TASER International, Inc. Q4 2009 Earnings Call Transcript

| About: Axon Enterprise, (AAXN)

TASER International, Inc. (TASR) Q4 2009 Earnings Call Transcript February 19, 2010 10:00 AM ET


Rick Smith – CEO

Dan Behrendt – CFO


Mark Strouse [ph]

Gregory McKinley – Dougherty & Company

Steven Dyer – Craig-Hallum


Good day, ladies and gentlemen and welcome to the fourth quarter 2009 TASER International Incorporated earnings conference call. My name is Stacy and I’ll be your conference moderator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of the conference. (Operator Instructions) Today’s conference call is being video-webcast. To watch the video, please go to Taser.com, click on the Company tab, and select the Investor Relations page. Please follow the link to the webcast. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today, Mr. Rick Smith, CEO

Rick Smith

Hello. I’m Rick Smith, CEO and Founder of TASER International and this is Dan Behrendt, our Chief Financial Officer. I like to welcome you to the fourth quarter of 2009 TASER International conference call. We appreciate you joining us for our first-ever video conference call and we are excited at this opportunity to not only share our results, but some of the results of the key investments we made over the past two years. So with that, I’ll pass to Dan to read our Safe Harbor statement.

Dan Behrendt

Looking at the Safe Harbor statement. So, forward-looking statements and GAAP reconciliation, this presentation contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended, and Section 21E of the Securities Exchange Act of 1934 as amended, including statements without limitation regarding our expectations, beliefs, intentions or strategies regarding the future.

We intend that such forward-looking statements be subject to the Safe Harbor provided by the Private Securities Litigation Reform Act of 1995. The forward-looking information is based upon current information and expectations regarding TASER International Incorporated. These estimates and statements speak only as of the date of which they are made, not guarantees of future performance, involve certain risks, uncertainties and assumptions that are difficult to predict.

Such forward-looking statements relate to expected revenue growth and earnings growth; estimations regarding the size of our target markets; successful penetration of the law enforcement market; expansion of product sales to the private security, military, and consumer self-defense markets; growth expectations for new and existing products and accounts; expansion of production capabilities; new product introductions; product safety; and our business model. We caution that these statements are qualified by important factors that could cause actual results to differ materially from those reflected by the forward-looking statements herein. This presentation contains non-GAAP financial measures, which include but are not limited to, non-GAAP adjusted revenue, non-GAAP adjusted gross margin, and non-GAAP operating income. A reconciliation of GAAP is included with this presentation or in the current report on Form 8-K furnished by TASER International Incorporated on February 19, 2010, which can be found at www.Taser.com or www.SEC.gov.

With that, I’ll pass it back over to Rick.

Rick Smith

As you all know, our mission at TASER is to protect life; to get people to stop killing each other. Injury or trauma is the leading cause of death for all age groups under age 44 in the United States. We are committed to developing technology to protect the lives and safety of people in this modern environment.

There are three key entities we look to for protection in our society. The first is the individual person. The second is the family, which is really the fundamental unit of society that looks after the health and safety of our youngest and most vulnerable. The third are the public agencies, such as law enforcement and first responders charged with providing emergency services and maintaining peaceful, secure communities.

Our core ECD technology empowers the individual to protect himself. Now, certainly, law enforcement agencies and heads of families also use ECDs, but at its core, these less-lethal weapon systems are designed to allow individuals to incapacitate other individuals for the purpose of protecting themselves or enacting a lawful arrest.

So, while the individual members of public safety agencies rely on our ECD technologies, those agencies themselves have come to rely on our tactical information systems to help ensure that their members are doing the job of protecting the public without abusing their power, as well as to protect their members from false claims against them.

The data port that records the date and time of each trigger pull in a TASER ECD and the TASER CAM have become invaluable resources to agencies, to help them better manage their members to better protect the public. In fact, TASER International has become one of the market leaders in on-officer video, with almost 40,000 TASER CAMs in the field today.

With the introduction of our new AXON system, we have further expanded this capability with the system that records every incident, not just TASER involved incidents. The AXON is an integrated system that includes a HeadCam integrated into a radio earpiece; a communications hub with pushbutton controls, and the AXON tactical computer -- a touchscreen computer that records and can analyze, log, and tag multimedia information.

As shown in this video, AXON records incidents from the officer’s visual perspective. The video here is a training exercise, but similar AXON videos from real-world incidents have been hailed as a quantum leap in technology by prosecutors and law enforcement officials, who are now able to see incidents unfold from the officer’s visual perspective. But the real challenge isn’t just recording the video. It’s how you securely store, analyze, and manage thousands of these videos in a manner that meets the federal and state rules of evidence to preserve records that every file has been unaltered and maintained in its original form. So we’ve developed AXON integrated with an end-to-end system called Evidence.com that delivers this entire capability on a turnkey basis for our customers.

