Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Rick Smith – CEO and Co-Founder

Dan Behrendt – CFO

Analysts

Eric Wold – Merriman Curhan Ford & Co.

Paul Coster – JP Morgan

Steve Dyer – Craig-Hallum

Pete Mann [ph] – Dougherty and Company

TASER International, Inc. (TASR) Q1 2009 Earnings Call Transcript April 23, 2009 11:00 AM ET

Operator

Good day ladies and gentlemen and welcome to the first quarter 2009 TASER International Incorporated Earnings Conference Call. My name is Den and I'll be your coordinator 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 this conference. (Operator instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to your host for today’s call Mr. Rick Smith, Chief Executive Officer. Please proceed.

Rick Smith

Thank you very much. Before we get started I'm going to have Dan read the Safe Harbor statement.

Dan Behrendt

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

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

We cautioned that these statements are qualified by important factors that could cause actual results to differ materially from those reflected by the forward-looking statements herein. Such factors include, but are not limited to market acceptance of our products, establishment and expansion of our direct and indirect distribution channels, attracting and retaining the endorsement to key opinion leaders and law enforcement community, the level of product technology and price competition for our products, the degree and rate of growth of the markets which we compete, and the accompanying demand for our products, potential delays in the international and domestic orders, implementation risks of manufacturing automation, risks associated with rapid technological change, execution and implementation risks of new technology, new product introduction risks, granting manufacturing and production to meet demand, litigation resulting from alleged product-related injuries and deaths, media publicity concerning product uses and allegations of injury and deaths and a negative impact this could have on sales, product quality risks, potential fluctuations in quarterly operating results, competition, negative reports concerning TASER device uses, financial and budgetary constraints of prospects and customers, dependence upon sole and limited source suppliers, fluctuations in component pricing, risk of government investigation regulations, TASER product tests and reports, dependent 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, our CEO.

Rick Smith

Thanks Dan. While there are many things to be proud of this past quarter, the announcement of EVIDENCE.com was a significant milestone in the evolution of this company. I would return at the end of the call to discuss how we expect this new initiative along with the previously announced AXON on-officer tactical computer to transform the company. But first let's start looking at the results of the first quarter. So for Q1, revenues were $24.6 million up $2.1 million or 9% over last year.

Operations continued to demonstrate improvement as gross margins increased to 59.5% compared to 56.8% last year, reflecting our continued focus on efficiencies. Items particularly important when you understand that we had a very high margin – we had a very high rate shield of cartridges this quarter as the UK brought at least over 100,000 cartridges to go with the weapons that they purchased in Q4. So, as you all know cartridges have a much higher labor content, as a percentage of sales in the lower overall margins compared to our ECD's. So it was almost at 60% with a very high ratio of cartridges is really quite an accomplishment for Steve Mercier and his team and operations.

Consistent with our strategy in the last year R&D was up $2.1 million or 98% in the first quarter continuing to reflect our commitment to expanding our future technology and product diversification. On GAAP basis, loss from operations was $1.0 million for the first quarter compared to an income of $1.5 million last year. So, if you look at the loss on a GAAP basis there is couple of things there. It is primarily a function of number one increased R&D investment, number two non-cash charges for stock option compensation, which by the way did increasingly toward component of compensation, you know we are now building out a world-class tech team where we have recruited, you have all seen some of the names I talked about in the last conference call, but we are now competing with the Google’s and the Microsoft's and the Apple’s of the world for the best talent in software and Internet services.

In that space, equity compensation is a very important factor. We also saw significant higher proportion of sales in our low-margin cartridges as we talked about, a sequential increase in legal costs due to timing and litigation we prepared a very large summary of expert reports during the quarter. We had a, frankly a great quarter in terms of some of the wins that we had and I would return to that shortly. And we also had increased costs related to travel and promotions related to our stimulus package program.

So, speaking about stimulus program let me share a few thoughts. The American investments recovery in investment group included about 4 billion for law enforcement, which was about 2.75 billion fees for equipment training technology. So, I'm really proud of our team, we moved at light speed from the moment the stimulus package was announced we are moving within hours to launch a program to get our technology in front of law enforcement decision-makers in the few weeks between the announcement of the stimulus program and the due date for the grant applications.

We accelerated the announcement of EVIDENCE.com, we were originally planned to announce this summer when we were ready to go-live. We accelerated so that agencies could plan ahead and that grant application and the budget process for this powerful new capability. We launched a webcast that reached nearly 3,000 viewing locations, many of which we understand had groups of people watching our announcement. We mobilized and extent of e-mail and Internet-based education campaign, including our sponsorship of the premier grant education program at Policeone.com.

All indications are that we believe we moved much faster and more effectively than any other company in the law-enforcement sector in developing and executing the program to address the stimulus package. I've personally been on the road almost continuously over the past six weeks meeting with chiefs and senior leadership in major law enforcement agencies. The stimulus packages also introduced some new factors in predicting our business.

Now we're certainly enthusiastic that these additional budget dollars will become available in the later half of the year, but there is a very distinct possibility that the stimulus program will have an adverse affect on second-quarter purchases by law enforcement. If an agency submits a grant application to buy equipment they cannot use existing funds to proceed with the purchase and then if they grant reimburse themselves later, they can't do that. So, if they apply for grant the uninfected affect of the stimulus package could well be they free some purchases until the grant awards are made.

Therefore this introduce some short-term or reset to Q2, but overall we think it is a significant benefit to the regular opportunities on the full-year basis. Again this is another situation where TASER has had a significant strategic advantage compared to most companies because of our strong cash reserves and our growing international sales, we are in a position where could certainly weather any short-term partnerships between quarters this year.

