TASER International Q2 2009 Earnings Transcript

| About: TASER International, (TASR)

TASER International, Inc. (NASDAQ:TASR)

Q2 2009 Earnings Call

July 29, 2009 11.00 AM ET


Rick Smith - Chief Executive Officer, Director and Cofounder

Daniel M. Behrendt - Chief Financial Officer


Eric Wold - Merriman Curhan Ford & Co.

Paul Coster - JP Morgan

Greg McKennely - Dorothy

Steven Dyer - Craig-Hallum Capital


Good day ladies and gentlemen and welcome to the Second Quarter 2009 Taser International Conference Call. My name is Shimit and I'll be your coordinator for today.

At this time all participants are in listen-only mode. We will conduct a question and answer session towards the end of this conference. (Operator Instructions).

I'd now like to turn the presentation over to your host for today's call, Mr. Rick Smith, Chief Executive Officer of TASER International. Please proceed, sir.

Rick Smith

Thank you. Good morning everyone. Before we get started, I am going to turn over to Dan, to do the Safe Harbor Statement.

Daniel M. 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 intend to such forward-looking statements be subject to the Safe Harbor created here-by.

Such forward-looking statements relate to expected revenue and earnings growth, estimations regarding size of our target market, successful penetration of market, expansion of products sales to the private security, health care and consumer and self defense markets, growth expectations for new and existing products, expansion of production capabilities, new product introductions, product safety and our business model. We caution 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, attract and retaining the endorsement of key opinion leaders in the law enforcement community, the level of product technology and price competition for our products, a decreased rate of growth of the markets which we compete and accompanying demand for our products, potential delays in international and domestic orders, estimation risk of manufacture in our nation, risk association with rapid technological change, execution and implementation risks of new technology, new product introduction risk, rapid manufacturing production to meet demand, litigation resulting from less product related entries and debt, media publicity concerning product issues and allegations of injuries and death and negative impact which could have on sales, product quality risk, potential fluctuations in quarterly operating results, competition, negative reports concerning TASER device uses, financial and budgetary constraints of prospects in customers, dependence upon sole and limited source suppliers, fluctuations in components pricing, risk of government investigation and regulations, case of product test and reports depends upon key employees, employee retention rates and others factors detailed in company's filing to Securities and Exchange Commission.

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

Rick Smith

Thanks, Dan. This has been just one exciting week for TASER International. And we are holding our annual conference and we have unveiled the new TASER X3, where -- that will be looked back upon as is bigger revolution in non-lethal weapons as when firearms went from the muzzle loader to the revolver.

We now have a multi-shot capable device with all sorts of additional data capabilities and I spent the last several days out with police officers, training officers around the country and they're saying we just nailed it in terms of the product features and technology.

Not just the X3, we are now shipping the wireless XREP Projectile, where now for the first time now non-lethal's can really start to go with head to head with lethal in terms of range and multiple-shot capability with the efforts of TASER yet without all the unintended consequences of traditional firearms.

The short waves now chip in our aerial denial system, AXON and EVIDENCE.COM that we believe will revolutionize the way police deal with digital information and the way these collaborate together that system is now online but moving into a data base.

So, you don't expect to see significant revenue impact this quarter, we may begin to see revenues next quarter in early 2010 as that part of the business starts to scale, but what you are seeing now is the result of the heavy investments spend we've made over the last few years and not only due to these open big new potential market opportunities for us.

Well I will just start with most obvious one, the TASER X3 give us an opportunity to go back and to have an upgrade cycle in our core business and just to put some color on that we have an installed base of 425,000 single shot TASER devices between M26 and X26.

We believe there is an opportunity we have an aggressive trading program to promote that that could generate upto $600 million in revenue opportunity just from upgrading our installed base from single-shot to multi-shot. So, obviously I am very excited as both a business man and as a technologist temporary company.

So with that we will go back into details now about the quarter and then will come back and will end with the big picture again.

For the second quarter our revenues is 21.8 million, up 3.5% over the same quarter of last year. So again proud our team was able to achieve some growth in the current economic environment. But you heard me say before it does makes you stronger, these are the times that give companies like us the ability to extend our lead that's why we will make an heavy investment spend, we've got our eye on the future but we're executing well in the present as well as Dan will talk about.

We had I think a pretty good success in terms of SG&A cost control this quarter and other things we're doing to make sure optimizing the present, while we're building for the future.

Our research and development expenses were 4.4 million, up 45% over the last year, driven by the intensive efforts on the near simultaneous launch of the TASER X3, TASER XREP and AXON and EVIENCE.COM moving into pilot phase.

Something that I'd like to keep my eye on the operating income before research and development, extraordinary event expenses, again the reason been such a bad number is basically we consider R&D investments in our future and then take out extraordinary expenses that are not indicative of ongoing operations.

The operating income before those gives us a good idea of how we're operating our core business before we think about, this was fiber case the concept of investing in our future with R&D from current operating results. On that basis, the quarter was 2.9 million to the positive which is 13.4% of revenue versus 3.9 million, last year which is 16.5%.

And as Dan and I were talking about why this year is lower than last year, we take that R&D, you did point out to me that we also includes still December of the FAS 123(NYSE:R) stock option expenses and as we become more of the tech company meaning we've built out an entire software development -- world class software development team both in terms of executives and execution talent I mean California options have to come in and will continue to be a larger part of our competition expense.

My personal opinion is that I was never big fan of stock options expenses and basically, just a store really what's going on but here and there because I am not an accountant but as you saw, I'd point out different modeling perspectives, we're seeing the type of accountants we're hiring in the -- environment we're competing in now in the software and service phase, we will hire 123 (R) charges as well.

Second, primary reason that we see operating income before R&D is well within what last year. As long enough let's move on.

So net messages, I'm very happy with operations that the company today. And I believe we are firmly placing our feat to make some bold moves that you are not starting to see in unfold.

So as I mentioned on June 30, we announced that the wireless TASER XREP shotgun rounds are now shipping, you will see posted on TASER.com you can go later today and view the key note address from Monday you'll see Tom and I were handing via net to some of the police that were there. They are pretty darn excited to get them and TASER X12 less lethal shot gun is also now shipping.

International sales have grown this year; they were 17% of total sales for the quarter up from 12% last year, they were down a little from 37% in the first quarter where we had some significant orders in the first quarter the large UK orders. What we continuing to see growth opportunities internationally and the adoption of TASER continue to expand.

Several more product liabilities seems to two semester in the quarter and so as of the end of the quarter we had 91 injury suits have been dismissed or judgment entered in our favor.

Also there is critical new medical study was released by Hennepin County Medical Center in Minneapolis. They looked at means and in similarly to the rest scenarios. This is really important as you all know we get our first litigation loss last year in the Hansen trial. And the theory in that case, TASER was, I'll just refresh the memory, the jury comment basically TASER was 15% responsible for the tragic death of Hansen, who was 85% responsible for own demise to toxic methane use.

