Axon Enterprise Inc (AXON) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2012 TASER International, Inc.

earnings conference call.

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

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

We will conduct a question-and-answer session toward the end of this conference.

(Operator Instructions).

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

I would now like to turn the call over to Mr. Rick Smith, CEO.

Please proceed, sir.

Thank you.

Good morning, everyone, and thanks for joining today.

Before we get started, I'm going to hand over to Dan Behrendt to read the Safe Harbor statement.

Thank you, 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 Harbor created thereby.

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

We caution that these statements are qualified by important factors that could cause actual results to differ materially from those reflected by the forward-looking statements herein.

Such factors include, but are not limited to, market acceptance of our products; establishment and expansion of our direct and indirect distribution channels; attracting and retaining the endorsement of key opinion leaders in the law enforcement community; the level of product technology and price competition in our products; the degree and rate of growth in the markets in which we compete and the accompanying demand for our products; potential delays in international and domestic orders; implementation risks for manufacturing automation; risks associated with rapid technological change; execution and implementation risks of new technology; new product introduction risks; ramping manufacturing production to meet demand; litigation resulting from alleged product-related injuries and deaths; media publicity concerning product uses and risks; potential fluctuations in quarterly operating result; 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 government investigations and regulations; TASER product tests and reports; dependence upon key employees; employee retention risks; and other factors as detailed in the Company's filings with the Securities and Exchange Commission.

Now I will turn it back over to Rick Smith.

Thanks, Dan.

As you all can imagine, once again I am in a very nice position of being able to be so proud of the team of people here at TASER that have worked so hard for you over the past several years to turn in results like this.

Our third consecutive quarter of strong operating results.

As you have probably seen in the press release, net sales of $28.8 million were an increase of 18% over prior year and the business generated $9.9 million in cash from operations.

Our ECD business segment, as you know we have broken them out now, so that our shareholders and investors can see how we are running the core ECD business versus the video business.

Obviously, they are in two different phases.

The ECD is a very strong and growing cash generation segment of business, and we have been investing in video, although you're starting to see some traction take hold there.

In the ECD business segment, revenues were flat in the second quarter, although the second quarter is typically a seasonally stronger quarter, so it was a good season for our sales group to hit the same mark in the third quarter, with revenues growing 15.9% over the prior year.

Our ECD margins, gross margins, came in over 64%, so, again, our operations and manufacturing teams have been doing a great job there controlling costs and in driving margin.

In the video business we saw a 30% sequential increase, on a GAAP basis, from $1.3 million to $1.7 million in recognized revenue, growing 65% year over year.

But if we look at the sales bookings, they doubled sequentially from the second quarter to the third quarter.

Obviously, there is a difference between GAAP and bookings in that a portion of the revenues are ascribed to services.

In some cases, services being delivered over a five-year time horizon.

And, as such, we defer those revenues and recognize them as the service is delivered.

And with that, I'm going to turn it over to Dan to go into more detail on the financial aspects and I will come back to talk more qualitatively about the business.

Thank you, Rick.

As Rick indicated, revenue for Q3 was $28.8 million, which is up approximately $4.4 million or 18% from the prior year.

The increase in sales versus the prior year is driven by the continued adoption of the X2 electronic control device.

The North American law enforcement business continues to be strong, mostly driven by the upgrade cycle to the new X2 electronic control device.

North American law enforcement sales are actually up 15% in the third quarter over the same quarter of 2011.

This follows a 39% and 25% year-over-year improvement in Q2 and Q1, respectively.

We view the pipeline of ECD segment as continuing to be strong as we go into the fourth quarter.

Gross margins for Q3 on a consolidated basis were $16.8 million or 58.4% of revenue, which is up 470 basis points from the 53.7% in the prior year.

We continue to benefit from higher operating leverage in the business.

We also had a higher percentage of drop shipments in the quarter, which increases our average selling price.

The offset to this is in SG&A, as we see variable selling expenses due to paying distributors a commission on their sales versus having them buy and then resell out of their stock.

The gross margin percentage was especially strong this quarter when you consider that we had 34% of our sales coming from cartridges this quarter, which are normally -- that mix differential is -- the cartridge margins are slightly lower than the ECD margin, so it was good to see strong gross margin performance, even with 34% coming from cartridges.

SG&A expenses for the quarter were $9.5 million.

That was basically 33% of net sales, compared to 38.9% of net sales in 2011.

Sequentially, SG&A increased 13.5% from the $8.4 million in the second quarter of 2012.

