Axon Enterprise Inc (AXON) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2011 Taser International Incorporated Earnings Conference Call.

My name is Stacy, and I'll be your conference moderator for today.

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

We will conduct a question and answer session towards the end of the conference.

(Operator Instructions)

As a reminder, this conference call is being recorded for replay purposes.

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

Rick Smith, CEO of Taser International.

Please proceed.

Thank you.

And welcome, everyone, to our 2011 earnings call.

Before we get started, let me just have Dan read the Safe Harbour Statement, and we'll be good to go.

OK, great.

Thanks, Rick.

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 Harbour 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 capabilities, new product introductions, product safety or business model.

We caution that these statements are qualified by important factors that could cause the 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 (inaudible) competition for our products, the degree and rate of growth of the markets in which we compete and the accompanying demand for our products, potential delays in international and domestic orders, implementation risks for manufacturing automation, risks associated with rapid technological change, execution and implementation risks of new technology, new product introduction risks -- sorry -- 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 that this could have on sales, product quality risk, potential fluctuations in quarterly operating results, competition, negative reports concerning Taser device uses, financial and budgetary constraints of prospects and customers, dependence upon sole and limited-source suppliers, fluctuations in component pricing, risks of governmental investigations and regulation, 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'll turn it back over to Rick Smith.

Great, thanks, Dan.

So let's talk about the results.

Our fourth quarter revenues came in at $21.3 million, plus we had $1.6 million in backlog that will shift in the first quarter of 2012 and be recognized.

Revenues for the quarter are down sequentially and year-over-year .

The decrease was primarily driven by lower international sales which were down 65% from $6.6 million last year, being 2010, to $2.3 million in the fourth quarter of 2011.

We see two primary factors that led to the softness in international sales.

First was the general weakness in Europe amid the economic confusion, austerity measures, et cetera.

And second, many international customers do require the use of a Taser Cam with their ECD's -- electronic control devices, of course.

Since the Taser Cam HD that we developed for the X2 is not ready to ship until the first quarter of 2012, we believe this did delay international adoption and even evaluation of the X2 platform as customers waited for the Taser Cam HD.

Two important bright spots in fourth quarter revenues that we should highlight -- US law enforcement sales were up approximately 25% over the same quarter last year, primarily driven by the X2.

Also, AXON at EVIDENCE.com gained some significant traction in the marketplace.

Fourth quarter bookings increased by over 140% sequentially from a small base of $220,000 in the third quarter to $537,000 in the fourth quarter.

We attribute the increased traction to the fact that we began selectively showing the AXON Flex unit, which we announced earlier this week, and integrating upgrades into our fourth quarter AXON deals.

I'll be back to talk more about video and the Cloud business after Dan covers the numbers in detail.

But before we do that, I do want to talk a little bit about the large balance sheet adjustments.

So, following the successful launch and strong demand for the new X2 and the AXON Flex we announced earlier this week, we are writing down the inventory and tooling for the previous generation Taser X3 and the first generation Taser AXON.

Both the X2 and AXON Flex have shown strong demand right from their launch.

And the adoption of these products from both new and existing customers has been impressive.

Therefore, the demand for legacy products has diminished as our newer products are showing much higher volume potential.

With the Taser X2 it became very clear that the X2 will be the primary volume driver for agencies looking to upgrade from the older X26.

So really it's become clear that the AXON Flex is making our first generation AXON obsolete.

What we're seeing is a parallel phenomenon in both product categories.

When you face a challenging situation like this, I do think it's important we take a few moments and do an analysis of how we got here and where we're going.

I think the best way to look at this is to compare and contrast where the company is today versus in 2008 when these previous products were in development.

I strongly believe that the new X2 and the AXON Flex are actually quite solid indicators that the company has successfully transitioned from an entrepreneurial and informal product development process to a more rigorous, scalable and customer-driven product development process.

So I'm now going to take a step back even further to sort of look at the timeline here.

If we go back to 2003 when we introduced our flagship X26, Taser at that point was a small company with only two full-time engineers, one electrical engineer and one mechanical.

The small team collaborated closely to rapidly develop the Taser X26.

Fast forward to 2007, and the company had grown to $100 million in revenue from, I believe in 2002-2003, we were less than a quarter of that level.

And by 2007, we significantly expanded, expanded our engineering team.

However, the processes to effectively manage and develop with a much larger engineering team were not yet fully developed.

The informal mechanisms of gaining customer feedback that worked well for the small entrepreneurial Taser of 2003, those same informal mechanisms did not work as effectively to connect the market needs to a larger engineering team with less direct customer experience.

As a result, both the Taser X3 and the first-generation AXON were driven more by internal and engineering priorities than by effectively organized customer requirements.

So both the X3 and AXON first generation share some similar traits.

Both products were significant technology breakthroughs, but the level of complexity and the physical size and the cost of both products were out of sync with customer needs.

In other words, while they were impressive engineering accomplishments, both products were too large, too complex and too expensive to appeal to the majority of the marketplace.

However, the past two and a half years, we've been very focused on overhauling and refining our entire product development process to better match customer needs.

We now have a focused product management team with dedicated product managers responsible for defining customer requirements through a rigorous voice of the customer process that has engaged hundreds, and in fact even thousands of law enforcement officers in the definition and design of our products.

This process drives close direct engagement between our engineers and end users throughout the entire design process.

So all design decisions are being vetted with customers.

As a result, both X2 and AXON Flex are being extremely well received by customers.

For example, TASER instructors that we surveyed showed that 96% of respondents chose the X2 as their preferred ECD platform, even over the vaunted Taser X26.