But the theory that put forward was that the TASER caused stress and muscle contractions that led to changes in the blood chemistry that were bad. It was the chemical theory.

This new study out of been accounting, what they did is they compared several different types of other scenarios, so in one case they have officers on to heavy bag for 45 seconds, the simulator struggled with police, and another they had people run 200 meters to simulate running from police.

In another case, they have down around I think 20 meters fight briefly or be attacked by the guard, while they we're having two of course. They did pepper spray and then they did the TASER device. And what they accounted was remarkable was that by far the most dangerous changes in blood chemistry, both in terms of Cataecholamines, which are the stress hormones, like adrenaline, and in acidosis which is basically exhaustion. The most dangerous things from this study, number one far away was the 45 seconds fighting with the heavy bag.

In fact most people don't think of it, but when you really fighting all out of full strength 45 seconds, you are beginning to reach exhaustion and half of the subjects either vomited or passed out after that exercise. And a blood chemistry changed dramatically, PHs dropped very close to the critical zone, where you start seeing risk of significant health forms.

By comparison TASER exposures had very minimal of impact on those hormones and on the blood chemistry. So this is could be a really critical study, because it actually shows that from this period of the strong camels back that the TASER is frankly much less dangerous than a continued physical struggle or some one running from the police in terms of stress it puts on our own system.

So that's going to help us a lot going forward, in terms of setting record straight and depending against similar theories in the future, there was again sign pretty solidly on our time. So with that I'll go to pass off to Danny for more detail on this financial results of the quarter and I will be back at the end.

Daniel M. Behrendt

Hey, thank you. Sales for Q2 as Rick said were 21.8 million which is up 732,000 from the prior year, mostly driven by the company's international sales. Sequentially our sales are down 2.8 million from Q1. And again that's caused by the higher international sales we had in the first quarter, when we had the large orders, I mean I can give in Brazil, which together with other international orders contributed about 0.1 million of international sales at 37% of the total.

The international part of the business has always been mostly being characterized by large orders, this time it's difficult to forecast. I can say that we had distributed some over the weekend, we had 29 countries represented our distributor summit.

So we continue to have very strong relationships with international distributors and they see solid potential in our product especially the expanded product lines starting to roll out now.

Gross margins of 13.7 million or 62.9% of sales are down 1.6% as the percentage of sales from the prior year. The decrease in margin is mostly driven by lower capitalization of overhead in the inventory, primarily, due to lower inventory which caused absorbed less of our fixed costs.

Sequentially, however margin did improve 3.4% from the first quarter, most of this was driven by the change in product mix from the first quarter we had a much higher percentage of sales from the cartridges, so this quarter we had a normal mix where the X26, other handheld devices had a much larger percentage of total sales, which helped to drive our progress margins.

We also had some amount of overhead capitalized in inventories last quarter, where last quarter we saw a decrease from the end of the year. So that's really helped to kind of stabilize the margins.

The $14,000 increase in direct manufacturing expenses you can see versus the prior year, again the biggest driver in that absorption of the fixed costs in the inventory.

The SG&A expenses of 10.8 million for the quarter versus 9.7 million in prior year. The increase is driven mostly by high salaries and benefits of $215,000 due to increased head count as we built our management team and hired support for the new product lines.

We also saw roughly charges for stock compensation go up by $535,000 for the prior year, and consulting was up about $450,000 as well. As you can see from the prior year we had a $5.2 million cumulative damage award for Hansen case, which we recorded that debt was actually thrown out by the judge and reversed in the fourth quarter of last year. But you could see certainly had an impact on the second quarter of 2008 results.

Sequentially, SG&A expenses are down to kind of $632,000 due to asset legal fee is lower, accounting fees, we really worked on try to cut our discretionary spending, in order to allow for better profitability in the quarter.

I will say that as we move into Q3, we may see that trend reverse itself a little bit. We've got obviously, costs resulting or relating to the X3, AXON and XREP and shockwave products that will hit this quarter.

We also have our TASER conference this week, which is a significant expense. But certainly hard to pulling those discretionary spending and trying to draw out profitability. R&D expenses of 4.4 million in the second quarter.

This is an increase of 1.4 million over the prior year, again driven mostly by higher salary benefits and charges of 1.4 million to support for the hardware development of our new products and the software development chain that we've got in California.

We also have increased tooling and supply costs of over $600,000, mostly due to cost associated with the working prototypes of AXON, XREP and the new X3 handheld device.

We did capitalize about $650,000 of the software development cost this quarter, for dotcom. And sequentially we saw that R&D is up about $200,000 from Q1. Again, that's driven mostly by the indirect supplies and tooling for the prototypes for the new products this quarter.

We expect the higher R&D spending to continue throughout the rest of this year. Certainly, as these products go into market, we've got some value engineering we need to do, and make sure that we can maximize profitability of these products and make sure that we've got the quality and manufacturer ability of the products as they move into the market.

We do feel very good about this by the new products we've introduced. We think we certainly have lot of new differentiated products which will better position us for the future.

And on a non-GAAP basis, the cash income from operations was $679,000 when you add back, 123R depreciation and amortization expenses. And we feel as Rick mentioned before, it makes sense to look at our operating income of both cash basis and also traditional GAAP basis, because of the significant amount of non-cash charges that are in the result at this point.

Getting back to -- I am sorry, on a GAAP basis, just we had our pre-tax loss of 1.5 million and net tax loss of $723,000 or $0.01 loss per share about the basic and diluted basis.

Back to sales for, I just want to give you the units for the quarter. We did sell 15,225 X26 that's up about 1900 units from Q1, which helped contribute to the higher gross margin this quarter.

We sold 232 M26 and 300,000 96 cartridges, which is down from Q1 we had significant cartridge from the UK. We sold 3863 Q2 devices and 2345 TASER caps in the quarter.

Moving on to the year-to-date sales, we had year-to-date sales of 46.4 million. This is up 2.8 million or 6.5% from the prior year. Mostly driven by the increase in our international business.

Additionally, we saw a sequential increase on a domestic law enforcement business in Q2. We are up by about $2.5 million over Q1, which is certainly something that is good time for us.

We also had a real strong month of June. We saw that kind of budget flush that we typically see. We've seen in prior years, we really didn't see that in June of last year or even December of the last year. So that the fact we are starting to see higher sales at the end of this quarters that relate to fiscal year-ends for our customers is a good sign that customers find some budget dollars at the end just to purchase our products.