In addition to the strategic investments that we're making back in the business, we had several one-time events totaling $190,000 that are not expected to repeat in the fourth quarter.

These include a lease buyout, a portion of the stock compensation expense for the quarter and some severance pay.

Variable selling expenses also increased $290,000 due to the prior quarter, but, again, offset by higher selling prices that we recognized in the gross margin line of the business.

We also saw increases in payroll expenses due to annual raises and some of the strategic hires.

And then, finally, we saw tradeshow expenses were up about $150,000 over the second quarter run rate due to a couple of trade shows in the second quarter, including the Major City Chiefs and the International Association of Chiefs of Police show, both occurring in Q3.

We are starting to see a return -- an increase in SG&A costs.

One of the areas we have been investing in is our telesales group.

This is a function we didn't have last year, but those folks are already adding a lot of value.

Sales for the telesales group this quarter is up over $2 million for the quarter, so we are seeing a solid contribution from those strategic hires.

We are also making hires in account management and some other functions that we think will pay off long-term for the business.

Research and development expenses were $2 million for the second quarter, which is favorable by $0.4 million compared to 2011 due to the continued cost containment efforts in R&D.

Specifically, we have seen a reduction in consulting and professional fees in R&D.

The adjusted operating income, which excludes the impact of stock-based compensation charges, depreciation, amortization and litigation judgment expense, was $7.8 million for the third quarter of 2012, so the adjusted operating income effectively doubled from the same period last year.

As we move on to the GAAP income from operations, those are $5.3 million in the third quarter compared to income from operations of $1.2 million for the third quarter of 2011.

Net income for the quarter was $3.7 million or $0.07 per share on both a basic and diluted basis, compared to net income of $1.1 million or $0.02 a share, basic and diluted, for the same period last year.

We did benefit in the second quarter from some income tax expense reductions that were somewhat of a one-time nature.

As you know, every year the Company files its tax returns in the third quarter so we do a true-up to reconcile the amount of income tax expense we recognized in the prior year versus what was on the tax returns.

That, combined with a rate reduction because of the strong operating results this year, our tax rate actually comes down as things like lobbying and meals and entertainment have a smaller impact on our tax rate.

So, between the tax rate reduction and the true-up to the prior return, we had about a $0.5 million benefit or about $0.01 a share just on the income tax line.

As we move on to the balance sheet, the Company did generate $9.9 million of operating cash flow in the quarter, which led to having $29.1 million of cash, cash equivalents and short-term investments on the balance sheet.

Even -- that is despite the fact that we continued to do the buyback this quarter, so we feel very good about the cash balances.

Accounts Receivable of $14.6 million are up $2.8 million from the prior year end, due to an increase in sales in Q3 of 2012 versus the fourth quarter of 2011.

Inventory, at $10.4 million, is down $1.1 million from the year-end balances, so we continue to manage our working capital very effectively.

Investment in the property and equipment of $22.7 million is actually down $4.2 million when compared to the year-end balances.

Basically, that is mostly driven by depreciation expense.

We have got depreciation of approximately $5 million, offset by some new purchases of equipment of about $989,000, so you have seen a net reduction on the property and equipment line.

I should point out that some of that is also driven from -- we are taking advantage of the low interest rate environment, so we have done some operating leases this year, which has helped in the capital expenditures as well.

Accounts Payable of $4.3 million are down $0.3 million from the prior year-end due to timing differences and check runs.

Accrued liabilities of $8.9 million have actually increased $1.3 million due to the accruals from federal income taxes of $2.5 million and some changes in some of our accrued variable marketing and selling expenses of $0.5 million.

And it is offset by the $2.2 million reversal of the accrual in the Turner case that we took earlier this year.

Deferred revenue of $10.5 million has actually increased $2.6 million from the 2011 due to increased sales of the X2.

We have got -- the X2 training program includes a warranty, so we are seeing -- that will drive a high attachment rate of warranties.

We actually differ that -- those extended warranties and recognize those over time.

We also, with the increase in the sales of the AXON Flex unit, we also see an increase in deferred revenues.

Rick said we ascribe some of those sales to the service and recognize those over the service period, so that is also driving an increase in the deferred revenue.

And, as I said, we ended the quarter with $10.5 million of deferred revenue on the balance sheet.

Total liabilities at $26.3 million and we finished the quarter with $76.3 million of stockholders' equity.

As we move on to the cash flow information -- as I said earlier, the Company had generated $9.9 million of cash from operations in the third quarter.

The year-to-date cash from operations is $23.3 million.

