Axon Enterprise Inc (AXON) 2010 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the third quarter 2010 Taser International incorporated interpretation conference call.

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

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

Later we will conduct a question-and-answer session.

(Operator Instructions).

As a reminder today's conference is being recorded for replay purposes.

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

Rick Smith, Chief Executive Officer.

You may begin, sir.

Thank you.

We'll start with -- I will turn it over to Dan for the Safe Harbor statement.

Then we'll come back for the content of the call.

Thanks Rick.

Certain statements contained in this present may be deemed to be forward-looking statements as defined by the Private Securities and Litigation Reform Act of 1995.

Taser International intends that such forward-looking statements be subject to the Safe Harbor created thereby.

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

We caution these statements are qualified by important factors which could cause actual results to differ materially from those reflected by these 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 obtaining the endorsement of key opinion leaders in the law enforcement community, the level of products technology and price competition for our products, the degree and rate of growth in markets in which compete, and accompanying demand for our products, potential delays in international or domestic orders, implementation related to manufacturing automation, risk associated with rapid technology logical 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 death, negative publicity concerning product uses and allegations of injury and death and the negative impact that could have on sales, product quality risks, potential fluctuations in quarterly operating results, competition, negative reports concerning Taser device uses, financial budgetary constraints and prospects for customers, dependence on sole source suppliers, fluctuation in component pricing, risks of government investigations and regulations, Taser product tests and reports, dependence on key employees, employee retention risks, and other factors detailed in the Company's filings with the Securities and Exchange Commission.

With that I will turn it back over to Rick Smith.

Thanks, Dan.

Okay.

For the quarter net sales were $21.1 million.

It was a decrease of $2.2 million or 10% compared to last year.

Actually it was a greater decline than that if you look at last year third quarter sales were reduced by $3.5 million of deferred revenue relating to a trade-in program that we had in place.

There's really two reasons compared to last year that we have seen some -- some softness in the business.

One was we did see delay.

In our last conference call we talked about the fact we have several very large International orders.

We had hoped to be able to close them in the third quarter, at least one of them.

That did not happen.

However, we have got a high degree of confidence that we will close at least one of these orders in the fourth quarter so we should hit the -- the metric we have put out about closing at least one of these big ones by the end the year.

The other thing that we saw was a real softening this year in the domestic or law enforcement marketplace.

In 2009 we had a record year of despite the weak economic environment and that was largely because of the stimulus funds from the federal government that allowed law enforcement to continue operating at their current levels.

Unfortunately, the -- the large sales that many were hoping for stimulus funds didn't really develop as what ended up happening is we believe it under are underwrote the agencies to avoid restructuring.

While that is happening this year now that the stimulus funds have clearly run out and it's clear that they're not going to be stimulus round 2 at least nothing in the magnitudes of last year.

So particularly this last summer many of our larger customers have gone through anywhere from 10% to 20% restructurings.

We do believe that that should clear itself by the end of the year as those agencies have either taken those steps or are in the process of taking those steps.

So we believe we're -- we do see the light at the end of the tunnel and improving economic indicators as well which we believe actually puts us in a very strong position going forward.

f you look back to 2007, we had quite a profitable year; we made a determination at that point to invest heavily in R&D to create some new business opportunities particularly AXON and Evidence.com over the last several years.

We are now pulling out that heavy investment cycle.

You can see our costs structure.

We have taken some significant costs cutting measures as well as coming again to the end of heavy R&D cycle.

So now as hopefully the economy is moving into an upswing, we're moving form a heavy investment phase into a profitability and growth phase.

So we're pretty excited about what the future holds.

If you actually look at those costs controls that we have done over the last several quarters we are seeing a desired effect.

Now sequentially our sales in Q3 were up $2 million, from $19.1 million to $21.1 million, but our adjusted operating income after you net out, things like depreciation and amortization et cetera -- so it's really approximately for a cash operating earnings was up to $3.2 million from a loss of a little under $1 million.

