TASER International, Inc. (TASR) Q3 2011 Earnings Conference Call October 31, 2011 12:00 PM ET
Rick Smith – CEO
Dan Behrendt – CFO
Steve Dyer – Craig Hallum
Greg McKinley – Dougherty
Good day, ladies and gentlemen, and welcome to the third quarter 2011 TASER International earnings conference call.
My name is Jennifer, and I will be your operator for today.
At this time, all participants are in listen-only mode. And, later, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.
I would now like to turn the conference over to your host for today, Mr. Rick Smith, CEO of TASER International. Please proceed.
Thank you and good morning. Before we get started, I’m going to have our CFO, Dan Behrendt, read the Safe Harbor statement.
Good morning. Safe Harbor statement, certain statements contained in this presentation maybe deemed to be forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. And TASER International intends that such forward-looking statements be subject to the Safe Harbor created thereby.
Such forward-looking statements relate to, expected revenue and earnings growth, estimations regarding the size of our target markets, successful penetration of law enforcement market, expansion of product sales to the private security, military and consumer self-defense markets, growth expectations for new and existing accounts, expansion of production capabilities, new product introductions, product safety and our business model.
We caution that these statements are qualified by important factors that could cause actual results to differ materially from those reflected by the forward-looking statements herein. Such factors include, but are not limited to, market acceptance of our products, establishment and expansion of our client and indirect distribution channels, attracting and retaining the endorsement of key opinion leaders in the law enforcement community, the level of product technology and price competition for our products, the degree and rate of growth of the markets in which we compete and accompanying demand for our products, potential delays in international and domestic orders, implementation risk for manufacturing automation, risks associated with rapid technological change, execution and implementation risk of new technology, new product introduction risk, ramping manufacturing production to meet demand, litigation resulting from alleged product related injuries and deaths, media publicity concerning product uses and allegations of injury and death and the negative impact this could have on sales, product quality risks, potential fluctuations in quarterly operating results, competition, negative reports concerning TASER device uses, financial and budgetary constraints of prospects and customers, dependence upon sole and limited source suppliers, fluctuations in component pricing, risks of governmental investigations and regulations, TASER product tests and reports, dependence upon key employees, employee retention risks and other factors detailed in the company’s filings with the Securities and Exchange Commission.
With that, I’ll turn it back over to Rick Smith.
Thanks Dan. Okay, so I’m sure everyone has seen the release this morning. Pretty happy with the results; up 16% over the same quarter last year, with $24.4 million in revenue and the business generating $5.3 million in cash from operations, or that’s 22% of revenue in cash generation.
One of the key drivers there was the introduction of the X2 from the second quarter. So this was the first full quarter that the X2 was available to our customers that accounted for about 15% of revenue, which is close to 20% of bookings. And the disparity there is we had a very high attachment rate of extended warranties and training services that are deferred and recognized over time. As we look into next year, we see a run of $300 million upgrade opportunity if we’re successful in helping our customers to upgrade X26 units that are more than five years old.
One other point about the X2 is, in our surveys with instructors who teach electronic control devices, we’ve seen 96% of them select the X2 as their preferred full-time carry weapon even over the X26 which was a huge number, a huge achievement actually, because the X26 was such a hit in law enforcement. But the rigorous voice of the customer development process where we put hundreds and hundreds of officers through surveys and focus groups to identify the right feature matrix for the X2 really seems to be paying off. It looks like we do have the next-generation ECD, which should be able to drive growth in the future.
This quarter, we also saw international sales continue to grow. It was up over the prior year by $4.4 million year-to-date, up $2.3 million in the third quarter, with large portion of that coming from strong cartridge sales to our install base overseas.
And, finally, before I turn over to Dan to go through the numbers in detail, we’ve continued to return cash to shareholders. As of the end of the quarter, we had executed a total of $12.4 million out of our $20 million buyback. But let me give you more current numbers. Through last Friday, we have completed $17.77 million of the buyback, leaving $2.3 million left to go. Those are in dollar terms. If we add that up, this year-to-date, we have returned $30.27 million to shareholders. And just to put that in perspective, the company we took public in 2001 had a pre-money market capitalization of right around $10 million. So we’ve returned multiples of the value we took public a decade ago just this year in cash to our shareholders. Something we’re pretty proud of that.
And, with that, I’m going to – one last thing to point out, our basis on the share repurchases is around little under $4.30 a share. So again, we’re pretty excited to have reduced our share count by so far about 11.3% this year. So we started the year with 62.6 million shares and at the current time we’re at about 55.6 million shares, little under 55.6 million shares, and we should be able to complete the rest of this buyback by the end of the year.