Although we don't have formal data yet for the AXON Flex, since we just introduced that product, the pre-order demand and qualitative customer feedback leads us to believe that number is even closer to unanimous preference of the new Flex over the first-generation AXON.

I would also tell you we've slowed down to speed up.

Instead of validating key design elements at the end of the design process with finished prototypes as we used to do in the less formal development process, we now force rigorous characterization and validation of all key design changes at the beginning of the design project, so that all identified technical risks are quantified and understood before the integrated design process begins.

This added about three months to the front end of our design process, but dramatically accelerated the entire project and the transition into manufacturing.

As a result, these new products are far more stable and reliable, and to date with over 10,000 X2's shipped to the field, we have a return rate of just about 1%.

And given the abusive environment in which these devices operate, we're very proud of that result.

We've also implemented far more robust inventory management and product lifecycle planning to mitigate inventory risks throughout the launch process.

Now it bears noting, if we look at the inventories of the -- inventory levels of the X3, it may look like we bought too much inventory in retrospect.

However, if we take a look back at how those inventory levels were calibrated -- let's, let's go back to the previous major weapons system launch, of the Taser X26 in 2003.

Now in 2003, when we announced the X26, the M26 sales plummeted immediately upon launch of the X26.

We saw the market immediately migrate over to the new platform.

So as we're preparing for the launch of the X3, our first multi-shot capable device, we felt we had to mitigate the risk that the market might stop buying the X26 and make that same immediate transition over to the X3, just as we had seen in our last major product introduction from M26 to X26.

So with sales in the range of 15,000 to 20,000 X26's each quarter, we felt it was prudent to have at least six weeks' supply on hand, or roughly 10,000 X3 units on hand, when we made the product launch, to ensure there was no revenue disruption.

Now in retrospect, the X3 did not hit the mark as well as we'd hoped, and we still have a significant amount of that inventory on hand which we are now writing down to the quantity we expect to sell over the next two years.

Now the great news here is that we have identified and rectified the issues encountered with the X3 with the new X2, which has sold over 10,000 units in its first six months.

But this has sealed the fate of the X3 as more of a niche product for high-end tactical teams that will want the extra capability and will tolerate the larger size, the higher price, and the greater product complexity.

We will continue to market and sell the X3 as our high-performance, high-end product, but we've concluded it will not be a volume leader.

As an organization, we also developed a more rigorous approach to partnering.

Rather than engineering these entire systems from the ground up, we've looked to partner with industry leaders with complementary capabilities that help us deliver a better product at lower cost and faster time to market.

Let's talk about AXON Flex.

For mounting options, we teamed with Oakley, the clear market leader in safety and sunglasses for law enforcement.

Rather than develop the camera system itself from the ground up, we partnered with [Looksy], a Silicon Valley company that is the technology leader in miniaturized cameras with wireless video streaming capability.

Then we took Looksy's technology platform and created a hardened system with law enforcement-centric capabilities such as extreme low light performance, advanced weatherproofing, secure file management systems, and over 12 hours of video buffering capability.

We also took a (inaudible) look at whether it makes sense for us to be building our own wearable computers.

For example, the ATC which is the touchscreen element of the AXON first generation.

We quickly determined that this was not an area where Taser could be best in the world, so we chose instead to leverage the existing universe of smart and fast-evolving mobile devices available using the Android and Apple IOS platforms.

So we now used apps on those operating systems to connect our cameras to these mobile devices for viewing and data entry in the field.

It should be noted, we retain all evidence data securely in a secure file system on the AXON Flex.

These mobile devices are merely being used as viewing and data entry systems.

The data does not transfer over to these consumer-grade devices.

And finally, we evaluated whether it makes sense for us to continue to build and operate and maintain our own data center for EVIDENCE.com.

Again, we identified there were potential partners with enormous scale and technical capability beyond what Taser could achieve on its own.

After a rigorous analysis, we chose to partner with Amazon, using their S3 system.

They've got a massively scalable infrastructure to host our back end storage and application.

This avails our customers of best-in-class technology, as Amazon clearly has one of the best engineering and security teams for delivering massive data center operations.

Collectively, these partnerships have allowed us to focus our resources on those areas where Taser can be best in class, and maximize the value add for our customers, speeding our time to market and delivering world class solutions.

We're not going to make excuses.

We've made some mistakes.

And as we're seeing today, some significant and expensive mistakes.

But we've learned from those mistakes as an organization.

These have been growing pains, but we have grown from and through them.

And I firmly believe our company is better positioned than ever to begin scaling and achieving sustainable growth in the future.

One last item I'd like to discuss before handing over to Dan is the timing.

Why write down the inventory and tooling now?

And why do both of these write-offs hit in the same quarter?

Let me start with the X3.

Clearly, the initial adoption of the X3 was below our expectations.

However, we were seeing some indications of traction in the marketplace.

And as we ended 2010, we sold over 1,000 units in the fourth quarter alone.

It did appear the product was starting to gain some traction.

However, as we moved forward in 2011 and we introduced the X2, the X2 saw significantly better market traction and accordingly, with the X2 now available, we saw sales of the X3 drop significantly, from over 1,000 units per quarter to under 100 units per quarter.

And we felt it prudent to give the market some time to demonstrate repeatedly which product would be preferred as well as time for our sales team to try to close some of the X3 deals in the pipeline.

However, by the end of the fourth quarter, we now had two consecutive quarters of data, and our year-end inventory analysis was undeniable, the X2 was a hit, and that relegated the X3 to a niche product.

Now let's talk about AXON Flex.

We were seeing some sales and adoption of the first generation AXON as well as some significant deals that were in the pipeline.

However, while we were seeing significant hurdles based on size, wires and comfort with the first generation, it was not exactly clear what the market reaction would be to AXON Flex, nor how long it would take until the Flex system was validated and ready for market entry.