I am sorry, it was up $3.2 million from a loss of $900,000 to a $2.3 million of cash earnings in the business.

So we are seeing so much significant leverage from the costs controls that have been put in place.

We will come back and we'll talk more about that but I am going to hand over at this point to Dan take you through a little more detail look at the financials, then I'll talk little bit more about that we see coming in the future.

Okay.

Thanks, Rick.

So as Rick indicated revenues for Q3 were $21.1 million.

This is down approximately $5.7 million or 21% from the prior year's sales when we exclude impact of the $3.5 million deferral related to the X26 trade-in programs that we introduced when we launch the X3 in the third quarter of last year.

The decrease in sales versus the prior year quarter is really primarily driven by fewer individually significant orders then the international federal business.

Last year, as you remember we had large sales to US Customs and Border Patrol in the third quarter and also a large sale in Australia.

So international sales for Q3 of 2010 were 11% of our sales versus last year they were 19% of our sales.

That is a big part, but as Rick indicated, we continue to work at international orders heavily and we expect to see at least one of them break in that Q4.

Gross margins of $10.4 million or 49.4% of revenues are down 13.1% as a percentage of adjusted sales for the prior year.

Evidence.com, which we commercially launched during the second quarter and as a result in Q3 2010 we actually moved $1.8 million of the staff data center costs and software maintenance costs up from the R&D line up in to cost of goods sold.

This represented 8.7% of sales.

So the product gross margins, which are really more comparable to the historical numbers, are about 58.1% for Q3 at 2010.

So we have seen a real improvement in the core business even though obviously there is a drag in gross margin right now as we move some costs up into the gross margin line.

But the core business continues to support and perform strongly and we have seen some significant improvements there.

We also have a little less leverage in the business right now due to lower sales, just about 4.4% of the decline is attributed to just lower leverage in the model.

But obviously we are working to improve the sales over time and we should see that leverage return and we will see the improvement gross margin with the higher sales levels.

SG&A expenses of $9.5 million for the quarter, this is down significantly from the $11.4 million we had in the prior year.

The decrease was really driven by lower salaries, benefits of stock compensation and that's down about $776,000 from the last year, due to lower headcount as we have made moves to restructure the business to size it properly.

We have also seen a decrease in sales and marketing expenses about $869,000.

This is attributed to the elevated spending we had in 2009 around the product launches and the Taser conference last year in which we introduced the AXON and also the X3.

These decreases are offset by higher legal fees, about $483,000 during the quarter, that's driven by higher legal activity in Q3 of 2010

Research and development expenses were $1.7 million for the third quarter, which includes the benefit of $200,000 of capitalized salaries and consulting fees for the Protector platform.

Gross research and development expenses of $1.9 million decreased $5 million compared to 2009.

The decrease is mainly driven by the exclusion of the $1.8 million of Evidence.com data center software maintenance costs, and additionally, there is a $2.5 million decrease in supply and tooling related to the AXON and X3 product demonstration units which were charged on R&D in 2009.

We built those units for the Taser conference and ICP trade show last year, significant costs to that, that obviously we didn't have this year.

Now, we'll continue to focus on the cost controls and making sure that expenses are turning either near or long-term benefits to the company.

And, as Rick indicated, we're absolutely committed to returning to profitability in the business.

For the non-GAAP operating income of $2.3 million for the quarter, this compares to $600,000 in the prior year, an increase of $1.7 million or 276%.

We believe that while our stock-based competition expense and depreciation expense, which is increased in relation to higher capital expenditures over the past couple years, these high cash, non-cash expenses, we believe we need it's very illustrative to add those back in so we can look at in both GAAP basis but also to the cash earnings basis.

On a GAAP basis, the company posted a pre-taxable operating loss of $0.7 million a quarter and net of tax loss of $2.3 million or $0.04 per share.

As we indicated in the press release, a big part of the loss for the quarter was really driven by a change in our effective tax rate and so we reduced our expected tax rate for the year and we had to true up that year-to-date tax expense and resulted by $1.6 million true-up to the year-to-date tax benefit.

