Axon Enterprise Inc (AXON) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen.

And welcome to the second quarter 2010 TASER International earnings conference call.

My name is Chantele, and I will be your facilitator for today's call.

(Operator Instructions).

I would now like to turn the presentation over to your host for today's call, Mr.

Rick Smith, CEO of TASER International.

Please proceed

Thank you.

Before we get started I am going to have our Chief Financial Officer, Dan Behrendt, go ahead and read the Safe Harbor Statement, and then we will get into the content.

Thank you.

Good morning.

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

Such forward-looking statements relate to expected revenue and earnings growth, estimations regarding the size of our target markets, successful penetration of the law enforcement market, expansion of product sales to the 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 and endorsing of key opinion leaders and law enforcement community, the level of product technology and price competition for our products, the degree and rate of growth of the markets in which we compete and accompanying demand for our products, potential delays in international 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 production to meet demand, litigation resulting from alleged product-related injuries and deaths, media publicity concerning product uses and allegations of injury and deaths, and 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 on sole and limited source suppliers, fluctuations in component pricing, risks of governments investigations regulations, taser product tests and reports, dependence upon key employees, employee retention risks, and other factors detailed in the Company's filings with the Securities and Exchange Commission.

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

Thanks Dan.

Okay.

So for the quarter net sales were $19.1 million, which was a decrease of about 12% compared to second quarter of last year.

The decrease was primarily driven by fewer significant international orders.

We have been looking after a number, we have got a number of very significant international orders we have been working.

Were not able to get them in the quarter.

But we do believe that we will get at least one or two of those significant orders in the back half of the year, which could have a significant impact on the business.

But as we talked about historically, these large orders typically have longer sales cycles, and there is just a lot of political things that have to happen in order to get them closed.

We remain positive on those,just unfortunately couldn't bring them in this quarter.

With the lower sales level our margins declined, with less leverage on the lower sales, and also some inventory obsolescence.

As you all recall in the fourth quarter we brought up a new automated assembly line, we continued to run some of our manual lines in parallel as we converted over, built up inventory, and made sure that we had stability on the automation line.

So this last quarter we completed that changeover, and there were some inventories in safety stocks that became obsolete that are not compatible with the new automated equipment.

So long term we believe this will improve margins, efficiencies and our cost structure, but the changeover obviously there were some costs involved, including obsolescence.

SG&A was down 8% year-over-year even within the restructuring charges.

We did, in the last quarter, do some downsizing within the Company.

We executed reductions in force across our various locations.

At this point we have reduced, if you look at salary and benefits versus high water mark in Q3 last year, our annual run rate is down by about $5 millionjust in salary and benefits.

Then of course we are looking at other places in SG&A as we are doing some belt tightening, to make sure that we can return the Company to profitability as soon as possible.

Our R&D expenses are down about 30% over the prior year as we are streamlining our efficiencies, and some of the major projects are winding down to completion.

Where we are now down into alpha or early market launch, so a lot of the heavy expense associated with the development of those projects is behind us.

So again, these steps have been painful, but they have been the right thing to do.

We have cited the Company to where I believe we can get profitability, even at lower sales levels, as we continue to chase some of these larger orders to bring the top line back to where it was.

The Company did generate over $4 million cash from operating activities,primarily driven by changes in receivables and payables.

So Dan and his team have done a great job really focusing on cash management.

So we ended with cash and equivalents back over $40 million, and we have no debt.

Additionally, on the litigation front we did win a summary judgment against Stinger Systems in a claim for literal infringement, of one of our key wave form patents.

The trial for damages is the next step in this process.

However, it may be delayed since we just found out this week that Stinger made an assignment for the benefit of their creditors, which is our understanding this is fundamentally a liquidation proceeding under Florida law that the Company's assets have been assigned to an overseer, who is now liquidating those assets for the benefit of creditors.

As to whether or not the company can come out of this liquidation proceeding and resume operations, that is unclear.