You know, managing a video data center is a very specialized skill set. Videos are enormous file sizes. A small agency can generate tens of terabytes of data each year, and being able to manage that data to make sure it’s properly backed up and that is protected -- again, meeting the Federal rules of evidence -- is a huge technical lift. With Evidence.com, we’re providing this service turnkey to our customers, so they can focus on being best-in-class law enforcement agencies, not trying to learn how to set up best-in-class video data centers.

So as we move to the next slide, I’m actually going to show you a brief video about the types of capabilities we can bring through Evidence.com -- because it’s much, much bigger than just storing this information. It’s about unlocking the evidence, unlocking the knowledge hiding in evidence. So, for example here, our geospatial mapping controls will actually plot on maps each incident, so that a commander can look at the city, find the incidents he’s looking for, click on it, and it immediately opens in our customized video player, which is built for video evidence. So it handles tags and markers and things that you can’t do in traditional multimedia players. And as you can see here, we can see exactly what the officer is seeing right out over his weapon.

Now we’ve built best-in-class multimedia management tools, this will feel familiar to what many of you have seen in some of the best consumer applications. So ease of use is just simply critical, including search functions, so that videos can be tagged and later searched. Here we’re searching on the name Jasmine, which turns out is the office dog out in Santa Barbara at our TASER Virtual Systems location. And we’ve got a video that was taken here with her chasing one of the laser sights. But what that also illustrated is that Evidence.com handles TASER CAM media. Here we’re showing in-car video. We can ingest other multimedia sources, so that Evidence.com can become a repository for all digital evidence, not just AXON, TASER CAM and TASER data. So what we’re actually showing here is users have the ability to upload any type of evidence, including photographs, other file types, and they all get tracked and tagged with a full chain of custody record for when it later has to be presented in court.

And of course, Evidence.com stores all the data port logs and TASER CAM logs from all of our TASER data. This is a version of Evidence.com we call Evidence.com Lite, which is free to our base users, to give them the ability to try Evidence.com to manage all their TASER data, and they can upgrade later to the full pro package of Evidence.com. The third, and perhaps most important group that protects lives and protects our most valuable and vulnerable lives, is of course, the family unit. PROTECTOR by Taser is a ground-breaking new toolset that gives parents the ability to supervise how their children interact in a mobile world.

As technology advances and your children grow, so will their access to people, places, and information. PROTECTOR by Taser can help families navigate the changing landscape, together establishing good judgment and safe habits, both on their phones and in the car. From one simple dashboard, I can see what matters most to me -- my family. I can click on any member to see right where they are now and how I can get to them quickly. I can control the approved contacts for my child’s phone right from the dashboard on my phone. So when friends and family that I’ve already approved to talk to my young child call, they’re seamlessly connected.

But when someone unknown calls, as shown with our tattooed fellow here, PROTECTOR alerts me and allows me to be an engaged parent. I can block the call; I can allow the call; or in this case, since I don’t recognize the number, I can even elect to have the caller directly connected to me as a father. And I can see who’s trying to call my little girl and decide if I’m going to let them through or not. You know, before this, cell phones had really been an unknown for parents. Once you give a child a cell phone, they are unsupervised in the digital world.

You have no idea who they’re talking to, who’s contacting them. If somehow some child predator or otherwise someone got your child’s phone number, with PROTECTOR, you’re able to stay engaged in the social community that your children are engaging in.

And now similarly, PROTECTOR has a rich feature set to protect children from sexting and other potentially dangerous behaviors. Once I have approved a friend of my daughter’s, I have no interest in seeing the 500 texts a day about the latest boy band.

But when one of her friends tries to send a sexual photograph, I’ve set it up so that PROTECTOR’s screening technology intercepts the offending photo before it ever gets to my daughter, and it routes to me as a parent, so I can take care of it. As my daughter grows older, PROTECTOR matures with her. I can relax the settings, giving her more freedom and control as she earns it. And when she becomes a young driver, I can add a small hardware module called the Driver Protector that allows me to help teach her safe driving habits by preventing distractions while driving, and monitoring for dangerous driving behaviors to keep her safe.

It’s like allowing me to be in the car when I’m not there; I can check in on current speeds and receive alerts when dangerous behaviors are detected. PROTECTOR works on a wide range of smartphones, using any carrier, so you can keep the phones and service you already have. You can also access PROTECTOR through your PC or Mac, and even through new widget-enabled television sets. Together, Taser, PROTECTOR and Evidence.com empower individuals, families, and public agencies to better protect themselves and our communities. So what are the business implications of these new products and services?

Well, first of all, last quarter, we began shipping the TASER X3, which is our latest electronic control device. The X3 offers us an opportunity to have an upgrade path for all of our existing customers, where they can upgrade from the single-shot technology of today to our newest technology, which is semi-automatic and multi-shot-capable.