Gross margins 20.4 million year-to-date is up 61.1% of sales, which is up 0.6% of sales from the prior year. We saw about $1.7 million increase in the direct manufacturing expenses. Again, that's due to lower absorption capitalizations planned overhead, due to lower finished goods inventory levels. And this was partially offset by lower salaries benefits and warranty charges in the result.

R&D expenses are up $3.5 million driven by higher salaries benefits, other discrete charges for the headcount added to support hardware development for the new products this will as EVIDENCE.COM.

The net loss for the year is 1.2 million or $0.02 per share about the basic and diluted basis. And one of the things I want people to think about as a model of the rest of the year, Rick have mentioned the X3, and there is going to be general administrative program for that and as people model that for rest of the year, that will have an impact for construe accounting in this but we expect to defer anywhere from about $225 to $275 on every X26 sold in Q3 to reflect the value that trade and rights for X26.

This is going to be -- our expectation is that programs are going to end at 12/31/09. So whatever we defer in Q3, it will get reversed in Q4 to the account that our customers have not taken up that trading rights but because we sell between 12 and 16,000 X26 in each quarter, the growth for Q3 could be pretty significant.

And we fell we did need to offer the trading program for HECD for current purchases, we didn't want people to not buy X26 in the current quarter while they evaluate the X3. So we felt that it was worthwhile, endeavored a software that was offered for prior purchases of the X26, although there is no accounting and that will record any trade-in guys as sales one as those program and sales happen.

On the balance sheet, we ended the quarter with 52.8 million of cash investments. This is increase to 3.4 million over the 12/31 balances mostly driven by cash flow from operations. Due to uncertain market, we continue to keep our investments very liquid.

Accounts receivable 13.1 million is down 3.7 million from the prior year balance of 16.8. It's mostly driven by the large UK order received by the end of 2008. Our DSO did go up a little bit in the quarter but that's really driven by the strong sales we had in the month of June, actually when I looked at our AR balances, we had 70% of our AR as actually current meaning that's not even due yet.

So we had real strong sales especially in the second part of June, which is encouraging. Inventory of 11.7 million is down 1.8 million from the prior year balances. This is driven by some of the significant international orders we had in Q1 allowed us to bring down total inventories.

We know we did expect inventory go up a little bit in Q2, which it did as we replenish our stated stocks and we'll probably see a further increase of inventory in Q3 as the initial raw materials and finished goods that support the newly introduced X3 and other product lines are added to our inventory. And we had prepared other assets of 2.6 million, which is flat with the year-end balances.

Our property and equipment investment and those assets at the end of the quarter here is 31.6 million, that's up 4.5 million from the 12/31 balance. Some of the big drivers on the CapEx side are the products famous on automated manufacturing equipments.

We've got new IT equipments here at in Scottsdale; we also purchased equipments to outset our first stock data canter. So there is some fairly significant expenses relating to those assets and we also purchased two assets for the new price in the pipeline. Total assets as at June 30th were $133 million.

Moving on the liability side of the balance sheet, we have cash payable of 5.6 million, which is up $1.7 million from the prior year end. Also driven by the differences in just check around from year end versus end of the quarter and some increased purchasing activity we are seeing for the manufacturing activity as well as from the data center equipments that was purchased at the end of the quarter.

Current liabilities, 3.8 million are down 46, which is driven by some differences in the credit expenses not being significant there and the current deferred revenue 2.7 million is up than a prior year end mostly driven by more extended warranties being sold. The total liability is 18.9 million and finished the quarter with 114.1 million of stockholder equity.

And we continue to have no long-term debt on the books and strong cash balance, which give at this point liquidity to operate the business as well as to fund our R&D efforts.

Moving on to cash flows, the company did have cash provided from operations of 8.4 -- I'm sorry 8.1 million for the six months ended June 30, this compared to a cash use in operations of $321,000 in the prior year.

So a significant improvement from our operating cash flow perspective. Big drivers for that are reduced accounts receivable 3.7 million, lower inventory 1.7 million, we've got non-cash one to three our charges at 2.8 million, that's pretty significant, add back for us, and we have depreciation, amortization of $1.5 million.

We did have net cash used by investing activities of 2.3 million, again this is driven mostly by the purchase of fixed assets of 4.6 million partially offset, we had one of our investments, the $2.5 million investment that was called. So that generates some cash on the financing side.

Company ended the period with 52.8 million in cash, which is up 19.8 million from the June 30th, '08 balance and certainly we feel very good about our liquidity situation.

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

Rick Smith

Great. Thanks, Dan. One question I have gotten from a number of folks is they're saying how does the current economic environment -- how they're going to tell these agencies that they are struggling for money and then there is a couple of answers in fact I was just seeing this morning on Fox news, there was a story about billion dollars of stimulus money that's been released to state local.

So federal funding is n using that tenfold over the last year, which should help to make it for some of the budget towards both. But as we presented at our key note this year, TASER buys all those rare investments per city they can pay for itself very quickly.

I've only these two case examples I'll share with you here, the Houston PD recently reported to us that their worker compensation claims for cops being injured on the job fell from $2.2 million the year before they introduced TASERS to $200,000 in 2007. So there was $2 million decrease which basically the savings that Houston of $500 per officer per a year and reduced worker compensation claims for cops getting hurt on the job.

Now another city came out of Michigan Municipal Risk Management Authorities with big insurance school in Michigan. It covers 150 agencies with 6000 officers. They began investing in TASERs in 2003 by reimbursing half the cost for agencies that would deploy them.

They just released this, the results that have shown that in 2003, when they started this program, they spend $7 million on excessive force claims. In 2008, that number dropped from $7 million to $366,000, a 95% deduction. So net affect is that the MMRM may have seen $1000 per officer per year savings in excessive force litigation.

I'm going to pause here for just a second because with some of the controversy that's happened in media and the Braidwood Hearings up in Canada recently. There is this miss-perception that TASER's increased litigation risk.

We have, in its beautiful brew period, Michigan it is reduce litigation by 95% and in fact if you look at it, pager claims over the six years that they have been in the field there represent less than 1% of their excessive force claim loss reserves or if you look at the cost per claim filed, your average use of forced claim cost the MMRM may $56,000 claims that involved TASER cost on average $9,000. So again significantly less constant on premium basis.

So the point is if we add up just these results in workers comp savings and excessive force savings, litigation savings, by the way the reason reported from different agencies is unfortunately, you never know one agency that tracks everything that you give added all up. So these are not mutually exclusive. Agencies there where comp to give less or probably others are getting sued less, well, its right there at $1500 per year per officer in savings.

We believe this data is going to be extremely compelling. It will be a major part of our marketing message at the International Association of Houston Police and when you look at the cost of new TASER X3, which is about $1600 for agency purchases and that's before trading credits and trading runs an exceptionally successful run between $300 to $800 between now and the end of the year.