But at this point, we have obviously won a big step in the litigation protecting our IP with the findings of literal infringement, but we are going to have to see what happens with the company before we would proceed to a trial, whether there is going to be a company there or not.

With that, let me pass it over to Dan to talk about some of the financial metrics and then I will be back to talk about the business overall.

Thank you very much.

As Rick said, revenues for Q2 were $19.1 million, which are down approximately $2.7 million, or 12.4% from the prior year.

Mostly driven by a push-out of some of the large international orders, which were originally scheduled to be completed during the second quarter.

International sales were 16% of our sales in Q2 of 2010, versus 19% of sales in Q2 of 2009.

We also experienced some weakness in our law enforcement business in the second quarter, driven by a decrease in the stimulus spending compared to the first quarter, with the federal and consumer sales also being a little bit lower versus the prior year levels.

Gross margins were $9.6 million, or 50.4% of sales are down 12.5% as a percentage of sales from the prior year.

The decrease in margins were driven by combination of factors including less favorable product and sales segment mix and increased direct labor costs, due to the increased use of temporary labor and overtime during the second quarter of 2010.

Indirect manufacturing expenses increased in the second quarter of 2010 due to depreciation expense on our cartridge automation production equipment that Rick talked about, as well as appreciation of the tooling costs and other costs associated with the X3 and XREP product lines, as well as some one-time charges for restructuring and obsolete inventory write-offs.

Again most of the obsolete inventory write-offs were around the cartridge components that were used on the manual lines that weren't compatible at the automated line.

It was actually cheaper to write-off those components than to continue to run the manual lines.

Finally, the commercial launch of Evidence.com during the second quarter began to classify some of the related data center operating costs as costs of goods sold, which impacted gross margins by about 1% in the quarter.

This impact as you expect an increase, in the third quarter we see a full quarter of data charges and cost of service delivered, which will actually impact margins by about 3%.

Moving on to SG&A, SG&A expenses of about $10 million for the quarter versus $10.8 million in the prior year.

The decrease in the second quarter compared to the same period in 2009 is attributed to a $372,000 reduction in legal professional and accounting fees, driven by a drop of volume in the legal case activity.

A $402,000 decrease in consulting and lobbying services, due to fiscal reductions in marketing and ITrelated projects, as we reduced a number of measures to reduce costs and source more of the work internally when it is practical for us.

We have also focused on rationalizing our marketing related spending at trade shows and advertising, and these reductions in SG&A expense were partially offset by $1.2 million in Q2 of one-time restructuring charges are related to the reduction in force, as well as some litigation settlement expenses for an officer injury claim.

Research and development expenses were $3.1 million for the second quarter, which include the benefit of $528,000 of capitalized salaries and consulting fees for the Evidence.com and Protector platforms.

Gross research and development costs before the capitalization was $3.6 million.

This is actually down $1.5 million over the prior year, mostly driven by a $364,000 decrease in stock compensation expense, an $185,000 decrease in indirect supplies, and $110,000 decrease in tooling charges, due to the reductions in force and decrease in prototype and launch costs associated with the AXON and X3 products, which occurred in the second quarter of 2009.

We will continue to focus on cost controls and as Rick indicated, we are committed to returning to profitability.

On a NonGAAP cash basis operating loss for the quarter was $0.9 million.

On a GAAP basis, we had a pretax loss of $3.4 million, and net of tax loss of $1.4 million for the quarter, or $0.02 per share on both a basic and diluted basis.

On a year-to-date basis, we saw year-to-date revenues of $43 million, this was down $3.5 million, or 7.5% from the prior year,mostly driven by a decrease in the Company's international and federal sales.

Those sales tend to be a little bit lumpier, last year we benefited from them being sort of evenly distributed during the year.

This year we are seeing a little bit more lumpiness in both of those segments of the business.

That is not unexpected but it certainly had an impact on the second quarter year-to-date results.

But as Rick indicated we expect to have a strong second half.

Gross margins of $23.1 million, or 53.8% of sales.