AXON and Evidence.com give us an entry into a new market space, the $350 million annual market for in-car video. And of course, with the Evidence.com piece it not only solve problems for our customers, it provides TASER International with a great recurring revenue opportunity. And with PROTECTOR, there are significant new revenue opportunity in family protection and distracted driving, which is a huge issue right now in public safety.

In addition to investing in these new breakthrough products and services, we’ve also been reinvesting in our core business. Just last quarter, our highly-automated cartridge assembly line came online. This state-of-the-art equipment improves our throughput capacity, quality, yields, and reduces labor content, which will help improve margins and I’m proud to report that we’ve been able to fund these significant investments from our operating cash flow.

If you look at this chart, you can see our cash resources grew significantly from 2006 to 2007. In 2008, we returned over $12 million to our shareholders through a stock repurchase. And we’ve been able to fund these additional investments without tapping significantly into our cash reserves. So while other companies were forced to cut back investments during the recession, we were able to sustain these investments, which we believe will position us very well to enter a cycle of accelerated profitability and cash generation as the economy recovers, and these new products and services come online.

At this point, I like to hand the presentation over to Dan Behrendt, our CFO, to review the fourth quarter financial results.

Dan Behrendt

Thank you, Rick. So first, I’ll get into the sales for the quarter and for the year. So, from a total sales perspective, as we talked about on the last call, TASER deferred a portion of its X26 sales made in Q3 to reflect the value of the trade-in right, which came with the purchase of an X26 in the third quarter.

This trade-in right allows the customer to get a partial credit towards the purchase of an X3 with the trade-in of their X26. The company reversed the $3.5 million deferral in the fourth quarter. We’re going to cover adjusted revenues, adjusted gross margins, and adjusted operating income, which excludes the impact of the reversal of the X26 deferred revenue adjustment, which is not in accordance with GAAP but does allow for better comparisons to prior periods. I’ll also cover the GAAP numbers that reflect the deferral.

Adjusted revenues for the fourth quarter were $31 million, which were up approximately $4.6 million or 17.6% from the prior year, mostly driven by an increase in our federal and military markets as well as some individual large domestic orders, specifically to the Philadelphia, Cleveland and Chicago Police Departments.

Our GAAP net sales for the quarter were $34.5 million. On a sequential basis, Q4 adjusted revenues were up $4.3 million or 15.9% from Q3, primarily caused by an increase in international sales and an increase in sales to the US law enforcement.

During the fourth quarter, we saw sales to US law enforcement came in at 58% of our sales compared to 55% of our sales during the prior year and 46% during the third quarter. Part of the increase was derived from stimulus funding and we expect to see some more benefits from the stimulus funding in 2010. Total sales for 2009 were a record $104.3 million compared to $92.8 million in 2008, with a year-over-year increase of 12.3%.

So, moving on to international and federal sales, as you can see from this slide, international sales and federal sales have become an increasingly significant part of our business. TASER has shipped products into 44 different countries and growing the international part of the business remains a strategic focus for the company.

The federal business has grown more important as well, which together, with the international sales expansion, has helped to offset the weakness in US law enforcement business driven by lower municipal budgets.

The Company has invested resources into growing these markets, so it’s gratifying to see these investments begin to pay off, with roughly one-third of our sales coming from these markets in 2009.

In 2009, sales to US law enforcement were 51% of our sales compared to 60% of our sales during the prior year. We’re starting to see the benefit of stimulus funding as we close out 2009.

In the fourth quarter, we saw US law enforcement making up 58% of our total sales, and we expect to see more stimulus-driven orders in the first half of 2010. Again, you see the increasing impact of international, federal, and military markets in the 2009 year. And while federal and international markets increased, the consumer market has decreased as a percentage of total sales. We do expect that sales in the new protector family of products will help to reverse this trend in 2010.

Moving on to gross margins and operating expenses, you’ll see the adjusted gross margins of $18.3 million represented 59% of adjusted revenues. This is down approximately 4.5% as a percent of sales from the prior year. The decrease in margin is mostly driven by less favorable product mix, and increased warranty and obsolete inventory charges.

Our gross margins on a GAAP basis were $21.8 million or 63.1% of sales. SG&A expenses of $9.8 million for the fourth quarter versus $10.9 million in the prior year. The decrease was driven by a $422,000 reduction in travel; a $912,000 reduction for professional and consulting fees, and these were offset by an increase in salaries and benefits of $241,000, due to higher headcount and an increase of $158,000 in our FAS 123R expense.

On a percent of sales basis, you’ll see that SG&A expenses were 31.5% of adjusted sales for Q4. This compares to 41.4% of sales in 2008. Sequentially, we saw SG&A expenses decrease $1.6 million over the third quarter. The third quarter SG&A was impacted by the launch costs associated with the AXON, Evidence.com, and X3 product lines, as well as the cost of the annual TASER conference.

As a result, fourth quarter marketing expenses decreased $444,000; supplies decreased $316,000; and travel decreased $306,000. Now, salaries and benefits, and 123R expense decreased $276,000 from the third quarter due to a reduction in force that occurred during the fourth quarter.