In the face of this uncertainty, it was unclear how long we would continue to sell and support the first generation AXON hardware.

We first began to show Flex to limited customers at the International Association of Chiefs of Police Conference in October.

Customer reactions were overwhelmingly positive to the new product.

Further, our experience supporting the first generation AXON in the field was proving to be an expensive endeavor.

Our analysis indicated it would be less expensive and create greater long-term market traction to transition even our existing customers off of the first generation and onto the second generation AXON Flex as soon as it would be ready.

Accordingly, as Flex neared design completion and entered validation, it became clear our existing inventory and tooling for the first generation AXON would also need to be written down significantly, as we have now done.

I hope this provides some helpful context into this situation, our analysis behind it, and the timing.

And with that, I'll turn over to Dan to review the numbers in more

Thanks, Rick.

As Rick indicated, revenue for the fourth quarter was $21.3 million, which is down approximately $1.5 million or 6.7% from the prior year.

However, demand for the company's products remained strong, having received orders totaling $1.6 million in the fourth quarter of 2011 which we'll recognize in the first question of 2012.

Revenue for the first year was $90 million, which is up approximately $3.1 million from the prior year.

The increase is driven primarily by the growing demand and successful adoption of the Taser X2 electronic control device, which generated $8.1 million of revenue in the full year of 2011, with $3 million of that coming in the fourth quarter.

So we definitely feel encouraged with the ramp on the X2.

Gross margins for Q4 were $6.9 million or 32.4% of revenue, which is down 19.3% from the 51.7 the prior year.

The (inaudible) is driven primarily by the one-time $5.7 million charge in the fourth quarter, reflects right off of production tooling and excess inventory for the Taser X3 and AXON video product lines.

With the success of the new Taser X2 electronic control device, the company has concluded it will not sell through the current level of the X3 inventory, even though we'll continue to sell and support the product line.

The resulting charges are a charge to excess inventory which hit in the gross margin of $1.7 million, as well as a impairment of the tooling process for the X -- to manufacture the X3, which were $558,000.

Similarly, with the AXON Flex video system, which we announced earlier this week, we've concluded that the -- we'll not be able to sell through the existing inventory of the first generation AXON product.

That resulted in a write-off of the excess inventory of $2 million which is in the cost of sales, as well as a [impairment] of the tooling to manufacture that product of $1.4 million.

So that the total of $3.7 million ends up running through cost of sales; the other $2 million is down below in the write-off of the production tooling for the discontinued product lines.

The SG&A expense for the quarter was $10.1 million versus $9.3 million in the prior year.

As a percentage of net sales, SG&A was 47.1% of net sales in Q4 of 2011, compared to 40.7% in 2010.

The increase in SG&A expenses is really primarily two things.

One is, we had legal expenses up year over year, due to some timing of some cases and the work for some of the legal cases, and professional fees were up $116,000 over the prior year.

The research and development cost for the fourth quarter were $2.1 million.

This is a favorable $500,000 adjustment from the 2010 levels.

The decreases is a result of decline in our consulting costs, about $335,000, along with a reduction in headcount in the research and development area.

The -- in the results for the quarter, you can also see that we had some litigation judgment expenses.

So again, it relates to the Turner case.

We saw some additional legal expenses hit in the fourth quarter as a result of some post-trial motion work that was done in the Turner case.

And those bills came in in the fourth quarter.

So that's been recorded as part of that litigation judgment line on the P&L.

And we've got $3.8 million in total, and that's a line of the P&L in the 2011 results.

The adjusted operating account which excludes the impact of stock-based compensation, depreciation, amortization and the loss and write-down to dispose of property and equipment was $1.1 million for the fourth quarter of 2011.

We also took out some of the one-time expenses for the litigation judgment expense and write-down of the excess inventory and, as I said, write-down of property and equipment.

For the full year 2011, we had adjusted operating income of $11.5 million, which is a $5.6 million increase over 2010.

The GAAP loss from operations was $7.7 million for the fourth quarter, compared to a basically break even in the fourth quarter of 2010.

The net loss for the fourth quarter of 2011 was $6.2 million or $0.11 per share on both a basic and diluted basis.

This compares to a loss of roughly $200,000 last year for the fourth quarter, which is basically zero cents per share on a basic and diluted basis.

The net loss for the full year of 2011 was a loss of $7.3 million or $0.12 a share, basic and a diluted basis, compared to loss of $4.4 million or $0.07 per share in the prior year.

I want to note that the tax provision which is reflected in the current results here could still be impacted by our valuation of deferred tax assets on the balance sheet.

As you know, the valuation of deferred tax assets is very complex and involves detailed models which could go out well over a decade.

The company has done its review, but this (inaudible) has not gone all the way through audit at this time, so any change in that line will be reflected in the 410(k) when we file.

As you see in the results in the press release [from] this time, we're actually starting to break out segment reporting.

We've basically broken our business into two distinct segments -- the video business, which includes the sales of the Taser Cam, AXON video products and accessories, as well as EVIDENCE.com, and the other segment of the business is our electronic control device segment, or ECD.

This includes, the Taser ECD is including the X26, the M26, the X3, the X2, C2, the cartridges, XREP and Shockwave.

So basically any product which is not a video product is included in the ECD segment.

We allocated the cost between the two business segments.

Costs which are directly attributable to the video segment were included in that segment, with the remainder of the costs remaining in the ECD segment.

We do not split roles for people not directly involved with the video segment.

These example as, we have a receptionist here at Taser Headquarters, does a great job for us.

But because we have that role, even if we didn't have the video business, we have (inaudible) costs in the ECD segment.