So we're trying to create a meaningful incentive for people to use stimulus dollars towards upgrading to multi-channel fazer but even at full price, these devices pay for themselves from the first year and that's just on the two factors we've talked about, we haven't talked about other cost of suspect injuries, internal affairs, complaint resolution, legal ports in terms of well just the human cost of life much less the and things TASER do it.

So I just be to share some of that in terms of how we're approaching the financial times, the face is not just a cool piece of equipment, it's a stunning return on investment in fact with the MMRMA, the Michigan Municipal Risk Management Authority, they have spend about $300,000 reimbursing their agency customers for purchasing pager devices. Over the six years, they've saved almost $18 million in lowered except the forced claims.

So that's about a 6000% return on investment, which we know they're pretty happy with.

All right. So let's talk little bit more about the X3. As I mentioned before, it gives us an opportunity to back and address our installed base and with any technology frankly, its usually little easier to go back and upgrade people who already see the value, the technology then selling new customers who never knew they needed it before.

And we have an installed base according only 425,000 units. So zero the number says its $600 million upgrade opportunity and we're going to be aggressively going after them to with these trading credits, which is now and the end of the year to see what we can do, what percentage we can get to upgrade pretty quick.

The officer response has been phenomenal. These cops, all of them found with joy like kids at a candy store walking around the new X3. They've loved the features, the design, for those of you haven't seen pictures go to TASER.COM and not only there are technology but it's just a beautiful looking weapon very well designed.

So couple of real advantages, we can now deal much more effectively if an officer misses or there is multiple subject, they can reengage immediately, if they could obviously again don't from our much of orders to a semi-automatic, we've added a warning arc, which interestingly enough out of the United Kingdom, they track very carefully their data anytime the TASER comes out of holster, they have to write a report.

And well with that level of data, they've shown that more than 80% of the time when TASER comes down little holster and they showed the electric arc or they put the laser side on the subject, people give up, which is what everybody wants. We don't want to fight, we want them give up.

In fact there was a story out of New Zealand I was talking to our distributor last night that because they have not yet rolled TASERs out nation wide there was a man with a knife and he stand up with police. He would not give up, he was threatening to hurt anybody, who came near or to harm himself. They flew a TASER in on a helicopter, took over an hour to get the TASER there, the officer shows up one side, walks up with the TASER, explain this about to use it and the subject says I don't want anything to back drop and then gives up.

So those were types of resolutions -- those are ones we like best because those don't end in the newspaper, and they don't up in court. So with the extreme, you added the ability to we're now the device can arc while it's loaded. So you don't have to unload the TASER to show the warning arc.

It's missing a bit new ones to folks on the phone here, but it's a huge advantage to the officer. Nobody likes unloading their weapon in the middle of a confrontation. Now we can get the benefit of the visual arc and not unload.

We've also waterproofed this device. The X3 will be soft fog and certainly rain proof. We are still doing final calibrations as to full water submerging, but when its really done, they can hear in a couple of weeks, we expect it will submersibles in water for short period of time as well.

In terms of the data and information this device has built-in calibration system, which records the arc offered of every pulse and then we adjust the next pulse. So we have a very specific target 63 microcoulombs of charge, not that, that should mean anything to you other than the fact that we can this device calibrates every pulse so that it's precisely delivering the charge we wanted to and we can download that information and we can also use that information to tell characteristics about what we have shot into.

Sometimes there is this speech about whether the police officer actually hit the subject or not, and if they did, for how long. We can look at the graphs that the X3 generates and tell for how long the electricity was supplied, when was he acting into the subject, and if they mess, we can tell that as well. And we can feed that information back to the officer on the new colored screen on the device.

So much more information intensive and the X3 is fully integrated with EVIDENCE.com. So as you all know, we are in about between 14 to 15,000 police agencies. EVIDENCE.com is an enormous opportunity for us in that, not only is this recurring revenue opportunity for the core service, we have a free version of EVIDENCE.com for handling pager device data like the X3, X26 TASER camp.

The X3 will only download to EVIDENCE.com. It is more secure than allowing folks to just download the local best half, so it's a free service, the cops love it, but it is also where it's a great way for us to build traffic and momentum to EVIDENCE.com bringing agencies online with the X3 and then around October, we'll be launching the three version of EVIDENCE.com that supports the standard TASER X26 TASER camp.

As we get more and more people on EVIDENCE.com, the ability to then upgrade them to the full paid version with AXON and the whole digital evidence and video management, we believe will really help with our sales cycle. And once those agencies are on there much like with Youtube, the content drives the value of the network. You go to Youtube because that's where all the content is, while in law enforcement, we're building a secure Youtube analog for digital evidence management, where agencies will share and collaborate as well. So of course, the more agencies that get on the network the more valuable the network becomes for the incremental agency and of course the higher the barrier's entry point in potential competitor's long-term, so very much focused on the first mover advantage.

We've also added a three laser sighting system to improve accuracy on the X3, and finally, inherit its safety. Because we are measuring every pulse we can dial in very specifically as maturity goes in to the subject so that we improve the safety margins over our prior devices. We'd like to characterize that it's not that, well the best example of it is that, like a 1999 Mini Van, very safe right, with the crumple zones and air bags and all. Is the 2009 mini van even safer? Sure, it's got side air bags now and there's some more technology basis. So, the X3, you know, we can't go, it's got about double the safety margin of X26 and we will also choose new charge diffusion probes that you can learn more about on the website at taserx3.com. I won't get into too much detail.

But the data capabilities in the safety and the transparencies of being able to report across the whole fleet TASER X3 is much responded, very responsive to every public policy going in the debate with TESARs.

So the X3 better fulfils some of the recommendations coming out of these public policy groups. And we believe we will also help to answer some of the questions if that would really happen.

So if we think about it, X3, and AXON and EVIDENCE.com, these -- all these system are breakthrough on their own, but when you put them together, they provide an integrated system of capabilities because the X3 actually even has a wireless communication pack that optionally you replace the battery with a rechargeable battery with a built-in wireless card.

The X3 and AXON can now communicate to each other, the time synchronization, event triggering so that for example on you turn the safety on the X3 it'll automatically start the AXON recording.

And then EVIDENCE.com provides our unified command center taking the data from these devices and from even third party devices including, things like fixed cameras and we can integrate that together using advanced geo-station mapping technology to give police a real situation awareness of what's going on in their jurisdictions.

So because these devices are designed to work, we're actually launching a new strategic program, we call the advanced technology officer or ATL. In the advanced technology officer, it's sort of an analog to future combat systems in the military, where ATL is an initiative to revolutionize the capabilities of the modern law enforcement officer, and we're partnering folks like Mossberg in building the X12 launcher.