So, overall the messages, stimulus is going to be very good we believe for law enforcement community, it could have some short-term negative rate precautions. The net loss and loss per share for the quarter were $0.5 million and $0.01 respectively. Non-GAAP income from operations for the first quarter, which excludes stock-based compensation and depreciation and amortization was $1.1 million compared to $2.5 million for the first quarter of 2008, and when you get down to what really matters in my opinion the company generated $10.5 million from operating activities in the first quarter ending with cash and equivalents of $58.3 million and zero debt.

Another factor that Dan and I looked at in running the business is the operating income before research and development and extraordinary events that was $3.18 million or 12.9% of sales for the first quarter of 2009 versus about 16% of sales in Q1 of 2008. Now significant events for the quarter include the following, so our international sales were at 37%, up from 28% in the fourth quarter and up from 13% in the first quarter of 2008. So, we had significant fall in orders out of the UK, Brazil, and some other countries.

The company on their own use integrated digital multimedia evidence management platform, evidence.com which works in conjunction with the TASER AXON, which is an on-officer tactical computer and video/audio recorder that captures incidents from the officer’s perspective. EVIDENCE.com is to AXON as iTunes is to iPod in the consumer world. Together we believe that AXON and EVIDENCE.com will revolutionize the way law enforcement securely captures stores analyzes, collaborates, and manages digital multimedia evidence collected by officers in the field.

The system will provide an end-to-end solution for integrating digital information and digital evidence. On March 31, the company announced that we began selling the TASER Shockwave, area denial system, and I will point out we do not expect significant revenues from Shockwave in the near-term. Shockwave at this point is, our first (inaudible) is going to be special report, it is to take the whole concept of non-legal area denial out of the PowerPoint presentation and put it into the deal, but because it is primarily targeted at military and major federal agency type of customers, we expect very – significantly lead times as they evaluate their technology over the coming months and years, but we believe long-term that non-legal area denial is a real growth opportunity for us, but I wouldn't know adjusting any financial models in the short-term for significant revenues from Shockwave.

We also had five more product liability suits that were dismissed during the quarter to announce a total of eighty-four wrongful death or injury suits that have been dismissed or judgment entered in our favor. While we're on the topic of, talking about litigation we talked about a couple of other events in litigation, we had very favorable rulings in the market hearing and our plan for principal case with (inaudible). The market hearing is part of the legal process in a patent case where the court looks at how to interpret patent claims, so both sides present their interpretation of the claims and then the court decides which interpretation it will adopt on those claims.

I don't have it right in front of me, but I believe something like four out of five of the key claims the ones we're most interested in, in fact record ruled in our favor and we believe that that is very significant in terms of now the quarter is adopted, the majority of our claim interpretation that bodes very well for us is the case in this towards trial. And another significant happening, we won a partial summary judgment in the litigation against Steve Ward in Vievu. Steve Ward is a former employee of TASER International, who left the company to start his own on-office or camera company and compete with TASER. We filed litigation in that case, the primary claims in which had to do with the breach of fiduciary duty and then Mr. Ward was working on that project when he was here at TASER, that's the primary elements of the claim. The court agreed with us on summary judgments and has found in our favor on a breach of fiduciary duty and related claims.

So I think it is important to note that TASER does vigorously defend our intellectual property and we are usually pretty effective at it, knock on wood we have continued to have some real success this past quarter. On another note, we received the report from the Houston Police Department, actually through their police union showing that the implementation of TASER devices in Houston has reduced their worker compensation claims for post-related injuries over 90%. So what that is showing is the cops in Houston are fighting a lot less and getting hurt a lot less.

In 2003 they spent $2.2 million on worker comp claims for injured cops, injured in fights that dropped from $2.2 million to $149,000 in 2007. We believe economics like this case will certainly help in these trying times as agencies look at TASER as investment in officer safety that is both financial and other rewards. During the first quarter we added another 263 agencies, so we now have a total of over 14,000 agencies deploying and testing of products in over 45 countries and we added another 116 new full deployments with agencies and are now deploying to all frontline officers. And on that note I'm going to pass over to Dan to get into more details on the financials and then we'll come back and talk more about the future.

Dan Behrendt

Okay thank you. So as Rick said, sales for the first quarter were $24.6 million, which were up $2.1 million over the prior year, mostly driven by the significant increase in the cop and international business. Sequentially, Q1 sales are down on $140 million from Q4, primarily caused by a decrease in the domestic law enforcement sales due to the continued lower municipal budget spending in the US, but the international sales were approximately $9.1 million in the quarter or 37% of sales. And the increase is mostly driven by the significant order from the UK and also a significant order from Brazil.

Gross margins in the quarter were $14.6 million or 59.5% of sales are up 2.7% from the prior year. Increase in margins is the result of several cost-saving initiatives such as the elimination of cash and distributed discounts, lower over time and temporary labor expenses, better productivity, lower warranty expenses, improvements and scrap, partially offset by lower capitalization of overhead and inventory primarily due to the lower cartridge inventory.

The sequential reduction in gross margins were driven by the mixed change from higher model electronic control devices to lower margin cartridges mostly driven by large UK cartridge other in Q1. Cartridges in Q1 of 2009 actually represented 32.4% of sales, this compares to 19.8% of sales in Q4 2008, so you can see there is a big shift in mix from the electronic control devices to cartridges. We did see a $919,000 increase in in-direct manufacturing expenses versus the prior year, and again this is mostly driven by lower absorption and capitalization of plan overhead due to lower cartridge inventory.

The large UK border basically wiped out majority of our safety stock of cartridges, so that had a negative impact on our amount of overhead that we capitalized on the balance sheet as well. SG&A expenses were $11.4 million for the quarter versus $9.2 million in the prior year, the increase is driven by higher salaries and benefits of 719,000 due to higher headcount as the company has built out its management team and hired support for the new product lines coming into the market, we got consulting and lobbying are up 505,000 due to additional marketing consulting done to support 52 product line and new product launches, as well as IT consulting relates to upgrades or new version of our ERP system.

