter are $23.3 million.

Sequentially our adjusted revenues are up $4.9 million, or 23%, from Q2, again primarily caused by the increase in the Federal/Military sales.

So, that's good news.

You know, seasonally Q3 is not normally one of our better quarters.

Usually, Q2 and Q4 are better seasonal quarters, so to have such a strong Q3 is really something we're encouraged by.

And you know, the one thing I want to talk about as well is that although we haven't seen a lot of stimulus related sales thus far, we've really noticed in the last probably month or so, an up-tick in the amount of quoting activity we're doing with departments that have now learned that they've been awarded stimulus grants.

So I think that's a good sign, and we expect to see some benefit in Q4, and more in 2010.

So I think that's also something we feel better, good about, as we move forward.

The adjusted gross margins back out the deferral were $16.7 million or 62.5%.

These are up 1.7% as a percentage of adjusted sales from the prior year, and the increased margin is really driven by the increased leverage in our indirect manufacturing costs.

The indirect manufacturing costs stayed relatively flat on a nominal basis even with the higher sales level, so we were able to get you know, leverage out of those indirect costs, which is something we definitely want to drive towards as we grow the business.

Our gross margins on a GAAP basis were $13.3 million or 56.9% of sales, and then both GAAP sales and gross margins will both benefit in Q4 with the remainder of the $3.5 million deferral is reversed.

Our SG&A expenses were $11.4 million for the quarter versus $9.1 million in the prior year.

The increase was driven by higher salaries and benefits of $703,000 with higher head counts to support a management team that we built out and new hires we've made to support the new product lines that we're moving into.

We also had an increase in our 123R charges for stock compensation of $371,000 and consulting costs were up roughly $300,000 from the prior year level.

Sequentially, we saw our SG&A expenses grow by $600,000 over Q2.

As expected, SG&A was impacted by launch costs associated with the AXON and EVIDENCE.COM and X3 product launches, as well as the costs of the annual TASER conference, that's one of our bigger trade shows for the year we put on each year for our customers.

We also had higher salaries and benefits in Q2 due to the hiring of some new employees to support the sales of EVIDENCE.COM as well as some severance payments we made in the third quarter.

Research and development expenses of $6.7 million in the quarter which is an increase of $3.3 million over the prior year.

The biggest driver here are indirect supplies, component costs, expediting fees, and the like to build X3 and AXON units that we showed at out TASER Conference and IACP trade shows.

That increase in those line items was roughly $1.8 million over the prior year, so that's the largest driver for the increase

We also had higher salaries, benefits and 123R charges of $1.1 million to support the hardware development and our new software development team headquartered in California.

We also had increased tooling and scrap costs.

Again, this is really associated with the new product builds of $443,000, partially offset by $851,000 of software development costs related to EVIDENCE.COM which we've capitalized in Q3.

Sequentially, R&D costs are up $2.3 million due to the significant increases in the indirect supplies, components, tooling and scrap charges for the prototype builds.

We also had as Rick said, the data centers up and running.

We had approximately $500,000 of data center expenses in the quarter.

This is salaries for the people working at the data center, the NOC operators, also the equipment we've purchased and you know, with depreciation, the rent for the data center.

So that's about $0.5 million of expense in the quarter.

Once we get to revenue on EVIDENCE.COM those expenses will move up into costs of services delivered.

But right now before we get to revenue, those costs are still sitting in the R&D line of the P&L.

We do feel good about the new products and again, as Rick said, we do expect the R&D spending to be back down to normal levels in Q4.

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

We have introduced several new and differentiated products which better positioned TASER to capture the market share and address the new opportunities as the economy improves.

We also feel the high R&D efforts aimed at building our virtual systems business which should in turn really provide a more stable and predictable revenue stream for the Company in the long run.

So we're making strategic investments now, and it certainly has had an impact on the near term profitability.

But we do feel good about those as we move forward.

Our non-GAAP adjusted sort of cash earnings, if you will, was $602,000 of income.

As we ramp up our development teams and have the large increases we've seen in the 123R comp as a result, we feel it really makes sense to look at our operating basis.

The operating account on both the non-cash, non-GAAP cash basis, as well as traditional GAAP basis.

You know, these costs for 123R and other cash, non-cash charges, are getting to be pretty significant.

So, we want to show it both ways.

On a GAAP basis the Company posed an operating and pre-tax loss of $4.8 million and a net of tax loss of $3.2 million or $0.05 loss per share on both basic and diluted basis.

So, the other thing, for the analysts and others who look closely at the financials, you'll probably notice that our effective tax rate decreased in the quarter from about 49% at 6/30 to 39% at 9/30, which reduced the tax benefit for both the third quarter and year to date.

The company reviews its tax rate each quarter for reasonableness, and because of variability in the annual effective tax rate caused by relatively small differences in projected fourth quarter results, we ended up calculating a year to date tax provision as if we ewer filing tax return with the year to date results, instead of projecting effective tax rate using the forecasted total year results.