But we do have separate sales force, separate product managers, separate software development teams, et cetera.

All those costs and others directly attributable to the video segment are their results.

In analysis, you can see the video business had an operating loss of $6.9 million in the fourth quarter of 2011 and $16.1 million for the full year.

This was impacted by a number of one-time items like the write-off for the first generation AXON inventory, and the loss on the write-down of production tooling for the first-generation AXON, as well as write-offs associated with the second data center which was not opened, as well as billing software which is no longer being used for the video product line.

In addition to these items, we added back stock-based compensation, depreciation and amortization to get to the adjusted operating loss of $2.7 million for Q4 and $8.9 million for the total year.

You may notice that the product gross margin for the video segment is, is negative.

That's really the result of some heavy discounting we did for the first-generation AXON device in order to gain traction in the market.

The product gross margins on the AXON Flex was much better than the first generation product, which will improve the results of that segment of the business as we move forward.

We also deferred some revenue in the fourth quarter relating to the upgrade rights we gave those customers.

As Rick mentioned, the customers we started showing the product to in the fourth quarter had a, a great reaction to AXON Flex and bought the AXON with the understanding that it'd be upgraded to Flex when it hit the market.

So we've deferred some of those sales relating to the upgrade rights to move to the AXON Flex product.

The ECD part of the business has been more profitable than the video business because of the scale it already enjoys, plus the fact that as the more mature business, there's less investment needed to grow it.

When we look at 2011, the fourth quarter results for the ECD segment saw an operating loss of $790,000, (inaudible) 2000 -- or total year 2011, total operating income of $4.7 million.

This is impacted by a number of one-time items like the write-off of the X3 inventory, the loss and the write-down of production tooling for the X3 product, the write-off of the company's investment in protective product line, as well as the accrual for the judgment not yet entered for the Turner Wrongful Death case.

In addition to these items, we added back stock-based compensation, depreciation and amortization to get an adjusted operating income of $3.7 million for the fourth quarter, and $20.4 million for the year.

We feel that the adjusted operating income number gives investors a better measure of the cash generation ability of the company.

Even though the company had an operating loss for the year on a GAAP basis of $11.4 million, the company still generated $17.3 million of cash from operations, due to the fact that many of the one-time expenses for 2011 are non-cash.

When we normalize the results, we see that the company has a profitable core business in the ECD segment which is funding our investment in the video segment.

We still feel very good about the long-term prospects of the video business.

But in the near-term, the video segment has been a drag on earnings, because we're still in a heavy investment phase.

We feel that by breaking out these segments, we can assure that we continue to focus on growing the profitability of the ECD business without having the results obscured by the investment we're making in the video segment.

We also want to drive the video business to profitability in a reasonable time frame so it can contribute to the consolidated results.

By breaking out the results, we can better make -- better -- make better investment and resource decisions, and drive to the right conclusions going forward.

So to move on to the balance sheet, we finished the quarter with $26.4 million to cash, cash equivalents and short-term investments.

This is a decrease of $16.3 million from the prior balance due to the $32.5 million of cash used for the stock buyback program during the year, offset by the $17.3 million of cash provided by operations.

During the buyback, we purchased 7.5 million shares, representing approximately 12% of the outstanding shares we had on, outstanding on 12/31 of 2010.

And the average price of the stock just in the buyback was $5.35.

Accounts receivable -- $11.8 million, are down $1.8 million from the prior year end, due to some timing of collections.

And the inventory is $11.5 million.

This is down $6.3 million from the prior balances due to the write-off of the excess inventory, as well as just general reductions in inventory balances with the increased sales.

The investment in property and equipment is $26.7 million.

It's down $9.2 million from -- compared to the prior year.

Big driver there is that we had a depreciation expense at $7.8 million for the year, as well as some of the write-downs of the Protector X3 and AXON product lines, bringing down those balances, along with a little bit lower CapEx during the year.

Most of the CapEx this year were for computer equipment, as well as some of the tooling for the new Taser X2 electronic control device and the AXON Flex product lines.

Total assets at December 31st, 2011 were $105.1 million.

Move down to the liability side of the balance sheet.

We had accounts payable of $4.5 million.

This is basically flat from the prior year.

Accrued liabilities of $8.1 million increased $4.3 million, primarily due to litigation judgment expense reserve of $3.8 million, recorded for the Turner case, and with the expenses hitting in the second and fourth quarters of the year.

Total deferred revenue of $7.9 million has increased [$296,000] from the prior year balances due to the X2 that the -- the packages we're selling for the X2 with the trade-in program included an extended warranty.

So we're deferring some of that revenue and recognizing it over the five-year warranty period.

Total liabilities are $23 million, and the company finished the quarter with $82.2 million in stockholders' equity, which has decreased from $35.4 million primarily due to the fact that purchase program executed in 2011.

Company continues to have no long-term debt, and continued to have plenty of liquidity to operate the, the business.

As we move to the cash flow information, we did have, as I said earlier, cash provided operations of $17.3 million for the year.

$2.7 million of that came in the fourth quarter.

This compares to cash flow operations for the full years last year of [$0.7] million.

So we're up, you know, over $16 million year-over-year, which we're certainly encouraged by.

The cash flow for operations is really driven by the adjusted operating income of $11.5 million along with some working capital changes.

Net cash use for investing activities for the year were $7.6 million compared to $4.5 million in the same period of 2010.

The use of cash is mostly driven by the net purchasing activity of short-term investments.

Cash use and financing activities was $31.1 million.

Again, that was driven by the two buy-back programs approved by the board of directors in both March and July of 2011.

And the company ended the quarter with $21.3 million in cash, and another $5.1 million in short-term investments.