We're partnering with a number of different holster manufacturers and accessory manufacturers to build out accessories to modernize the police officer with these new capabilities. There will be more on that as we roll in later in the year and as AXON moves from pilot trials in the revenue, you'll see bundled pricing and promotional programs for agencies that deploy the full integrated system as opposed to just buying the individual parts.

So not only do these things create new capabilities, it actually creates a feedback look and this is really resonating with the officers we've talked to. So if you think about it, our ECD is improved tactical performance. So if there is a crop on the street, who is dealing a bad guy, our electronic control devices allow him or her to do their job better, lower injuries, more effective ability to get that person under control.

Now if that case moves into the court system, which is what happens in our country, it's not about street justice. We cannot just resolve it in the street, that's going to start get, then goes into the court, while with the AXON's ability to record exactly what happened, we improved the legal performance of the agency in the core system.

So now they are able to show you an audio-video kind of exactly what happened. We recorded from the officers' point of view. So this allows the agency to better defend its officers' action to rapidly dispose the false complaints and to better prosecute criminal activity recorded in the digital record.

What another thing I should actually point out, there are some bad apples out there in any business. And one of the challenges for law enforcement is it let's say I have extremely definitive crew of an officer doing something inappropriate, firing government employees is extremely difficult. And I thought many officers, who're saying. 'you know what, there is 1% out there that makes us all look bad. We like to get them out of law enforcement into another job.'

Well, with AXON, if the officer doing something wrong, we are going to know that too. So it's actually going to help agencies to better perform their jobs by not only improving the performance of their officers, but if their officers are just aren't hitting the performance levels required, its going to make it easier to make the change that I think everybody wants, which is get bad cops off the street and wants to make the good ones better.

So with the TASER and AXON so far, we've talked about individual interesting cases. But where we are unique with EVIDENCE.com, the real breakthrough is we can provide a global strategic view. We use geo-spatial mapping technology to fuse thousands of entrants into a strategic map so that now police commanders can see the big picture.

They will be able look at the map with all their incidents plotted on it. They can do filters and searches to concentrate on different types of crime, map that against where their officers are going based on the GPS and the AXON. It is the sort of commanding control system, the analogy I used is what GPS did for the armed forces of the United States in the Gulf War I. It gave a situational awareness, where the enemy was flying in the desert, and it was an overwhelming advantage, where right now, law enforcement has nothing like this in terms of technology to give them through situational awareness of their battlefield. With EVIDENCE.com, we now take these individual incidents and fuse them together into the big picture.

So data feedback to officers can be redeployed more effectively within the community and of course they've got their TASER, so they can do their job more effectively, feedback with the legal system with that kind of better evidence. We believe this feedback loop is going absolutely revolutionize the overall effectiveness of law enforcement.

So, TASER historically, we've already revolutionized at the tactical individual officer level. Now we've got our sights set on revolutionizing law enforcement at the strategic level. And when we succeed at it, we will have created tremendous value and I think it will be transformative for the company.

So at this point, I'm going to go and wrap-up. I'll encourage everybody go to taser.com or taserx3.com or little bit later today, and you can watch the key note address from Monday. It's upright now but to be honest, there is something going on in the playback controllers haven't -- aren't recording out properly. This is an hour and half long video, and you may not want to sit and watch the whole thing. So come back in a few hours and you'll have the fast forward scroll bar.

And I want to tell you two things you want to watch for, go to the EVIDENCE.com section and watch the live demo of the mapping technology. That was the hit of the show and it was funny because when I asked the audience coming officers enjoy using their departments' police or computer systems, not one hand went up.

And when they saw what we're doing with EVIDENCE.com, you'll hear oohs and aahs, they are blown away with the tool they're going to get on. So that's around the middle of the presentation and then go to the end, there is a section, where Tom and I have a pretty good time firing off all these new capabilities, which I think the final entertainment, but it will give you an idea how all these devices work.

All right. So with that, we'll open it up to some questions and then we'll wrap the call.

Question-and-Answer Session


Thank you. (Operator Instructions). We have a question from the line Eric Wold of Merriman Curhan Ford. Please proceed.

Eric Wold - Merriman Curhan Ford & Co.

Thank you. Good morning guys.

Rick Smith

Good morning.

Eric Wold - Merriman Curhan Ford & Co.

I apologize Dan, you read off the numbers, can you just give me the number for the X26 units again?

Daniel Behrendt

Yeah, the X26 units were 15,275.

Eric Wold - Merriman Curhan Ford & Co.

Okay. Then just one more quick number of questions I got you. Looking at the tax rate of past couple of quarters is popped up to nearly 50%, is that a decent level going forward?

Daniel Behrendt

Yeah, I mean its kind of it really depends on obviously the second half results. But our effective tax rate tends to be a little bit higher on a year like this when things like the ISO, stock options and also things like any other payment and the lobbying and of being add backs or tax income ends up being higher than book income, which drives that rate up from the -- basically a sort of a normal rate about 39.5%. It goes up like 50% we have some of these add backs. But that's probably additional rates as long as we're on track, in our call your numbers that we projected.

Eric Wold - Merriman Curhan Ford & Co.

And then I guess one, if anyone could take it, thinking about the upgrade offer as you're doing, thinking back to the when you have the X26 and came out the M26, what was kind of the experience back then of upgrades from departments and as we are now in a traffic analysis situation or what not, you think they are more likely to want to spend money on an upgrade or you think they will be more likely who want to spend money on a new product or what is your thinking there?

Rick Smith

Well, back to 2003 when we introduced the X26, in its first four quarter of production, it blew right half the employee M26 in sales. So we do tend to see that law enforcement agencies, they tend to buy the best equipment because their lives are on the line.

So we had actually at the time popped the price of the X26. We had actually designed it to blend demand. So we would have time to ramp production and cash demand. It is best actually to now work, demand just dropped. The total number of upgrades was less than we had expected. Agencies, when their on the M26, the main picture at that point was officer convenience, then it is lighter and its nicer to carry, and that final thing, which is to compelling to managers.

So I think kind of the answer there was well sought it up, you can wear the light holster or whatever. So we didn't see that many upgrade but we saw the new purchases flip over.

I'm hopeful, although and people just saw for the first time, Monday, they were excited to see how the agencies respond. I think that we've got to be more compelling upgrade argument now in that the multiple short capabilities really about officer safety, not just convenience. The improvements in safety given all of the public discourse on the safety topic, we believe we'll resonate at the political levels we agency better.

And then the additional transparency of the accountability, this is we can tell you whether we like specially went into a person or not exactly how much went out, all the additional data features, but they could also resonate at the administrative level better self.

My personal view is I think we've got a stronger shot at the upgrade cycle with this transition that we did with the last one.