This is down versus the prior year levels due to the increased temporary labor and overtime charges, and the one-time charges related to inventory write-offs and restructuring charges.

The $1.3 million increase in indirect manufacturing expenses versus prior year are mostly driven by increased depreciation of $1.3 million on the automation equipment, as well as the production equipment and tooling costs for the new product lines.

$0.5 million of increased write-off charges, and the inclusion of Evidence.com data center operating charges in this quarter's results.

Again, these were partially offset by an increase in the absorption of overhead inventory due to growth in the finished goods inventory during the quarter.

SG&A expenses of $20.3 million have decreased $2 million.

Again driven by about $1 million of reduced consulting and lobbying expenses,$900,000 of professional legal fees reductions, and then just general reductions in discretionary spending as we have focused on tight cost controls.

These increases were partially offset by $1.2 million related to the one-time restructuring charges, and a litigation settlement as previously mentioned.

The gross R&D expenses of $8.5 million year-to-date are down $800,000, driven by significantly lower indirect supply tooling and scrap charges of $1.4 million, driven by the new product introductions of AXON and X3 in the prior year.

This is offset by restructuring charges of approximately $600,000, and equipment rec, appreciation, computer licenses due to the support of Evidence.com development efforts.

Gross R&D expenses are offset by $1.3 million of capitalized salaries and consulting fees for both the development of Evidence.com and the Protector platforms.

The adjusted cash operating income is actually $700,000 positive when we add back the [123R] and depreciation and amortization charges, and we had a book loss from operations of $4.4 million.

Net loss for the year is $1.9 million, or $0.03 a share on both a basic and diluted basis.

Moving onto the balance sheet, we finished the quarter with $40.6 million of cash and investments.

This is a decrease of $4.9 million for the prior year end, due to cash used in operations and investing activities, but up sharply from the Q1 balance due to the cash from operations generated in Q2.

Accounts Receivable $11 million are down $4.4 million from the prior year balance, due to increased collection efforts, as well as lower quarterly sales in the second quarter of 2010 versus the fourth quarter of 2009.

Inventory of $19.1 million is up $4 million from the prior year balance.

We have seen an increased inventories for some of the new PRODUCTS like AXON and X3 and also increased our finished goods inventory for the X26 product line.

Prepaid and other assets of $3.4 million are up $2 million, mostly driven by income tax receivables and prepaid liability insurance that was paid in January 2010.

And our investment in property and equipment of $38.8 million is up $1 million from the prior year balance, due to $1.9 million of capitalized [route] cloud, which is the protective platform in Evidence.com costs, and $1.3 million of new product production equipment and computer equipment, offset by depreciation of $3.1 million year-to-date.

Full assets at June 30th are $137.5 million.

On the liability side of the balance sheet, we had Accounts Payable of $4.6 million, this is down $1.7 million from the prior year balance, due to some timing difference and differences in the AP check runs at year end versus the quarter, and then the final payments we made on the automated cartridge line that were made in the first quarter which significantly reduced the AP balances.

Accrued liabilities of $4.2 million in line with year-end levels, and then the deferred revenue of $7.6 million is up slightly from year-end levels due to the sale of extended warranties and some training credit deferrals.

Total liabilities are $18.9 million, and we finished June with $118.7 million in stockholders equity.

Again, we have no long term debt and we continue to have plenty of liquidity to operate the business.

As we move on to the cash flow, the Company had cash used in operations of $2.5 million through June 30th.

Compared to cash provided by operations of $8.2 million the prior year.

Again for the quarter we generated $4.2 million cash flow from operations.

For the use and the first six months of 2010, was mostly driven by increases in inventory and a reduction in AP.

The net cash used by investing activities was $3.4 million.

Again this is mostly due to new property and equipment assets, made up of the capitalized costs for Evidence.com and Protector products, and some new production and computer equipment.

The Company ended the period with $40.6 million in cash.