This compares to $14.6 million at prior year, so we feel very good about the amount of cash we have been able to generate in the business this year.

Cash provided from investing activities was $0.7 million.

This compares to cash used in investing activities at $7.8 million last year.

Mostly the difference is between us -- really just the purchases of short-term investments in the prior year and some of those were actually redeemed this year, providing some cash, so that is why the large change between years.

Cash used in financing activities was $19.3 million for the nine months ended September 30, 2012.

This compares to $24.8 million used in the same period in 2011.

In the third quarter, the Company repurchased $3.9 million or approximately 0.7 million shares this quarter, and for the nine months we have repurchased about 3.8 million shares at a cost of $20 million.

We have actually completed that stock buyback that was approved by the Board of Directors in April.

On a cumulative basis over the last 21 months, we have actually purchased 11.3 million shares or approximately 18.7% of our shares outstanding when the program started.

We did end the quarter with $26 million in cash and another $3.2 million in short-term investments, so we continue to feel very confident about the liquidity.

It has been good to return that excess cash to shareholders this year in the form of buybacks and that has been, I think, a very successful program for us.

And so it has been good.

For the analysts, for their models, let me just quickly go through the unit sales for the quarter.

We sold 8312 X26s in Q3.

We sold 7290 X2 units.

M26s, we sold 1617.

We sold 36 of the X3s.

C2, we sold 2832.

We sold 1957 TASER CAMs.

And cartridges, we sold 428,911 cartridges.

Again, that was a very strong cartridge number for the quarter, it represented about 34% of our sales.

You may notice that the X2 units came down a little bit from Q2 to Q3.

That was really driven mostly by a large order we had in the second quarter to an unnamed agency.

About 2500 units.

So, if you consider that large order, that lumpy part of the business, we believe we are continuing to progress well on the X2 adoption and see continued upgrades in the field for the installed base.

So, still feel good about how that program is working for us.

And with that, I will turn it back over to Rick Smith, our CEO.

Thanks, Dan.

As we talked about on, I believe, every conference call this year, we have three primary areas of focus at the Company and I'm going to talk about each of those briefly.

First is upgrading our installed base of users that have devices that are more than five years old.

And our primary effort there is with the X2 ECD.

And, as of the end of the quarter, we have upgraded 6.1% of the devices -- the ECDs in the field that are more than five years old.

So we are continuing to make progress there.

That is helping to drive the strong topline results, but we still have 94% of the market to go, so a lot of opportunity for us to continue to grow the business through our upgrade program.

If you look at this, we have a couple of the major orders we announced.

Pima County for 600 X2 ECDs and Colorado Springs for 520 X2 ECDs.

Now, one thing that is interesting about those, which were two of our largest deals this quarter, those were both results of our new TPP program, the TASER Protection Plan, which we talked about briefly on last call.

That is a program where we now partnered with a municipal leasing partner and we are able to offer our customers the ability to pay over the five-year expected useful life of the device in equal annual installments.

We are finding that it makes it much easier, particularly for some of the larger agencies, to be able to fund this out of their operating budget, rather than having to go back for special capital equipment budget.

And we actually believe that having agencies on these TPP deals will make a really big difference over the long term as we get to year five, year six, since they already have, built in to their operating budgets, line items for their ECD programs, we believe that we should see significantly higher upgrade opportunities as those units come to the end of their useful life.

Also, we saw orders for X2s from Indian River County Sheriff's Department for 249; Orange County Sheriff's Office in Florida for 400 X2s; Miami-Dade purchased 200 X2s; and the New Jersey State Patrol started out with their first purchase with 40 X2s with the high-definition cameras.

Now that is an important one, just because New Jersey was the last state to legalize ECDs, and it is important we are starting to see some traction there.

So, focus one, upgrading the market -- we're making good progress there.

Focus number two, Flex and Evidence.com, growing our video business.

And, again, we are seeing significant traction there.

This quarter we saw Pittsburgh deploy 50 units; Chesapeake deployed 125 with a five-year service contract.

And then Pittsburgh about a three-year service contract.

The Hartford Police Department deployed 42.

They're taking advantage of the one free year of Evidence.com and maximizing the number of hardware units they get on the street.

Topeka deployed 30 units with a three-year program.

Wentzville in Missouri deployed another 30 units with the free year of Evidence.com.

And we are seeing significant growth in our pipeline as we look forward to 2013.

As we've mentioned, there is a longer sales cycle with these Flex units and with the Evidence.com, because there is many more decision-makers involved in IT and operations within the police department, in patrol and training.