Our total SG&A expenses were 42% in both fiscal year 2008 and 2009. We do expect an up tick in SG&A expenses in the first quarter of 2010, mostly due to timing differences associated with costs related to the CS and Shot Shows that take place in the first quarter; we have increased audit fees in the first part of the year; as well as higher legal costs associated with cases going to trial in the first part of 2010. With that being said, we’re still looking into leverage existing SG&A resources to the extent possible to improve the operating performance.

Now, the research and development expenses were $4.8 million for the fourth quarter, which includes the benefit of $850,000 of capitalized salaries and consulting costs for Evidence.com. Gross research and development expenses of $5.6 million increased $1.1 million over the prior year, mostly driven by the $868,000 increase in salaries and benefits to support both hardware development and our new software development team headquartered in California.

Equipment rent increased $210,000 for the data center that houses Evidence.com servers, and computer licenses increased $152,000, also driven by Evidence.com. Now, R&D expenses actually decreased $1.9 million or 29% from the third quarter levels, due to significant reductions in indirect supplies, expediting fees and scrap costs incurred in Q3, surrounding the AXON and X3 product builds for the TASER conference and the International Association of Chiefs of Police Show, which both took place in Q3. While we’re not happy with the expense levels in Q3, we have reduced R&D in Q4 to a more acceptable level and instituted tighter cost controls to better control spending going forward. You can see that the difference in operating account from the 2008 levels to 2009, it’s almost completely attributable to the increased investment in research and development. And as this slide shows, our research and development expenses have gone up significantly over the last couple of years. This is really driven by the fact that the Company wanted a much more robust product pipeline and a broader array of product offerings with AXON, XREP, Shockwave and X3 products all being introduced in 2009.

The AXON and Evidence.com development will allow the Company to have a strong product to compete in the police video market, which we estimate at $350 million per year. As Rick mentioned earlier, we’ve been able to fund a significant investment in R&D through internally generated cash from operations. Despite the large increase in CapEx and R&D, our cash balances have remained relatively constant, with the exception of the impact of the 12.5 million stock buyback, which we executed in 2008. Now we do expect R&D expenses to relax in 2010, as the launch costs for AXON, X3, Shockwave and XREP are behind us.

Now because of items like depreciation and cash flow -- or I’m sorry -- depreciation and non-cash 123 stock compensation charges, you can see that these are having a more significant impact on our results. Therefore, we’ve decided to discuss earnings on both a GAAP basis and also a non-GAAP cash basis. We’ve also excluded the timing impact of the X26 trade-in credit reversal in Q4 and the impact of the reversal of the $5.2 million litigation judgment in Q4 of 2008, today’s comparisons to prior periods.

Our non-GAAP adjusted income from operations in the fourth quarter was $6.2 million or 19.9% of sales. Now this compares to $3.1 million or 11.6% of sales in the fourth quarter of 2008. Our GAAP operating income was $7.2 million in the fourth quarter and $6.6 million in the fourth quarter of 2008. On a total year basis, we had non-GAAP adjusted income from operations of $8.5 million in 2009 or 8.2% of sales. Now this compares to $10.3 million or 11.1% of sales in 2008. On a GAAP basis, we had a $79,000 loss in 2009 compared to operating income of $5.2 million in 2008. Again, the difference was driven by the large increases in R&D year-over-year.

Our EPS on a dilutive basis was $0.07 for the fourth quarter of 2009 versus $0.06 for the fourth quarter of 2008. Total year EPS for 2009 is basically breakeven versus $0.06 in 2008. Now the reconciliation from GAAP to non-GAAP income and sales are included as part of the earnings release put out earlier today, so you can see exactly how that math works and you can work through the numbers from a GAAP to a non-GAAP basis.

Moving on to the balance sheet, I’d like to talk about the 12/31 balances that we have here. We did finish the quarter with $45.5 million of cash and investments. This is a decrease of $3.9 million from the prior year-end, mostly due to capital expenses of $15.1 million, partially offset by our operating cash flow of $10.1 million. Due to the uncertainty in the market, the Company has elected to keep its investments very liquid, and that’s worked very well for us; we continue to do that.

Our Accounts Receivable, you see they ended the year at $15.4 million. This is down $1.4 million from the prior year-end balance of $16.8 million. This is mostly due to a large UK order that shipped at the end of 2008 and collected in the first quarter of 2009. Now, when we look at a days sales outstanding basis, we actually had a DSO of 42 days, which is a decrease of 12 days from Q3 of 2009, and is down approximately 16 days from the 12/31/08 DSO [ph] balance, largely because of the large international orders that we shipped in the fourth quarter of 2009, that we actually got cash of our large deposits before delivery.