So $26.4 million in cash and investments.

So we're confident that we've got strong liquidity as we enter 2012, and feel good about that.

The last thing I'd like to cover is just the unit sales for fourth quarter for the analysts so they can model it.

We had 10,098 X26 units sold in the fourth quarter.

We sold 4,136 X2 units.

We sold 961 of the M26.

X3, we sold 40 X3's; 3,405 C2's; we sold 1,036 Taser Cams; and 289,451 cartridges.

And with that, I'll turn it back over to Rick Smith.

Great.

Thanks, Dan.

Yes, one thing just to point out.

The Turner case from last year that Dan was referring to -- we are still waiting the response from the court on the post-trial motions.

So the judgment -- the jury verdict has still not been entered.

This is pretty non-typical for it to go this long.

We do see that there's -- that could be interpreted as an indicator that the court is carefully considering the situation.

Okay, so as Dan talked about, and as you saw in the earnings release, we've begun to break out P&L by business unit.

And as you can see, the profits and cash flow from our core business have been funding a major development in AXON and EVIDENCE.com.

We believe we are well-positioned as the first major mover in Cloud computing for law enforcement.

And we stand at what we see as an inflection point for the rapid adoption of officer-based video.

So while we've had some expensive lessons along the way, that is part of building a new business as we know from even building our Taser business over the past two decades.

We're confident these investments have been the right move for Taser, and position us to be a dominant player in a major new market.

So even while funding the new business opportunity, the company generated $17 million in positive cash flow over the last year.

So keep your eye on what will happen if the Cloud and video business unit shifts from cash consumption to cash generation.

One note as well -- most of the revenue I think, as Dan pointed out, in the video business unit, was associated with our legacy Taser Cam product.

So we actually saw a decline, year-over-year, in recognized revenue in the video business unit from 2010 to 2011.

And there's two real reasons we see for that.

Number one is, the AXON and EVIDENCE.com get sort of lost at this point in the numbers because it's, it's outweighed by the legacy Taser Cam until, obviously we hope to see the on officer cameras begin to scale, or the officer [warn] cameras, the AXON Flex.

And the other piece is revenue deferrals associated with upgrades and associated services.

But the, the indicator that I think is more telling at this point was the more than doubling of bookings for AXON and EVIDENCE.com from Q3 to Q4, and we'll continue to track that over time.

So as we look forward to 2012, we're very focused on rigorous execution.

We have thinned down our focus.

2011 I'd say was a focusing year.

We decided to exit the Protector business and focus on three key goals.

First is driving an upgrade cycle in our existing electronic control device business in North America.

Second is driving international sales adoption of ECD's globally, whether those be -- those will primarily be new adoptions, because our penetration globally is, is far less than it is in the US, where the upgrade is the more meaningful segment in North America.

And then the third goal is the adoption of AXON and EVIDENCE.com -- really building out our video and Cloud business unit.

Progress on any one of these three initiatives can drive significant growth and profitability for the entire company in 2012.

Therefore, we're limiting the scope of our efforts to focus on doing these three things.

The upgrade opportunity alone will represent around 327,000 units by the end of 2012.

It'll be more than five years old, so past their expected life.

This represents a roughly $350 million potential market.

So one of the things that we learned in 2011 was that many agencies could not react in the short six-month time period from when we introduced the X2 to the end of the year to take advantage of our trade-in program which expired at year-end.

So to evaluate a new weapon, make a decision to upgrade, and execute that upgrade within their budget cycles was simply not achievable for many agencies.

We also heard from customers that, because of our reputation for excellent customer service, they did not believe that Taser would simply cut off the trade-in program overnight.

So based on these concerns, and to better service our customers, we are announcing a new trade-in program extending into 2012 that gradually phases down the trade-in credit over time.

So this does provide incentives for agencies to move expeditiously, but also acknowledges that some agencies are constrained and do need more time.

We also believe this will, will have a greater degree of credibility in the marketplace rather than a [cliff end] to an upgrade program, one that phases out over time.

So whereas the 2011 trade-in credit was a $300 trade-in credit, in 2012 trades will receive $250 per unit in the first part of the year, declining to $160 by year-end.

So we believe this new program will help agencies continue to transition to the newer platform over the course of 2012.

In the international sales arena, we're focused on integrating our sales and marketing capabilities for scalability and repeatability.

As we've announced, my brother, Tom Smith, has retired from both his board duties and his sales duties, although he is still serving in a consulting capacity to help get some deals across the goal line where he's been very personally involved.

We are focused on transitioning from a founder-driven culture to a more rigorous metric-driven culture.

And you'll see that as a theme throughout our business.

As part of this, I should also point out, we elected our first non-founder and independent chairman, Mike Garnreiter, a financial expert and former auditor.

We believe that it's best practice from a corporate governance perspective, and an important milestone for Taser.

Internationally we've launched our first localized website in France with Taser.fr.

And we have several more local language websites coming later this year.

And we're already seeing sales traction and greater market visibility with Taser.fr.

We're integrating our sales pipeline management with our international consultants, distribution partners and employees to drive more visibility and repeatability in international sales.

And we'll talk more about specific global sales plans in our next conference call.

The third area of focus of course is driving adoption of our video and Cloud services.

The first and most obvious effort here is the dramatic product improvements with AXON Flex.

I'm actually wearing one here today.

I'm sitting on site at a customer.

And the amazing thing about AXON Flex is I keep forgetting I'm wearing it.

It is just a dramatic improvement from the first generation.

So the primary barrier to sales with the first generation AXON was size, wires and comfort.

This unit was just too big, too complicated, too heavy.

And with 19 wire cable connectors, the wires themselves were, were pretty significant.