So from an operating perspective, EPS with kind of a normal tax rate would have been a loss of $0.01 per share.

We had another $0.03 per share that's was a true-up for the tax rate to get us to the $0.04 a share that were reported.

The year-to-date revenues were $64 million.

This was down $9.1 million or 12.5% from the prior year adjusted revenue which includes the effect of the $3.5 million deferral.

The decrease is mostly driven by the lower international and federal sales versus the prior year.

Last year we had, those sales were looking more evenly distributed during the year.

This year that, that simply is going to be much more back-end loaded as we move in to the fourth quarter.

Year-to-date international sales in 2010 are 18% of sales.

Last year at this point we're international was 25% of sales.

Gross margins of $33.5 million or 52.4% of net sales, this is down 9.3% of the adjusted sales in the prior year.

Following the Evidence.com launch we have now year-to-date basis have moved approximately $2.1 million of the Evidence.com data center costs and software maintenance costs, in the costs of goods sold which has reduced our year-to-date margins by 3.2%.

We've also seen some indirect manufacturing expense increases this year due to the depreciation expense on the cartridge automation production equipment, as well as some one-time charges related to obsolete inventory, warranty reserves and some value engineering that we have done during the year

SG&A expenses of $29.8 million have decreased $3.9 million, which is a 1.8% decrease as percentage of net sales.

This again is mostly driven by the decrease in sales and marketing expenses as well as lower salaries and benefits.

The gross R&D expenses year-to-date is $10.1 million are down $6.6 million, again driven by the significant lower indirect supply tooling and scrap charges of $4.1 million and then the new product development costs for AXON and X3 in the prior year.

Gross R&D expenditures exclude the impact of the $1.3 million of capitalized salaries and consulting fees for the development of Evidence.com.

Additionally in 2010, roughly $2.2 million costs related Evidence.com, data center and software maintenance costs are now included in the costs of sale.

Adjusted operating income is $3 million, when we add back stock compensation and depreciation, amortization of $8.1 million.

We also had a GAAP loss from operations year-to-date of $5.4 million.

The net loss, net of tax is $4.2 million or $0.07 a share for both basic and diluted.

On the balance sheet, we finished the quarter at $40.3 million of cash and investments.

It was a decrease of $5.2 million from the year end balances, mostly due to cash used in operations and investing.

There are a lot of cash use in operations is a result of the inventory build.

Accounts receivable was $13 million, which is down $2.4 million from the prior year and balance due to the timings with selections and the lower quarterly sales volumes.

Inventory of $18 million is up $2.9 million from the prior balance.

Again we have increased our inventories for some of the new products including AXON and X3.

Prepaid and other assets of $2.2 million are up about $700,000 mostly driven by the prepaid liability insurance that we paid in January of 2010, and some income tax receivables.

The net investment in property, equipment and capitalized software development costs were $37.3 million has decreased $1.4 million, net of the result of about $1.6 million for various production and computer equipment we've added this year and $2 million capitalization for Evidence.com and Protector platform.

We had about $5.2 million for the depreciation and amortization.

So, we are kind of getting into a steady state now where the new CapEx is going to be offset by the depreciation.

So from a cash burn perspective there should be an equilibrium.

Total assets at September 30 were $135.4 million.

On the liability side of the balance sheet, accounts payable, $4 million.

It's down about $2.4 million from the prior year balance.

Again due to some timings from check runs at year end and also the final payments in the automation cartridge line that we made in 2010.

Accrued liabilities of $3.5 million has decrease about $700,000 mostly due to the timing of property tax accruals, some decreased commissions and decreased legal accruals as well as some just the sort of the general reduction in our operating expenses.

This total deferred revenue is $7.9 million is up about $400,000 from year end levels, mostly due to sales from more extended warrantees.

Total liabilities are $17.9 million and the Company finished with the $117.4 million stockholders equity.

The Company continues to be well capitalized with $40 million of cash in the bank with no debt on the balance sheet.