So it leads to a longer sales cycle, and Flex has only been shipping really since late in the second quarter.

So this was its first full quarter of shipments and we are seeing the results in the increased traction.

Particularly, we have been pleased with how fast some of the larger agencies are moving -- Pittsburgh, Chesapeake, Hartford, Fort Worth, Mesa, these are large agencies that typically don't move this quickly when new products are released.

So we see that as really some validation of the importance of on-officer video.

Speaking of which, we did have the IACP conference this year, the Chiefs of Police, was actually straddled across two quarters.

Right at the end of the third quarter and into the fourth quarter.

And two things really stood out at IACP.

One was the continued interest in Flex and Evidence.com.

In fact, one of the buzz items that we heard, particularly from some of the Chiefs of larger agencies, we have heard on multiple occasions chiefs saying, we believe every officer in North America is going to be wearing a camera within the next 5 to 10 years.

That is not a sentiment that we've heard previously, so we do believe the market is really accepting the concept of officer-worn video.

In fact, that was borne out in a survey done by PoliceOne, which is one of the law enforcement oriented websites, and in their survey reached out to line level officers, chiefs, et cetera, the general law enforcement community, and over 82% at which time said that they see a need for on-officer video.

Again, we didn't see those sort of acceptance rates a number of years ago.

So, we are delighted to see the attraction taking hold and our pipeline growing and we look forward to a great 2013 with Flex and Evidence.com.

On the international front we had a strong quarter.

Coming in at $5.4 million of international sales, representing roughly 19% of sales.

The bulk of those sales really coming from within the European sector, where, as you know, we have opened an office in Europe, and we have got a team on the ground there.

We are in the process this quarter -- we actually have got our team deployed now into Brazil in South America, so we look forward to seeing some more contribution from South America over the next 12 months.

Some other things to talk about in terms of our focus on growing the business and just improving our general operating tone here.

Dan talked briefly about telesales; that has been a new effort.

We really stood telesales up starting from a zero start in February/March.

They have already sold $5 million year-to-date and the rate of sales is accelerating.

The charts are all up and to the right.

Jeff Kukowski, our CMO, had the hypothesis that the smaller agencies in the market weren't necessarily getting the level of service and touch that we could accomplish if we had a dedicated sales team and that hypothesis is certainly bearing fruit.

We are seeing a lot of growth come from those smaller orders.

We are talking, on average here, orders that are around $3000 to $4000 compared to our typical distribution orders, which are more around $20,000.

But there is a very large segment of small agencies out there that we are now touching more effectively.

Also, to accelerate the adoption in the upgrade to the X2, we have launched two service plans now.

We talked about the TASER Protection Plan previously, which allows agencies to spread out their payments when they acquire new ECDs; they can spread those payments over a five year time horizon.

We have also, this month, announced a new program called the TASER Assurance Plan or TAP.

So, the difference is, the TPP, again, they can spread their payments over five years for the devices they are buying now.

TAP allows us to target agencies that do have the capital equipment purchase -- to purchase today, or they may have bought within the last couple of years.

And what we do with TAP is, it is an extended service plan where they pay in at around $195 per year, per handle, and for that we give them a no-questions-asked warranty, extra service and support, including on-site spares and spare parts.

So, if anything ever breaks they are not out a unit while it is being repaired.

And, at the end of year five, they receive a free upgrade to -- or replacement of the same product or upgrade to a similarly priced product.

So basically with TAP, that allows agencies who just bought to put in their operating budget that will cover their upgrade five years out.

And, in fact, we offer 10-year price protection on this plan so they can keep going another five years at the same price and receive a replacement or upgrade at the end of year 10.

It is early to -- we don't have any results really that are measurable yet on TAP.

We have just announced the program.

In fact, I am doing a webcast on it this week to our customers.

But we have added a tremendous interest, conceptually, where we floated this in marketing focus groups, so we will be excited to see what TAP does.

So between TPP and TAP we are looking for ways to add more value to our solution set for our customers and help them overcome any of their budget hurdles.

One other thing to talk about in terms of focusing the business, I talked about the Chiefs of Police conference, the IACP, the tremendous interest we saw in our products.

Something else we did at IACP was we donated the $300,000 that was in the TASER Foundation to the IACP Foundation.

Effectively what we've done is we've now partnered with the IACP, so rather than running our own foundation, which we set up in 2004 to make donations to the families of fallen officers, we realized maybe this is better to partner with a larger foundation, so that they can focus on the operating day to day of the Foundation and we can just continue to do the financial support.