Our inventory balances of $15.1 million is up $1.6 million from the prior year-end balance. As expected, inventory balances climbed from the Q3 levels due to purchases to support the X3 and AXON product lines. You see that prepaid and other assets of $1.2 million are actually down $1.3 million from the prior year-end balances. This is really due to some product liability insurance that we renewed in December of 2009; we didn’t pay those bills until January of 2010. That’s the major part of the difference in the pre-paid.

Again, investments and property, plant, equipment of $38.7 million, this is up $15.1 million from the prior year-end balances. Now we had significant capital expenditures in 2009, as you can see from this table. We had $4.5 million related to additional payments on the automated cartridge line that Rick talked about earlier. We had a $2.1 million investment in data center equipment to support Evidence.com. We had production equipment of $3.8 million to support the new existing product lines; and we had some investments in other computer equipment to support the business of approximately $1.7 million.

So, moving on to the liability and equity section of the balance sheet, accounts payable of $6.4 million is actually up $2.5 million from the prior year-end, due to timing differences and AP check runs at year-end and increased purchasing activity, including the automation equipment of $1.2 million.

Accrued liabilities of $4.2 million are roughly flat with the prior-year balance of $4.3 million; just had some slightly lower accruals year-over-year. The current deferred revenue of $2.8 million is up from the prior year-end balances of $2.5 million due to the sale of more extended warranties in 2009. We had total liabilities of $20.7 million, and the company finished the quarter with $118 million of stockholders equity. The company has no long-term debt and we continue to have liquidity to fund our R&D efforts and operations as we move into the future.

Lastly, I’d like to cover the selected statements of cash flows information. We had $3.6 million of depreciation expense in 2009, which is up roughly $1 million over the 2008 levels due to the capital investments we made in 2009. The stock-based compensation is also up year-over-year and we had roughly $5 million of non-cash 123R charges that hit the income statement in 2009. With over $8.6 million of non-cash charges, you begin to understand why we report operating income on a GAAP, non-GAAP basis.

We had $10.1 million of cash provided from operations, which is up $5.5 million from the $4.6 million of cash provided from operations in 2008. Cash used by financing activities of $11.7 million is driven by the CapEx, which we previously covered and we finished the 2009 year with $45.5 million of cash on the balance sheet, which again, continues to provide the needed liquidity to operate, invest in our business.

With that, I’d like to turn it back over to Rick Smith, our CEO.

Rick Smith

Thanks, Dan. So, fourth quarter achievements, we had significant orders from Philadelphia, Chicago, Cleveland and DeKalb County. Frankly, the Philadelphia order was the largest one that we have been able to track to stimulus funding, around $1 million.

International sales were 17% of net sales. We had a large order for 2,500 TASER X26’s that were ordered by the US Army under an IDIQ contract and 443 X26 units ordered by the US Marshals. Also in the fourth quarter, the Attorney General in New Jersey allowed electronic control devices to now be used in limited circumstances. Up until now, New Jersey had been the last state that did not allow their officers to use TASER devices. We are proud to announce that that has now changed.

Also in the fourth quarter, four more product liability suits against the company were dismissed. Importantly, we also took the AXON and Evidence.com into field pilots. We have several agencies now pilot-testing AXON and Evidence.com. And in one case, AXON video actually cleared an officer that was involved in a fatal shooting incident.

Now, historically, an officer involved in a fatal shooting would be subject to an extensive investigation that could take weeks or months while they are placed on leave. In this case, because of the video, the officer was cleared in a matter of days because the prosecutor’s office was able to see that, in fact, he was facing an armed subject. And the prosecutor himself said that this was a really breakthrough, quantum leap technology in terms of the capability to be able to investigate these types of cases.

Also, the country of New Zealand ordered 777 TASER X26’s to be deployed nationwide. And also, New Zealand became the first country to standardize on Evidence.com, so they’re using it nationwide with a minimum three year contract to support all of their electronic control devices and TASER CAM data.

Now, for projection purposes, they’re not yet using the Evidence.com Pro version, so the revenue from this is significantly lower than it would be for an AXON/Evidence.com Pro account; but still, it’s quite a watershed that the New Zealand Police Department has now standardized on Evidence.com for handling all their TASER and TASER CAM data. And at this point, I’d like to open it up for questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from the line of Paul Coster. Please proceed.

Mark Strouse

Good morning, it’s actually Mark Strouse [ph] for Paul. So you guys have made a lot of investments over the past couple of years in OpEx. And it sounds like we’re nearing the point where you can start to reduce those expenses. Can you provide a target operating expense level and how quickly it’s achievable to get to that level?

Dan Behrendt

Yes, good morning, Mark. This is Dan Behrendt. Yes, I mean, it certainly -- we’re looking to, as we mentioned on the video part of the webcast, to get leverage back in the model again. So we’re going to work hard to control the expense levels in 2010 in both the SG&A and R&D levels. I think the return of operating margins is really going to be driven mostly by increased sales. I think that at this point, we’ve got a good cost structure in place. It’s really going to be getting the leverage back in the model and growing the sales. The idea of starting to get these new products to become a more meaningful part of the business is certainly going to be the main driver for that.