Again we have plenty of liquidity for the business, and feel good about our cash balances as we move into the second half of this year.

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

Thanks, Dan.

Okay.

Speaking of some of the new products, as Dan mentioned, AXON and Evidence.com are now in general release.

We have several paying customers at this point.

At last, I believe it was two weeks ago we had our Annual Master Instructor School, where we had 130 of the top law enforcement trainers representing about 115 agencies around North America.

AXON and Evidence.com were integrated into the training exercises we ran there, so we could showcase the product, and get these thought leaders familiar with how the product actually operates.

The response was excellent.

A significant majority of the people there indicated that they would love to begin using the system.

They got the message point that 90% of police work takes place outside of their vehicle.

So the in-car cameras don't really catch the majority of what they are doing, and yet when they have incident video of an incident, 96% of all complaints are dismissed in favor of police.

So it is really resonating that this will be something to protect officers in the court room, the way that our core products do out on the street, however, we got some new technology right now in the short term is going to be challenging as main agencies are in a cut-back mode.

I am sure you have all seen the headlines that state and city governments are particularly strapped right now, as they are adjusting their budgets due to the new fiscal environment, where they are no longer projecting they are going to be able to count on getting some federal stimulus dollars.

While there is some short term restructuring that is happening in our customer base in the state and local areas, we think the long term adoption of the technology looks very good.

We also do expect there will be a longer sales cycle.

This is a bit more complex sale because now it includes IT, not just tactical officers, the administration of the department of city councils.

So at this point we are focused on continuing to build the sales spout, and on streamlining our customer location process, so that we can bring more customers into pilot and online more efficiently.

It is a fairly complex system.

There is hardware.

There is embedded software.

There is on-site evidence transfer machinery, which includes computers with internet switches, et cetera, all connecting through to the property and storage and data center that we operate.

So given all of those moving parts, streamlined so that we can bring many agencies on quickly is where our primary focus is now.

We have got our initial customers up and running.

Obviously we need to go and build pipeline.

We were glad to see the CIO Magazine praised TASER for the CIO 100 Most Influential Companies in the IT space this year, primarily because of the work that we are doing with AXON and Evidence.com.

Also while you probably saw the press release that Hadi Partovi has joined our Board of Directors.

We are very excited about having Hadi on board.

For those of you who are not familiar with his background or didn't read the press release, Hadi most recently the founder of a company called iLike,it was purchased by MySpace.

Before that he was the General Manager of Microsoft.com's MSN.com portalbusiness.

Before that he was the founder of a company called Tellme Networks, that did interactive voice response technology that was purchased by Microsoft for a little under $800 million.

Before that, he was the General Manager of the Internet Explorer team, and has been an Adviser to such start-ups as Facebook, Dropbox, Zappos, [OnImport], and others.

So Hadi really brings a wealth of knowledge in both enterprise, software involvement from his two stints at Microsoft, as well as Internet services and Internet startup, and we believe it is a real validation of our business model.

He is pretty excited about what we are doing at our Company, on Evidence.com and disruptive technologies and he is turning out to be a great thought partner already, and he is just joining on the Board.

Also we talked about one of the recent hires our new Executive Vice President of Marketing.

Jeff Kukowski.

Jeff is a CO executive, with background in both enterprise, SAS applications, and location-based services.

So his background matches beautifully onto what we are doing.

His background in SAS, Software as a service applications and commerce, where they dealt with enterprise customers, integrating EDI solutions.

It is very similar to what we are doing at Evidence.com.

In bringing these software as a service solutions to our law enforcement enterprise customers.

And then location based services uses a company called Destinator, which is largely one of our Protector service, which is a consumer oriented service that includes both location based services and call routing and distraction management services.

So we have made cuts in certain areas of the business, but we continue to invest where we believe we will see a significant return.

I think Jeff's talent is a great asset for the Company long term.

We are excited to have him on board.

Speaking of Protector, let me touch base on that.

We are in alpha with the Distracted Driving Management product.