Legal expenses for the quarter were up $450,000 due to more outside legal expert registries as Rick spoke to due to the number of cases going to trial in 2009. Our 123(R) expenses also increased $602,000 to two options granted in 2008 included options granted media which replaced the cash bonus program and cash bonuses were down 93,000 during the first quarter partially offsetting that increase to the 123(R) charge.

Rick Smith

I like to make a comment there. I think it is important that shareholders understand that the vast majority of our employees actually opted in to an option equity comp program and gave up cash bonuses for, was it two years or three years, Dan?

Dan Behrendt

Came at two years of cash bonuses, that's right.

Rick Smith

So our employees have voluntarily gotten into same boat with the shareholders that we are very much delivers in where the company is going and I just think it is worth pointing that out.

Dan Behrendt

Yes, thanks Rick. I think that is a good point. Sequentially our SG&A expenses are 514,000 over Q4 2008, again this is driven by higher salaries and benefits the $294,000, mostly driven by headcount ads we made during Q4 that we are at a full quarter of expense and Q1 offers some new salary ads in Q1 as well. We had additional stock compensation expense of $194,000 versus the fourth quarter and also had increased legal and professional fees of $350,000 relating to significant increase as per witness expenses during the quarter.

We do believe that's more of a timing difference than anything else and also we saw an outside auditing fees up about 197,000 versus the fourth quarter, this is a normal event, obviously the first quarter of each year is the heaviest part of your outside accounting works done to support the work around the 10-K. Our research and development expenses of $4.2 million for the quarter which is an increase of $2.1 million over the prior year again driven by higher salary benefits and 123(R) charges at $1.2 million to support both the hardware development and a new software development teams headquartered in California.

Outside development cost of $397,000 for the EVIDENCE.com development and we also had an increased supply cost at $321,000 due to costs associated with developing working prototypes in the new products in the pipeline. I think on the positive note, we just see a sequential decrease in R&D expenses from Q4 2008 as much as the development work is on the outside is now being brought in house at a lower cost and the outside consults are charging similar work.

Our heavy investment R&D is driven by our strategy of product line expansion and diversification, therefore we expect our higher R&D spend to continue throughout 2009, we have several new and differentiated products in the pipeline, which will better position TASER at the caption market share and address new opportunities as the economy improves. As Rick indicated our non-GAAP cash income from operations was $1.1 million. The company believes that with the ramp-up of our software development team in California and the result they increase in 123(R) compensation it makes sense to look at operating income on both the non-GAAP cash basis, as well as traditional GAAP basis.

The non-GAAP P&L expenses have grown to a point where they are not material therefore we believe that cash earnings is more representative of our operations. On a GAAP basis the company posted an operating loss of $1 million with a pretax loss of $923,000 this quarter and a net loss of $468,000 or $0.01 per share in both the basic and diluted basis.

Moving onto the balance sheet, we did finish the first quarter with $58.3 million of cash and investments. This is an increase of $8.9 million from the December 31, 2008 balances, mostly due to the cash flow from operations. Due to the uncertainty in the market the company does likes to keep its investments very liquid, which we believe yes there is a lot of opportunity cost as we move forward. Accounts receivable of $12.3 million is down $4.5 million for the prior end balance of $16.8 million. We talked about this a little bit on the fourth quarter earnings call, we did have a large UK order received right at the end of 2008 which we collected in February and that was a big part of the reduction in the accounts receivable balances.

Inventory of $10.3 million is actually down $3.1 million from the December 31 balances, the reduction is really driven a large part by the cartridge order from the UK, which drove our inventory below targeted levels. The reduction in finished goods also resulted in less overhead being capitalized in the inventory. We do expect inventory will increase in Q2 as the safety stocks replenished and initial inventories of some of the new products such as Shockwave and XREP are produced, but we are certainly happy to see the reduction in Q1 from the operations cash flow perspective.

Prepaid and other assets of $1.9 million are down $586,000, this is really driven by mostly due to the amortization of prepaid insurance and our investment in property equipment of $28 million is up 900,000 for the prior year end balance, due to progress payments on the automated manufacturing equipment, some new IT equipment is being brought in house until we support the new products in the pipeline. And our total assets to March 31, 2009 were $131.7 million.

On the liabilities and equity side of the balance sheet accounts payable of $4.4 million is up 591,000, this was just really driven mostly by the timing AP check around the year end and increased purchasing activity. Accrued liabilities of $3.9 million are down $452,000, driven mostly by lower accrued income taxes and the current deferred revenue of $2.7 million is up from the prior year balance of $2.5 million due to the sale of more extended warranties in the first quarter of 2009.

We finished the first quarter with total liabilities of $18.3 million and stockholders equity of hundred and $13.5 million. We continue to have no long-term debt and have plenty of liquidity on the balance sheet to fund our R&D efforts and investments as we move into the future.

Moving to the cash flow information, the company had cash provided from operations of $10.5 million for the quarter ended March 31, 2009 compared to the first quarter of 2008 of $659,000, so a significant increase in cash generation in the quarter. The cash again was driven mostly by the lower accounts receivable for $4.5 million and lower inventory of $3.1 million, we had non-cash 123(R) charges off $1.4 million and depreciation and amortization of $715,000, so you can see sort of the components that showed that cash from operations.

We did also have net cash provided by investing activities there at 5000, the company realized $2.5 million from a maturing, actually it was an investment we had in the long-term investments have actually called in the first quarter so that generates $2.5 million of cash and be offset that by $1.7 million of new property equipment purchases. We ended the period with $58.3 million of cash which is up $10.6 million from the prior March 31 balance and as I said earlier we saw plenty of liquidity to manage the business in these challenging times.