There likely would be some variability in the fourth quarter rate depending on the fourth quarter results, and the likelihood that the impact of non-deductible expenses for things like ISO stock options, meals and entertainment and lodging, will make the income for tax purposes significantly higher than book pre-tax income.

So, we did reduce it for the quarter, the fourth quarter, it'll likely will see some variability.

It's really going to just depend on where, where the year ends up.

But you know, we'll continue to monitor that pretty closely.

On the year to date basis, our adjusted revenues are $73.2 million which is up $6.8 million or 10% from the prior year, again mostly driven by the increase in the company's international, military and federal segments.

And, our net sales were $69.7 million.

Adjusted gross margins are $45.1 million, or 61.6% of adjusted revenues, were up 1% as a percent of sales from the prior year.

The $1.7 million increase in indirect manufacturing expenses versus the prior year were mostly driven by the lower absorption capitalization of plan overhead due to lower inventory levels, partially offset by lower salaries, benefits, scrap and warranty charges.

But overall, obviously with a adjusted gross margin of 61.6% we've been happy with our performance in that area this year.

R&D expenses on a year to date basis are $15.2 million.

This is up $6.8 million, again driven by higher salaries, benefits, and 123R charges of $3.7 million for a head count added to support the hardware and software development as well as significantly higher indirect supply, tool and component charges of $3 million to build these initial prototypes and units to showcase at the TASER Conference and the IACP trade show.

Last year we had a $5.2 million accrual on the books for the punitive damages in the Heston case.

As you recall, we did reverse that in Q4 of 2008 when a judge on the case threw out the punitive damages, but on a year-to-date basis in the 2008 you'll see that $5.2 million reserve on the books.

Adjusted operating income is $2.4 million of income.

When the X26 trade-in credit, 123R charges and depreciation/amortization are added back and we had a book loss from operations of $7.3 million.

The net loss for the year is $4.4 million or $0.07 on basic and diluted share basis, and again we do expect to reverse the remainder of the X26 trade-in credit in Q4.

Moving on to the balance sheet, the [status for] the quarter is $45.4 million of cash and investments.

This is a decrease of $4 million from the prior year end, mostly due to capital expenses.

We had significant expenses for tooling of $2.5 million, to support the new products.

We had equipment to outfit the first data center, $2.1 million.

We had capitalization related to EVIDENCE.COM development of $1.5 million and then costs associated with the automation equipment of $2.2 million.

So, significant capital investment this year as well, but again, this is partially offset by our cash flow from operations of $5.5 million.

And due to the uncertainty in the market, we've continued to keep the investments very liquid, and certainly have plenty of liquidity to continue to operate the business and make those investments for the future.

Accounts Receivable, $16.3 million, or down $0.5 million from the prior year-end balance of $16.8 million.

Again, at the end of the last year, we had a large UK order if you recall, that shipped right at the end of 2008.

We collected in the first quarter, but to drive up our accounts receivable balances.

Our days sales outstanding is 54 days, which is in line with where we were in Q2, and down approximately 3 days from where we were at 12/31, so continue to be pretty happy with our receivables and the levels and the days sales outstanding.

Our inventory balance is at $13.2 million, are down about $240,000 from the prior year-end balance.

As expected, our inventory balances did climb up a little bit from the Q2 level to the purchases to support the X3 and AXON product lines.

And, our pre-paid and other assets of $1.8 million are down about $656,000 from the year-end balance.

This is really due to the reductions in our pre-paid insurance as we amortize that over the year.

Our investment of property and equipment of $35.6 million is up $8.4 million from the prior year due to progress payments on the automated manufacturing equipment, the new IT equipment including the equipment to outfit our first EVIDENCE.COM data center, and then to support the new product lines and EVIDENCE.COM.

So, total assets at September 30th were $137.1 million, and on the liability side of the balance sheet, accounts payable of $7.7 million is up $3.8 million from the prior year end balance.

Again, it's due to some timing of check runs and then just the increased purchasing activity, including purchases of the data center equipment.

Accrued liabilities of $3.8 million are down $428,000 from the prior year-end balance of $4.3 million, mostly due to just lower accrued expenses for payroll and other type of employee expenses.

Current deferred revenue is $6.3 million.

This is up significantly from the prior year-end balance of $2.5 million, again, as we talked about the biggest part of this is the deferral of the X26 sales that's going into the deferred revenue line of $3.5 million and the remainder of that increase is just driven by continued sales, extended warranties in 2009.

We had total liabilities of $25.1 million and we finished the quarter with $112 million of stockholders' equity.

We have no long term debt and continue to have plenty of liquidity to fund R&D efforts and operations as we move into the future.

On the cash flows, the Company had cash provided from operations of $5.5 million for the nine months ended September 30th.

This compares to about $4.6 million of cash provided from operations in the prior year.

The increase is really mostly driven by a $2.4 million increase in 123R charges year over year.