Daniel Behrendt

And this is Dan, I'd add to that, that also we have and obviously a much larger installed base at this point that we did back in 2003 and the units that are out there is just lot more units that are probably closer to the end of the useful life, which we're getting agencies now an opportunity upgrade, which I think is a better argument versus somebody maybe half of this only a year or two old at that point, which really talking about their really is officers in 2003 versus today so much widely used platform.

Eric Wold - Merriman Curhan Ford & Co.

And then just lastly on, any reason why the upgrade offers won't last until year end. Any chance of moving that into next year or is that just an issue of kind of not want to do, have that deferred balance lasting longer than it really has to on the income statement, on the balance sheet?

Rick Smith

I think we're going to monitor things and we'll end up doing what's right for the business long-term, but we believe this that stimulus mind is coming out and is going to presented short-term flush opportunity for our customers and we think that does tell nicely with the accounting challenges that we face since we believe pulsing it is a shorter program but its pretty done in generous.

We started $800, which is full trading credit. We depreciate the TASER 3% from month embedded in field, then we get more floor, $300 no matter how old the X26 is. That raised some eyebrows, its compelling in our particularly people order units or agencies that have really 2000 M26 is going to be able to get $150 trading credit.

So its not getting stoned and we wouldn't change it if we felt it was really compelling as we get into this but we think that I think we'll be wrap up by the 31st. Dan?

Daniel Behrendt

Yeah, and I agree with that and I think we want to try that adoption cycle quicker and get it mainly down the field to get with the fact that capability of this arc are so strong that having those reference customers only, I think will help us longer terms as well. That is why we -- one of the reasons that drove us that real upgrade at this point.

Rick Smith

And we are giving to every master instructor, which certified at our instructor school this year. So again that's a way for us to see the market because they'll go back and they'll have the latest greatest equipment at everybody at the agency is going to want see it. And when you see an X26 and X3 side by side, there is really no comparison in my mind that which I'd want to have.

Eric Wold - Merriman Curhan Ford & Co.

And one final question, and I'll get back to the queue. On the Obama, you find the stimulus ones coming through, you'll better know the answer better than I, how early was this kind of upgrade potential telegraph in the police departments such that they could include it in their request for fund. That was not included in the request for funds, can they amend them, can it still be kind of use and the kind of first ones to give, they have to actually exclusively say what they want do with the money?

Rick Smith

But we really struggled with telegraphing this earlier and we did not telegraph it earlier frankly because we didn't want to take the risk of stalling out sales of X26 until the X3 was ready to go.

So we made the difficult decision of not telegraphing it. And they cannot redirect funds that they've already applied for. There is additional regular burn gram funding that's now opening up and I think everyone knows that when it will be released. It's not insignificant either.

But I guess we have characterized it as those stimulus funds come in, they wouldn't necessarily be able to acquire directly to X3, but when they get those funds, they can apply also in the budget. It's going to free up other budgetary dollars that they otherwise would have spend.

So the fact that money's coming out even if its not specifically anticipated, we think we'll free up other moneys to go this with direction.

Eric Wold - Merriman Curhan Ford & Co.

Perfect. Thank you guys.

Rick Smith

Thank you.


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

Paul Coster - JP Morgan

Thank you. Dan, first of all, I just missed your comments on the deferred revenue associated with the upgrade plan. Can you just talk us through that again please?

Daniel Behrendt

Some of the -- the current purchases of the X26 in the third quarter will be buying with the rights to trade it in. And of the previous purchases didn't know about the X3. So there's no account on that.

But the current purchasers are buying with an upgrade right, so that we value that upgrade right between 225 and $275, which means that for sales of the X26 and Q3 we're going to have to defer between 225 and $275 per unit. That will flip itself once we -- once this program sunsets but its going to across that sort of short-term deferral of sales which will obviously impact for the sales and profitability because we'll recognize the full amount of cost of sales but it's more recognize the full value that X26 sell in the quarter.

Paul Coster - JP Morgan

Got it, and then if it's not exercise, the right upgrade then presumably it just come straight back into end of the year.

Daniel Behrendt

That's exactly correct.

Paul Coster - JP Morgan

All right. Got it. You mentioned R&D is going to go up, do you think it go up and then go down or flatten or it is just going to keep going up I mean obviously I'm sure you got the sort of ideas in the pipeline but just trying to get sense of whether we're going through an abnormal period or whether is not normal for the company.

Daniel Behrendt

My comments around more it's going to sort of stay at these elevated levels. I don't expect that its increase significantly from these levels but I don't want to people to sort of model in and the R&D is going to kind of happen in Q3 or Q4 stay at these elevated levels through the end of the year.

At that point, we'll upgrade -- we start evaluate the products in the pipeline, how quickly you want to bring them to market and just the R&D spending in quarterly.

Paul Coster - JP Morgan

What impact do you think the new product has on gross margins sort of short-term and medium-term through calendar year '10?

Daniel Behrendt

Yeah, I think through the rest of this year, there is probably a little bit of a negative impact as you get through the -- certainly a lot of current from the factoring perspective. There is also sort of a value engineering process that will happen once the products are enter production we'll look at finding efficiency.

So we expect that probably have a little bit of negative impact for this year. But certainly as we get into 2010, we've got some really good people here. I think some capabilities we didn't have couple of years ago, when we introduced that, I expect that drag on gross margins will be shorter than it was say last major introduction which was introduced.

Paul Coster - JP Morgan

Rick, as you start to launch this set of solutions for law enforcement, so you see this business evolving from a kind of book and ship business into a more sort of programmatic business, where you got more visibility into the sales, into a specific agency?

Rick Smith

Absolutely, in particular with the software services group, there is more of a recurring revenue model. So once people become a customer with EVIDENCE.com, their revenue will be highly predictable.

Paul Coster - JP Morgan

All right. Good. I'll look forward to that. And then finally, France was related with respect to the agenda and their intentions?

Rick Smith

I don't have any specific updates out of France. We have seen some room movement out of Australia with two of the states making announcements about very significant purchase orders that are pending. So we've got a lot of work going on there. We are continuing to work in France and just -- we're not getting a lot of transparency.

The French, in particular have been really pretty secretive about their acquisition process. So we cannot give lot of heads up until we get orders. So I wouldn't read anything good or bad into the fact that we're not giving much feedback. They're just -- they're very careful about any appearance of coziness with vendors. So there's a real wall up to their acquisition process, which just gives us no real visibility.

Paul Coster - JP Morgan

Thank you.

Rick Smith

Thank you.


Your next question comes the line of Pete Mahoun of Dorothy. Please proceed.

Greg McKennely - Dorothy

Yeah, good morning, it's actually Greg McKennely. Guys, I wanted to ask you a little bit about the X3, maybe you're talking about this at this point, or may be you're not, but when we think about relative ASPs for that product and margin expectations compared to your current X26 product, how should we think about that difference.