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

Rick Smith

I am going to talk a little more about our future initiatives. Any of you have not had the opportunity I certainly would invite you to go to EVIDENCE.com and watch the webcast there, it is about a 45 minute webcast that will show you a little better than I can describe just hear her over the phone, where it is that we are going with this new service offering.

So with the answer of EVIDENCE.com, we now have the complete solution set that we can take to law enforcement's most challenging problems. Out on the streets with miser at stake our family of TASER ECDs provides the safest and most effective options of police respond resistance. With the eye contact with the computer we streamline the collection and analysis of evidence while preserving and audio/video record from the officer's perspective of what really happened in these incidents, in all incidents, and not TASER incidents, but everything from traffic stops, to the most contagious and dangerous use of force incidents.

With EVIDENCE.com we will provide groundbreaking analytical capability for digital information and evidence while preserving a foreseen evidential retail of custody all going to the courts until the last couple of drops. So the point is we are now developing a suite of tools to help our customers not only doing their job in street, but defending their actions and protecting themselves against false allegations and claims against them. And we're building this case ability to EVIDENCE.com in a way that lays the foundation for a secured global network for the law enforcement community.

This integrated set of hardware and software tools has the potential we be believe to revolutionize law enforcement in the same way that real-time tactical situation where in this technology have revolutionized the military. If you look back over the past 20 years and you think about how the GPS and economist systems like cruise missiles or GPS guided ammunitions they actually revolutionize our military capabilities in the two wars in the Persian Gulf.

We see a similar prospect for technology to be able to revolutionize law enforcement to better information technology. Our assessment is that while many agencies use computers today for the most part, many are still using paper-based forms or they're just printing information and using computers to store documents. AXON with its multi-media recording capabilities and the ability to use GPS to be able to quart where incidents are happening within any jurisdiction is going to give tactical strategic dashboards for law enforcement leadership that will enable them to do a much better job of policing because of real-time information tools.

In addition to having tools that help them defend use of force or other types of cases in the court system. So it is not just about creating evidence for the court system it is about creating tactical situation awareness. This integrated set of hardware and software tools has the potential to continue the revolution where he started with a handheld TASER electronic control devices, which are reducing violence, reducing injuries as we saw in Houston cutting worker components by over 90% and those devices are stabilized everyday.

AXON and EVIDENCE.com protect truth through an end-to-end integrated solution to capture, store, and analyze digital information and digital evidence and ways that enable both tactical and strategic decision making. EVIDENCE.com brings software as a service for the first time in the mainstream through public safety and law enforcement, you have all heard about the Web 3.0 revolution, Web 1.0 right was Amazon and Wikipedia [ph] sort of the rise of commerce over the Internet, Web 2.0 was the rise in social networks user generated content, YouTube, MySpace, etcetera. zero degrees from Jazz’s background. Web 3.0 is a concept of power-based computing, centrally deployed applications like salesforce.com one of the big ones, Google applications, Microsoft live. EVIDENCE.com is taking some of the best of all integrations, but particularly Web 2.0 with social networking technology to enable better investigative capabilities across agencies and Web 3.0 of deploying software as a service.

So law enforcement don't have to go out and figure out and set up their own video data servers or their own media management server forms, we can provide that as a turn-key service. So EVIDENCE.com will create a network that can tie together the eyes and ears of hundreds of thousands of law enforcement officers into a global secured law enforcement collaboration network based on digital information.

We believe this capability runs to the core and how to keep our community safe and how to address modern threats facing society. In fact it was the mission of uniting the 18,000 state and local law enforcement agencies into a seamless community with which the United States formed these Department of Online Security. It has been very difficult to however to get through interoperability across these 18,000 agencies with directors from the top down, we believe this is something that can best be accomplished with grounds up – bottom-up approach, like you have seen out in the Internet in general where you can unit people through network sort of built from the user base rather than being dictated from the top.

So we believe that the revolutionary capabilities AXON and EVIDENCE.com will create a unified collaboration network along our 14,000 customers. The future is certainly is digital information. Our breakthrough hardware the AXON accelerates the needs from massive data storage and management because of the video that it collects seamlessly, EVIDENCE.com creates both the method and the network through which they can handle this information. In using the software as a service approach removes the burden capital investment and the execution risk in local agencies who are struggling without a hands to the complexities of digital evidence and video in particular.

I talked with agencies that have spent millions of dollars in fact I talked with one agency that has spent over $100 million on a customized IT system that was supposed to be an end-to-end system for handling all these new digital assets and that agency scrapped the program after overspending over $100 million. So the solution risk you can't understate that that the very sensitive point for these agencies it is a difficult thing to do, by providing this software and infrastructure as a turnkey service we remove that execution risk for our customers and we're finding that that message really resonates well.

We're designing this infrastructure to enable next-generation video analytics and secure social networking to enable really the vision of a unified law enforcement community, the table to interact, interoperate much more effectively. So what we're doing is we're taking elements from a variety of fast moving technology trends and combining them together to our law enforcement. From the administration [ph] of video reporting devices and wearable computers such as the iPhone or Blackberry that many of us where in a pocket every day makes no doubt about it those are computers with communication capabilities with data transfer and e-mail.

We are operating that into a dedicated law enforcement hardware and software set. So many of us now use these devices every day, the main contact with computer is of course taking this technology and resetting it for law enforcement. EVIDENCE.com is a world-class Web 3.0 cloud computing solutions perfectly fit to address the highly complex capital-intensive technology need of law enforcement community. It’s a full vision that is for coming realities quickly. We are set to create the technology toolset, the hardware and software product end solutions that enable the vision of a safer community, while making law enforcement more effective and more accountable.