123R charges are $3.8 million on a year to date basis and our depreciation and amortization for the nine months are $2.4 million.

We did have cash use from investing activities of $7 million.

This is really driven by the $9.5 million of CapEx, offset by $2.5 million that we realized from maturing called investments.

And then, we ended the period with $45.4 million cash, and plenty of liquidity to continue to operate the business.

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

Great, thanks Dan.

Okay.

The couple things I also want to talk about from the sales accomplishments perspective is, we added 355 new agencies, up for a total now of 14,853 agencies testing or deploying our products.

So we're approaching the 15,000 mark.

Let's see.

We added 88 new TASERCam agencies, including obviously one very big one in Australia, for a total of now 2,233 agencies testing or deploying our TASERCam.

We added 12 new agencies using the newly-released X12 Shotgun from Mossberg, and 17 agencies with the XREP so again, the XREP is now shipping.

It an extended-range impact munition that a smaller overall market than the patrol officer market that we see with our hand held devices, but none the less it's a critical [thought] leadership market for us.

International book sales were about $4.5 million and book domestic sales were about $21.5 million.

And, all book sales in total in the quarter was about $26 million.

So again, congratulations to our sales team.

Not many sales teams are turning in those kind of numbers in this economic environment.

Couldn't be more proud of those guys.

One other thing I wanted to comment about, on the R&D front, we have been making heavy investments.

I think we've made that point several times throughout the call.

I should also mention that we've taken some additional steps to streamline our R&D, namely we've brought in a new VP of Research and Development named Mark Phelps.

Mark comes out with very strong background from companies like Medtronic and others, sorry, I'm drawing a little bit of a blank here.

Motorola.

Elsewhere, very strong background in terms of R&D management, which we believe will help us to streamline our expenses and our management processes in R&D.

Another thing that does is, that frees up Max Nerheim, is the company's first technical fellow which we're all very excited about.

That allows Max now to really focus, many of you may know Max Nerheim, he's the inventor of the shaped pulse and the X26, holder of many of our patents.

And with this new management structure, it now frees up Max to be solving our most technical challenges, and inventing our technologies for the future, rather than managing day to day managerial activities.

So, we think it really will help optimize the Company to take it again to the next level, both technologically and in terms of our business processes.

Last item I want to talk about again, over the last two or three years we've invested significantly in transforming our company with a couple of goals.

One was to broaden our revenue base so that we weren't as dependent on the TASER hardware product line, and that includes the AXON on-officer computer, and video camera system, which allows us to tap in to the in-car video market space, which we estimate to be a $350 million plus a year, market here in North America, as well as EVIDENCE.COM which is our video management system.

We're providing a turn-key solution, end to end, hardware, and the video management software solution, to really streamline our customer's operation.

It was extremely well received with police chiefs we talked to.

They're interested in running police departments, not building massive complex data centers.

And the fact we're providing this turn-key is resonating very well.

In fact at the IACP conference, TASER International took the top awards in the innovation awards from Cygnus Publishing, that runs the innovation awards at that conference.

In the categories of computers and software.

As you can imagine, some people were scratching their heads, they didn't see this coming.

TASER International taking top awards in computer and software, and we beat out world-class folks like Panasonic in the computing category.

So, those folks who kind of look at technology and the future of law enforcement have given us a pretty solid endorsement there.

It's up to us now to convert that into revenues and to sustainable business, but I'm telling you, I'm very enthusiastic and excited about seeing EVIDENCE.COM and the AXON come online.

It will take you to the next level for law enforcement and being able to defend their actions by having video from the officer's perspective.

And with EVIDENCE.COM we're tying in world class analytics so we're not just taking those videos and storing them away for use in court later, we're bringing those videos to life with geospatial mapping from our partners at Microsoft.

We've -- and actually Cisco did a whole case study on the EVIDENCE.COM data centers.

TASER International was one of the first in the world to deploy Cisco's new unified computing platform, so we've used the absolute best in class technology in building the EVIDENCE.COM data centers.

Because we'll be managing potentially massive amounts, petabytes and petabytes of data, Cisco was so impressed with our operation that [Jeff Dillon] and his team have done at TASER virtual systems, that they launched their 2010 public safety campaign with a case study of EVIDENCE.COM that they released at the IACP conference, was a major focus for Cisco.

So, we of course are delighted to be getting awards from the industry, industry innovation awards to have absolutely wonderful partners like Microsoft and Cisco, and IBM supporting us, and IBM on the data and storage side, and let's hold on tight.

We're getting close to market.

Of course, we still have a lot of work to do to deliver, but we expect 2010 to be a transformative year for us and much more to come.

So with that we'll open it up and we'll take a few questions.

And then we'll wrap up the call.

(Operator Instructions) Our first question comes from the line of Paul Coster with JPMorgan.

Please proceed, sir.

Yes, thank you.

Two questions, really, let me start with the first which is, regarding this decision to sort of amend your advice on how to use the TASERs and avoid chest areas, and so on.