So with that, we’ll turn over to Dan, to go through some more details on the financial performance.
Okay, thanks, Rick. So as Rick said, revenues for Q3 were $24.4 million. This is up approximately $3.3 million or 16% from the prior year. The increase is driven mostly by the introduction of the new TASER X2 two-shot taser device, which generated approximately $3.7 million of sales during Q3.
As a result, the North American law enforcement sales for third quarter are up about 11% over the prior year. International sales are also up significantly over the prior year due to some sizable follow-on orders during the quarter. Our international sales for the quarter are 19% of sales and we’re running about 22% of our total sales year-to-date at our international; this is up over the prior year. So that’s excellent news to see further penetration.
Gross margins of $13.1 million or 53.7% of revenues are up 4.3% as a percentage of sales from the 49.4% the prior year. The improvement is driven by a combination of factors, including the cost of our SaaS datacenter operations and software maintenance revenues for Evidence.com [ph] were reduced over the prior year. We had a lot of dedicated effort in the third quarter of 2010 around just short of final sort of bug fixes and maintenance for the Evidence.com which ended up in operations. Well, that’s behind us, so we’re kind of more of a normalized level for the SaaS datacenter costs and costs to support e.com.
We also experienced the more favorable sales mix with higher margin international sales representing a greater percentage of our total. And then we saw an improved leverage of our fixed operating and overhead expenses. And then those were offset by – we did have a generous trading credit for the X2 this quarter, which had about $1 million impact or about 180 basis points. But overall, we’re pleased with the direction we’re heading in gross margins.
The SG&A expenses of $9.5 million for the third quarter are up just slightly over the $9.4 million in the prior year. SG&A as a percentage of sales was 38.9% of sales in Q3 of ’11, compared to 44.7% of Q3 in 2010. Again, the total cost for the quarter, we had a reductions in sales and marketing, consulting, travel, and other SG&A expenses, those were partially offset by an increase from legal fees just due to the timing of the cases and some other factors.
Research and development expenses of $2.4 million for the third quarter, this is down $0.7 million compared to 2010. Again, it’s driven really by the reduction of the allocation of development costs that made its way up into cost of sales last year, which is down back down in R&D this year. So again, it’s sort of kind of more of at a normalized low. If you look at sort of the trend during the year of R&D, we’re back to kind of that normalized level.
The adjusted operating income which includes the impact of stock-based compensation, depreciation, amortization, and losses regarding the write-downs and disposals of property was about $4 million for the third quarter of 2011. This is $1.7-million increase or 72% higher than the adjusted operating income of $2.3 million we had in the third quarter of 2010.
And then the GAAP income from operations was $1.2 million for the quarter, compared to a loss from operations of $0.7 million in the third quarter of 2010. So improvements demonstrate that we’re seeing really great operating leverage on the incremental costs or incremental sales we see – once we cross break-even, we see a really a very healthy follow through of the business. You can see that reflected this quarter with the dramatic fall through to this operating income from the higher sales value.
Net income for the third quarter of 2011 was $1 million or $0.02 a share on a basic and diluted basis compared to a loss of $2.3 million or $0.04 a share of basic and diluted basis for the prior year. Again, you may notice that this effective tax for the quarter was unusually low. This is because we had R&D tax credits included in the $0.20 tax returns which are filed in September of 2011 were much higher than we forecast in the tax provision we had last year due to a higher percentage of research and development activities qualify for tax credits. So this is good news, it ran through the third quarter results. We booked about a $500,000 benefit for those higher R&D tax credits in this quarter’s tax provision. Our effective tax rate on normal basis remains about 50% for 2011, but we did see a benefit from that normal rate in this quarter, which certainly benefited to net income as well.
Moving on to the balance sheet, we finished the quarter with $30.8 million of cash, cash equivalents and short-term investments. The decrease of $11.9 million for the prior year-end is due to the $24.9 million of cash used in the stock buyback during the first nine months of 2011, partially offset by $14.6 million of cash provided by operating activities.
Accounts receivable at $12.5 million is down $1 million from the prior year and balance just due to the timing of collections and sales. Inventory at $15.8 million is down $2.3 million from the year-end balance, due to larger quarter-end orders in the third quarter, and also just concentrated effort to reduce those inventory balances.
The investment of property equipment of $29.8 million is down $6 million. The net decrease is comprised mostly of $5.6 million of depreciation expense. We’ve had a probably low CapEx requirement this year, so our depreciation is running significantly higher than the capital expenditures which is bringing down that net PP&E balance. And we also saw a reduction in the property and equipment balance due to the write-down of the Protector and some surplus Evidence.com datacenter assets during the year. The total assets at September 30th, 2011 were a $117.2 million.