As you are all well aware, distracted driving is a huge issue in this country.

About 6,000 people died last year from distractions while driving, or 500,000 people were injured in distracted driving incident.

It has become the major focus of Oprah, of the Department of Transportation, of DOT Secretary Ray LaHood, and we believe that we have a unique solution that is far more robust than what is out there today.

We will be moving into Beta, and then into a soft launch this fall.

When I say soft launch, we will be going more in a consumer direct route initially, focusing on working with the many advocacy groups that have sprung up around the issue of distracted driving.

As it is a little late in the year, you generally don't see retailers adding new products in the fourth quarter.

They are focusing on executing their retail season.

So we will be doingmore of a consumer direct launch, and positioning those products for a wider channel of distribution in 2011.

If you do to our website you will obviously see one of the things I have been working with Jeff on, is a number of new campaigns to help get the message out to our customers in our core market.

We have launched the I Saved a Life TASER campaign, where we have officers submitting stories about how they used our devices in these dramatic situations where they have saved lives.

The first of those stories is out there, we have had probably several dozen submissions that have come back in that we are sifting through now.

They will go into the production line.

They will go into a full campaign.

And are focused at the International Association of Police Conference this fall, as well as in various online social media and any commerce channels, making sure again, that we make sure people know about the tens of thousands of lives that tasers have saved.

With that, I would say that we are very excited about the back half of the year.

We think the structure of the Company is set for profitability, we have got the right people.

We have got some exciting new people on board, both in advisory and executive positions, and there is a lot of opportunity out there,especially once the economy starts to really turn for us.

We believe the investments we have made for the last several years will really position us to grow into these new markets.

With that, we will wrap up the presentation part of the call, and we will have a few questions and answers.

(Operator Instructions).

Your first question comes from the line of Mr.

Paul Coster of JPMorgan.

Please proceed

Good morning, it is Mark Strouse on behalf of Paul.

Starting with Evidence.com and AXON, can you just give us an update as to how many pilots are being currently run, and what are the size of those pilots?

And I guess how are they being funded?

Is TASER paying for those, or are the customers paying for them?

We have about eight pilots that are currently ongoing.

We do have paying customers in several of them.

So for example, as we talked about before, the country of New Zealand is a paying customer.

They have got a national implementation of Evidence.com for handling all of their Taser Cams and their taser data.

They are not yet piloting the AXON.

We have two major agencies of more than 1,000 men each, where we have got approximately 10 to 20 AXON units in the field.

We have got about five or six smaller agencies where we have got roughly five to ten AXONs in the field.

We have got two paying customers that have deployed, purchased the units in the smaller agencies.

Frankly at this point our focus between now and the end of the year is going to be on the under 200 man agency size for a couple of reasons.

Those agencies are able to make decisions very quickly.

That is where we really grew our business with the TASER devices.

They don't have the long decision making cycle.

They also tend to have frankly not as fully developed of an IT infrastructure.

They are less likely to have an existing solution, that we may be coming in and displacing with our products.

So traditionally so far we have gone in and we have supported most of these initially where we have gone in and put the equipment in place, let them trial it, and then focus on converting them into paying customers

Okay.

And I might have missed this and I apologize if I did.

But with Protector, can you just remind us with the go-to-market strategy will be there?

If you are going to be marketing it yourself, or if carriers will be doing it?

With Protector, we are really focusing initially on the distraction management portion of that product line.

Frankly just because there is such a fevered pitch, and there are such a number of folks that are looking into getting into that space about how to manage distractions while driving.

That is the first product that will come to market.

Our focus at this point is transitioning, we are in alpha right now.

We have got working units basically within companies controlled that are being field tested.

We will be moving to beta this quarter, where we start moving into non-employee beta testers, and later in the fall, we will be moving to more of a soft launch, where we will be focusing on working with advocacy groups and primarily consumer direct sales for the balance of the year, so that we can streamline the customer implementation process, really get around to make sure that we have got all the features dialed in.