In the event that a police officer does use it, and you know, makes contact with the chest area and you see some kind of issue arising, are you still going to be defending the police officers in the manner that you've done historically?

Absolutely, and unequivocally, yes.

This is -- the advice is designed to avoid potential controversy.

For us and the officer, if that officer is able to aim lower, then (a) it's more effective, and (b) it makes the defense easier for all of us.

But we've been in this business for 10 years, we've had hundreds of thousands of chest shots, and it's proven to have an extraordinary safety record.

So, this is more about risk management and we are reassuring our customer base they can count on our full support that in the event they do hit someone in the chest, we're not suggesting it is a significant medical risk.

We are suggesting that this improves risk management by improving the defensibility.

It takes us out of the position of having to prove to a jury that the TASER did not have an effect, which is sort of today the challenge that we've had.

And as we learned in the Heston case, you know, sometimes juries are not swayed entirely by science.

But sometimes, they go more by other factors.

And this is just one more risk management layer to protect us all, but no means will we be backing off from protecting officers and helping them co-defend cases.

Got it, okay.

Second thing is that you do seem like you're at the threshold of turning into a different kind of company, more diversified, more visibility going to the AXON initiative, and so on.

With which, why don't you start to issue guidance?

I think it will be well received by a broader investor base.

We'll of course take that under advisement.

As that business begins to stabilize and if it becomes more practical, we at least might be able to look at providing some better modeling for people to look at our forward-looking business.

So we certainly understand that, and as -- that's our goal, is to make our business easier to model and to take out some of the volatility.

Thank you.

Okay.

Our next question comes from the line of Steve Dyer with Craig-Hallum, please proceed.

Thanks, good morning.

I guess I'll just ask the predictable question first.

What are you seeing on the municipal budget side of the world, and maybe more importantly, how has that trended or changed in the last six months call it?

Yes, I think -- Steve, this is Dan Behrendt.

I think that you know, it's still a tough municipal budget environment.

I think the one thing we're encouraged by is that we're starting to see a little bit more core activity around the stimulus package, so the really, the thought and the hope we have as we finish this year and move into next year was that that large amount, that $2.75 billion of Federal money flowing into law enforcement for equipment purchases helps offset some of those municipal budget weaknesses.

But, certainly as we looked at our business this year, we've seen a shift in our segments of our business from being really heavily dependent on US law enforcement, and really having more of our sales come from the international part of our business, from the Federal/Military part of our business, and I think it in some respects it's good because we're not as dependent on a single segment.

I think we purposely made investments, and sales folks to focus on segments of the business.

I think you're starting to see some of that impact with parts of the business like the Federal part of our business become more significant.

So.

But, the US law enforcement which is still roughly half of our sales, it's a tough budget environment but hopefully helped by the stimulus.

And I could add a little bit there, when Dan said the $2.7 billion flowing into law enforcement for equipment purchases, that also is being used for keeping officers on the street, and jobs as well.

So, just to be clear, that's not all for purely equipment.

But it is helping with budgets, the stimulus is starting to flow.

Okay.

And I guess can you give us any indication as to how much you think stimulus maybe helped the quarter, or you know, on a scale of 1 to 10, or 1 innings to 9 innings, call it, how far into this stimulus help are we, do you think?

I think, I think it's really early.

I think it's sort of first inning kind of thing.

We saw probably a little bit in Q3, we're starting to see that quoting activity start to increase.

But I think there's still, I think the agencies are now starting to - you know, there's actually websites that show by state, where the (inaudible) have flowed, so you can look to see okay, this is the State of Texas, and you click on Texas and you can see each agency in Texas, they got a stimulus grant.

Honestly that gives us a good hunting list as far as who to go talk to, and we know has got the stimulus funding.

But it's pretty early in the game at this point.

You know, one thing I would say, there's been a little bit challenging, is we launched into you know, when the President announced the stimulus, we obviously got very engaged in letting people know about our products that were coming.

The tenor in Washington has been very sort of negative, to be blunt, on corporate America.

And there have been some pretty strong directives about how they don't want corporations or corporate America over influencing how grants are done, etc.

And I think that sets a tone that many government agencies, including law enforcement agencies, they're taking information in but I think they're being very careful in not -- we don't get a lot of visibility, as to whether or not they're putting grants in that may or may not apply to our equipment.

At least not near as much visibility as I would have liked to have seen, but that's just a function of the current political environment.

So we do know that you know, the money's finally starting to flow.

How many people put in for grants that are specific to you know, TASER or our devices, it's hard to get a good grip on.

And then the second order of effect is, if agencies get grants for non-TASER equipment, does that free up other budget dollars that they would have had to spend on additional officers, or on new cars, or whatever it is they're buying with the grant money, can we then see that that frees up other budget dollars, and so there's a secondary effect that can increase TASERs.

So, again, we've spent a fair amount of money trying to get a grip on it.