Moving on to the liability and the stockholders’ equity section of the balance sheet, accounts payable of $5.1 million is up almost $600,000 from the year-end balance due to the timing of AP check runs and just no more changes in activity. Accrued liabilities at $7.7 million is an increase of $3.9 million, due from the 12/31 balance, due to litigation judgment expense reserve of $3.3 million recorded on the Turner case that was recorded in the second quarter. We had total deferred revenue of $7.4 million, it’s a decrease of $284,000 from the 12/31 balances due to extended warranty revenue recognized in the third quarter outpacing the addition of new warranties, although we are seeing a good attach rate of warranties on the X2, so that we make see that reverse itself over time.
And then, our total liabilities of $23.1 million and the company finished the quarter with $94.1 million of stockholders’ equity, which has decreased $23.5 million, primarily due to the stock repurchase programs we’ve executed so far in 2011. We still have no long-term debt. We continue to have plenty of liquidity to fund our R&D efforts and operations as we move into the future here.
Moving on to just the selected statements from the cash flow statements. The company did have cash provided from operations of $5.3 million during the third quarter and $14.6 million for the nine months ended September 30th, 2011. This compares to a cash used from operations at $2.4 million for the nine months ended September 30th, 2010. This cash generation for the nine months ended September 30th, 2011 is really driven by our adjusted operating income of $10.4 million, a decrease of inventory, and also some just other changes in working capital. But we’re very pleased with the cash generation ability and the cash from operation. That’s really a big driver of company’s confidence in order to return cash to shareholders through the buyback.
We did have net cash used in investing activities for the nine months ended September 30, 2011 of $7.8 million. This compares to $3.4 million of the same period of 2010. The use of cash is mainly driven by the purchasing of some short-term investments in order to improve our yield on our cash and investments.
We also had cash used in financing activities to $24.8 million, again driven by the two buyback programs; the one approved in March and also the one we announced in July. And through the end of third quarter, we purchased 5.9 million shares for a cost of $24.9 million. But as Rick indicated earlier in the call, we continued to buy in October here, so those balances are slightly higher now. The company ended the quarter with $24.6 million in cash and $6.2 million in short-term investments for a total of $30.8 million of cash and investments. Again we feel very good about the liquidity position we’re in, and feel like we’re really positioned for a strong end of the year and a strong 2012.
And, with that, I’d like to turn the call back over to Rick Smith, our CEO.
Thanks Dan. We touched on a couple of significant events for the quarter. First, New Jersey, the last remaining holdout state that had prohibited law enforcement from using ECDs has now changed. They have now specifically approved only the X26 and X2 models for use by law enforcement officers in New Jersey. There was a rather rigorous process of evaluation by the AC’s office and we’re delighted to finally cross that important milestone. And I just got back from the International Chiefs of Police Conference in Chicago last week, and I can tell you there was a lot of excitement from the Chiefs in New Jersey they now have this tool available.
During the quarter we had a number of a significant orders for the X2. San Bernardino became the first major county sheriff upgrading all of their 1,500 officers to the new X2, and also deploying 20 of the AXON on-officer camera systems. Also critically important with Charlotte-Mecklenburg; for those of you who haven’t put the two pieces of information together, the Turner case where we had the adverse verdict earlier this year which still has not been entered by the way, we’re still in post-trial ruling, but Charlotte is part of their risk mitigation plan, took their X26 units off the streets and do an evaluation, look at their policy, et cetera, and they actually made a determination that part of their response was to upgrade their systems to the new X2s to take advantage of some of the new safety features, particularly the audible alarm and shutdown feature to help avoiding extended duration and the charge metering and the new Trilogy Logs that record more data upon other devices were used and ensure that we’re delivering in a more narrow band of an electrical output to maximize effectiveness and safety.
We also saw other agencies moving, University of Texas at Houston, the Plymouth Police Department putting 85 X2s on the street, and we continued to see a lot of momentum. We have a training program that will run through the end of the year where we give agencies a $300 training credit for their X26s toward an upgrade package that includes the X2, extended warranties, cartridges, holsters, sort of a full conversion kit. And we’re finding that that’s really fitting a critical need for these larger agencies to be able to justify making the upgrade.
We also saw some significant orders internationally. We had 377 X26s with TASER Cams. The new TASER Cam HD, which is our high-definition unit, we introduced that at the IACP, we expect that should be shipping around the end of this quarter. That will really help a state like New Jersey where they’re requiring TASER Cams as well as Australia, New Zealand, and some international markets, where I believe they generally require the user TASER Cams. We saw a large 60,000-cartridge order, so some continuing business from our install base.