And then in 2011 we will be focusing on scaling that part of the business with both retail and our carrier partners

Alright.

Just a couple more, if I can.

With the US stimulus spending, can you just give us an update on where you think we are in that?

Majority has been spent or if the majority is still to come.

Just your view on that spending?

This is Dan Behrendt.

Yes, we definitely saw a much larger impact from stimulus in Q4, and again Q4 of 2009 and Q1 of 2010.

We didn't see as much impact in Q2.

We think part of what has happened is some of that stimulus money has actually just helped to prop up the budgets, and really replace other capital, capital that they had in their capital budgets.

So it didn't have the positive increase to the capital budgets we had hoped for, it has really kind of allowed things to stay in the status quo.

Certainly we see a challenge on the municipal side, but we have sort of seen the business stay relatively flat year-on-year, but I think as we move into the second part of the year, I think that the challenge will be how much of that stimulus money still exists out there.

We certainly saw a much smaller impact in Q2 than what we saw in Q1.

Okay.

And then with your existing products that are in the field with agencies today, I mean is there any evidence of a large product replacement cycle coming up?

Are you seeing any kind of like product wearing down, or anything like that, that would need to be replaced any time soon?

Yes, I think that is one of the things that we are excited about as we look to the future.

We have our useful life of our products is typically in the five to six year timeframe.

The installed base of product that is in that five to six year range, where you have some of these early adopters.

It is well over 150,000 units at this point.

So there is a significant opportunity out there for that.

I think part of it is getting the customers to be proactive, as far as replacement and not just hanging on to the products until they fail in the field.

This is a safety product.

The bulletproof vest guys have done a great job in convincing the customers that on a five-year cycle they need to replace bulletproof vests for safety reasons.

Because our technology is a lot newer, we haven't really had that cycle yet.

But certainly with the large installed base, we do think that is a big opportunity as we move the business forward, and as the budget environment improves.

I think right now the challenge is if somebody has got something that is working, it probably a little bit of a challenge to get them to proactively replace it.

But I think as the budget cycles improve for these municipal budgets, I think that large installed base will be a benefit for those customers to start coming back for upgrades.

Okay.

That is it for us.

Thank you very much

Great.

Thank you.

Your next question comes from the line of Steve Dyer of Craig-Hallum.

Please proceed.

Please proceed

Thanks.

Good morning.

Dan, in the past you have kind of gone product by product and given us sales numbers.

Could you do that again this quarter?

Yes, certainly.

So the X26 units for the quarter were 13,503.

We sold 711 M26s, 3,261 C2s, and the cartridge sales for the quarter were about 258,269.

Okay.

So cartridge kind of appears to be one of the larger weaknesses in the quarter.

What are you seeing from your customers in terms of, given the budget tightness?

Are they just electing to train less often with the cartridges, or are they keeping less cartridges in inventory, or just not replacing handles, or sort of what is sort of their strategy, given that they need these things in the field every day, and at the same time now budgets are tight?

This is Dan again.

I think it is a little bit of all those things.

I think it is really more inventory levels.

Cartridges are definitely one of the things that you see purchases with sort of the budget flush at the end of the quarter.

To the extent the municipal budgets, you don't see those purchases as much.

But I think what we saw in 2009 was a real strong year for cartridges after kind of a weaker 2008.

So there is going to be sort of an ebb and flow.

Obviously as the installed base continues to increase, long-term we feel good about the cartridge part of the business.

But in a tough budget environment,people can sort of milk down their inventories a little bit, and as a result defer purchases.

I don't think the sales go away, I think it is just more of a deferral.

Okay.

And could you give a little color on the X3?

It seems, at least in terms of press releases, to be a little slow coming out of the gate.

I don't think you gave the unit numbers for that this quarter.

What is your early perception on it?

What are people telling you?

And if there is a push back, is it cost?

Is it size?

What does it seem to be?

This is Rick.

We have got a number of agencies that have deployed those that have we are getting very positive feedback.