As we move on to the cash flow statements, we have used $2.6 million in cash from operations for 9 months ended September 30, 2010.

This compares to about $5.5 million of cash provided from operations in the prior year.

The use of cash in the current year is really driven by an increase of inventory of $4 million, increased prepaid and other assets of $2 million, and the reduction of accounts payable of $3.9 million, offset by the non-cash charges.

The significant cash we generate from operations in the prior year is really driven by some timing differences which led to increase in AP as well as the deferred revenue $3.7 million related to X26 trade-in.

Net cash used by investment activities was $3.7 million.

The new property and equipment assets this year is mostly made up of capitalized cost for Evidence.com, Protector platform and some new production and office equipment we purchased in the year as well.

Again, we ended the period at $40.3 million in cash and so we feel we've got plenty liquidity to continue to manage the business and make proper investments for a profitable growth in the future.

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

Great.

Thanks, Dan.

So a couple of key accomplishments for the quarter.

Obviously, you all have seen that we had a significant order from the Texas Department of Public Safety for a little under 3000 Taser X26 ECDs that they are now deploying to their front line officers in Texas.

Secondarily, we had a significant win in our patent infringement case against Stinger Systems.

We received the final injunction there.

As we have stated before, we are assertive about protecting our intellectual property rights.

We do have what we believe to be very broad patent coverage in the space, it was a greenfield space and we started here 15, 16 years ago and we've been able to stake out some pretty broad patent coverage.

We do have full-time patent counsel in addition to our litigation team internally.

That positioned us with right resources to be able to effectively defend on our intellectual property rights

And then, as Dan mentioned we have begun to sail AXON and Evidence.com.

Burnsville, Minnesota is the first one that publicly announce.

Lake Havasu City here in Arizona put up their own press release on their purchase of Taser, AXON and Evidence.com systems.

We have got a number of other agencies as well that have not gone public yet.

Most importantly we are getting really positive feedback from these early deployments The SaaS business model really is showing some real strength in terms of the ability for us to deliver our turnkey service that really creates some breakthrough value for our customers without all headaches that they traditionally run into in trying to set up complex IT deployments themselves.

Some of their public folks they have been interacting came in to file complaints, one of the incidents were caught on video and the complaints completely went away.

We had some dramatic uses of the device, arresting folks, catching them with firearms, literally all that.

We had one where an officer was assaulted by youth.

The officer actually broke his leg but the AXON on systems stayed on throughout, and we were able to show that the youth was really the one who had aggressively attacked the officer and not vice versa.

Obviously any time officers are involved in altercations with minors, those are very sensitive situations.

So the officers are finding that it's becoming quickly critical piece of equipment for them.

And so the most important thing to me is the positive customer feedback because that's what generates momentum in the marketplace and happy customers ultimately will create value for all of our stakeholders be it our customers, of course our employees and our shareholders.

At this point in terms of the roll-out, for those of you who have invested in the SaaS type of business in the past, they do tend to take a wider scale because we recognize revenues over time as well as the adoption curves, because we are now selling in something that is supposed to use a weapon system that where there is limited set of decision makers.

We now touch IT, policy makers within the agency.

So it's a multi-party sell process.

So we are seeing there is a long sale cycle.

But over time if these things ramp obviously if we've got a lot of potential.

We are focusing most of our sales efforts to this point and to the smaller agencies.

If you look at the demographics of law enforcement, that's where the bulk of the market is in the US.

We have 17,000 police departments across United States, employing about 800,000 officers.

So the average size of the department is fairly small.

Not only that, that's where the bulk is.

But we're also seeing of course that those of the agencies that adopt new technologies much faster, they tend to have much less entrenched, big IT systems that you are competing with.

And the other thing we are learning is that they are less affected by the current economic environment.

Virtually every major city we are dealing with right now is being particularly hard hit by the economic environment, whereas the smaller agencies particularly those in the Midwest and other areas were not as hard hit by the housing bubble seems to have much more robust budgetary environments right now.