Daniel Behrendt

Certainly, the ASP, we did announce on Monday that the end user price is 7099 and agency prices will be 5099, so certainly a higher price point. One of the things that allows us is it gives us a little more room to have this generous trading programs, which will help drive the demand. And as a result we expect the long-term margins, the X3 would be certainly right up with other hand-held devices, which tends to some of our shorter margin products.

Greg McKennely - Dorothy

Yeah, okay. So comparable to X26 or may be even better than X26 margin?

Daniel Behrendt

That's right. I think it will certainly be comparable to the X26 for sure.

Greg McKennely - Dorothy

Okay. And then in terms of the intended distribution channel for the AXON product, can you talk a little bit about, it's obviously the same customers base. So there is a lot of leverage for you there I would think compared to the products you've been selling in with electronic control devices.

But it's a very different product in terms of it being a software and sort of a service application. Do you need different distributors or different sales capabilities to sell this product versus how you sold the hand-held in the past?

Rick Smith

Yeah, let me take that one on, the answer is yes and no. So in its simplest form, we can think when we'll take the ipod, itunes model, where retailers carry the ipod, which then drove, I can see people get on their local back and then they see why I can go and I can buy this right online right to, although in our case if EVIDENCE.com is a requirement in order to use the AXON, our distributors especially because we're really creating this hedge about the value of this whole system with advanced Technology Officer that the extreme integrate to that time and EVIDENCE.com.

Greg McKennely - Dorothy


Rick Smith

That all of our hardware -- all of our current suppliers have got to be able to sell all of it. By the way, they're going to get frustrated as well as the customer, if the customers hedged all this is great to sure, I want come and buy this stock and distribute and say 'well, I can only sell you the handle.'

So our distributors are really excited about the opportunity, some of them will just be hardware distributors, the ones that are more fire-arm oriented. We'll sell the hardware but they won't be very involved in the software.

Then other large distributors having expressed some interest in becoming more of a value added reseller kind of partnerships, where because of EVIDENCE.com, we've build a robust set of APIs, so agencies can start to integrated into their record management system, their computer aided system.

So there will be value added integration services that will either require that we bring in additional partners to do that work, although some of our TASER Partners I mean, for example, DGG TASER out of Florida has built their business centered around TASER. And we've found historically our most successful distributors are the ones that, are the evangelists that live in brief that TASER mentioned.

Folks like that have already said they'll go out and they will higher additional resources with our guidance and counsel to build out the IT implementation part of their business, and we actually think that that's the right model for us. So they look to customers as one contact point for those distributors are going to make that investment.

Now we internally, have recently hired a dedicated Vice President of SAS sales for software to service.

Greg McKennely - Dorothy


Rick Smith

That will compliment our existing hardware sales team. So she's now starting to build out with sales application engineers that will work with our hardware group. But its really a team selling approach and that -- our belief is that the way we win this is we've got a make up this EVIDENCE.com appealing to the tactical officers and to the comp on the street. That IT is a very important player but IT possibly gets driven by the mission by achieve and by the taxation to say, 'here is overtime to do' and then they go to IT and say 'hey, find us a solution to make this happen.'

If we are successful, which we believe we will be in driving the training officers and achieve on a strategic level to say, 'look, we want this capability and it integrates with hardware that we want' that IT again will be part of the purchase process but not the primary decision maker. And where we think we can really outperform we have been doing a lot of market research with the office we have this week and what we've discovered is that there is a real disconnect between the IT side of the house and the tactics and training side of the house in law enforcement, namely a lot of country talked to a very frustrated that their agencies buy these big behave of record management systems or computer disk back systems and the training is just frankly not there.

Yesterday I was at a group of several hundred officers, we were asking questions. We asked them what they thought about training on their computer, on their agency's computer systems and the room broke out laughing. And when the survey came back, it was there was no training. Well that is our port, really if there are some things we do well right at the top of the list is our old training regime and the program and the 300 master instructors and our inhouse training stamp, and our ability to create good training materials and deliver it.

So we will be integrating and training on EVIDENCE.com with the same intensity we train on our weapon systems, which we believe is getting better customer experiences, because the officers will see the value in this. They're going to come out and they're really be able to use our software, everybody else think he is our hardware, which will create reference account, and again I think you may see how that should lead to a very successful sale cycle.

So that's how we're thinking about it. It's really adding a new software group with dedicated sales engineers coupling them with our current hardware sales team and our training division.

Greg McKennely - Dorothy

Okay. And I wonder if I can just ask one follow-up question Dan on sort of your marginal, what I think margins are probably lot better than certainly what I expected in the June quarter here. And there is a lot of moving purchase we head into the second half of the year not only with I know some of the improvements you guys were making on your production side, then we got new products coming in.

We've got some trade in allowances being offered on the X26 sales on the second half of the year. I know you indicated you expect some degree of moderation there in margins as the second half unfolds. But do you care to give us any may be more specific view on that or is that all you guys really want to comment on at this point?

Daniel Behrendt

I think you pointed out, it's a little bit soft because against obviously sales mix we saw the impact of sales mix from Q1 to Q2 and what I can do to that I mean is...

Greg McKennely - Dorothy


Daniel Behrendt

3.5 point change in margin driven partially or a lot of was driven by that sales mix but the way I model is just is obviously we are still going to target margins longer term to be north of 60, obviously what I would do is maybe model in that range and then back half this trade allowance this show we're really end up for Q3 and then how that reverse itself that with in Q4. So we certainly expect the margins in Q3 will negatively impacted by this trade allowance, so I'd model that in.

Greg McKennely - Dorothy

Yeah. Thank you.

Daniel Behrendt

Sure. Thanks.


We have a question from the line of Steve Dyer of Craig-Hallum. Please proceed.

Steven Dyer - Craig-Hallum Capital

Thanks guys, nice quarter. Most of my questions have been answered and first of all very nice event that you guys put on this week. It was very informative and I think showcased a lot thing very well.

Couple of questions, I guess just around see the cabins of the stimulus I know you've talked about it little bit before. How do you see that sort of playing out from a timing perspective, and again is it kind of a short first year, kind of like Q3, Q4 or does it have some spending, some legs in your mind?

Daniel Behrendt

You know I wish I could give you a good answer. Unfortunately, what we've seen is that the administration has been really focused on keeping corporate America out frankly of the process you've seen some it did down about -- being restricted very heavily from what they can do to interface with government agencies that are getting stimulus money.

And we are seeing that agencies, that are also being very careful. They are not giving us a lot of feedback. I think just everybody is being very careful here. They don't want to be seen as allowing corporations to include the process and as such it's just really hard to get information. And then also I think the government agencies are just struggling to figure out how they are going to get this money out as fast as they are supposed to.