I believe our technology will transform this community and it will transform our company from a world-class product manufacturer to a cost technology platform solutions provider. Our customers will receive breakthrough capabilities never before possible and our company benefits with significantly expanded available markets, both in terms of revenue and market segments as we see AXON applicability in adjacent markets, where our prior case of products may have had limited applicability. And further, subscription based software to service greatly reduces the need for our customers to make ample investments, but for our company it creates more predictable streams of recurring revenue while enhancing customer retention and further developing the depth of our customer relationships.

Over the past two months, the senior leadership at TASER has met with more than 60 command staff from the top 150 law enforcement agencies to share our vision of TASER, AXON and EVIDENCE.com. The result has been extremely promising. The significant majority of the agencies we met with have validated the customer pain points that we are solving, and their interest in our solution set is high. In fact, we even have received very favorable feedback from agencies who are not significant customers for our core TASER products. So next week, we are holding a technology summit with over 130 participants from leading law enforcement agencies around the world who are coming together the unscathed sale with us to learn more about EVIDENCE.com and to provide further customer input into our final product development phase. In fact, there were 400 officers already participated in focused groups and surveys that have helped us to develop this break free solution set.

We know this past year has been a difficult time for us to ask our investors for patience as we significantly expanded our R&D investments in spite of a troubled global economy. The short term challenges of constricted municipal budgets still exist. As I have said before, now is the time for us to invest from a position of strength to extend our lead and enter into new markets. Challenging times favor the strong and the bold. Our company’s financial condition is indeed strong. Our ideas and our people are innovative and our thinking is bold. So thank you for your support. We look forward with great interest for the later half of this year.

And with that, we will open it up and take a few questions.

Question-and-Answer Session

Operator

(Operator instructions). Your first question is from the line of Eric Wold from Merriman Curhan & Ford. Please proceed.

Eric Wold – Merriman Curhan Ford & Co.

Hey, good morning.

Rick Smith

Good morning.

Eric Wold – Merriman Curhan Ford & Co.

I guess, first of all, for Dan – you might given up the unit numbers as usual for the second quarter.

Dan Behrendt

Yes, absolutely. So the units for the X26 were 13,392, M26 were 3,941, and the C2 actually saw little bit of a decrease, I think its kind of a seasonal nature first quarter as well weaker for us was 5,111 units and then the cartridges again that was where we saw the huge ramp up in units that went from 284,000 in Q4 to 438,000 in Q1, so 438, 337 in cartridges and then TASER counts were 1,710.

Eric Wold – Merriman Curhan Ford & Co.

Okay. And then question on the stimulus plan because applications are coming in now and obviously you are having conversations with Police Departments about their needs, what kind of an evidence have you seen so far kind of just anecdotally about what your – what level of – what kind of – what percentage of the funds or request you kind of you can possibly allocating towards TASER products.

Dan Behrendt

That’s a great question and Rich, we had good visibility into it, but that visibility point I can give you is that we’ve had little over 230 agencies have approached us for assistance with grant writing through our (inaudible) helpline we set our grants. The one of the challenges is law enforcement tends to look at their grants – is information that they are not going to share, so we don’t get a lot of feedback, it appears to be one way information flow. So the (inaudible) for help would provide information, we’ve provided an integrated set of tools, I think cell based model that helps them estimate not only comps but financial savings, benefits and increase the jobs calculator. So we will be going back to our joint customers. The final deadline would be May 18, so we are still out talking to everybody. The last phase of our communication program will be to get customers used incentivize them to share information with us basically by telling them that we are expecting a lot of grant applications related to TASER and that if they would give us a forecast by letting us know what they are put in for. That will help us to reserve inventory in case we do get a surge of orders. But at this point, we're not getting a lot of feedback. Agencies tend to hold their actual grants pretty close to the best.

Eric Wold – Merriman Curhan Ford & Co.

Perfect and then, if you look at the AMEA article, maybe a month or so ago whether you estimated this – the grant could generate about a years worth of revenues to the firm. Do you sense of kind of how that came about an estimate?

Dan Behrendt

I was talking with media reporter and he sort of quoted to me what do you think is possible and I just – to may be honest, that’s not a very accurate number, there were no signs behind it and there was more just a matter of their reporter asking, this pretty good job, he is trying to corner me and said, will you agree it might be worth as much as the year of revenue and I forget its not unreasonable. But it’s really hard to say, there is about – out of the 4 billion, there is 2.7 billion that can be used for training and equipment, was proportionate that come towards TASER is going to – it’s really hard to say. So I wouldn't go looking at this as if that was something that we've been able to model, that would represent about 4% of the stimulus funds, we certainly have internal goals. We like to see in terms of the amount of stimulus dollars spent towards TASER products, but your modeling is probably going to be more effective and more accurate than the net number, so it's really just the result of the conversation with the reporter.

Eric Wold – Merriman Curhan Ford & Co.

Not with the conservative estimate. I guess, lastly –

Dan Behrendt

I allude to you.

Eric Wold – Merriman Curhan Ford & Co.

Would you get a sense that, I know it's early – you haven't shared a lot of that in the request for products with you, but would you get a sense of the majority of the funds would likely go towards kind of the regular TASER's and cartridges or do you think you could see a lot of this being used towards you are getting people involved in AXON earlier than they may otherwise have been.

Rick Smith

That’s a great question. One thing we can look at in that respect is the American Conference of Mayors was approached by the Obama Administration to put together a witch list of where they worked out, where they wound spend the money, these were shuffle ready projects, now this is not any indication of what – where the money will actually go, so it’s the best time we are out here, but when the Conference of Mayors came back, there was – of saying huge where we would put the money, there was about – we identified in that list about $2.4 million related to TASER devices, we identified $17.5 million for video equipment particularly in dash cameras with surveillance cameras.