It's just those factors make it real difficult for us to get much insight into precisely how large the opportunity is in any timing that might be associated with it.

Okay.

AXON, it sounds, it sounds like it slipped a little bit just in terms of when you expect it to be a revenue contributor.

You know, what are your thoughts as to next year, what's the pilot process going to look like, from a timing perspective, and when would you expect this to start generating revenue?

Personally let me take you head on, yes we did slip over what we thought originally.

We had set a pretty aggressive schedule.

Looking back on it to develop a full robust internet services group, the staffing up of that, the software development, the QA, and then the integration of the hardware, both from the AXON itself to the image transfer machine, which is the local rack that gets installed at the agency.

We've got caching, and a lot of network switching that happens there, and then back to the data center.

So, that integration process, has been a heavy, heavy lift.

Now the good news is, it's going to be a big barrier to entry for anybody else who wants to follow us.

It's - the fact it's not been easy means it won't be easy for others to do either, and that improves our first mover advantage.

But we did slip.

Now, our looking forward, we anticipate that we will be in field trials in the November and December time frame.

With the -- frankly we have more agencies that want to field trial it than we have the logistics ability to support at least you know, we're also all trying to keep our eye on the costs.

We can't go support you know, a bunch of these things simultaneously.

So, the field trials will probably go into January or February.

In terms of when we'll actually start to see revenue flow, let me punch over to Dan here, and get your thoughts, Dan.

Yes, and I think.

I think to the extent that these trials are successful, some of the -- you know, one of the criteria for these field trials are folks that do have some budget dollars.

So it's going to be you know, somewhat dependent on the field trials and certainly you know, our customers, because this is a new concept that are certainly going to need to touch and feel this product before they buy it.

So, you know, certainly we're hopeful to see some revenue in the first half of the year, and depending on how the field trials go and how it works for these customers, we may see something as early as the first quarter.

But it's tough to predict at this point, but the field trial is just starting now.

Okay.

And then Dan, in the past, you've - you know, you've kind of gone through and given the unit numbers for each of the product areas.

I'm wondering if you could do that again and then specifically interested as to what the X3 contributed in the quarter.

Yes.

Yes, certainly, I'm happy to do that.

So cartridges actually continue to be a you know, definitely a strong part of the businesses.

As you remember last year, cartridges were pretty weak and we felt that it was probably just a more just driven by economic climate as people sort of used up their current inventory and would be back to us this year.

And then we've certainly seen that, cartridges for the quarter were 394,417 cartridges.

So that's again, one of the larger quarters in the company's history from a cartridge perspective.

We sold 18,121 X26's.

I think to Rick's point, I think we're very happy that legacy product continues to hold up well.

I think that trade-in credit helped to make sure that happened, so again, to have 18,000, over 18,000 X26's before, we're certainly encouraged by that.

We saw M26's, about 692 units including a new consumer M26-T which we kind of re-introduced in the quarter based on some feedback from our sales group.

We actually sold on the spot, 100 of those in the first quarter, which was good.

And then we sold 5,253 C2's in the quarter.

Shockwaves, just sold about 190 of those, that's still new.

A new product but we're starting to at least see some trials and some customers take that.

We've actually had our field use of that already, so that's encouraging.

And we sold 1,061 XREP rounds, which again that's a product slowly gaining momentum.

On the X3, it really wasn't a contributor in the quarter.

You know, we shipped a handful of units to our first customer.

We had some challenges from a shipping perspective, with the cartridges which impacted our ability to sell the X3.

We had to get the new cartridge because it's significantly different from the current cartridge.

We had to go and get formal transportation approval to ship that product with common carriers.

That approval didn't come until late in the quarter, which really impacted our ability to actually get these units to customers.

But certainly, we'll see --

I thought the approval didn't come until after the quarter?

Yes, actually you're - Rick's right, actually it didn't come until October, so.

So we delivered one or two orders but they were literally hand delivered to some customers we have good relationships with for just a small number of units that they wanted to get in before the end of the quarter from a budget deadline.

But for all intents and purposes, we weren't shipping in the quarter.

We now have the DOT approval and the -- so that's in place, and we'll start shipping the testing, you know, testing evaluation units are really where these things get started.

People generally have to see them and play with them first and they'll just start going out in the next week or so here.

Yes, that's right.

And then we had 2,289 TASERCams.

So, again, the Australia order was a big part of that, but it's been interesting that product has continued to hold up pretty well for us.

So, that's it, that cover all the unites you needed, Steve?

Yes, that's helpful.

So, I uses that the X3 question that I have then is with only one quarter really remaining to -- for departments to take advantage of that rebate program, do you expect it to be relevant?

Is it possible it would get extended, or has it just, has the delay kind of hurt that, I guess, hurt that momentum?

Yeah, I think that's a good question.

I mean, clearly, we want to create sort of a sense of urgency with our customers to have that trade-in.

You know, certainly I guess we reserve the right to extend the program, the expectation at this point is we probably won't at least for current purchases.