The largest deployment at this point is Lakeland, Florida.

They have gone to full deployment with the X3s.

They are having great results with it.

In fact, I met with one of their Master Instructors just last week.

The challenge at this point is really primarily budgetary.

That the price point that the X3 is at this point.

Agencies, a lot of the agencies in the last six months have been going through layoffs.

The stimulus in 2009, in a lot of cases what we are learning is that a lot agencies to forestall restructuring and cutting back.

And then early this year, as the sentiment shifted, and people, I think it is clear that they don't see the federal government continuing stimulus as a long term strategy, a lot of these agencies have had to cut back.

So what we have heard is that just right now for them to upgrade to newer technologies, especially if they are at a higher price point when they are laying officers off, they would rather cut back everywhere they can in their budget, try to save as many of their officer positions as they could.

So it has made it a tough environment with these new products in.

Although we do have several major agencies testing the X3 right now.

We are getting positive feedback.

It has just proven to be a really tough environment to roll out new products into right now.

People are sort of in a stasis mode.

They will maintain the projects and programs they have got, but we just don't see a lot of people investing in new technology.

Okay.

And then my last question, just how do you see, I think domestically you are probably 35% or 40% penetrated.

What do you sort of see as saturation at this point?

I mean, it seems like maybe we have hit a little bit of a plateau here for a while.

Certainly it is not a product that is necessary or works well for everybody.

But sort of where do you see your saturation point in the US at least?

Well I don't know if I agree with that, in terms of it working well for everybody.

Policing across North America, frankly across the world, they face the same sorts of challenges.

And agencies are at the point they are just seeing significant reductions in the number of cops that are injured.

In fact there is a study going on right now, that is looking at some agencies that have pulled Tasers off the street several years ago and hit all kinds of controversy and they put them back out.

The early indications are that when they pull the Tasers off of the street, they saw a spike in injuries to both cops and the subjects that they dealt with.

I believe even spikes in police shootings that are being directly correlated with Taser deployment.

We believe that the Tasers are moving toward standard equipment.

At the end of the day, police radios have nearly 100% penetration, firearms, batons, pepper sprays, are nearly 100% penetrated.

We believe over the long-term Taser as well will be in that 80% to 90%, north of that, penetration where it is being more and more accepted, and a necessary piece of standard policing equipment

Okay.

Thanks

Thank you.

Your next question comes from the line of Eric World of Merriman.

Please proceed

Hey, good morning.

Question kind of on the domestic landscape.

You kind of talked there, taking stimulus out of the equation.

What tends to be any major pushbacks, and why they are not rolling out Tasers besides funding, if there are any?

Is there any differentiation you are seeing in trends between new agencies equipping officers with Tasers for the first time, versus existing customers going to full deployment?

I would say that the vast majority of what we are hearing is it is 90% financial, particularly in the larger agencies.

The larger the agency, the bigger the budgetary problems it seems that they are having.

There are some pockets of smaller agencies that have budgetary surpluses, but of the major agencies, literally everyone I can think of is in budgetary deficit.

They are reducing the number of cops on the street.

And in that environment, you think about police work.

It is a very high commradery, it is a para-military type of organization.

These guys look to each other as comrades in arms.

They go out every day and put their lives on the line.

Anything they can do to protect their friends, their comrades, their coworkers, and that includes helping them keep their jobs, they are going to do.

So the primary focus of our customer base is on finding ways to keep cops out on the street.

And they are going to extraordinary measures, like some agencies have put two cops per vehicle rather than one.

Some have gone to being parked for portions of their shift to cut back on gas consumption.

Training budgets across the board have been kind of cut back.

I think the good news is relying on this is that unfortunately this year, and the early part of this year it started where these agencies have finally gotten to the point where they have to undertake the painful steps of restructuring.

Once they do we think the budgetary segment will return to more of a normal type of situation.

Especially if we start to see some growth in the economy and the tax base.