So based on that sample, 2.4 to 17.5 what we got to start 8X in the organic budget that were produced sort of through this third-party survey at the Conference of Mayors. So that sort of consistent of what we have seen in general, the budget dollars allocated to video solutions in law enforcement kind of run between 5 and 10X of the budget again that’s very sort of inform able, we’ve seen it from a couple of different sources and that’s one of the reasons we accelerate at the launch of EVIDENCE.com and AXON as we figured – we knew that many agencies would be putting in budget requests for both days or end In-Car Video and frankly what we are trying to do is make sure that these agencies don't tend themselves in by putting in a grant request specific for – in car video.

As we talked with our customer base, we’ve been letting them know about AXON, EVIDENCE.com and making sure they write their grants. We are hoping that the language would give them the flexibility to use it for on-officer or in-car video. And I think that measure is really resonated. We’ve got a number of agencies we talked to like Bill Lansdowne, the Chief in San Diego is out on National Public Radio and announced that they basically held offline deploying in car video in favor of AXON and has quietly done that feedback from a significant number of departments. So the – from the stimulus package perspective, there is a bigger pool of funds to go after for the AXON, EVIDENCE.com just based on those factors I gave you previously.

Eric Wold – Merriman Curhan Ford & Co.

Perfect. Thank you guys.

Rick Smith

Thank you.

Operator

Your next question comes from the line of Paul Coster from JP Morgan. Please proceed sir.

Paul Coster – JP Morgan

Thanks. Rich, when does the AXON product actually go on sale?

Rick Smith

We are currently targeting the end of this summer around the August timeframe that we would begin to field shipments.

Paul Coster – JP Morgan

Okay and when does the sort of sales pipeline start to build? Has it already started?

Rick Smith

Well, with the law enforcement, they are going to want to go through testing evaluation phase with products and the larger the agencies generally the longer the testing evaluation phase is going to take. So we've got a significant pipeline of interest, but until we can start putting the physical product on people's hands, we are not able to really predict any pipeline flow yet. Other than, its been pretty – it's been very well received, much – I can compare this to one when we were launching TASER into the law enforcement market, that was a much harder fight to get people to accept this concept given electronic weapon years ago when we really entered law enforcement.

The management is now two-fold, number one we are coming back, TASER has built a deep relationship with law enforcement not only because of the weapon that we provide it, it’s really impacted their job the streets like for Houston example, that’s a factor frankly where as aggressive as we are in defending law enforcement, officers, they love that. One time when you talk to police, then you are really frustrated about, a cop on the street who is involved in an incident where the agency gets sued and the agency settles, those officers look at that as an affront to their honor, they get very emotional – they do not like these cities stepping up and settling going to get the agency. So its agents have been very aggressive about defending those claims in fact we were appointed where we filed the lawsuit in Ohio against the medical examiner.

In that case, where an officer has been charged with murder because of frankly it was a bad ruling from medical examiner and 15 officers were sued. We stepped in when after the medical examiner got – prevailed in court and because of that, that officer was basically exaggerated in that case. So those types of actions have built the real deep relationship of trusts with law enforcement.

So now as we are coming back from our second major product category set, we've got a very strong relationship of trusts which we will never violate with our customers and we are fetching in area where because of the (inaudible) work it’s been done with the in-car video business is still – we estimate it to be $350 million annual business in car equipment. So there is an existing budget, we’ve got a – what we believe is a breakthrough solution set and strong relationship.

So how fast it will accelerate though is really going to be a function of – that we are not able to put any real numbers on it and so we get units out on the hands of agencies and we’ve got these other uncertainty factor of the stimulus dollars. And all of these things will be heading by our estimation around the late third quarter and into the fourth quarter, so I wish I could give you a more specific answer rather than we do see a lot of opportunity and a lot of green light indicators, but this is a big opportunity for us.

Paul Coster – JP Morgan

Should we assume that initially some sales or product sale in the EVIDENCE.com service revenues kind of kick-in a couple of quarters later.

Rick Smith

Yeah, I think there is probably – we're still (inaudible) go to market on that. There may be – I certainly think that the – we will have the EVIDENCE.com service up and running right out of the gate, exactly when that revenue start to flowing, I think we still need to work with our sales and marketing to partners to figure out what's the best way to position that, but certainly we want that recurring revenue stream to start looking – and also obviously our customers get use to having to pay for that service. So I think the ramp is really going to be – is a big question, I think the stimulus is probably the biggest wild card right now that could cause a quicker adoption that look like – otherwise happen naturally, but it's so kind of remains to be seen.

Paul Coster – JP Morgan

Do you think the product – the AXON product will be – the revenue recognition will be amortized over the life of the service contract essentially?

Rick Smith

No, our intent right now is to buy for those two and recognize the product sale upfront and then the service ratably overtime.

Paul Coster – JP Morgan

Okay, got it. All right, now with respect to the near term outlook, I realize you don’t issue guidance, but we should be pretty conservative at the second quarter and the first half of the third quarter, it sounds like and then hopefully the stimulus spending will – and the uncertainty around that – it will be relieved and will start to see the some kind of upgrade cycles and new sales kicking in late third quarter, is that the great way of thinking about things here?

Dan Behrendt

Yes, this is Dan. Yes, I think that's the right way to look at. I think not only do the stimulus dollars flow, but any of the money that may be spent on the sidelines as people wait for the stimulus dollars and maybe money that's budgeted right now that gets spot for a quarter or quarter and a half as people wait for the stimulus funds and then – if they don't get the stimulus, then that money still flows in the purchase of stocks, right now I think there is definitely some near-term risk.