And we actually felt that this builds more goodwill in the market space by us partnering with the Foundation of the IACP.

That enables us now to focus our resources better.

We have got a great partnership with the IACP and they will continue to do a fallen officers fund named, as I believe, the TASER Fallen Officers Fund, but being administered and run by the IACP.

The last thing I want to talk about, which you all probably saw a press release within the last couple weeks, that we have hired Danny Dalal as our new VP of Software Engineering.

Danny comes from the research group at Microsoft.

He has got 20 years of experience doing some pretty sophisticated software development, running reasonably large teams.

But what we really liked about his background at Microsoft, research was really focused on relatively small teams of fast time-to-market and cloud-based solutions.

So, we are excited.

Welcome aboard, Danny.

He started just in the past couple of weeks here and we are really excited to have him now leading our software engineering efforts.

So with that, I will wrap up and we will move to questions.

But before we do, I would like to take a moment and just thank our shareholders who have stuck with us.

We started a heavy investment cycle in 2008 and 2009.

Obviously, those were challenging times for many companies in the world; we stuck to it.

I think we have got the products right.

I think we have got our execution right.

We have got our staffing right.

I know it has been a bit painful for some of our investors along the way.

I'd like to thank you for sticking with us and we are proud to be able to be turning in the results that we have these past three quarters.

And we remain very committed to continuing to grow this business and turn in great operating results going forward.

So, thanks for being shareholders.

And, with that, we will take a few questions.

(Operator Instructions).

Steve Dyer, Craig-Hallum.

Could you remind me a little bit about the rebate program?

I think that is scheduled to sunset here at the end of the year.

What the amount was right now and then, Dan, how that is accounted for?

Sure, Steve.

So, in the third quarter we still had a rebate in place.

It was $210 per unit, and that goes down to $160 in the fourth quarter.

We have haven't announced a 2013 program yet, but there will be some program in place.

We have seen that having those trade-in programs has made a difference.

Our customers have a hard time I would say disposing a unit that is still operational, so giving them some value for that unit has made a difference.

We saw that in the first quarter where we went without a program for the first two months of the quarter and we had low unit sales of the X2 as a result.

So, we definitely see a correlation there.

The accounting for it is, we basically just take a full reserve for the trade-in credit at the time of the sale, so we basically reduce the total sale value by that trade-in credit.

So it is already reflected in the results in the lower sales value.

As those units come back we will just offset that accrual, but there is no -- basically, at the time of the sell-in, we fully account for that trade-in value.

Okay, that is helpful.

And then, is there any fear -- I think you alluded to it a little bit, but is there any thought that you're pulling sales forward?

Or you are essentially paying people who are going to upgrade anyway or is your sense more that you need the trade-in credit in order to spur action?

I think our view is that we do need that trade-in credit; some kind of program.

How big it needs to be, I think we can -- we will continue to iterate on, but I think having -- especially when you're talking about somebody with an operational unit disposing of it, I think emotionally it is just a lot easier for them to get some value there.

I think the good news is the higher selling price of the X2 allows us -- the economics still work for us, and you have seen that in the results all year.

Even with this trade-in program in place, we have been able to put up high results.

It is not like we have had to sacrifice profitability to offer that, and we do believe there is a big market.

As far as pulling things forward, there is probably -- we definitely want to spur action here.

Would those people eventually upgrade?

Yes, potentially, but we want to spur action here and we do think there is a momentum effect here.

I think our customers tend to look to each other to see how to operate their individual agencies, so the more agencies we can have upgrading and that drumbeat I think will create more momentum in that upgrade and drive that point home.

Okay, great.

And then cartridge sales, looked to me like it is the biggest number maybe on record.

Maybe there was one quarter in 2007 that was close.

Is there anything in particular that you attribute that to or how do we think about that going forward?

Actually, in the cartridge sales, we did basically -- we did have a special on cartridges this quarter for our distributors that allowed them to stock up.

I expect the cartridge sales to probably tail off a little bit in Q4 as a result.

But we basically -- we went through a program where we increased the price of cartridges for distribution to reflect the fact that they don't have to put in as much effort to sell the cartridge.

But, we basically -- what we did as part of that is we told the distributors that twice a year we will run some specials on cartridges and allow them to stock up if they need to.

So, I do expect we will probably see a little bit of a degradation of those cartridge unit sales in Q4, but I think it is a good balance with the distribution, and I think it has been pretty popular with our distributors to give them opportunity to -- twice a year they can stock up and recognize a little higher margin on those cartridges.