I think once that X3 is out on the market, I think it's tough to continue to indefinitely allow customers to continue to buy the X26.

At that point they're starting to kind of make their choice as far as which platform they want to be on.

But we'll continue to evaluate it.

Certainly, you know, we've actually been showcasing the X3 and training, that's where we have been pretty successful in showing and training.

And hopefully as we move into the quarter here, we'll get more and more units in the customer's hands.

Okay, I'll hop back in the queue.

Thanks.

I think that we just -- I think we're pretty intent that the right to trade in will sunset on 12/31.

If from a marketing perspective we elect to look at other types of upgrade programs, you know, next year, we'll certainly be flexible about that.

But we wouldn't indefinitely extend the trade-in right just because if for no other reason, it creates some really bizarre accounting that you know, we think it's in the best interest of the Company to get that cleaned up.

Our next question comes from the line of Greg McKinley with Dougherty, please proceed.

Hey guys, can you hear me?

Yep.

We can.

Hey, just a couple housekeeping questions.

Say you talked about your R&D costs returning to a more normalized level in Q4.

Where do you guys see that, what level are you kind of referring to?

Are you talking more of the $4 million level that we've been dealing with over the last couple quarters?

Or are you talking more $3 million, $3.5 million, which is more an early 2008 level?

That's a good question.

It's really more sort of that $4.5 million-ish level that we saw in the first half of the year.

That's kind of our goal for Q4.

We're certainly going to work hard to get that down to that level.

We're going to have to sort of finish up getting these pilot programs for AXON and stuff, but we do feel that certainly, the -- especially the indirect supply that filled these pre-production and units that showcase at these trade shows, that was the biggest driver for the quarter.

Those expenses are behind us, so we definitely expect to see a pretty significant drop in R&D expenses in Q4.

Sure.

If I could linger in on that as well, you know, we effectively have built much of the infrastructure to run a Software As A Service business with EVIDENCE.COM, and obviously Web 3.0 Software As A Service businesses are very hot space.

We've seen Salesforce.com and other companies, what they've been able to do in that space.

We believe we'll be the first major Software As A Service vendor in the law enforcement sector, and for all the reasons we've talked about we're pretty excited about that.

But from a short term perspective, though, what's happening is we've got the business infrastructure to run that business and yet we're still pre-revenue.

And so, part of that's what's sitting in R&D.

It's not clearly you know, what I would typically think of as you know, your research and development functions, at least as relate to the hardware.

Some of that, the infrastructure that will transition into our Software As A Service business as we enter revenue.

Sounds good.

And so, it kind of on that same note, as these programs get rolled out in early 2010 for example, the EVIDENCE.COM and AXON kind of start to gain traction, do you see that level even going down further in 2010?

You know, that's really hard for us to predict.

And the reason is this.

Is, we start to enter into that space, as we're finding success, there are a number of adjacent spaces that could tie into EVIDENCE.COM that are very interesting and I don't think we're ready to really talk about those yet.

But I wouldn't want to commit that we're going to start really scaling back the R&D because what could well happen is, as EVIDENCE.COM scales, that we find adjacent markets that are -- or adjacent applications, or other uses of the platform that we've built, that would have very high ROIs that would make us continue to make new types of investment in R&D.

So the best thing I would tell you is that we will continue to look at R&D on an ROI basis.

The existing programs are getting to maturity and we're now in the process of making those judgment calls as to what are the very high ROI next generation products, when do we kick those off, and how far do we ratchet R&D back down versus you know, making some next generation investment plays.

Dan, do you have any further comments?

No, I think, I think that's fair.

I mean certainly, we're going to, we're going to look at that carefully.

One is obviously we'd like to see, you know, some leverage in that part of the business as well, but I think Rick is right.

We're going to have to continue to look at where the ROI is, and if we've got some really high ROI products that we can turn out relatively quickly given the current infrastructure, I think it's going to make sense to continue to invest there.

Sure, that makes sense, it's helpful.

Just a couple other questions.

Looking at your gross margin, you know, you had a really nice quarter at 62.5% on the, excluding the trade-in program.

Kind of where do you guys see that over the next couple quarters, especially as you roll out these new products and they kind of gain that traction we've been talking about?

You know what, certainly we're going to continue to target that, to be you know, 60% or above.

I think part of it's going to depend a little bit on the mix of the new products versus the existing products, and part of it's going to depend on the overall sales level as you saw.

This quarter, having those higher sales certainly helped the margin because we get the leverage out of those indirect costs, which are pretty significant.

It's a couple million dollars a quarter of indirect manufacturing expenses.

So.

You know, having those higher sales levels certainly helps us to maintain those higher margins.

I'll tell you that Mark Phelps, one of the things that we've done from an organizational standpoint is that we used to sort of have two teams.

We had R&D team and then we had a plant engineering team.

And at this point it's just one team, it's just going to be TASER Engineering.