Mark Strouse

Got it. Okay, thanks. And then under what circumstances would you guys be comfortable to begin to start issuing guidance, either quarterly or annually?

Dan Behrendt

Yes, this is Dan Behrendt again. You know, I think that’s really going to be driven -- as we look at the business model here, as you know, it’s always been a business that’s a little difficult to predict because of significant individual orders that, especially on the international and federal side, that are -- that can be difficult to predict the exact timing. So it makes giving guidance difficult.

Now, with that being said, I think as the Evidence.com and potentially Protector business become a more meaningful part of our business, those should provide a more predictable revenue stream for us. And at that point, we’ll certainly entertain giving guidance. But certainly, as we move into 2010, there’s not -- we don’t anticipate giving guidance in the near-term.

Mark Strouse

Got it. Okay. And then, lastly, Dan, can you just give us the normal rundown of shipments by product line?

Dan Behrendt

Yes, certainly. So, actually we had really strong cartridge sales in the quarter. We actually sold 447,397 cartridges, which I believe is actually the highest cartridge sales in the Company’s history. We had 20,653 X26’s; 2,894 M26’s; 7,015 C2’s, which is up pretty sharply from Q3 levels, and then we had 3,028 TASER CAMs. So, the TASER CAM business is continues to be, I’d say, pretty meaningful, as Rick mentioned earlier. We’ve got about close to 40,000 TASER CAMs in the field at this point, which is about a 10% attachment rate, which is actually pretty good and actually gives us, as we move on with the AXON and Evidence.com platform, we certainly, I think, having that foothold in that police video market is going to help us there.

Mark Strouse

Okay. Is X3 broken out or is that in the other category still?

Dan Behrendt

That’s still going to be in the other category until -- you know, we’re going to give it a few quarters to get its feet under it, and then we’ll start reporting that probably later in 2010.

Mark Strouse

Got it. Okay, thank you very much.

Rick Smith

Unfortunately, we didn’t really ship X3’s until pretty late in the quarter. It was really end of November, early December, until it usually started hitting in the street for test and evaluation. You saw earlier this week, we just announced one of the first significant orders of 150 units, but it will take a little while to scale. Agencies tend to test new platforms for -- depending on the size of the agency, the bigger the agency, the longer the test.

Mark Strouse

Got it. Okay, thank you, guys.


Your next question comes from the line of Greg McKinley with Doherty. Please proceed.

Greg McKinley – Dougherty & Company

Yes, thank you. Could you walk through with us again the economics of the AXON and Evidence.com as well as the X3, in terms of maybe revenue per unit, margins that you might earn on the sales of each of those, and sort of the per, I think, C [ph] license fees, if you will, on Evidence.com? Just so we can better understand margin revenue impacts from those sales. And then maybe talk a little bit about what your go-to-market timing looks like when AXON and Evidence.com sort of graduate from field trials into something that might be a more likely contributor to revenue recognition?

Rick Smith

Sure. This is Rick Smith. I’ll take that one. So let’s start with the X3, it’s the simplest. The X3 is currently priced at around $1,600. During the fourth quarter, third and fourth quarter, obviously, we had reserved room for a trade-in program that would bring the ASP probably down to around $1,200 or $1,300 net of trade-in credits. This year in 2010, that trade-in program has expired. However, there will be other programs we’ll be doing to help drive sales. So the $1,600 may end up being like a $1,400 net end-user price.

And from that, I would take off about another 12.5% for the distributor. Margins on it, on the X3, are comparable to what we see on the X26, you know, high 60% margins on a per-unit basis.

Gregory McKinley – Dougherty & Company


Rick Smith

Moving to AXON and Evidence.com, the AXON’s hardware itself is list price of $1,700. Margins on that -- distributor margins, plan on 10% to 12.5%. Our margins are going to be lower on the AXON system than they are on our core ECDs. Dan, do you want to comment on it?

Dan Behrendt

Yes, it’d probably be roughly 50% kind-of margin on a variable basis for that product, on a hardware piece, but obviously, we’re looking forward to that recurring on the subscription side as well.

Rick Smith

Moving through the Evidence.com per-feed license. So, we have announced last year the business model would be approximately $100 per month per-feed subscription fee. Our discussions with customers at this point is indicating that’s likely to evolve into enterprise pricing, particularly with the larger agencies that don’t have to be turning feeds on and off as officers churn through different roles within the agency, et cetera. So, for smaller agencies buying several units you can plan on, again, roughly $100 per month, per user.

If we look at bigger agencies, we’ll be looking enterprise pricing, so there may be some net discounts for the larger agencies. Although there will be different types of seats as well you’ve got your full Evidence.com user that is a content generator that’s wearing an AXON and is generating and uploading that content. But then there are other types of seats, you might have administrators that are using Evidence.com for administering that evidence. You have detectives that may not have their own AXON but will be looking at other folks’ video and uploading video from other sources, et cetera.