And those are -- you recognize those on sell -- sell in to the distributor, right?

That is right.

And the reality is, although we have 18 are so distributors, there is only a handful that stock in large quantities.

So there is a few of them that really took advantage of the program.

A lot of the maybe smaller distributors are the ones that don't tend to stock as much, didn't take as much.

So, like I said, I think we will be back to more normal levels in Q4, but it is certainly -- it helped this quarter.

The third quarter is seasonally a little slower for us, so it made sense for us to run that cartridge special this quarter and we certainly saw the benefit of that special.

Like I said, the economics are still good for us on that sale.

Basically, we increased their prices at the beginning of this year and, basically, when we run the special it is going back to the prices maybe they had back in 2011.

So the economics still work.

Is this the first time you have done that?

I guess I haven't heard of that before.

Have you done that before?

This is the second time we have done it.

And when was the last one?

Was it Q3 also last year?

No, we did it -- well, we did it in Q1.

Okay.

And we did it again in Q3.

Got you.

Q1 was really when we introduced the change in the price structure.

Yes, we gave them basically an opportunity to -- even with -- to have the old prices for Q1 and then it started in Q2, basically.

Got you.

Got you.

Okay.

And then one last question and I will hop back into the queue.

Any sense for when video may break even going forward?

It seems to be getting some nice momentum on the top line could.

How should we think about that from a profitability standpoint?

I think it really is driven by that topline growth.

We need -- we are continuing to focus on it.

We do want to -- we do see a situation where we want to grab as much of that market as we can.

You do have the long tail of the Evidence.com, so getting as many customers in that system as possible is really the primary focus.

Obviously, we want to be profitable as quickly as possible, but we want to make sure that the product is right.

We want to make sure those customers, those early adopters, are well served.

That is why we are looking at some account management and some other functions.

So, it is a -- we are absolutely committed to getting into profitability, but we're also want to make sure that, like a lot of SaaS businesses, there is a large fixed component cost, we want to make sure that we get as many people using that system as possible and that will pay off in the years to come.

Got you.

Okay, I will hop back in the queue.

Thank you.

Paul Coster, JPMorgan.

It is actually Mark Strouse on for Paul.

Can we just start with your cash?

So you have been able to generate a lot of cash year to date, and you have put a lot of that into buying back shares.

Now that that program is over, I know you're talking about investing some in the business, but are you still targeting to grow that cash balance in the near term and what are the plans for that?

Should we expect more buybacks or M&A opportunity?

Mark, this is Dan.

Obviously, we have been very happy with the cash generation in the business.

Even with the buyback, we have actually grown our cash balances this year, even with the $20 million buyback.

We will continue to look at buybacks over time as a way to return excess cash to shareholders.

We do see a value in those programs, so that is something we will continue to evaluate.

As far as M&A, obviously if we do that we will announce that to the broader market when it happens.

But right now we are really just focused on operating the business as efficiently, effectively as possible, and I think the cash generation is a product of that and it is something we will continue to focus on.

Right, okay.

Okay, and now we have got a few months of the protection plan under our belt, are you able to share any quantifiable metrics as far as the number of new agencies that have purchased throughout the quarter?

The percentage of those that are utilizing the protection plan, and any financial impacts that you have seen now that you have got some actual evidence there?

Mark, this is Dan again.

I think it has been -- it is early, so we have had a couple of deals already in the first quarter we have announced it, so I think it is good.

I think it is -- there is some other tangential benefits to the program.

I think it allows us to keep the conversation going with our customers.

Customers that say, hey, this is a tough budget environment and we can't -- we just don't know if we can upgrade our units this year, or maybe increase the number of TASERs we have.

I think it keeps the conversation going instead of saying, hey, let's not stop at you have got a tough budget.

Let's talk about things that TASER can do to spread those payments over time, maybe allow an agency to upgrade all at once versus having to do it over a several year period.

So, I think it has been good.

It has been well received by customers.

It is a little bit early.

I think we'll continue to talk about it on the calls as we have deals, and, certainly, this quarter about $1.1 million of our business this quarter was directly associated with these TASER Protection Plan deals so I think that is a good start for the first quarter.

And there is definitely a pipeline of interest there.

We will see how many deals we do.

Like I said, I think even -- regardless of whether the amount of deals -- I think the sales folks find it valuable, because it gives them another arrow in their quiver as they have conversations through the agencies and make sure that the budget conversation doesn't stop the sale process.