So, engineers will follow a product from the research and development phase into production, which you know, the idea there is that these guys will help with the manufacturability, and make sure we do some of that initial value engineering that really would drive the margins on these new products.

And yeah, we do think that certainly we're targeting the margins to stay above 60% and I think the way we structured it we're giving ourselves the best opportunity to do that.

Great, that's thoughtful, thanks.

Just one last question, real quick.

You mentioned your tax situation, how you -- you know, 34% this quarter, big improvement over the last couple.

Where can, where do you kind of see that shaking out for 2010?

Is that going to return to that more 40% to 45% range, or --?

Yeah, that's my expectation, and I think this year it's really been a just -- it's very strange in that it's just a -- it's a tough concept sometimes to explain that the Company just has roughly about $4.5 million of non-deductible expenses for things like ISO stock options, meals and entertainment, lobbying, that just gets added to book income before we calculate the tax expense.

So, one year, when you have a year like we have this year where you're closer to break even, those things end up having just an outsize impact or potential impact under rate.

I think as we grow the business those things go back to having more of a smaller impact on the rate, and certainly I think as we move into 2010 if we're successful we'll see the rates back in that 40% to 45% range again.

Okay great, thanks a lot, guys.

Thank you.

Our next question comes from the line of [Eric Wold] with [MCFCO].

Please proceed.

Hey, good morning, guys.

Morning.

Good morning.

Quick follow-up on the kind of the stimulus plan in place.

Can you give a sense, when you're talking to these police departments once they've gotten indication they've been awarded funds under the stimulus, what's kind of the size of the income in quotes they're doing on average, what's kind of the product mix of what they're looking at?

I think it's a pretty, it's actually kind of a - kind of an eclectic mix both from a size perspective, and also what they're looking at.

We've got customers who are say, partially deployed, on X26's, looking at what it's going to take to get the full deployment.

We've got some customers definitely looking at the new products, which is encouraging, that they'll use some of these stimulus dollars to either fund the trials of the new products or actually make the conversion to new products.

So, it kind of runs the gamut, you know, with 18,000 potential customers in the US, it's just sort of you know each one is going to sort of operate independently.

So we've seen lots of variability with that.

But definitely we're starting to see more quoting activity which you know, encourages us that that money is finally starting to flow.

Can you help me understand the process, because I was under the impression that when they put in their budget requests or their requests for funds into the government, they actually had to kind of say what they wanted to spend the money on.

Do they now just kind of get a blanket amount from, a blanket amount from the government and they can come to you and kind of spend it on completely different things than they requested?

There's actually sort of two, there's two kind of sort of tranches in that.

The one, that as you described, which is where people put in individual grant requests based on needs they have in their agency that met certain criteria that they already set out, and there's also another set that is just really more formula based, where states get so much and then the states on formula basis allocate it to their local agencies.

And that's really more you know, it's still got restrictions as far as what you can spend the money on, but it's really a, that's really more along the lines of where agencies didn't apply for it and now they find themselves with some extra budget dollars for equipment or officers.

Are they, are both tranches restricted from spending those funds on something that was already in the budget, or is a second tranche able to spend it on that?

The second tranche, as far as reimbursing yourself, I think that's still is, you can't reimburse yourself for prior purchases.

But you know, certainly they, if they have something they budgeted and now they find this, there's also some extra stimulus dollars that certainly they can use that to buy stuff as long as they haven't purchased it before they get awarded the money.

Okay.

And then, on the, on the X3, now you've been out there for a little while marketing it.

What's been the feedback from the agencies on their ability to forward product, obviously more expensive than the original one.

Does it impact the number of TASERs they're willing to deploy to their officers?

Do they kind of do a mix, some get a 26, some get an X3?

What have you kind of heard feedback that way?

We've got very positive feedback from the chiefs at the IACP conference that saw it from a features perspective and the benefits perspective, and the documentation that the device records, electrical characteristics.

That really helps from a risk management perspective to be able to defend cases and know how the device was used in much greater detail.

We've had frankly, at least one or two of the stimulus things that have come in, we've had some smaller agencies request quotes that look like they're getting to buy the X3's even though they haven't had a chance to trial them yet, just based on what they've seen.

Some of the chiefs I've talked to are now talking about mixing X3's in with their X26's, so rather than buying all X26's, upgrading some of them to X3's.

Certainly, the price is a bit of a discriminator but frankly it should be.

The X26 is a great weapon for agencies that want to spend $800.

We've got a great weapon in that price category.

The X3 has significantly greater capabilities.

It is about twice the price, but if you actually look at what's on a police officer's belt, from the gun, that's a $500 to $600 price point, up to the radio, their communications gear, those headsets will run $3,000 to $5,000 in some cases.

So, we're certainly not the highest priced thing on the belt.

And part of it is getting them to understand that the X3 is a lot more than just a weapon.

It's a weapon plus built in electronic communication capabilities, onboard computer, oscilloscope that records all these different characteristics.