We also saw a continued traction with our AXON on-officer camera system. We had a number of smaller agencies deployed. I would tell you this, standing at the IACP, I’ve met probably with 40 chiefs, many of them from the largest agencies, and we’re seeing a real shift in the tone which is encouraging.
Two years ago when we really started talking about on-officer cameras and Evidence.com as a cloud storage solution, the typical reaction was, “You want to do what?” This idea of putting a camera on an officer, there was a fair amount of, “Hey, it sounds like a great idea, it’s pretty futuristic, not sure when it’s going to happen,” and the idea of using the cloud were pretty foreign a few years ago. Last year, it was getting better. I think last year I characterized the tone was, “Yes, we see cameras coming someday, but it’s probably off in the distant future.” This year, the tone was much more, “Yes, this stuff is coming, we got to get onboard, we need to start really looking hard at on on-officer camera systems.” And with the cloud first policy and now at the federal government level, that is a key endorsement of a cloud strategy as well as frankly Apple’s iCloud, bringing the whole cloud concept mainstream.
Again, off the chiefs I talked to, I would say the majority of them have now gone from being cloud skeptics to very interested in how can we use the cloud to be able to better our IT performance. As Vivek Kundra, the former CIO of the Federal Government said, “The advantage of the cloud is that customers get value they want when they start using a service that’s up and running.”
And as one example, I talked to two former chiefs of major police departments, each of them told me they had spent over $10 million in their department on a project that has been going from more than a decade to do a digital record management systems. Neither of those systems were live after 10 years and more than $10 million in both cases, and they both related to me the level of frustration that at least one of them had had an independent firm sort of auditor system and told them, “The day it goes live, it will be more than a decade out of date,” and basically the technology equivalent of what the private sector was giving away scrapping five years ago. So the message about the cloud being away to hold service providers accountable, to get more value starting day one, really resonated with those chiefs.
The other thing that we’ve got is we have separated our AXON camera systems from Evidence.com. Evidence.com is now optional. Previously, the AXON only worked with Evidence.com, we’re now enabling agencies to use the AXON in a standalone mode and download it if they want to build out their data servers and data centers, they can, or they can Evidence.com. We’ve actually found in just removing the mandate has had a huge impact psychologically. Agencies now don’t feel – it is simplifying a bit the purchase process, where previously they had to make a long-term commitment at Evidence.com to really buy the cameras. Now, they can buy the cameras, use Evidence.com or use it locally. We’re finding them that’s reducing some of the purchasing decision pressure.
So at this point, I would say, we’re continuing to focus on streamlining implementation, preparing for scaling. We just released – we’re on about a 90-day release cycle, so we just released our Version 1.11, which had a bunch of new enterprise data management features that allows agencies to track by user, usage statistic across the agency, how much data storage they’re using, et cetera. And we’re really refining the user experience down to make it simpler and simpler to the individual officer. So just a lot of refinement going on and I believe 2012 will be a very interesting for AXON on and Evidence.com.
So the net effect of the quarter, it looks like with X2 that we have a – I guess, I call it a hit. We’ve got a great product that the market is reacting well too. Given the slowdown in the last few years, most of our customers know that they’re equipment is getting out of date. Hopefully, as we come out of what was a pretty nasty recession, these agencies know that they’re going to have to be investing in their technology and capital equipment, we believe we’re well positioned, both with the X2 and now with the AXON on-officer camera systems.
So with that, thanks for joining us on the call today, and we’ll go to a few questions.
(Operator Instructions). Your first question comes from the line of Steve Dyer from Craig Hallum. Please proceed.
Steve Dyer – Craig Hallum
Thank you, good morning.
Steve Dyer – Craig Hallum
Dan, as you have customarily, could you go through kind of product by product and given us the quantities there?
Yes, sure. Thanks Steve. So X26 for the quarter were 10,600 units; X2, we had 4,987 units; M26 1,647 units; we sold 16 X3s; 1,962 C2 ECD devices; 1,751 TASER Cams; and cartridge totaled at 389,676.
Steve Dyer – Craig Hallum
Okay, great. And then, am I assume – correct in assuming that we’ll have another quarter of the gross margin impact just on the trading credit?
Yes, we’ll see that in the fourth quarter as well. In the second quarter, the X2 sales were kind of a positive impact, because we – most of those were sold at full price, because they were just sales into our distribution channel. This quarter it’s a lot more trade-ins. But that’s the margin of that – even with that trade-in is good, it’s just a part of what impacts us is we defer some of that revenue, because we’ve realized some warranties in training.