So it's making very hard for us to model or predict. Generally, what we see -- we are finding how about stimulus earn being spend either because the purchase order shows up or we are reading about it in our media alerts that local newspapers are doing stories on it. But agencies are not being very communicative on it and nor are the federal folks that we deal with us obvious than do you see. It's really a black box. Wish I had better answer, but I don't.

Steven Dyer - Craig-Hallum Capital

Okay. And just if you could spend a little time on the Shockwave and XREP kind of the lesser two talked about newer products, how do you see that sort of progressing in terms of revenue maybe anecdotally?

Rick Smith

Okay. Shockwave, the way to think about Shockwave is it's really sort of improvement concept products. For ten years, the military and there's been PowerPoint circulating around and many a discussion about let people denial systems. And two years ago, we made the decision that what we got to get this often concept and put a tool out there they can start war gaming with and make it real.

Now note this sort of primary focus of Shockwave is the military customer. And they've got a long horizon and its just starting enter their thinking map.

We'll be probably giving up fair number of units away to a various training centers and demo centers, so that they can give their arms around the concept. We have had interest from swap teams, we've one used it in a barricade, where they've got a arms uptick and how they come running out and they have the Shockwave set-up, so that they from the same business.

But I expect to hold on revenue on Shockwave in the next year that again is more ever a future concept.

XREP, we are getting a lot of interest. It's -- but extended range is much lower volume business atleast in the law enforcement market base, the vast majority of competitions happen ofcourse in personnel, so the agencies that might have hundreds and hundreds of PGs every year they might have 5 or 10 bean bag or extended range uses every year.

And it's really that two are competing with now in the extended range market. So I think we'll start to see, we'll start to see XREP sales. I don't give any guidance because, again it's our core business is hard not to guide on. But I think its fair to measure how XREP is doing because that was thought that should be a good revenue generator.

In long-term frankly, we think the wireless systems will sell better in the consumer space and private citizen self defense. We have not launched the XREP in that market, and we don't have plans to do this year. Next year, we may look at that, and the reason I say that is law enforcement is really focused on -- most of the time they're not actually bending themselves. They are proactively going on arresting somebody. So they're very focused on low risk of injury and the hand-held devices just do a great a job at that. An dthey are generally pretty close anyway.

These wireless systems, there going to leave more remark, it's a bigger project out to reach out the extended ranges, its moving faster, its going to potentially cause much bigger bruises, confusions that hit to the head is going to be a pretty bad thing. So law enforcement is going to use those more sparingly only at very high risks situations.

But in a window between relatively high-risk but not yet just define law force. Now when we look at the military customer or the consumer customer in those applications if somebody is breaking your house, you are not too concerned about that they might lose an eye, its not big cavalier if you hit them or you're willing to put up a little higher risk of injury and the same with the military customer, the military generally, they get too, there is not civil liability issues.

They want to keep threats further and further away. Of course the military takes longer to adjust and adopt new technologies and in the consumer stage, we don't want to launch a wireless technology in consumer space until we've really got it ironed out with good feedback in the professional space.

So we would like it not to launching that market and just get. So, I think you'll see niche, a reasonably good size niche market for the XREP in law enforcement. And then over the next couple of years, the other market will start to adopt and then we could really start to take off.

But the big revenue drivers I would say, my first classification is X3, it's a big revenue driver, AXON, EVIDENCE.com, are big revenue drivers. XREP is moderate to maybe niche and then Shockwave is proved to concept.

Steven Dyer - Craig-Hallum Capital

Okay. Great. Thanks, very helpful. Just other question on the C2, how do you think about that, while I guess as long as you kind of going over product lines, I mean is that an area for investment, or is that kind of you think that's kind of not performing about what you would expect and hope it should perform.

Rick Smith

We feel the C2 is, it didn't quiet frankly hit my expectations, where I would like to see it by now. And part of the reason there is we've struggled in the larger retailers. People need -- if somebody requires personal interaction and when you go to a major retail store, for the most part, people are in and out on a regular basis, there is short job tenures, it's hard to get consistency.

So we've been struggling a bit to get the right recipe to get the big box resellers more successful selling it. The smaller mom and pops are doing pretty well with it. And then we actually just brought in a new person Dan, can we talk about his background?

Daniel Behrendt

Yes, I think its fair, yes.

Rick Smith

Yeah, but we haven't put a press release out there per say but we brought in Danny, who is the former Head of Sales for Clarry and Car Audio, very short guy, really knows the consumers space, has dealt with both big box retailers and the smaller independents like the, in their business, it was car, stereo, he got some great ideas for how we can be more effective in training.

And then other thing we're starting to look at is how to be more effectively use the TASER brand. We have significant brand awareness out there over 90%. We got extremely strong brand. So we are -- as we look to the future, we're starting to think not only in terms of the okay, what are proprietary products we can develop but over complementary product this might spin to our brand they could build a strong the overall retail presence.

And I feel little ahead when I saw that is not yet fully flushed out but as if we got somebody now they can kind of owe in that business for us and it's a nice part of business, decide the today it's...

Daniel Behrendt

5% of sales.

Rick Smith

5% of sales. But I seen an opportunity to grow that but we don't -- it's not something we have not yet found the model where we can invest a dollar and get $5 back. It seems to be more organic in its growth with high type swaps of interaction and we haven't got a replicable model yet on known how to scale that certain level, where we'd be happy. But we are working on it.

Steven Dyer - Craig-Hallum Capital

Okay. Thanks and then just last question Dan, o you have CapEx number for the quarter?

Daniel Behrendt

Yes, CapEx for the current quarter, year-to-date, we are obviously about $4.8 million for the -- let me just pass the quarter here. I just have the year-to-date numbers. So I'll give you a call after this with a breakout of current quarter, but its pretty significant in the quarter especially with the addition of the equivalent at first data center.

Greg McKennely - Dorothy

Okay, just give me a call. Thanks.

Daniel Behrendt

Thanks Greg.


There are no further questions at this time. I would like to turn the call back over to Mr. Rick Smith. Please proceed.

Rick Smith

Thank you. All right, well again, I really encourage you if you are interested in learning more about where we're going and how this all fits together, go taser.com later today and watch the key notes particularly, the parts on that EVIDENCE.com and then be conclusions actions.

You want to go little bit later today, we're just having some trouble with the player controls because it's such a large video, its hour and half long. And they discarded up late last night. So it's still treating it. So go back in a couple of hours to taser.com, check it out.

Thank you for your time, we value over an hour this morning. And I don't know about you, I am beyond excited about where we're going. And if these if the X3 in particularly in EVIDENCE.com and AXON fits, its going to be an exciting time for us.

So we appreciate your patience with us as we made the heavy investments required to make these things happen and over the three quarters, now its time for these investments to start delivering. So thank you very much.


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

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