So, I would say expect us to continue to focus on and win orders in these smaller agencies and scaling those upside together again, put together the small agencies are much larger than the big agencies in this country in terms of total workforce and total availability.

And frankly, this is a similar strategy what Taser used when we first started launching our electronic control devices back in around 2000.

We saw the bulk of our business come from the smaller agencies.

And even today as you can tell by the demographics of our business, the bulk of our business today comes from these smaller agencies and that's where Taser has particularly strong relationships.

The last item there is the economies of scale of the SaaS business model are particularly compelling within the smaller agencies.

For example in one smaller agency I was meeting with in terms of looking at the cost of going with an Evidence.com solution versus them implementing some sort of on-premise digital evidence management system if they have to just allocate one IT person to supporting setting up and maintaining onsite system, that salary to staff that one person is comparable to the entire solution cost of Evidence.com over a five year period.

And that's without looking at hardware, software licensing fees and all the other elements.

So the smaller agencies because of the sort of lumpiness that going and setting up new IT systems actually bodes well for us in terms of the again the costs comparison to the software as a service business model approach.

As I mentioned earlier we are continuing in work several very large international orders.

We are optimistically we believe we'll close at least one of them by the end of the quarter here.

And we believe we'll continue to see extreme of revenue from those into 2011 as well.

So the last item I'll end with is as I mentioned at the beginning of the call, you can see we are ramping down some of our R&D expense.

We are coming off the heavy investment cycle and we are very focused at this point on growing to revenues of our SaaS business and focusing on the global profitability of Taser International.

And again, hopefully as the economy recovers here over the next couple of years, we'll be well positioned to benefit from the investments we have made over the last several years.

So as the CEO what I can tell you it's a really exciting time for us, the rubber is starting to meet the road with these investments starting to bear fruit.

And, we definitely appreciate the patience from our shareholders.

Some of these technologies do take longer to get to market, longer to get to revenue than we certainly planned on, but the opportunity is our largest that we had ever projected.

And we're excited now about continuing to execute on our business plans.

So, with that, I'll go ahead and I will open it up for a few questions and see what's on your mind.

(Operator Instructions).

Your first question today, gentlemen, comes from the line of Steve Dyer with Craig-Hallum.

Actually this is Steven Gregory.

Actually with Mandalay Research.

A couple of questions where after the last hearing in things regarding like e-commerce where I have been reading over the last couple of months is that a lot of articles, talking about 2011 the Company's going to try to drive more e-commerce revenue because of higher margin and better profitability.

Are you just driving more exposure to their company website?

Can you provide our shareholders on the call today with some colors?

What is your e-commerce decision going forward for our company?

And how do you plan to take us there to drive more revenue for our site?

Thank you.

Well, we actually are right in the mix right now of an overhaul of Taser.com.

We've just brought in a new head of marketing, Jeff Kukowski who actually comes from the e-commerce space.

He was one of the founding team the company called Cyclone eCommerce here in Arizona as well as having a background in the location-based services space.

So one of his top priorities is overhauling Taser.com particularly for, and primarily, frankly for information purposes for our core law enforcement market, I am sorry, where Taser.com is a primarily information resource, as well as driving our e-commerce business with Taser C2 and now with the launch of the Protector product.

So you will see a new Taser.com probably in about 120 days out from now and we're pretty excited about them.

And of course there is the whole Evidence.com side of the business where software as a service has obviously got a heavy e-commerce components as well.

Are you guys going to actually be setting up like any mobile --

Your next question today comes from the line of Greg McKinley with Dougherty and Andy.

Hello?

It looks like we got cut off there.

Yes I apologize, and this caller is not answering either.

Your next call comes from the line of Paul Coster at JPMorgan.

Yes.

Thank you.

A two part question.

Perhaps three.

Can you talk a little bit about the ECDs that have been deployed over the last five years.

So, the average age of them is, and the likelihood of an upgrade cycle associated with that population of devices?

Can you also in passing comment about the X3, its reception and what you see going forward?