We have seen a number of those where the agency says, well, we don't have the budget for it.

We go down the CPP route where they start moving in towards approving that and then they end up coming back and saying, well, we found the money to just buy it.

And we estimate that those deals may have gone cold on us had we not had the ability to make the offer.

Got it, perfect, okay.

That is it for us.

Thank you very much.

Greg McKinley, Dougherty & Company.

Wonder if you can talk a little bit about -- first of all, it seems like a higher volume of lower value orders, which are driving a fair amount of revenue upside, relative to maybe your announced orders during the quarter.

My sense is that it is related to development of this telesales group you have referred to, but wonder if you can talk a little bit about what you are seeing in terms of order size and order volume?

And if it is this telesales group and maybe just help us better understand that sales effort.

This is Dan.

I think that is exactly what we are seeing.

I think the theory was that that -- those smaller agencies were underserved, both by TASER and distribution.

And having a dedicated telesales department to take leads generated, mostly through our web programs, and follow up with those customers that may be our -- maybe not in super-convenient locations or just not easy to get to -- and wouldn't normally warrant a face-to-face visit, I think has been successful for us.

That market is underserved, we think, and I think the fact that we have sold over $2 million through the telesales, and, as Rick alluded to, these average sale is about $3200, $3300, so it is a lot of small ticket sales, but clearly it has made a difference to our business and we feel that it has been a successful program.

We have invested in it throughout the year.

We have made a pretty strong investment in Q3.

We added a fair amount -- I think we close to doubled the headcount in the third quarter, but it has been so far it has been very successful and we expect that that will continue.

So, just as a framework, you did $2 million of revenue this quarter, what was that from this effort a year ago?

And you said you doubled your headcount.

What size of a sales force are we talking about there?

So, basically, a year ago it would have been zero.

This is a brand-new function.

And we have got about 8 to 9 people dedicated to this effort right now.

They are doing both telesales and also, as part of that, they are doing some health and wellness checks with their customers, so there is some other benefits we are getting.

I think some good situational awareness as far as what is happening in the agencies.

In some cases, it doesn't result in a sale, but it results in a lead that we can follow up on later, and telesales is starting to create their own pipeline of future deals, just like our regional sales managers are doing for the larger transactions.

Okay.

And, looking at the numbers a little bit more closely, if I look at the units that you gave us, and extend those into revenues based off of what our normal ASPs for these devices in the past, there is a bigger gap between your reported revenues and what I can come up with and what is historically the case.

I think that other bucket typically is maybe service and training.

Was that a much larger portion of your revenue base this quarter than normal?

Or why am I -- I may be a couple of million dollars off there.

The service revenue will continue to grow.

The amount of -- as I mentioned, on the balance sheet, the deferred revenue is the line on the balance sheet that is growing.

So that service component and the -- we are starting to see the E.com service revenues come through from deals we have done earlier in the year.

Every quarter you will see more of that previously deferred revenue recognized.

We are seeing that.

I don't think it would be to the extent of a couple of million dollars.

I think probably what you're seeing a little bit, Greg, is that, because we had more of these drop shipment sales, that we see a higher selling price because we sell at the full MSRP, and then pay a distributor a selling commission.

I think that is part of what is driving it.

I think ASPs are a little higher than normal this quarter because of that.

Okay.

So, you're realized price per unit is higher, then?

That is right.

What happens is that offset ends up down in the SG&A line, because then we pay a sales commission to the distributor instead of them selling out of their stock.

Or we sell-in at a low price and then they sell at the full (multiple speakers).

Yes, okay, that makes sense.

Now you talked about -- you had 15% increase in law enforcement revenues year over year and your Q4 North American law enforcement market pipeline is quite strong.

And this is now the third quarter in a row where we have seen some generally positive traction in that market.

Does that just mean your customers are slowly coming out of what might be a four- or five-year perfect storm in terms of pressures on their budgets?

Or how would you characterize any changes in the ability of your customers to spend some money?

I think it is -- the budget climate remains tough.

It is certainly -- I think it is better than it was a few years ago, but it is still a tough environment.

I think what our sales team is focused -- Jeff Kukowski and his team is really focused on being a funded priority.

Even though municipalities are spending less on capital equipment than they were in the heyday, that number is not zero, so we just need to make sure that we are a funded priority.

And if we are a funded priority we think we will -- those are deals we will continue to get even in a tough climate.

We just need to make sure we are showing enough value in our product offering to just be high on that list of priorities.