Rick Smith

Let me add one other thing, on the topic of the AXON revenue recognition, so we've announced pricing at $1700 per AXON unit which is about a third of the customers in car videos, we think it's very favorably positioned competitively, but it's twice the revenue opportunity of the TASER X26 from the sell in opportunity. The recurring revenues, we’ve announced pricing of the EVIDENCE.com service at $100 per officer per month in terms of revenue, so obviously you can do a math on that, that $1200 per year in recurring revenue that again is pretty favorable even compared to the sell in opportunity with the TASER X26. So sort of twice the sell in revenue opportunity, plus recurring revenue opportunities we talked about, but we've have had a number of agencies in some particular market segments like the (inaudible) segment have alerted us that they may prefer to lease the equipment and have an integrated monthly service fee that include both the service and the hardware. So there is unique [ph] possibility we may look into now with the third-party leasing companies, so that we would effectively sell the hardware – to recognize that revenue, but I don’t want to put a line on your hand here that we will not amortize – we may have market techniques where we make a determination given the amount of cash you got on the balance sheet and the wealth of costs that go into leases, we may end up having some segments where we amortize the hardware over the life to get it with the service.

Paul Coster – JP Morgan

Okay, last question. Can you give us any outside on what was happening with the National Police in France?

Rick Smith

Well, actually Tom is there – today as we see, it’s a (inaudible) data I could give you, we are certainly in discussions with them over there. We are frankly expecting some cartridges orders before we would expect to get some more hardware. They’ve been running a little low on cartridges, we had some logistics purchasing issues, we got to work out – when you do a large bureaucracy, there is a lot of process you go through, but we are continuing to get fantastic feedback from the end users. (inaudible) for the number of places they have deployed versus the reduction they’ve seen in police shootings, it’s been pretty remarkable, but we don't have any short-term forecast we are able to put on it. Of course, what happens will be, international customers versus black box of bureaucracy that we – we get questions, we are certainly doing presentations etc, we don't give a lot of feedbacks and then bang in terms of purchase order.

It’s just a challenging thing to try to correct that business. I don’t think you want to confuse, because those guys – because I know every year – every conference call we are talking about predicting the future, we're telling how hard it is, the EVIDENCE.com which we will be able to model the recurring revenue, so at least a portion of our business and a growing portion of our business will become more predictable, that's one of the reasons that we've really focused on launching this new service.

Paul Coster – JP Morgan

Thank you.

Operator

Your next question comes from the line of Steve Dyer from Craig-Hallum. Please proceed, sir.

Steve Dyer – Craig-Hallum

Thank you. Good morning, guys.

Rick Smith

Good morning.

Steve Dyer – Craig-Hallum

Most of mine had been answered, a couple of them a while ago probably a year ago you had talked about installing some automation equipment that would make the production of cartridges a little bit less labor intensive, a little bit more automated which was intended to improve margins. Where are we in that cycle I guess?

Dan Behrendt

Yes, that's a great question Steve. Actually right now as we speak, our engineers are up at the manufacturer of that equipment, they're going through factory acceptance testing right now, there is some pretty significant test that we do before we buy off the equipment at the factory and then – disassemble and reassemble on our side and there is further test to go on to get through this – to the side acceptance test, but we do expect that equipment will be here this quarter and will be up and running and we will start seeing some of the benefits of that equipment probably as we begin the third quarter to be conservative. We expect that equipment to be installed here. Assuming all of the tests go well at the factory, we will see that installation in the May timeframe and we will be up and running by the – sometime in June. So it's a very complicated project and one that certainly have a lot of challenges from a technology standpoint, but we're pretty close right now, like I said, we got our engineers up there going through the testing and the run-off of that equipment to make sure that it performs as we expected.

Steve Dyer – Craig-Hallum

Okay and then what kind of an improvement I guess do you expect in operations margin vise or I mean nothing to hold you to, but what are the thoughts, I expect I am sure this is – I think at one point was going to be an $8 million or $9 million piece of equipment.

Dan Behrendt

Yes, that’s right. There is a – we are certainly going to see a margin impact, I think the tough thing is you are going to be – you're right out of the gate, we may not be as significant as we will see as you sort of get that piece of equipment running exactly as we would like to see it and thoughts of – a function of the amount of cartridges we are selling each quarter, we certainly would have loved to have it this quarter with the large volume, but we do expect that the price will have a positive ROI and be a thought contributor to margins in the second part of this year.

Rick Smith

From a product life cycle management perspective, this is – we are timing this absolute as that equipment is coming online, so some of our newer products like AXON and XREP. So we are able to redeploy our workforce on to some of those other new products. So from a global perspective, it will be a transition period as we are shifting people around, so we should see the cartridge margins improving on a lever basis as we redeploy those people on to some of the other devices that we are making. But this is – it's not to make clean cut off, it's going to be sort of a transition period.

Steve Dyer – Craig-Hallum

Okay, thanks. And then the other thing I was wondering if you could give a little bit of additional color on the UK order, I think you shipped some handles in Q4 and then you had indicated a big cartridge shipment in Q1, what sort of left on that initial I guess funding tender or is that pretty much through the pipeline now or not in the field?

Dan Behrendt

Yes, our expectation is really most of those dollars allocated have been used at this point. I think what was significant is, we had the sort of UK central government funding both the purchases of handles and the cartridges, and I think they’ve originally approved the purchase of 10,000 handles. I think really what’s happened, we reallocated some of those dollars into the cartridges because they bought 5000 handles right at the end of 2008 and no cartridges. So given – they typically use about 50 cartridges per year in trading, we knew that they may be coming back just in Q1 for significant cartridge purchases which we did see. And so – they did bought some more handles and then reallocate some of the dollars to the cartridges. At this point, there is still potential sales for the rest of the year through the (inaudible) that’s how it was funded traditionally and then the central government stepped up to make this significant purchase and I think there is still opportunity that's (inaudible) to purchase on their own.

Steve Dyer – Craig-Hallum

Okay. All right, great, thank you.

Dan Behrendt

Thanks, Steve.

Operator

Your next question comes from the line Greg McKinley from Dougherty. Please proceed, sir.