Paul, is this.

Dan Behrendt.

I'll start with the age there.

The average useful life of Taser electronic control devices get in sort of that 5 to 6 years range and at this point we have got about 175,000 units in that installed base that are sort of at that and beyond that useful life.

So we do think that goes well for an upgrade cycle.

We need to continue to get that message out to our customers to be proactive about the replacement of their products.

And we have got a number of initiatives in place that, that continue to drive that message.

But the installed base is aging and I think that does create a large opportunity for us.

On the X3, we are working on several significant deployments of the X3 as we speak.

So far it's been primarily adopted in some of the smaller agencies.

It's just been frankly a really tough environment, introducing a premium price point product in that -- with a lot of these agencies is going through these budget cuts at this point where they are cutting officers.

We are seeing more success obviously with our core products where we had deployments in process and this is already part of their sort of operation model.

But moving them up to a more premium price point has been difficult.

But again, we hope at the end of this quarter should be announcing some additional business with the X3 with a more large and more notable customer.

Okay.

Thank you.

Your next question today comes from the line of Greg McKinley with Dougherty.

Can you hear me?

Yes.

Okay.

So thanks for taking my question.

I guess, I really wanted to understand more about your long-term view on just really infrastructure cost of the business.

So we are clearly migrating away from some of the heavy R&D spend and bringing some new products to market.

But it still strikes to me that the organization is really heavy on infrastructure given the revenue base.

And I am wondering if you agree with that, maybe you don't, I just like to hear your thoughts in terms of 5 to 6 years ago, I think SG&A was may be 20% of revenues today, its closer to 40%, where do you see that heading over the long-term and what do you think we need to do to get that back to where it was historically?

This is Dan Behrendt.

I think it's an excellent question.

I think we have certainly done a lot to reduce that SG&A expense.

If you look versus the prior year both on a quarterly and year-to-date basis and I think we've seen some significant changes there.

I think that there is, the Company as definitely committed to getting the leverage back in an operating model here.

I think what I am really encouraged by is that the fact we see that leverage at a much lower sales point.

Where before we wouldn't really start seeing that impact that the leverage until we're, say, into the upper 20s now we're in the sort of below 20s before we really start seeing that impact.

So I think we really well-positioned.

I think that as the Company grows I think that SG&A percentage sales will drop.

I think that our expectation is that the sales can grow much quicker than the operating expenses, that we're pretty well positioned at this point.

So we feel very good about the business model and how we've set up.

We continue to take a hard look to make sure that all the expenses that we have and all the investments we are making are going to yield either near- or long-term results for the Company.

But we've taken a significant amount of cost out.

We continue to look hard at it but we still pretty well-positioned as we move into next year.

Thank you.

Your next question comes from the line of Eric Wold with Merriman Capital.

Hi.

Good morning.

Before I begin the question do you mind giving out the typical unit- by- unit breakdown?

Sorry, Eric.

Yes.

Absolutely.

Yes.

Absolutely.

So the Taser X26 was 15,171 units for the quarter.

The M26 was 589 units.

We sold 3,326 C2s, 123 X3s, 1560 Taser CAMs and 276,865 cartridges.

So we're up pretty much in almost all areas over the prior quarters as far as units.

Perfect.

And then, looking at what you have done on the Evidence.com and now that we are capitalizing all those expenses kind of bringing them in -- can you give us a sense of kind of where you need to be in terms of an installed base there to get to break even on that segment?

It's going to really -- it's a tough question.

A lot of it's going to depend on how much of the costs will sort of stay down in R&D.

We moved about $900,000 of costs from the R&D line up, for just sort of the operating costs of Evidence.com, and then another $900,000 relating to sort of the maintenance of the systems.

So, clearly one of our goals here will be to continue to put most of that investments into new product enhancements and make sure that we're going to continue to improve the product offering.

I think that, as Rick indicated, businesses tend to start off smaller in scale, quickly once you sort of getting sort of your reference customers.