So we haven’t published any models there yet. I think as a rough approximation, the advertised pricing, when you look at in larger agencies adding in these other seats, and then potentially sort of discounting the volume across their active AXON users, I think roughly $100 per month per user is a good starting point for modeling it. You’ll have some gives and some takes.

Gregory McKinley – Dougherty & Company

Okay. And then in terms of your thoughts around these products migrating from trial to commercially launched, what would your thought be on the timing standpoint there? And can you share with us any thoughts around goals or expectations for these products in 2010?

Rick Smith

Okay. Let me first start with -- obviously, I went out online and I looked at some of the message boards this morning too and there were some questions, in particular about New Zealand as to why New Zealand was our first significant Evidence.com user and our customer. I’d point out that with New Zealand, they’ve standardized on what we call Evidence.com Lite, which is the version for managing TASER CAM and TASER files.

Now in the United States, Evidence.com Lite will be a free service, basically to introduce our customers to using Evidence.com and giving them all the tools they need to manage their fleets of TASER devices.

The reason New Zealand is right at the front end of the curve is that that product feature set does not rely on having the fully baked and field-tested AXON system that -- we don’t need it for that, it relies on our existing products. And then for New Zealand with them deploying across a nation and they have required TASER CAMs on every TASER in New Zealand, they needed to have a centralized network application for managing all those devices. So that actually pushed them and we’ve been working with them for many months to the front of the curve, because Evidence.com actually became a gating factor that enabled their national deployment of TASERs.

Now if we step back from that, X3, I think we’re going to see a relatively slow ramp over the course of the year given the economic environment. It is a premium product. I think as we see stimulus funds and assets forfeiture funds come in, the user feedback we’ve gotten is that they really like the features of the device.

It is on the larger side than the X26, so some agencies may decide to stay with the X26 for patrol and use the X3 for SWAT or for more tactical operations, although Lakewood, Florida just went fundamentally to a full patrol deployment. So, X3 is now in the field. I would -- you’d expect a slow ramp over the course of the year.

AXON and Evidence.com Pro, we are in fields-pilot. I would characterize -- we’re in a stabilization phase right now. It is a highly complex system between the deployed hardware. There’s three elements, it’s got to integrate to their radios; there’s embedded software that’s fairly sophisticated on the device; then at the agency, we have the these evidence transfer managers, which is sort of a local server with local running embedded software. And then that connects first to our back-ended Evidence.com, where we’ve got a full stats service with maps, storage, and transcoding grids.

So, long story short, we believe we’ll be in pilot type of operations fundamentally through the second quarter, and I think we might start to see some revenue, relatively small in magnitude in the second quarter. And the product, based on current timelines, should be ready to commercialize in the lateral half of the year.

Gregory McKinley – Dougherty & Company

Okay, thank you. And then maybe talk a little bit on some of those same thoughts on Protector. How will that come to market? Do you envision that being marketed through, like, an iPhone app store type of distribution channel, where people could be loading that on their mobile devices? And how will that be priced?

Rick Smith

At this point, we’re not going to be disclosing a whole lot more about Protector for proprietary and other reasons until we get close to market, which we anticipate -- there probably be a soft launch in the summer, meaning we’ll likely go to this end market with some direct sales models initially, as we scale it up and get through user beta testing and product refinement before you really push it into pitching it to retail and other distribution channels.

Gregory McKinley – Dougherty & Company

Thank you.

Rick Smith

Thank you.


Your next question comes from the line of Steven Dyer with Craig-Hallum. Please proceed.

Steven Dyer – Craig-Hallum

Thanks guys. Good morning. Just most of mine actually have been answered to the extent that you can. Dan, what was CapEx in the quarter?

Dan Behrendt

CapEx was actually just a little over -- it was $15 million for the year, so you can sort of back into that. It was -- it’s probably in the $4 million range. I can get you that exact number, but -- or just about $15 million -- just a little over $15 million for the year. We had some pretty significant CapEx around the automation to finishing that up, which is installed. And some of the new product tooling and things like that ran through in the fourth quarter. So, we expect that the CapEx will also moderate a bit in 2010 as well, now that we have a lot of these large investments behind us.

Steven Dyer – Craig-Hallum

Okay. And then as far as SG&A, it ticked down really nicely in the quarter. It sounded like maybe there was a one-time benefit from a capitalization in there. Directionally, does that go kind of back to previous levels? Or have you taken out some costs that will remain?

Dan Behrendt

Yes, it’s a little bit of a mixed store there, candidly. The -- well, certainly in Q1, we’ll see it tick back up again, just because we’ve got a couple of our larger tradeshows for the year -- the CES Show on the consumer side; the Shot Show on the professional side. And then the first quarter is always a little bit heavier from a spend on things like the Odyssey’s and stuff like that, just because you have a lot of that year-end audit work that happens in Q1. And we record those based when the service is delivered. So, I do expect it to tick back up a little bit in Q1; but as we look at the total 2010 budgets, we’re going to work hard to keeping SG&A costs as flat as possible and leveraging the resources we have, in order to improve our operating leverage as we go forward.