So, it's getting them to start wrapping their minds around this, as being sort of a hybrid between the weapon and the communication gear.

So overall, is it going to replace the X26?

No.

But, the premium end of the market, we do see upgrading to the X3.

And the real market mover here is probably going to be the small agencies.

As it's always been in our history, with new products, the smaller agencies moving en masse tend to do a lot more.

And then also from a stimulus perspective you know, those smaller agencies that aren't on our radar getting stimulus funds and being able to use those for X3's, again that's where some of the early ones -- we've had folks that have, getting some stimulus funds, they just want to go ahead and get a quote for the X3, even though they haven't had a chance to field trial it yet.

If you have any additional comments --

I think that's, that's fair.

Okay, and I appreciate that.

And the last question, assuming, let's hope we see a good flood of these orders coming in and the quotes coming in from the stimulus.

Where are you in terms of capacity to kind of fulfill the orders that come in?

What's kind of the you know, I'd say maybe the maximum level you could ship out right now, in a quarter?

And how quickly could you ramp it up if you get a big level of orders coming in?

On the X3, you're saying?

Yes, I'd say focus on the X3 and the X26.

Yes, really what we've done as far as a how we've laid out our plan floor really is, we've got the ability to shift our production very quickly from one product to another, and instead of having lines that are just dedicated to one product we've got lines that can really have the flexibility with just some swapping out some fixtures, some things that are relatively quick, you're talking about an hour or something, switch a line over.

That can make either the X3 or the X26.

We've got the ability to make over 200 a day of either or, or any combination, and certainly that's with one shift.

So, if the business ramps, we've all got the ability to bring in a second shift and ramp accordingly.

I don't think we're really capacity-constrained is the short answer.

On some of the newer product we may elect to move more slowly, just as we're really keeping a tight eye on quality and --

Value engineering.

Value engineering, exactly.

So the X3, you know, if we had a bunch of huge orders this quarter we might run into some capacity constraints that we're putting in place just from a controlled run-up sort of perspective, but other than that, I don't think capacity constraints are really much of an issue for us in the business.

Again, unless we had a huge order on December 30th we didn't see coming.

Perfect, thank you guys.

All right, thanks, Eric.

Okay.

We have a follow-up question from the line of Steve Dyer from Craig-Hallum, please proceed, sir.

Thanks.

Dan, can you give me the CapEx on the quarter?

Yes, we had CapEx of about $9.5 million, or you mean for the quarter?

Yes.

For the quarter, we had CapEx of -- I'll have to get that for you.

I don't have a breakout for that.

Actually, what's the nine month number?

Then I can back into it.

The nine months is $9.5 million on a cash basis.

Okay.

[$10.8 million in purchases] but some of that's still sitting in payables so about $9.5 million on a cash basis.

Okay.

And then given the strength of your balance sheet, and the fact that the stock is actually down this year, when most of the market is up pretty significantly, would you consider using some of that cash to buy back stock?

Is that in the thought process at all?

Yes, it's all, it's something that's on the radar to think about.

We did a pretty significant buyback this year, with $12.5 million of stock repurchased.

And it's certainly something we'll continue to look at.

Certainly, this year we made a pretty heavy investment in R&D both on a capital perspective and a P&L perspective.

In fact, as we looked at it, if you look at when you count the tooling and the data center and other computer charges and everything else, it's about $24 million year to date on a cash basis, what we've invested in R&D.

So it's been really significant investment, and I think we've wanted to keep our powder dry.

We'll continue to look at that.

I think we feel excited about the long term prospects of the business and certainly want to make sure hopefully the market is giving us credit for what we see is a really exciting future.

Okay, thanks.

Thank you.

All right, and with that, we will wrap up the call.

We'll be back in January to talk to you all, and by that time we should have some good news to report from our field pilot trials.

Again, I wanted to round out one other thought on the X3.

This really kind of rounds out our product line now, where we've got our price, with the industry price leader with the M26 at a $400 price point.

We've got the X26 at the $800 price point.

And now, with the X3 at a $1600 price point, it gives us the ability to effectively price segment according to the relative wants and needs of the marketplace, which of course overall is better for the business and better for our customers.

So we think that this really rounds out our product offering, and we do see the opportunity that many of our customers will upgrade because the TASER devices become the most used, most relied upon force option in law enforcement.

The US Department of Justice did a study funded out of Florida where they found TASERs are used five times more often than anything else on a police officer's belt.

And part of what we're pointing out to them is, you know, it is a great weapon, but it's single shot.

Your primary weapon should probably have a multiple shot capability.

And that is really resonating, that's probably the biggest thing resonating with the X3, that they get it.

That when they rely on the TASER, it is the safest, most effective tool on their belt.

But if they miss, right now then they have to transition to something else.

The X3 solves that problem, so it brings tremendous value.

And we look forward to seeing how it performs out in the field and reporting back after the first of the year.

So thank you all, and have a great day.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a great day.