We've reduced the size and weight by over 85% to the new AXON Flex.

We have fixed the comfort issue with multiple new mounting options, including integration with Oakley.

And we've replaced the multiple large and flexible cables with a thin, lightweight connector that we gave our engineers the goal, they had to match the attributes of an Apple iPhone headset -- those thin, flexible, comfortable cables.

And they achieved that.

And that is just simply to connect the battery pack controller unit up to the camera.

So the new Flex system pairs with mobile devices.

So it is live streaming ready.

We already stream video to a local smart device over proprietary Bluetooth over video link, taking it then from that mobile device remotely over selling our networks, or the newly-approved D-Block that is the wireless initiative for a dedicated public safety wireless network.

We'll be able to use D-Block as well.

Of course, D-Block will take many years to implement.

So the great thing about our system is it does not require a dedicated infrastructure.

We can do it over commercial secure cellular networks; we can do it over D-Block as that comes online.

So you will see us moving towards launching a live video streaming service at a later date.

We have dramatically improved low light performance, dramatically improved simplicity and reliability of the product, and the entire ecosystem.

The product is operated by a single large tactile button.

My eight-year-old daughter can operate this thing seamlessly.

The user simply double clicks to start recording, and you press and hold for five seconds to stop recording.

That's it.

One button.

Double click to start; press and hold to stop.

Officers love the simplicity.

All the equipment needed to deploy this system in a policy agency now fits conveniently in a Fed-Ex box.

So our prior evidence transfer machine was an eight-foot tall rack mount that required special shipping and handling, required on-site assembly, service and repair, and maintenance.

Our new evidence transfer machine sits on a desktop.

It can be easily shipped via Fedex.

So if there's a problem, we can have it -- we can just ship out a replacement module and have it mailed back for service -- far less expensive than sending field support people on site.

The co-branding with Oakley has significantly improved the officer's emotional reaction to the equipment.

Previously, we were told that our, our gear did not convey a professional cosmetic look.

Now we have a world-class industrial design that fits seamlessly with the most widely-sued fashion brand in law enforcement -- Oakley.

A

nd finally, we've significantly reduced the price point, where it's $700 for the camera module, and under $1,000 for a typical configuration with the extended controller unit and mounting option.

The competitive market space is comprised of, primarily of systems between $750 and $1,000.

And our analysis shows that Flex has the most robust feature set at a competitive price.

We also retooled our business model.

With our first-generation AXON, the system only worked with EVIDENCE.com back end.

We've found that this was perceived as too restrictive by our customers.

They were reluctant to buy the hardware with concern that if they decided not to use EVIDENCE.com, the hardware would be unusable.

With AXON Flex, the system can be configured to download files into local servers or with EVIDENCE.com.

It removes this risk from the customer.

It allows them to use EVIDENCE.com in a "risk-free" fashion.

They don't have to make an indefinite financial commitment, knowing they always have the option to download files locally if they decide to change course.

Further, we've included a free year of EVIDENCE.com for all AXON Flex customers.

So for obvious reasons, we're confident that the Cloud business model provides breakthrough capabilities, faster time to new features, at a fraction of the cost of building and maintaining local systems.

So one of the key advantages of the Cloud business model in the consumer and enterprise business space is the ability for customers to try these fully operational systems before they buy.

So we're emulating that now in law enforcement -- free trial before they buy.

And we're moving the commitment and perceived financial risks, we believe we can show customers the value of the technology and drive greater overall adoption.

We also changed our pricing model.

When we first launched, we used a subscription pricing model.

We found this did not fit the way law enforcement budget for and purchase IT systems.

So we've now developed a flexible business model.

It enables our salespeople to price and sell our systems the way our customers want to buy them.

We can sell a software license plus maintenance and storage to fit existing budget line items.

Or agencies many times don't want to buy new capabilities with federal grant funds or drug asset forfeitures, where they sort of have a pile of one-time found money, and they don't want to have to think about recurring budgets.

We can accommodate that with a single up-front payment for a multi-year contract.

Or we have other agencies that want to spread out payments evenly in a lease-style payment over time.

As in any business, what we have found is that it's most important for us to have the flexibility to meet our customers' needs rather than asking our customers to conform to our business model.

And finally, we're continuing to refine our sales team, our sales processes, our support systems, even our test and evaluation programs.

All of these have gone through major overhaul and refinement over the past two years.

We've added several experienced solutions salespeople to our team in the last two quarters, augmenting a team of some of our younger talent as well, and we're continuing to build out our team in 2012.

Company-wide, we've introduced our first metric-driven compensation plan for all employees, where quarterly and annual goals will be based on meeting company metrics and objectives.

We believe this plan is creating greater alignment around our goals and helping continue this transition from an informal entrepreneurial culture to a metrics-driven culture of operational excellence.

And so as we wrap up this call, I'm going to leave you with a thought on a few key performance indicators that we believe are key to the growth in 2012.

So as of the end of 2011, we had upgraded approximately 3.3% of the ECD's that are greater than five years old.

We'll continue to share this metric on each conference call.

And driving an increase in that upgrade metric is obviously one of our core corporate goals.

International sales, which were $2.3 million in the fourth quarter, will be reported each quarter, so you can continue to see our progress in growing our international sales pipeline.

And then finally, we'll report on the sales bookings for AXON Flex and EVIDENCE.com.

In the fourth quarter, again, up 140% from Q3 at $220,000 to $537,000 of bookings in the fourth quarter.

Now mind you, that includes services in some cases that'll extend out over a multi-year time period, but we believe the bookings are probably the best indication of overall traction.

And of course we'll continue to now provide profit and loss breakouts so we can see how the video and Cloud business unit is performing, as well as how -- our core ECD business unit.