Pete Mann – Dougherty and Company

Yes, hi, this is actually Pete Mann [ph] calling with Greg. Say, I got a couple of questions guys. Looking at the gross margin, we are just under 50% this quarter, which was down from the last three quarters, kind of where do you see that kind of running for 2009 for the last three quarters?

Dan Behrendt

Yes, we have certainly – we saw – the mix impact this quarter, the shift from electronic control devices to cartridges had about a 1.8% impact. So just that – if that alone would have put us back up into the lowest 60s. Certainly our internal target has stayed north of 60, but as I have said on prior calls and unfortunately this quarter I think it’s sort of pore [ph] that out the fact that our mix does have a kind of have a pretty material impact on the margins. I think in the fourth quarter, we enjoyed a real heavy mix of electronic control devices which was beneficial for us. This quarter, we saw a ship back at cartridges, we expect that – the second quarter will have more a traditional mix, but then the other part of the drive is obviously our overall sales volumes will have an impact, we do have fixed cost to carve as well, but our term targets are always to be above 60% and if the sales – depending on sales levels and mix, we certainly think that – those targets are still reasonable.

Pete Mann – Dougherty and Company

Fair enough. Now coming along that same topic, where do you guys see EVIDENCE.com and AXON sitting into the gross margin picture. Those going to be like higher margin products, I assume the EVIDENCE.com would be, but how does AXON kind of sit in that picture?

Dan Behrendt

I think AXON – I think will be certainly within our range, I don’t know if they have a margin basis of existing hardware products, it’s not – it’s a very complicated product and certainly out of the gate we think it will have comparable margins of other hardware that we sell. Clearly as the volume ramps and we get our focus on the product engineering and process engineering side looking at things, there is certainly opportunity to take off hopefully out of them and get efficiencies as far as the manufacturing side, but out of the gate its going to a solid contributor and certainly we think the time is going to be good. EVIDENCE.com is again – will be a good margin product for us and there is definitely from a capital perspective, as Rick indicated, we have taken a lot of risk on ourselves, so there is going to be a fair amount of capital spend in the next quarter or so to create the data centers, but we think that’s part of the value proposition for our customers that they don’t need to make those capital investments, we will make those and we can be just more efficient to make those investments and manage it across lots of agencies versus taken that risk on individually [ph].

Pete Mann – Dougherty and Company

Excellent. That’s very helpful. Last question, looking at your operating cost, I know you guys mentioned that research and development is going to remain at kind of these levels throughout the rest of the year, but from an SG&A perspective, do you see that your headcount kind of where you wanted to be at or you still kind of pursuing some other people to fill other software holes or other initiatives that you guys are tackling?

Dan Behrendt

Yes, I mean it’s certainly – I think it’s a great question. I mean there is certainly some more hedge we need to add, the – especially around sort of the AXON and EVIDENCE.com products, selling that software as a service is a different animal, there is sales, engineering, talent that we are going to need because it is a little bit more complex as far as how we speck it out and how we implement the product. So there is certainly some infrastructure there that – I think we are sort of nearing the completion of that ramp up of headcount, I think in the near term, we’ve got the Tech Summit, its going to happen in the second quarter which is a incremental expense. We think that the money we are putting there, we think is very well invested because its going to gather both good information about the product features and making sure we are heading the mark that also gives our customers a really good introduction to the product and get them excited about the technology that comes to market.

We also have in the second quarter the expenses around the annual report to proxy at the end of shareholders meeting, so there is some incremental things for the second quarter that are kind of unique to the second quarter, but certainly we are paying attention to the cost where we are trying to make sure that we are smart about where we are making the investments and really spending the money where we think we got the best return and investments more strategic, but certainly it’s a little bit of a challenge as we kind of really transform the company and really get ready for the sort of the next phase in the company’s growth cycle.

Pete Mann – Dougherty and Company

Okay, great. Thanks a lot guys.

Dan Behrendt

Thank you.

Operator

At this time, there are no further questions. I would now like to turn the call back over to Mr. Rick Smith for closing remarks.

Rick Smith

Thank you very much. Again it was – I don’t want to overlook to think that on a revenue basis, I believe this [ph] is the strongest first quarter we’ve ever had.

Dan Behrendt

That’s right.

Rick Smith

Not many companies are saying that in Q1 2009. So Broadware [ph] seems it has been able to do. As you know historically, we’ve returned funds to shareholders from share repurchases etc. We over the past year, we made the strategic decision as rather than returning cash that we had an outstanding investment opportunity with AXON, EVIDENCE.com and so we’ve been able fund that from our operating cash flow and from our operating income streams, and as you start to model this, you will all realize the total available market opportunity is at least as large as our existing business, so we are thinking obviously on a pro forma basis, the investment made a lot of sense.

We look forward to getting to the end of this year and see how market acceptance goes, but its really quite an exciting time and there is some guys out in our software division out of piece in Virtual Systems in Carpinteria, California and what I might [ph] really see inside is that how amazing is that to be involved in such a really cool project, hiring people, creating jobs and creating new capabilities when the world really needs that. Lot of people are struggling right now, lot of people are afraid, lot of companies have pulled back, lot of people are without work and we feel really good about the fact that we are able to make in a positive economic contribution, we put the people to work on a great project and I believe our shareholders will see we are going to create breakthrough value for our customers and our shareholders if we succeed in this endeavor. So thank you for being a shareholder in TASER, we enjoy working for you, we’ve got our annual meeting coming up in May 28 and you are all invited to come on out and we’ll show more at the shareholder meeting and see you some of the hardware and we’ll do some demonstration for some of the EVIDENCE.com capabilities, so it should be a fun shareholder conference this year and we look forward to talk you all again – thanks a lot.

Dan Behrendt

Thank you very much.

Operator

Thank you for your participation in today's conference call. This concludes the presentation. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: TASER International, Inc. Q1 2009 Earnings Call Transcript
This Transcript
All Transcripts