There is definitely, I think in our case probably more or so and a lot of these smaller are sort of the network effects where every new customer make the whole system little bit more valuable.

We are pretty excited that as this thing scales out I think we will start seeing that impact as well.

Looking back the last kind of major product launch of the C2 is kind of somewhat a mixed results, and maybe somewhat disappointing results in terms of the uptake from consumers -- what would you, 12 months out, let's say from the commercial launch of AXON/Evidence.com what would you feel, is kind of a minimum level you need to be happy with, how it's an e-commerce, what kind of the level of non-disappointment for a penetration into that product?

Yes, I think it really going to depend a lot on sort of overseeing the overall market.

I think if we start seeing the market improve, we'd be looking to make sure adding new accounts, we are going to have a number of metrics.

Users are one thing, but we're also looking at how many agencies are on it, how many agencies that did trials converted over to paid users.

So I think as far as selling a specific goal as far as, call it either a success or disappointment, I think a lot of this is going to depend on what happen in the overall market.

I think if the police budgets stay tight like they were in 2010.

I think it's going to be tougher sledding.

But if we start seeing the budgets open up and certainly we want to see, we've got high expectations longer term for the product.

Understood.

And then on, probably maybe a little early here but the situation with Stinger and they would be effectively be out of the market -- have you seen any early indications of an improvement or shortening of sales cycle with them kind of not out there competing?

I don't know if we've seen a significant shift in the sales cycle yet.

It's pretty early to say.

Frankly, as you know, it was just a little bit more disruptive where some agencies had to go out and do T&Es.

But we didn't see any long-term disruption or a loss of any significant orders.

But we're certainly hopeful that this will clear up some of the consternation around moving orders to the pipeline quickly.

But it's a little early to say anything definitive about it.

I think it probably helps the Company overall with its customers that kind of show the benefit of dealing with an established player.

Obviously, Stinger has got a number of pretty unhappy customers.

Now they aren't going to have warranty coverage for their products and things like that.

I think it's just kind of should help to cement with our customers the values of doing business with the company like Taser.

Probably not bad for that many customers actually.

Last question -- on the delayed international orders, anything other than just budget issues and getting the cash, and finalizing all kind of how they're going to pay for it that may be delaying these orders?

Yes.

Everything that we are hearing from our customer and we have been pretty involved in meetings and moving the orders through the pipeline.

We continue to hear that they are making progress.

We're clearing different checkpoints along the way.

But as you know, interestingly these big orders tend to take a long time to germinate.

They tend to be bit unpredictable but then, once we have the purchase order, there is a lot of pressure to shift quickly.

And we have taken on some additional inventory from earlier in the year to make sure that we are able to meet the customer expectations there.

So our sales folks that are working directly with the customers remain very optimistic and believe that we are moving to ball down the field.

We are getting closer just a, in their estimation a question of timing.

But until we have the order we're careful just not to count our chickens.

Okay then very last question Dan, a numbers question.

Is the combining direct and indirect manufacturing expense into one line -- is that an ongoing move?

Yes.

Until we break out Evidence.com as a separate sort of segment we are almost forced from a GAAP perspective to do that.

If we break out sort of the cost of service delivered, we need to break out the revenues.

We will continue to evaluate when we break that out.

So we ended up combining sort of the manufacturing direct, indirect and cost to service delivered lines together because that break them out separately we do break that revenue we are not quite ready to do that.

Okay.

Perfect.

Thanks, guys.

All right.

Thank you.

Ladies and gentlemen, this concludes the question-and-answer portion of the call.

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

Smith for closing remarks.

Great.

Thank you very much.

Again, we appreciate everybody's time on the call this morning.

And again, we look forward to some exciting times ahead here as a lot of these R&D projects move from R&D into revenue phase.

And we look forward to talking to everybody after the first of the year.

You have a fantastic holiday period, and looking forward to 2011.

Thanks.

Bye-bye.

Ladies and gentlemen, thank you for your participation in today's conference.

This concludes the presentation and you may now disconnect.

Have a wonderful day.