We believe 2012 is the year where AXON and EVIDENCE.com begin to attain significant revenues and become additive to the overall business.

So with that, we'll end the formal portion of the call, and we'll take a few questions.

Dan and I are on opposite sides of the country, so if it sounds like we're not in the same room, and there may be a little hesitation as to who's going to answer, it's because we're not in the same room.

So we're going to have to coordinate live with you guys on the call.

So, with that -- Dan, I'll turn it over to you to coordinate the questions.

Yes.

So go ahead and indicate if you're willing to, like to ask a question, and the operator will get you into the queue.

Thank you.

(Operator Instructions).

Your first question comes from the line of Steve Dyer with Craig Hallum.

Please proceed.

Thanks.

Good morning.

Good morning.

If I could drill in a little bit to the AXON.

I think we're four years into this, a whole bunch of money, a bunch written down.

It seems like a very promising product, but it has all along.

What concrete evidence do you have at this point in time that this is, you know, that this is something that, that you're going to be overcome all the roadblocks and actually get people to do?

Well, at this point, you know, having pre-release orders for almost 600 units, basically what you're seeing is virtually everybody that had the previous unit is going to be converting over.

And having the Bay Area Rapid Transit Police placing an order for all of their officers going to full deployment right out of the gate, we see it as real helpful indicators.

In terms of, you know, other specific quantifiable indicators, I think you're just going to have to keep an eye on order flow over the coming weeks as we continue to now go out and market and, and sell the product.

So I think the pre-orders were helpful.

Most of what we have at this point is, unfortunately, qualitative in nature.

You know, I met with 50 or so chiefs at the IACP where we showed Flex.

I would characterize that 48 out of the 50 really reacted positively that they thought this was "the right product" now.

They felt our first generation didn't look like it was ready for prime time; that they thought it was, looked a bit prototypy, and that the technology wasn't quite there.

But again, that's obviously just a qualitative metric.

We're -- you, you're just going to have to have to, you know, watch order flow as it develops in those bookings over the coming quarters.

OK.

And then with respect to, to the X2 -- still being outsold pretty, pretty handily by the X26.

You know, it -- by the end of the year we'll have I guess 350,000 that are older than five years old, but we're selling 4,000, 5,000 a quarter.

So what are the people doing that are, that are over five years old that we're not seeing?

Is that, they're just choosing to roll the dice and, and go with older equipment?

Or, you know, I guess what the -- on an annualized basis you're selling 20,000 X2's, you know, which is 7% or 8% of, of what you consider to be a really ripe, addressable market at this point.

Yes, let me also -- I'm going to add one more insight to the last answer on, on Flex.

I think the market -- when you said that even with the first generation it seemed promising, I would say that was true in the marketplace conceptually -- it was promising and well-received.

The stumbling blocks were the execution that the -- it was -- the first generation hardware just wasn't fully baked.

And that was really what was holding us back.

So I think what hasn't changed is that it makes sense.

It's just the implementation now is, is something that, that officers are reacting very positively to rather than the old hardware.

Now shifting gears to the X2, we do have a number of things we'll be announcing over the course of the year to continue to drive the upgrades.

One of course that we're talking about today was extending a phased approach to trade-in credits.

What we are seeing customers do that have units that are more than five years old -- these are the same agencies that have cut back on all their capital purchasing.

They're driving cars that are beyond their typical useful life.

They're not replenishing many of their supplies given the budgetary environment.

So what we've seen so far is they're just continuing to use their existing inventory.

And part of that is, is -- also the training and transition costs to transition over to the new weapon platform - you know, there's just some time.

For example, that's what I've been talking about with a customer here in Florida, one of the first agencies that went full deployment with the X2; so I'm down here to learn about what their transition has looked like.

You know, we're streamlining online training components so that they don't have to spend as much time with officers coming off the street in classrooms for retraining, and those sorts of logistical issues.

So I think the, the budget availability and the logistics of making a change have been sort of the two things that have slowed the adoption to the level that we're at now.

And obviously, we're, we're looking at everything we can do to help remove those obstacles and accelerate adoption over the course of the year.

OK.

And then finally, any insight on the cartridge number?

That seems relatively light this quarter versus, you know, previous quarters; certainly previous Q4's, where you normally see some budget money.

Anything you can take from that?

This is Dan.

I can take that one, Rick.

Yes, I think there's kind of a typical ebb and flow with the cartridges.

I can tell you that part, a large part of that $1.6 million of orders that we received in the fourth quarter that'll be recognized in the first quarter are for cartridges.

And if we'd included those in the numbers it would have been closer to the kind of levels you'd expect.

So it's just a little bit a of a timing difference, both with the sort of ebb and flow through the year, and also just the fact that we got some of those orders in late in the year and they'll be recognized in, in 2012.

Okay.

That's, that's it for me.

Thanks.

Thanks, Steve.

Your next question comes from the line of Paul Coster with JPMorgan.

Please proceed.

Thank you.

Dan, I apologize if you've already said this.

But I got the unit volumes.

I haven't seen the revenue by product.

Is that disclosed somewhere?

If so, I'll just take it offline and go to the source.

We'll, we'll disclose that with the filing of the case.

So the only thing for this morning will just be the unit volume, Paul.

Okay, got it.

Looking forward, any comments on the buyback plan or the tax rate?

Ah, this is -- yes, regarding the buyback, we've completed the -- you know, fully executed the buyback.

It was approved from the Board, both the $12.5 million in March and the $20 million in July.

So we fully executed that.

We'll continue to obviously look at that as we go forward.

But there's nothing approved at this point.