The fact that they are cutting back their core operating expenses, much like what we have done in our business.

Now positions us well for profitability when the company starts growing.

Similarly with our customers, when their tax revenue starts growing, they will be able to start, they are going have to start investing in equipment.

Agencies have really kind of stretched out, and they are feeling the pain of that over the last several years.

They have not been investing significantly in new technology.

Okay.

Then following up on a question about the stimulus.

Correct me if I am wrong, I was under the impression of the majority of the stimulus dollars that law enforcement got approved for or requested had to be spent on equipment, and stuff that otherwise was not in the budget, and they otherwise could not afford.

Are you getting the sense that they got around that?

So now just kind of plotted into their budgets?

Eric, this is Dan.

I think it is a little bit of that.

I think also that what has happened is, their normal capital budgets got swept into cover things like payroll, and then they used the stimulus money to replace the capital budget.

So we didn't really see the positive impact.

It was sort of a pocket shift to capital budgets used it to pay salaries and then took the stimulus money and put it in the capital budgets to kind of keep the status quo.

So I think it was a little bit of a shift.

I don't think they have used stimulus monies for salaries, but it is really more they just swept the capital budgets and used the stimulus in place

Okay.

And then on the delayed orders from Q2, you mentioned there were a number that didn't close in Q2.

You expect one to two, at least one to two to close in the back half of the year.

How many total orders were delayed, and can you give any sense of a range of what you expect, what could come from the back of the year from those?

There was one very large order that we were working on.

In fact, if you look and Dan talked about some of the overtime expense and our inventory ramp, that we were building up in anticipation of receiving that order this quarter.

And it would have made a significant difference.

I don't feel comfortable at this point divulging the exact magnitude, but it would have been probably the largest order, or one of the largest orders in the Company's history, and we have got that one, and I think there are two other internationals.

So we have three different orders.

Are we going to close them all?

Probably not.

We would love to.

But any one of those three could be in the top tier of orders we have received in our history.

And then we have the normal order flow internationally, these are three big ones that are [out there] for us.

Okay.

Then just lastly just a couple of housekeeping ones for Dan.

How much was the obsolescence charges or costs in Q2?

About $400,000 in Q2.

About $500,000 year-to-date.

If we look at SG&A of $10 million, take out the $1.2 million, take out some for the salaries and risk that happened in the quarter, is a new good quarterly run rate for SG&A somewhere in the $8 million to $8.5 million range?

It is probably more like $9 million to $9.5 million.

We are going to keep on driving that down.

There are sort of ebbs and flows.

In Q3 we have our Mass Constructor School and Tactical Conference.

That is certainly a little bit of a larger expense for us.

Certainly we are going to continue to look at any of those discretionary items.

We have seen significant reductions in travel and meals this year.

Significant reductions in the trade show expenses, just because we have determined that the trade shows we are not a positive ROI on.

We are either not attending, or attending with a smaller booth and a smaller presence.

We got creative as far as using some booths that are more temporary booths at these things, that have had big savings on the generic and other setup costs.

We are really looking at everything we can to take costs out of the business without impacting the development of new products, or sort of the customer facing roles that impact sales.

But all of those discretionary items we have been very vigilant this year on.

Okay.

And then final one, when you talked about rolling the data center costs into costs of goods sold, you said it impacted 1% in Q2, and should impact 3% margin in Q3.

Is that 3% more than Q2, or 2% more to get to a 3%?

Yes, it gets to 3%.

It was about 1.2% on the lower sales this quarter, on kind of a normal sales level, expect it to be about 3%.

Okay.

Thank you very much.

Sure.

Thanks, Eric

All right.

We will do one more?

Okay.

Your next question comes from the line of [Peter Mahone], please proceed.

Actually our questions have already been asked, so thank you.

All right.

Thank you, Peter.

Alright.

So we appreciate everybody giving us your time this morning to participate in the call.

We wish everybody a wonderful day, and here is looking forward to a brighter second half to 2010.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Have a wonderful day.