Steve Dyer – Craig Hallum

Okay, so kind of flattish would suggest that there are some permanent costs that have been taken out, that it’s not going to necessarily tick all the way back up to previous levels, or I should say, at least it won’t grow a lot; is that fair?

Dan Behrendt

I think that is fair.

Steve Dyer – Craig Hallum

Okay. Good. And then R&D, any color as to sort of how much of a decline we could expect? Or is it more -- I mean, should we expect something more on a year-over-year basis, relatively flat as well?

Dan Behrendt

Yes, I mean, well, really, what we’re trying to sort of convey there is we’ve, at $20 million, we feel like we have hit the high-water mark. Obviously, we reserve the right to, as exciting technologies come down the pike that we may have to accelerate that again. But we feel that that $20 million probably is the high-water mark and we expect to leverage the R&D expenses in 2010 as well, and start reaping the benefits from that large investments we’ve made over the last couple of years.

Steve Dyer – Craig Hallum

Yes, okay. And then, I guess, finally, could you give us anecdotally sort of what you’re seeing from stimulus? Is it more than you thought, less than you thought? Is it primarily kind of the 5’s and 10’s agencies? Or have you seen some big beneficiaries from it? And how far do you think you are through it, through the benefits of it?

Dan Behrendt

Yes, I hope to think we’re at the early part of this. I think as I’ve talked to our regional managers out in the field and even just some other companies in our industry. I think we’re kind of at the early stages of the stimulus. We have seen one big order, the Philadelphia order we saw in Q4 was stimulus driven. So that was a roughly $1 million order that was driven through stimulus. But most of the orders we’ve seen so far that we can attach to stimulus have been on the smaller side. But our expectation is that we’re kind of still early, that we haven’t seen a lot of that flow yet.

It’s one of those things that, as we move into 2010, we’re hopeful that we’ll start seeing more of that, because we haven’t seen an awful lot yet, and we know there is just a lot of money out there for law enforcement equipment. So, to the extent that that money starts flowing to agencies, we’ll start, hopefully, seeing that in the early to mid-2010 time frame.

Steve Dyer – Craig Hallum

Okay, that sounds good. Nice quarter, guys.

Dan Behrendt

Thanks a lot.


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

Greg McKinley – Dougherty & Company

Hi, guys. Just a follow-up here. When we look at prior year, obviously, the Company really benefited significantly from a couple of large transactions, certainly started off the year in ‘09 with a big UK order. Can you give us some thought in terms of taking that into context, how we should look at possible near-term revenue growth rates, so we have a general feel for how you’re looking at your business starting the year versus how it may end, as these new products come to market?

Rick Smith

Yes, I mean, you just put your finger on what makes it such a difficult business to predict and why our current business state -- it’s just not practical for us to give guidance because of those large orders like we saw out of the UK last year. We do have a pipeline that includes large orders this year, I’d say similar to the pipeline at the beginning of last year. As to whether and when those big orders come in, it’s frankly kind of surprising because what will happen is, we’ll be working on an order for an indeterminate period of time, and then -- they tend to accelerate very quickly right at the end. So, some of these might be on our radar for years, and then, bang, within a space of a few weeks, it just accelerates -- and okay, it’s been approved, here is the purchase order, and we tend to ship same quarter, so we don’t carry much of a backlog.

So, in the short-term this year, I would say, first quarter safely tends to be a down quarter from the fourth quarter. So, first and third tend to be a little weak; second and fourth quarter tend to be a little stronger. And those larger Federal and international major agency orders will continue to be unpredictable upside sprinkled in and over the course of the year.

Gregory McKinley – Dougherty & Co.

Thank you.


And at this time, I would like to turn the presentation back over to your host, Mr. Rick Smith. Please proceed.

Rick Smith

Okay, well, again, I’d like to thank everybody for your time this morning. If you didn’t get a chance to watch the video, I believe the link will stay live on the website, so you can go and see some of the demonstrative aids we use. We appreciate your support. Again, I am really proud of the team and the work that they’ve accomplished here.

Our sales group was able to deliver a 12% increase in revenues, based primarily on our Legacy products in a year when, obviously, the global economy was in pretty poor shape. And at the same point, a lot of the investments that we’ve made, we have either finished across the goal line like the -- which might be almost $9 million automation project that will improve our margins and yields in throughput this year, and then the new products that are starting to come out at the end of the pipeline with the X3 that gives us a fresh opportunity at our base; AXON and Evidence.com that will move us into the police video market with strong recurring revenue. And then in the back half of this year, we’ll start to see Protector, our new consumer product.

So, we look forward to talking to you all in a few months when we report on the first quarter. And again, we appreciate having you as shareholders. Thanks and have a great weekend.


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