Steve Dyer – Craig Hallum
Okay, makes sense. I’m wondering as it relates to the buyback – you guys have obviously done a good job of buying back stock, I’m wondering why the – looks like you bought about 3 million shares in the quarter and the diluted share count didn’t move down much, can you give me a little color there?
It’s based on the weighted average, so it just kind of – it tends to move a little bit slower. But we’ll – you’ll see more of that impact as we go into fourth quarter.
Steve Dyer – Craig Hallum
Okay. Do you know the number that you ended the third quarter with offhand on a diluted basis?
Well, we’re about 56.7 on a basic before the options.
Steve Dyer – Craig Hallum
Okay. Okay, I will hop back in the queue. Thanks.
Great. Thanks Steve.
Your next question comes from the line of Greg McKinley from Dougherty. Please proceed.
Greg McKinley – Dougherty
Yes, good morning. I wonder if you could talk a little bit about from both Evidence.com and AXON, how many agencies are now using the product, how many units have been installed, and maybe slip that number in context of what you think the broader market opportunity is?
Got you. Well, this is Rick. We’re going to give a lot more detail in our year-end call, will be coming up in February. At this point, I would say we’re still in the early phase. We do have several hundred agencies using Evidence.com. That’s the combination of the free introductory version that we do that comes with the TASER devices, so they can store their TASER Logs and TASER Cam files on there. And we actually expect that number to continue to grow, because with the new X2 there is a whole bunch of advanced data features that are making much more compelling for agencies to Evidence.com what we call Lite, which is the free version. And by the way the reason that that’s important is that helps to get agencies over the initial sort of interpretation of using the clouds. So having them sort of using the light version gets them over the line. There is some colorful adjectives we can use about that, but you can probably imagine them, it gets past the initial resistance.
In terms of a number of AXON units in the field, we have – I don’t have the number of agencies here, it’s in the dozens of agencies, not in the hundreds of agencies, that have purchased, and then we have a couple of dozen more agencies that are in the testing phase. But we’ve been – I would say on what we call the Evidence.com pro side which is the pay version and the hardware, we’ve identified a number of things that we’re refining in the experience with the products based on the last 18 months or so out in the marketplace. So we’re seeing continued traction, but we’ve not yet hit the knee of the curve in terms of adoption. But we expect next year, we’ll be talking about those numbers in more detail.
Greg McKinley – Dougherty
Thank you. And then, on the X2, can you just walk through the history there a little bit again, when did that product officially began shipping, and maybe compare and contrast – you did almost 5,000 units there here in the quarter, compare and contrast how September was versus the June quarter.
Yes, so the – this is Dan. So we sold about 600 units or so in Q2. We introduced it in Q2, so we didn’t start shipping until Q2. In fact, we finished Q2 with a little bit of a backlog. We had about 500 units backlog at the end of Q2. We really just started shipping it in June. So this was the first full quarter. And we sold close to 5,000 units this quarter, including as Rick indicated, a couple of big upgrades in San Bernardino and Charlotte. So I think it’s encouraging as you know that upgrade opportunity is really the compelling thing with X2 is to go back and refill into that install base, and we’ve seen a couple of our bigger customers embrace that right out of the gate which is encouraging.
Greg McKinley – Dougherty
Thank you. And then the accounting for that rebate, that $300 rebate, can you remind us how that flows through the P&L?
Yes, so what we do is we basically take out of the sales allowance. So we’re basically reducing the sales of the trade incomes and a package of a TASER device, the holster, six cartridges, some training and extended warranty, the total is about 50/50. We actually just record in revenue about $1250 of that.
Greg McKinley – Dougherty
And as part of that $1250 is even deferred because the warranty is a little recognized that ratably over the five years. So out of the total sale that starts at $1550, we recognize about a $1000 in the quarter, and then about $250, we’ll recognize over time.
Greg McKinley – Dougherty
There are no further questions at this time. We will now turn the call over back to the presenters for closing remarks.
Great. Well, I’d like to wish everybody out there a Happy Halloween; I’ll be out trick-or-treating with my kids tonight. Wish you all the best and great holiday season.
The momentum here internally for those of you who get a chance to come and visit the company, I think the operations are really hitting their stride, our product development processes have really matured over the last couple of years, I think the physical discipline, we’re seeing it in the cash generation and the improved profitability, and I could be more excited for the future.
So thanks for joining us today and we’ll be back for our next conference call in February of next year to report on the full year. Thanks and bye-bye.
Ladies and gentlemen, that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.
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