And we believe that -- maybe at the heyday, the top 10 items got funded and now it is the top three.

We just need to be in the top two or three priorities and we think we can have success there.

Okay, and then on -- just two last questions.

The ECD gross margins again remained quite healthy, 64%.

Is that a good -- represent a good baseline for us to think about that business going forward?

I think it is -- I think that is a -- we feel very happy with that.

Again, mix will always have an impact on that.

Again, we saw those higher average selling prices this quarter, because of the drop shipment, so you will see -- there is the -- the ability -- you will have some mix.

So, as you model the business you have to just be cognizant of the amount of direct business either we take ourselves or we drop ship and they pay a distributor a sales commission.

That will definitely increase the gross margins and then you will see that offset somewhere else.

So, you saw that drop ship, in essence, offset the higher mix we would have seen from cartridges from a margin standpoint?

That is right.

That is exactly right.

Because, normally, if we had the normal complement of direct deals, we would have seen that margin maybe in the 62% range instead.

Yes.

What -- how big of a mix was drop ship versus where it historically has been?

It is definitely higher.

We had, like I said, we had almost $300,000 of variable selling expenses.

So I would say that several million dollars more of direct business this quarter versus the prior quarters.

Okay.

So it was a pretty big swing.

It would be about 10% more sales direct versus what we had maybe in the second quarter, as far as drug business.

Okay, and so then direct overall is roughly --?

About a third.

A third, okay.

And so that was up from, call it, 20%.

It went to 30%?

Actually, it is normally about a third, so it probably went from about a third to about 40%.

Okay.

And then, finally, Rick, you had mentioned the TAP program.

And I got a little bit sidetracked there; I wasn't quite sure what that was referring to.

Yes, so the TAP program is -- let's say you buy a TASER today, for round numbers, for $1000.

You can go -- you can either buy an extended warranty, which is basically around $300.

It is the no-questions-asked five-year warranty.

Or, we can put you on this new TASER Assurance Plan.

And what you do there is pay -- it is included for the first year if you sign up for it.

There is no additional payment up front.

Then at year one, you pay $195 and you get on that, basically every year, it is $195.

What we do with that is we include the no-questions-asked warranty.

We give you some on-site spares, so if you ever have a unit go down, instead of waiting -- having an officer without a TASER while it is being shipped back for repair or replacement, you can pull one from your spare parts inventory to keep your operators live.

That has been a really well-received benefit from the people we have talked to.

Okay.

And then at the end of year five, we replace that unit with a like unit, a brand-new unit, every five years.

So, basically, the way to think about it, you get -- for $1000 that you are paying on a -- almost like a prepaid basis, we bundle in the warranty and other value-added services, so we can position it as, fundamentally, they get about a 33% discount over what they would get if they bought all the components separately.

But by getting us on this cadence, they have basically get a free warranty and services and they pay for that unit, and as soon as they have paid up the next unit, we swap out their whole fleet.

Okay.

Is the gist of this -- gets it as a recurring budget line item and you're no longer dealing with one-off purchase authorizations?

You make it more part of the annual expense structure?

Yes.

Absolutely.

That is what we heard from our customers -- they don't like spending their political capital to go back and make special requests.

It is just -- it is a pain for them to do that.

Where they prefer putting it on operating budget, autopilot, so to speak.

Once they have accepted that the TASER is a capability they're going to need -- it is an interesting dynamic.

New agencies tend to want to buy new capabilities and test them out using drug asset forfeiture funds, et cetera, sort of one-time money.

Once they are convinced they need it and it is going to be ongoing part of the operation, the feedback we have gotten is, they would prefer to just put this in their operating budget so it doesn't become something they have to deal with on a sporadic basis.

Okay, all right.

Thank you, guys.

I would now like to turn the call over to Rick Smith for the closing remarks.

Okay, well, like many of you, I was watching the stock this morning and I think we all had a light heart, feeling good.

Again, I know there has been some pain to get here, both operationally for the Company and for our shareholders.

It has been a hard road.

We have been investing significantly.

We appreciate the patience.

You have stuck with us.

We are seeing some of those rewards now, and you can rest assured that I and the rest of management team here remain very focused on continuing to run a profitable business, generating strong operating results and leveraging the investment we have made in some of these new business segments to start bringing them to the same state of being that we have achieved with our core ECD business, which is solid growth, strong profits, lots of cash generation.

So, look forward to talking to you all after the first of the year.

Have a great holiday season and thank you one more time for being a shareholder in TASER.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.