On a, on a deferred tax assets -- we've -- you know, we'll continue to evaluate those.

As you know, I'm sure, that it's a very complex calculation as -- just to see exactly when those tax assets will be utilized.

We've got our analysis.

We just have to get through, through the audit on that.

And you know, any changes we'll reflect in the, in the 10-K when we file it.

Okay.

Rick, you talked about strategic objectives for 2012, rigorous execution.

One of them was to drive international sales adoption.

I think that's what you called it.

Now that sounds like a little bit of an evangelical sale.

Are you going to be beefing up your sales force to do, to create that effect?

Yes, we are.

It -- we'll, we'll provide more detail in the next conference call.

But I can tell you, thematically, one of the things that we're doing is, is actually going to be sending -- I love the term you use -- missionary.

Benioff, the founder and CEO of Salesforce used that same term when Salesforce expanded internationally.

One of the things that they found was sending teams of people that, that really were trusted lieutenants within the existing organization over to help bring up overseas capabilities was an important element of their business expansion.

And that's a play that Jeff Kukowski, our Chief Marketing Officer -- he was actually pushing that, you know, independently of some of the research I was doing in that space.

So part of the plan will involve taking some of our thought leaders that are part of our North American team and relocating teams of folks into key international markets to work with local agents, distributors, consultants, et cetera, and, and making sure that the approach to global sales is more integrated into the DNA of the company.

And that we have teams of smart, dedicated people who know the technology and have Taser in their bloodstream, are in-market focused in, you know, in understanding those markets and growing them for us.

But it's not going to be a huge budgetary -- I'll tell you the thing that we're not planning on doing, is going out and hiring a whole raft of, you know, new international salespeople cold.

You know, we don't think that that's the right approach.

We do see -- and again, Taser is a bit of a missionary sell.

It -- our distributors that we've analyzed that have done very well tend to be focused distributors, small teams of people that don't carry a lot of product lines, but they live and breathe Taser.

And that's the model we need to replicate.

This isn't something we're going to big, full- line international sales -- you know, import/export companies -- is very successful.

We need people that are willing to break eggs to over -- you know, make the omelet, so to speak, and overcome the obstacles of introducing new technologies.

And of course, that team will also be focused on AXON Flex, and eventually EVIDENCE.com.

Although EVIDENCE.com were not as focused internationally, the Patriot Act actually creates quite a hurdle to selling Cloud services internationally, 'cause most international police departments don't want to have their data in the US because of the Patriot Act.

So our initial foray internationally would be focused on selling the camera hardware and then, as we see opportunities for EVIDENCE.com, [as] one of the advantages of working with Amazon web services, they do have a number of international data centers that we can spin up with a relatively light lift, compared to going out and building out our own infrastructure internationally.

But that'll be the latter half of the year, certainly before...

We need to get our focus on EVIDENCE.com traction here in North America first.

Think I heard you say that the Taser Cam HD product will come to market in the second quarter.

And anticipation of that product kind of slowed sales for that category in the fourth quarter.

Will it do the same in the first quarter do you think, and then we'll see a big step up for that in 2Q?

We are -- the Taser Cam HD is now shipping.

Yes.

So it is out in the marketplace.

We do have some agencies that have significant Taser Cam deployment that are testing the Taser Cam HD right now.

Obviously we're hoping that we can get them through that testing and evaluation process in the first quarter.

If not, then, you know, we could see that bump slide to the second quarter.

But it's, it is now shipping.

OK, last question.

Dan, you -- with this inventory now written down, and yet the X3 will be sold through, can you just talk us through the accounting implications of the subsequent sales?

You're not writing back the previously written down inventory?

Presumably, it's just sort of a different...

You know, talk us through the mechanics there, if you would, please.

Yes, sure thing.

Sure thing.

So basically we've written down the inventory to the quantity we think we can sell through in the next two years.

So to the extent that, you know, what we sell is sort of added onto that quantity, there's just -- it'll be just a normal sale.

If, for some reason, the demand for that product is greater than we expected, we'd actually have a higher profit, because we'd have units being put back in inventory and sold that were previously written off.

But right now, our expectation is it'll just flow through the P&L in a normal way.

So it's basically just written down to the number of units we expect to sell through.

Okay, got it.

Thank you.

That helps.

Thank you.

Thank you.

And at this time, I'd like to turn the call back over to Mr.

Smith for closing remarks.

Great.

Thank you.

Well, it's no secret, obviously calls like today are not the most fun conference calls.

But when you're running a business and, and doing some things that are potentially transformative and building out a new business as we are, you know, these are things that the management team -- you know, you have to, you have to work through.

So we appreciate everybody participating in the call.

We appreciate having you as shareholders.

I do think that Taser has gone through a number of growth phases in its history.

I'd invite you all to come out to our shareholder meeting and meet some of the management team.

You know, a lot of those folks that I rely on as independent sounding boards have remarked on the changes in the company and in the culture that they believe are really reflective that we're doing the right things to be able to position ourselves to really break through that $100 million revenue mark and have an infrastructure and a team that can scalably grow this business, both in the core ECD business and in the new video and Cloud space, of which we are pioneering.

So, we look forward to so much more fun and rewarding conference calls later this year, as some of these efforts begin to take root, and you know, show their results in our financial statements.

So thanks, everyone.

We'll look forward to talking to you in a few months on our next conference call.

And Dan, do you have the date for our shareholder meeting?

It'll be on May 24th, Rick.

May 24th.

So again, we'd invite everybody to come out, see, touch and feel some of the new products, and join us in Scottsdale on the 24th of May.

So, thanks, and everybody have a great day.

We thank you for your participation in today's conference.

This does conclude your presentation.

You may now disconnect, and have a great day.